UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934





TOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)





Registrant's telephone number, including area code:    (248) 675-6000



Securities registered pursuant to Section 12(b) of the Act:





Securities registered pursuant to Section 12(g) of the Act:

None



Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☐    No ☒



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Act.  Yes ☐    No ☒



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 ☒   No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒        No ☐



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ☒



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

Large accelerated filer ☐       Accelerated filer  ☒        Non-accelerated filer  ☐      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  ☒



       The aggregate market value of the common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock as of the closing of trading on June 30, 2017, was approximately $439,942,031.



       There were 20,542,397 shares of the registrant’s common stock outstanding at February 21, 2018. 



DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III.

 





 

---

 

TOWER INTERNATIONAL, INC. – FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017



TABLE OF CONTENTS













---

 

PART I

Item 1.    Business

Our Company

We are a leading global manufacturer of engineered automotive structural metal components and assemblies primarily serving original equipment manufacturers (“OEMs”). We offer our automotive customers a broad product portfolio, supplying body-structure stampings, frame and other chassis structures, and complex welded assemblies for small and large cars, crossovers, pickups, and sport utility vehicles.  



Our products are manufactured at 23 facilities, strategically located near our customers in North America and Europe. We support our manufacturing operations through six engineering and sales locations around the world. We are a disciplined, process-driven company with an experienced management team that has a history of implementing sustainable operational improvements. For the year ended December 31, 2017,  in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we generated revenues of $2 billion and net income attributable to Tower International, Inc. (the “Company”) of $47.6 million. In addition, we had Adjusted EBITDA of $209.7 million and an Adjusted EBITDA margin of 10.5% for the year ended December 31, 2017.  (Item 7 of this Annual Report includes a discussion of Adjusted EBITDA as a non-GAAP measure).



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



Our History and Corporate Structure

Our Corporate History

On October 15, 2010, our common stock began trading on the New York Stock Exchange following our initial public offering (“IPO”). On July 31, 2013, Tower International Holdings, LLC, an affiliate of Cerberus, completed the sale of 7,888,122 shares of our common stock in a secondary public offering. Upon completion of the sale, Cerberus no longer controlled a majority of our outstanding common stock and therefore, we ceased being a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. On November 6, 2013, Tower International Holdings, LLC, completed the sale of 3,000,000 shares of our common stock in another secondary public offering. In addition, Tower International Holdings, LLC completed multiple transactions during the fourth quarter of 2013 whereby it sold additional shares of our common stock in the open market. As a result of these sales, Tower International Holdings, LLC and Cerberus held no shares of our common stock at December 31, 2013.



Sale of China Joint Ventures

On December 6, 2015, the Company completed the sale of its equity interest in its Xiangtan DIT Automotive Products Co. Ltd. (“Xiangtan”) joint venture. The sale agreement provided for the repayment of $9.9 million of the Company’s shareholder loans to the joint venture, and the purchase of the Company’s equity in the joint venture for $3.5 million, net of tax.



On December 31, 2015, the Company completed the sale of its equity interest in its Changchun Tower Golden Ring Automotive Products Co., Ltd. (“TGR”) joint venture. The sale agreement provided for the purchase of the Company’s equity in the joint venture for $29.4 million, and the payment of a dividend of $14.8 million, net of tax.



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



Xiangtan, TGR, and Wuhu have been presented as discontinued operations in the Company’s Consolidated Financial Statements, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 205, Discontinued Operations. 



Also, in October of 2016, the Company entered into an agreement to sell its joint venture in Ningbo, China: Tower DIT Automotive Products Co., Ltd. (“Ningbo”). The agreement is subject to Chinese government approval. The sale agreement provides for purchase of the Company’s equity in the joint venture for approximately $4 million, net of tax. The Company anticipates that this transaction will close in the first quarter of 2018.



As of December 31, 2017, our China joint venture in Ningbo has been presented as discontinued operations, and is considered held for sale in accordance with FASB ASC No. 360, Property, Plant, and Equipment, and FASB ASC No. 205, Discontinued Operations.

---

 

Brazil Discontinued Operation

On December 21, 2015, the Company sold one of its two operations in Brazil. Net cash proceeds from this sale were $9.5 million.   During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil. At December 31, 2017, the remaining Brazilian business operations are considered held for sale in accordance with FASB ASC No. 360, Property, Plant, and Equipment, and presented as discontinued operations in the Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations.



Our Industry

We believe OEMs produce a majority of their structural metal components and assemblies internally. While OEM policies differ and may be especially impacted by their own capacity utilization, the capital expenditures associated with internal production of the types of parts and assemblies Tower manufactures can be substantial. As fuel efficiency and emissions regulations tighten globally, the continued lightweighting and electrification of vehicles is expected. Due to the capital investment and fixed cost requirements for the OEMs related to these trends as well as the evolution toward autonomous vehicles, we believe that longer term, OEMs will outsource a greater proportion of their stamping requirements and we may benefit from this shift. We also believe that our products are relatively agnostic to vehicle autonomy because the stampings and assemblies we produce are critical to the structural integrity of a vehicle and not dependent upon the powertrain or how vehicles are driven. In addition, we believe OEMs will increasingly favor larger, more capable, financially strong regional suppliers. Given our manufacturing, engineering, and operational program management capabilities, we believe we are particularly well-positioned in North America and Europe to take advantage of these potential opportunities.



Our Strategy

We seek to:



Execute Business Model Focused on Free Cash Flow

Free cash flow (defined as net cash provided by operating activities less cash disbursed for purchases of property, plant and equipment) is one of our most important financial metrics. Our focus on sustainable ongoing free cash flow keeps us disciplined regarding product pricing and margins, as well as determining and prioritizing affordable capital expenditures. To further our alignment with our business model, free cash flow is a major component of our annual bonus program for salaried and hourly colleagues. (Item 7 of this Annual Report includes a discussion of free cash flow as a non-GAAP measure).



Achieve Organic Growth Above Industry and Opportunistically Pursue Accretive Acquisitions

We have demonstrated the ability to win significant net new business from our customers from a combination of share gains from competitors via conquest wins and OEM outsourcing. In addition, the increased use of aluminum, higher strength steels and hot forming (i.e., “light weighting”) with complex joining technologies is providing us with higher value-add opportunities. We believe our ability to win new business at a return in excess of our cost of capital is a direct reflection of our core engineering strength, competitive cost and quality, and proven ability to manage complex new-model launches for OEM customers. We use processes such as Lean Six Sigma, labor best practices standardization, and advanced product quality planning (“APQP”) to drive productivity and quality while managing new programs on time and on budget.    



We believe Tower is positioned for organic growth well above industry from 2018 through at least 2020 as a result of major new business awards primarily in North America that are anticipated to provide approximately $350 million of annual ongoing net revenue.  We also believe there can be future upside growth opportunities from accretive acquisitions. Our projections regarding future performance constitute forward-looking statements. For information regarding the risks associated with forward looking statements, see “Disclosure Regarding Forward-Looking Statements.”



---

 

Achieve and Maintain Appropriate Leverage

Achieving and maintaining net debt leverage (defined as total debt less cash and cash equivalents divided by annual Adjusted EBITDA) at our target of 1 times Adjusted EBITDA is an important business priority for optimizing cost of capital and maintaining appropriate financial strength. As of December 31, 2017,  our net debt was $263.1 million, representing net debt leverage of 1.3 times. (Item 7 of this Annual Report includes a discussion of net debt as a non-GAAP measure).



During the last two years, we have entered into operating leases to fund a portion of the capital expenditures necessary to achieve growth above industry average. We believe that these operating leases provide a diversified capital source for financing capital expenditures at competitive rates. These leasing arrangements bear a weighted average fixed interest rate of 5.4%. As of December 31, 2017, the effective interest rate on our Term Loan Credit Facility (the “Term Loan”) was 4.2%.



Beginning in 2019, FASB ASC No. 842, Leases, will change the financial reporting for leases. Certain of our manufacturing equipment leases currently classified as operating leases will be considered financing leases under the new standard. As a result, we will be required to record a right of use asset as additional property, plant, and equipment and the associated liability as lease debt.



As of December 31, 2017, the associated liability from these leases would have been approximately $72 million. Including our net debt of $263.1 million, our pro-forma leverage including these leases represents net debt leverage of 1.6 times.



In addition, we have numerous real estate and equipment leases currently classified as operating that we believe will continue to be classified as operating under the new standard. We expect that the right of use assets and liabilities associated with these leases will be material, but have not yet quantified the total balance sheet impact for these leases.



Return Capital to Shareholders

With our long-term leverage target in sight, we have begun returning capital to shareholders. In the fourth quarter of 2017, Tower raised its regular quarterly dividend per common share by 9%. In addition, on June 17, 2016, the Company announced its Board of Directors’ authorization to repurchase up to $100 million of the Company’s issued and outstanding common stock from time to time in the open market, or in privately negotiated transactions (the “Repurchase Program”). As of December 31, 2017, 829,648 shares have been purchased for $18.9 million under the Repurchase Program.



Manage Risk

We consider risk management to be an important part of our ability to operate predictably and successfully in the cyclical automotive parts industry. Foremost in managing risk is financial discipline, beginning during the evaluation and approval of new programs to ensure sound assumptions and projected returns in excess of our cost of capital. During each year, we carefully monitor and manage all elements of cost, with an objective of achieving productivity and other savings that offset customer price reductions and labor and overhead inflation. Through our commercial agreements, we are largely shielded from changes in steel prices.



Customer and Vehicle Portfolio

We believe we have a well-diversified customer mix, as six different OEMs individually accounted for 5% or more of our revenues in 2017. The following table summarizes our customer mix as a percent of revenues for the year ended December 31, 2017. 







---

 

Geographic Regions 

The following table summarizes our geographic mix as a percent of revenues for the year ended December 31, 2017.







Platform Diversification

We supply products for approximately 130 vehicle models globally to 11 of the 12 largest global OEMs, reflecting the balanced portfolio approach of our business model and the breadth of our product capabilities. The following table summarizes our vehicle platform mix as a percent of revenues for the year ended December 31, 2017.



 



In North America, SUV and Pickup accounted for 45% and 34% of revenues, respectively, for the year ended December 31, 2017.



IHS Automotive® (“IHS”) Global Sales Sub-Segment and Global Production Segment include the following references:





The reports prepared by IHS referred to in this Annual Report are subscription-based. All references in this report to historical industry production volumes, projections, estimates, or other data attributable to IHS, are based on data available from the IHS January 2018 forecast.

---

 

Our Products

We produce a broad range of structural components and assemblies, many of which are critical to the structural integrity of a vehicle. Images of some of the products we offer are presented below.

Body structures and assemblies

Body structures and assemblies form the basic upper body structure of the vehicle and include structural metal components such as body pillars, roof rails, and side sills. This category also includes Class A surfaces and assemblies, which are components of the “exterior skin” of the vehicle—body sides, hoods, doors, fenders, and pickup truck boxes. These components form the appearance of the vehicle, requiring flawless surface finishes.



Chassis and lower vehicle structures

Lower vehicle frames and structures include chassis structures that make up the “skeleton” of a vehicle and which are critical to overall performance, particularly in the areas of noise, vibration and harshness, handling, and crash management. These products include pickup truck and SUV full frames, automotive engine and rear suspension cradles, floor pan components, and cross members that form the basic lower body structure of the vehicle. These heavy gauge metal stampings carry the load of the vehicle, provide crash integrity, and are critical to the strength and safety of vehicles.



Complex body-in-white assemblies

Complex body-in-white assemblies are comprised of multiple components and sub-assemblies welded to form major portions of the vehicle’s body structure. We refer to body-in-white as the manufacturing stage in which the vehicle body sheet metal has been assembled but before the components and trim have been added. Examples of complex assemblies include front and rear floor pan assemblies and door/ pillar assemblies.



Product mix

We believe we have a diversified product group mix, as each of our product groups individually accounted for 20% or more of our revenues in 2017. The following table summarizes our product group mix as a percent of revenues for the year ended December 31, 2017:



---

 

The following table presents the major vehicle models for which we supply products:





International Operations

We have significant manufacturing operations outside the United States, including Europe and Mexico. In 2017,  36% of our revenues originated outside the United States. For information regarding potential risks associated with our international operations, see Risk Factors Relating to Our Industry and Our Business — “Our substantial international operations make us vulnerable to risks associated with doing business in foreign countries”. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 14 to our Consolidated Financial Statements for further information regarding our international operations.



Manufacturing and Operations

Our manufacturing operations consist primarily of stamping and welding operations, system and modular assembly operations, cold and hot forming, coating, and other ancillary operations. Stamping involves passing metal through dies in a stamping press to form the metal into three-dimensional parts. We produce stamped parts using precision single-stage, progressive, and transfer presses, ranging in size from 100 to 4,500 tons, which perform multiple functions to convert raw material into finished products. We invest in our press technology to increase flexibility, improve safety, and minimize die changeover time.



We feed stampings into assembly operations that produce complex assemblies through the combination of multiple parts that are welded or fastened together. Our assembly operations are performed on either dedicated, high-volume welding/fastening machines or on flexible, cell-oriented robotic lines. The assembly machines attach additional parts, fixtures, or stampings to the original metal stampings. In addition to standard production capabilities, our assembly machines are also able to perform various statistical control functions and identify improper welds and attachments.



Our products use various grades and thicknesses of steel and aluminum, including high–strength, hot- and cold-rolled, galvanized, organically coated, stainless, and aluminized steel. Although changing steel prices affect our results, we seek to be neutral with respect to steel pricing over time, with the intention of neither making nor losing money as steel prices fluctuate. The pricing of our products includes a component for steel which can increase as steel prices increase and decrease as steel prices decrease. For our North American customers and several of our other customers, we purchase steel through our customers’ resale programs, where our customers actually negotiate the cost of steel for us. In other cases, we procure steel directly from the mills, negotiating our own price and seeking to pass through steel price increases and decreases to our customers.



Our hot forming technology provides customers with ultra-high strength steels (“UHSS”) for automotive body structures. Demand for UHSS is increasing to allow conformance to additional regulatory requirements for fuel economy – through mass reduction – while maintaining vehicle safety.



We focus on achieving superior product quality at the lowest operating costs possible and concentrate on improving our manufacturing processes to drive out inefficiencies. We seek to continually improve our processes through efforts to improve our cost competitiveness and achieve higher quality.



We are committed to sustaining Lean Six Sigma principles throughout our manufacturing processes and as of December 31, 2017, we employed 92 certified black belts. We utilize Lean Six Sigma principles to increase the efficiency of our operations and to reduce operating costs, thereby improving our cost competitiveness. We have accomplished efficiency improvements, while at the same time improving our quality.



Supply Base—Manufactured Components and Raw Materials

We purchase various manufactured components and raw materials for use in our manufacturing processes. All of these components and raw materials are available from numerous sources. We employ just-in-time manufacturing and sourcing systems, enabling us to meet customer requirements for faster deliveries, while minimizing our need to carry significant inventory levels. The primary raw material used to produce the majority of our products is steel. A portion of our steel is purchased from certain of our customers through various

---

 

OEM resale programs. The remainder of our steel purchasing requirements are met through contracts with steel producers and market purchases. In addition, we procure small- and medium-sized stampings, fasteners, tubing, and rubber products.



Sales, Marketing, and Distribution

Our sales and marketing efforts are designed to create awareness of our engineering, program management, manufacturing and assembly expertise, and to translate our leadership position into contract wins. We have developed a sales team that consists of an integrated group of professionals, including skilled engineers and program managers, whom we believe provide the appropriate mix of operational and technical expertise needed to interface successfully with OEMs. We sell directly to OEMs through our sales and engineering teams at our technical centers, which are strategically located around the world. Bidding on automotive OEM platforms typically encompasses many months of engineering and business development activity. We integrate our sales force directly into our operating team and work closely with our customers throughout the process of developing and manufacturing a product. Our proximity to our customer base enables us to enjoy close relationships with our customers and positions us well to seek future business awards.



Customers

We have developed long-standing business relationships with our automotive customers around the world. We work together with our customers in various stages of production, including development, component sourcing, quality assurance, manufacturing, and delivery. With a diverse mix of products and facilities in major markets worldwide, we believe we are well-positioned to meet customer needs. We believe we have a strong, established reputation with customers for providing high-quality products at competitive prices, as well as for timely delivery and customer service. Given that the automotive OEM business involves long-term production contracts awarded on a platform-by-platform basis, we believe that we can leverage our strong customer relationships to obtain new platform awards. Contracts are typically sole-sourced to one supplier for individual platforms.



Customer Support

We have six engineering and sales locations throughout the world, including a 24-hour engineering support center in India. We believe that we provide effective customer solutions, products, and service to our customers. Our customer service group is organized into customer-dedicated teams within regions to provide more focused service to our clients.



Seasonality   

Our customers in North America and Europe typically shut down vehicle production during portions of July - August and for one week in late December. Our quarterly results of operations, cash flows, and liquidity may be impacted by these seasonal practices. For example, working capital is typically a use of cash during the first quarter of the year and a source of cash generation in the fourth quarter. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion on working capital.



Competition

We principally compete for new business at the beginning of the development of new models and on the redesign of existing models. New-model development generally begins two to three years before the marketing of such models to the public. Once a supplier has been designated to supply parts for a new program, an OEM will usually continue to purchase those parts from the designated producer for the life of the program, although not necessarily for a major redesign. OEMs typically evaluate suppliers based on many criteria such as quality, price/cost competitiveness, system and product performance, reliability and timeliness of delivery, new product and technology development capability, excellence and flexibility in operations, location relative to the customer’s assembly plant, effectiveness of customer service, and overall management capability.



We believe that we compete effectively with other leading suppliers in our sector. Our main tier one competitors include: Magna International, Inc. (Cosma division), Gestamp Automocion, Martinrea International, Metalsa, S.A. de C.V., Gruppo Magnetto, and Benteler Automotive. We compete with other competitors with respect to certain of our products and in particular geographic markets. The number of our competitors has decreased in recent years and we believe that number will continue to decline due to supplier consolidation. In addition, most of our OEM customers manufacture similar products that compete with our products. We believe the recent trend has been for OEMs, on average, to increase outsourcing, and we expect that trend to continue, which may provide above-industry growth opportunities for key suppliers like Tower.



Joint Ventures

In the fourth quarter of 2016, we entered into agreements in principle to sell our two remaining joint ventures in China: Wuhu and Ningbo. As of December 31, 2017, we had completed the sale of Wuhu and expect to complete the sale of Ningbo during the first quarter of 2018.



---

 

Employees

As of December 31, 2017, we had approximately 7,600 employees worldwide, of whom approximately 4,400 were covered under collective bargaining agreements that expire at various times. We are not aware of any significant work stoppages since the formation of Tower Automotive Inc., our predecessor (the “Predecessor Company”), in 1993. A prolonged strike or slow-down by one of our unions could have a material adverse effect on our business. We believe that our relations with our employees are satisfactory.



Environmental Matters

We are subject to various domestic and foreign Federal, state and local laws and regulations governing the protection of the environment and health and safety, including those regulating the following: soil, surface water, and groundwater contamination; the generation, storage, handling, use, disposal, and transportation of hazardous materials; the emission and discharge of materials, including greenhouse gases (“GHGs”) into the environment; and the health and safety of our employees. We are also required to obtain environmental permits from governmental authorities for certain operations. We have taken steps to comply with the numerous and sometimes complex laws, regulations, and permits. We have also achieved ISO 14001 registration for substantially all of our facilities, which means we have implemented environmental management systems to improve our environmental performance. Compliance with environmental requirements has not had a material impact on our capital expenditures, earnings, or competitive position and we have made, and will continue to make, capital and other expenditures pursuant to such requirements. If we violate or fail to comply with these requirements, we could be subject to fines, penalties, enforcement actions, or lawsuits.



Environmental laws, regulations, and permits, and the enforcement thereof, change frequently and have become more stringent over time. In particular, more rigorous GHG emission requirements are in various stages of development. For example, the United States Environmental Protection Agency (“U.S. EPA”) has promulgated the GHG Reporting Rule, which requires reporting of GHG data and other relevant information from large sources and suppliers in the United States and the GHG Tailoring Rule, which requires certain facilities with significant GHG emissions to obtain emissions permits under the authority of the Clean Air Act (typically limited to only the largest stationary sources of GHGs.) The United States Congress has also considered imposing additional restrictions on GHG emissions. Any additional regulation of GHG emissions by either the United States Congress and/ or the U.S. EPA could include a cap-and-trade system, technology mandate, emissions tax, reporting requirement, or other program, and could subject us to significant costs, including those relating to emission credits, pollution control equipment, monitoring, and reporting, as well as increased energy and raw material prices. In addition, our OEM customers may seek price reductions from us to account for their increased costs resulting from GHG regulations. Further, growing pressure to reduce GHG emissions from mobile sources could reduce automobile sales, thereby reducing demand for our products, and ultimately our revenues. At this time, none of our facilities are required to report GHG emissions or participate in any cap-and-trade system programs under the existing regulatory scheme. However, there is still significant uncertainty surrounding the scope, timing, and effect of future GHG regulation, and any changes to the current laws or regulations could have a material adverse impact on our business, financial condition, results of operations, reputation, product demand, and liquidity. 



We are also responsible for certain costs relating to contamination at our, or the Predecessor Company’s, current or formerly owned or operated properties or third party waste disposal sites, even if we are not at fault. Certain locations have been impacted by environmental releases and soil or groundwater contamination is being addressed at certain of these sites. In addition to potentially significant investigation and remediation costs, contamination can give rise to third party claims, including fines or penalties, natural resource damages, personal injury, or property damage. Our costs and liabilities associated with environmental contamination could be substantial and may be material to our business, financial condition, results of operations, or cash flows. Refer to Note 15 to our Consolidated Financial Statements for information regarding our environmental liabilities.



Segment Overview

Refer to Note 14 to our Consolidated Financial Statements for information regarding our operating and reportable segments.



Public Information 

We maintain a website at http://www.towerinternational.com. We will make available on our website, free of charge, the proxy statements and reports on Forms 8-K, 10-K, and 10-Q that we file with the United States Securities and Exchange Commission (“SEC”) as soon as reasonably practicable, after such material is electronically filed with, or furnished to, the SEC. Additionally, we have adopted and posted on our website a Code of Business Conduct and Ethics that applies to, among other people, our principal executive officer, principal financial officer, and principal accounting officer. We intend to disclose any waivers of the Code of Business Conduct and Ethics on our website. We will provide, free of charge, a copy of our Code of Business Conduct and Ethics to any person who requests a copy. All such requests should be directed to our Executive Director, Investor & External Relations, c/o Tower International, Inc., 17672 Laurel Park Drive North, Suite 400 E, Livonia, Michigan 48152. Except as otherwise stated, the information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we file with, or furnish to, the SEC.



---

 

Disclosure Regarding Forward-Looking Statements

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





























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



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

---

 

Item 1A. Risk Factors 

Our business is subject to a number of risks. In addition to the various risks described elsewhere in this Annual Report, the following risk factors should be considered. 



Risk Factors Relating to Our Industry and Our Business

A downturn in the global economy could adversely affect demand for automobiles that are manufactured with our products and therefore, could adversely affect our business, financial condition, results of operations, and cash flows.

The level of demand for our products depends primarily upon the level of consumer demand for new vehicles that are manufactured with our products. As experienced in 2008 and 2009, a global economic recession can have a significant adverse effect on our business, customers, and suppliers, and can contribute to delayed and reduced purchases of automobiles, including those manufactured with our products. If the global economy were to undergo a significant downturn, depending upon its length, duration, and severity, our financial condition, results of operations, and cash flow could be materially adversely affected.



Demand for and pricing of our products is also subject to economic conditions and other factors (e.g., energy costs, fuel costs, climate change concerns, vehicle age, consumer spending and preferences, materials used in production, changing technology, etc.) present in the various domestic and international markets in which our products are sold. 



We may be unable to realize revenues represented by our awarded business, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

The realization of future revenues from awarded business is inherently subject to a number of important risks and uncertainties, including the number of vehicles that our customers will actually produce, the timing of that production, and the mix of options that our customers may choose.



In addition to not having a commitment from our customers regarding the minimum number of products they must purchase from us if we obtain awarded business, the terms and conditions of the agreements with our customers typically provide that they have the contractual right to unilaterally terminate our contracts with them without notice or with only limited notice. If such contracts are terminated by our customers, our ability to obtain compensation from our customers for such termination is generally limited to the direct out-of-pocket costs that we incurred for raw materials and work-in-progress, and in certain instances, un-depreciated capital expenditures.



We base a substantial part of our planning on the anticipated lifetime revenues of particular products. We calculate the lifetime revenues of a product by multiplying our expected price for a product by the forecasted production volume for that product during the length of time we expect the related vehicle to be in production. In addition to applying our experienced judgment to customer projections, we use IHS, a third-party forecasting service, to provide long-term forecasts, which allow us to determine how long a vehicle is expected to be in production. If we over-estimate the production units or if a customer reduces its level of anticipated purchases of a particular platform as a result of reduced demand, our actual revenues for that platform may be substantially less than the lifetime revenues we had anticipated for that platform.



Typically, it takes two to three years from the time a manufacturer awards a program until the program is launched and production begins. In many cases, we must commit substantial resources in preparation for production under awarded customer business well in advance of the customer’s production start date. We cannot provide assurance that our results of operations will not be materially adversely affected in the future if we are unable to recover these types of pre-production costs related to our customers’ cancellation of awarded business or if projected volumes are not attained.



The automobile industry is highly cyclical and a downturn would adversely affect our business, financial condition, results of operations, and cash flows.



Our business is directly related to the volume of automotive production. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including interest rates, consumer confidence, consumer preferences, patterns of consumer spending, fuel costs, and the automobile replacement cycle. Automotive production and sales may fluctuate significantly from year-to-year and such fluctuations may give rise to changes in demand for our products. Because we have significant fixed production costs, declines in our customers’ production levels can have a significant adverse effect on our results of operations.



The highly cyclical nature of the automotive industry presents a risk that is outside our control and that cannot be accurately predicted. Moreover, a number of factors that we cannot reasonably predict could affect cyclicality in the automotive industry, and have affected cyclicality in the past. Decreases in demand for automobiles generally, or decreases in demand for our products in particular, could materially and adversely affect our business, financial condition, results of operations, and cash flows.



---

 

Our substantial international operations make us vulnerable to risks associated with doing business in foreign countries.

Our international operations include manufacturing facilities in Europe and Mexico. For the year ended December 31, 2017,  approximately 36% of our revenues were derived from operations outside the United States. Our international operations are subject to various risks that could have a material adverse effect on those operations and our business as a whole, including, but not limited to, exposure to the following in certain locations:





























 

Additionally, the economic instability in Mexico and other countries in which we operate could adversely affect our business, financial condition, results of operations and cash flows, as well as adversely affect our access to, and cost of, capital.



We are dependent upon large customers for current and future revenues. The loss of any of these customers, or the loss of market share by these customers, could have a material adverse effect on us.

Our customers are major vehicle manufacturers. During 2017,  our largest volume customers, Ford, Fiat-Chrysler, Volkswagen Group, Nissan, Volvo, and Toyota accounted for 35%,  20%,  11%,  10%,  7%, and 5% of our revenues, respectively. The loss of all or a substantial portion of our sales to any of our large-volume customers could have a material adverse effect on our business, financial condition, results of operations, and cash flows by reducing cash flows and limiting our ability to spread our fixed costs over a larger revenue base. A variety of reasons could lead to a reduction of sales to our customers, including, but not limited to:















---

 

Foreign exchange rate fluctuations could cause a decline in our financial condition, results of operations, and cash flows.

We generate a significant portion of our revenues and incur a significant portion of our expenses in currencies other than the U.S. dollar, primarily the Euro. Appreciation of the U.S. dollar against these foreign currencies will generally have an adverse effect on our reported sales and profits, while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and profits.



We may use a combination of natural hedging techniques and financial derivatives to protect against certain foreign currency exchange rate risks (see Note 8 of our Consolidated Financial Statements for further information relating to our swaps). Such hedging activities may be ineffective or may not offset more than a portion of the adverse financial effect resulting from foreign currency variations. The gains or losses associated with hedging activities may adversely affect our results of operations.



The Trump Administration could make substantial changes to regulatory, fiscal, trade, and other policies that could adversely affect our business. 

The Trump Administration has called for substantial changes to regulatory, fiscal and other policies, which may include significant changes to trade agreements currently in effect. We cannot predict the impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business. It is likely that some policies adopted by the administration will benefit us and others will negatively affect us. Until we know what new changes are enacted, we will not know whether in total we benefit from, or are negatively affected by such changes.



Deterioration in the United States and world economies could adversely affect our customers’ and suppliers’ ability to access the capital markets, which may affect our business, financial condition, results of operations, and cash flows.

The capital and credit markets provide companies with liquidity to help operate and grow their businesses, beyond that which is provided by operating cash flows. Disruptions in the capital and credit markets could adversely affect our customers by making it increasingly difficult for them to obtain financing for their businesses and for their customers to obtain financing for automobile purchases. Our OEM customers typically require significant financing for their respective businesses. In addition, our OEM customers typically have related finance companies that provide financing to their dealers and customers. These finance companies have historically been active participants in the securitization markets, which experienced severe disruptions during the global economic crisis. Our suppliers, as well as the other suppliers to our customers, may face similar difficulties in obtaining financing for their businesses. If capital is not available to our customers or suppliers, or if the cost of capital is prohibitively high, their businesses would be adversely affected, which could result in their restructuring or even reorganization or liquidation under applicable bankruptcy laws. Any such adverse effect on our customers or suppliers could materially and adversely affect our Company, either through loss of revenues from any of our customers so affected, or due to our inability to meet our commitments without excess expense, as a result of disruptions in supply caused by the suppliers so affected.



Financial difficulties experienced by any of our major customers could have a material adverse effect on us if such customer were unable to pay for the products we provide or if we experienced a loss of, or material reduction in, business from such customer. As a result of such difficulties, we could experience lost revenues, significant write-offs of accounts receivable, significant impairment charges, or additional restructurings beyond the steps we have taken to date.



Any acquisitions or divestitures we make could disrupt our business and materially harm our financial condition, results of operations and cash flows.    

We may, from time to time, consider certain acquisitions or divestitures. Acquisitions and divestitures involve numerous risks, including identifying attractive target acquisitions, undisclosed risks affecting the target, difficulties integrating acquired businesses, the assumption of unknown liabilities, potential adverse effects on existing business relationships with current customers and suppliers, the diversion of our management’s attention from other business concerns, and decreased geographic or customer diversification.



We cannot provide assurance that any acquisitions or divestitures will perform as planned or prove to be beneficial to our operations and cash flow, or that we will be able to successfully integrate any acquisitions that we undertake. Any such failure could seriously harm our financial condition, results of operations and cash flows.



We sponsor a defined benefit pension plan that is underfunded and requires annual cash payments. If the performance of the assets in our pension plan does not meet our expectations, or if other actuarial assumptions are modified, our required contributions may be higher than we expect.

We sponsor a defined benefit pension plan that is underfunded. While this plan is frozen as benefit accruals under the plan have ceased, the plan will require annual cash payments in order to meet our funding obligations, which adversely affects our cash flow.



Additionally, our earnings may be affected by the amount of income or expense recorded for our pension plan. GAAP requires that income or expense of  a pension plan be calculated at the annual measurement date using actuarial assumptions, the most significant of

---

 

which relate to the capital markets, interest rates, and other economic conditions. Changes in key economic indicators can change these assumptions. These assumptions, along with the actual value of assets at the measurement date, will impact the calculation of pension expense for the year. Although GAAP expense and pension contributions are not directly related, the key economic indicators that affect GAAP expense also affect the amount of cash that we would contribute to our pension plan. The investment portfolio of the pension plan has experienced volatility. Because the values of these pension plan assets have fluctuated, and will fluctuate in response to changing market conditions, the amount of gains or losses that will be recognized in subsequent periods, the impact on the funded status of the pension plan, and the future minimum required contributions, if any, could have a material adverse effect on our business, financial condition, results of operations, and cash flows.



The decreasing number of automotive parts suppliers and pricing pressures from our automotive customers could make it more difficult for us to compete in the highly competitive automotive industry.

The automotive parts industry is highly competitive and bankruptcies and consolidation among automotive parts suppliers are reducing the number of competitors and resulting in larger competitors who benefit from purchasing and distribution economies of scale. Our inability to compete with these larger suppliers in the future could result in a reduction of, or inability to increase, revenues, which would materially adversely affect our business, financial condition, results of operations, and cash flows.



Although the overall number of competitors is decreasing due to ongoing industry consolidation, we face significant competition within each of our major product areas. The principal competitive factors include quality, global presence, service, cost, product performance, design and engineering capabilities, new product innovation, and timely delivery. We also face significant competitive pricing pressures from our automotive customers. Because of their purchasing size, our automotive customers can influence market participants to compete on price terms. If we are not able to offset pricing reductions resulting from these pressures by improving operating efficiencies and reducing expenditures, those pricing reductions may have a material adverse effect on our business.



We cannot provide assurance that we will be able to continue to compete in the highly competitive automotive industry or that increased competition will not have a material adverse effect on our business.



The volatility of steel prices may adversely affect our results of operations.

We utilize steel and various purchased steel products in virtually all of our products. We refer to the “net steel impact” as the combination of the change in steel prices that are reflected in the price of our products, the change in the cost to procure steel from mills, and the change in our recovery of scrap steel (which we refer to as “offal”). Our strategy is to be economically neutral to steel pricing by having these factors offset each other. While we strive to achieve a neutral net steel impact, we are not always successful in achieving that goal, in large part due to timing differences. The timing of a change in the price for steel may occur in separate periods and if a change occurs, that change may have a disproportionate effect on our liquidity because of the time difference between our payment for steel and our collection of cash from customers. We tend to pay for replacement materials, which are more expensive when steel prices are rising, over a much shorter period. As a result, rising steel prices may cause us to draw greater than anticipated amounts from our credit lines to cover the cash flow cycle from our steel purchases to cash collection for related accounts receivable. This cash requirement for working capital is higher in periods when we are increasing our inventory quantities.



A by-product of our production process is the generation of offal. We typically sell offal in secondary markets, which are similar to the steel markets. We generally share our recoveries from sales of offal with our customers either through scrap sharing agreements, in cases in which we are participating in resale programs, or through product pricing, in cases in which we purchase steel directly from steel mills. In either situation, we may be affected by the fluctuation in scrap steel prices, either positively or negatively, in relation to our various customer agreements. As offal prices generally increase and decrease as steel prices increase and decrease, our sale of offal may mitigate the impact of the volatility of steel price increases, as well as limit the benefits reaped from steel price declines. Any volatility in offal and steel prices could materially adversely affect our business, financial condition, results of operations, and cash flows.



We have a material amount of goodwill, which, if it becomes impaired, would result in a reduction in our net income and equity. 

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. GAAP requires that goodwill be periodically evaluated for impairment based upon the fair value of the reporting unit. As of December 31, 2017, we had $63.7 million of goodwill that could be subject to impairment. Declines in our profitability or the value of comparable companies may impact the fair value of our reporting units, which could result in a write-down of goodwill and a reduction of net income.



Disruptions in the automotive supply chain could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Automotive industry conditions could adversely affect the original equipment supply base. The automotive supply chain is subject to disruptions because we, along with our customers and suppliers, attempt to maintain low inventory levels.



---

 

Disruptions could result from a multitude of potential problems, such as the closure of one of our or our suppliers’ plants or critical manufacturing lines due to strikes, mechanical breakdowns, electrical outages, fires, explosions, or political upheaval. Disruptions could also result from logistical complications due to weather, earthquakes, or other natural or nuclear disasters, mechanical failures, technology disruptions, or delayed customs processing.



If we are the cause for a customer being forced to halt production, the customer may seek to recoup all of its losses and expenses from us. Any disruptions affecting us or caused by us could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  



The inability for us, our customers, or our suppliers to obtain and maintain sufficient credit insurance or capital financing, including working capital lines, may adversely affect the liquidity and financial condition of us, our customers, and our suppliers. 

Our working capital requirements can vary significantly, depending, in part, on the level, variability and timing of our customers’ vehicle production and the payment terms we have with our customers and suppliers. Our liquidity could also be adversely affected if our suppliers were to suspend normal trade credit terms and require payment in advance or payment on delivery. If our available cash flows from operations are not sufficient to fund our ongoing cash needs, we would be required to look to our cash balances and borrowing availability under our credit facilities to satisfy those needs, as well as look to potential sources of additional capital, which may not be available on satisfactory terms or in adequate amounts, if at all.



There can be no assurance that we, our customers, or our suppliers will continue to have the ability to maintain sufficient capital financing. This may increase the risk of not being able to produce our products or having to pay higher prices for our inputs that may not be recovered in our selling prices. Our suppliers often seek to obtain credit insurance based on our consolidated financial condition and strength, which may be less robust. If we were to experience liquidity issues, our suppliers may not be able to obtain credit insurance and, in turn, would likely not be able to offer us payment terms that we have historically received, which could have a material adverse effect on our liquidity.



We may incur costs of a material nature related to plant closings, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

If we must close manufacturing locations because of lost business or consolidation of manufacturing facilities, the employee termination costs, asset retirements, and other exit costs associated with the closure of these facilities may be significant. In certain circumstances, we may close a manufacturing facility that is operated under a lease agreement and we may continue to incur material costs in accordance with the lease agreement. We attempt to align production capacity with demand; however, we cannot provide assurance that plants will not have to be closed.



We are subject to environmental risks and requirements and we may incur significant costs, liabilities, and obligations associated with those risks and requirements.

We are subject to a variety of environmental and pollution control laws, regulations, and permits that govern, among other things, soil, surface water, and groundwater contamination; the generation, storage, handling, use, disposal, and transportation of hazardous materials; the emission and discharge of materials, including GHGs, into the environment; and health and safety. If we fail to comply with these laws, regulations, or permits, we could be fined or otherwise sanctioned by regulators or become subject to litigation. Environmental and pollution control laws, regulations, and permits, and the enforcement thereof, change frequently, have tended to become more stringent over time, and may necessitate substantial capital expenditures or operating costs.



Under certain environmental requirements, we could be responsible for costs relating to any contamination at our, or the Predecessor Company’s, currently or formerly owned or operated properties or third-party waste-disposal sites, even if we were not at fault. Soil and groundwater contamination is being addressed at certain of these locations. In addition to potentially significant investigation and cleanup costs, contamination can give rise to third-party claims for fines or penalties, natural resource damages, personal injury, or property damage.



We cannot provide assurance that our costs, liabilities, and obligations relating to environmental matters will not have a material adverse effect on our business, financial condition, results of operations, and cash flows.



A disruption in our information technology systems, including a disruption related to cybersecurity, could adversely affect our financial performance.



We rely on the accuracy, capacity and security of our information technology systems. Despite the security measures that we have implemented, including those measures related to cybersecurity, our systems could be breached or damaged by computer viruses, natural or man-made incidents or disasters or unauthorized physical or electronic access. A breach could result in business disruption, theft of our intellectual property, trade secrets or customer information and unauthorized access to personnel information. To the extent that our

---

 

business is interrupted or data is lost, destroyed or inappropriately used or disclosed, such disruptions could materially and adversely affect our competitive position, relationships with our customers, financial condition, operating results and cash flows. In addition, we may be required to incur significant costs to protect against the damage caused by these disruptions or security breaches in the future.



Risk Factors Relating to Our Indebtedness

We have a substantial amount of indebtedness, which could have a material adverse effect on our financial health and our ability to fund our operations, obtain financing in the future, and react to changes in our business.

As of December 31, 2017, our total debt, including capital lease obligations and net of debt issue costs,  was $386.8 million. That indebtedness could:



















Our primary debt instrument is the Term Loan Credit Facility which bears interest at (i) the Alternate Base Rate plus a margin of 1.75% or (ii) the Adjusted LIBO Rate (calculated by multiplying the applicable LIBOR by a statutory reserve rate, with a floor of 1.00%) plus a margin of 2.75%. As of December 31, 2017, the balance on the term loan was $356.5 million (net of a $2.3 million discount). If the LIBOR rates increase in excess of 1%, we will incur higher debt service requirements, which could adversely affect our cash flow and operating results. While we periodically enter into agreements designed to limit our exposure to higher interest rates, any such agreements do not offer complete protection from this risk.



We may not be able to refinance our debt on commercially reasonable terms, if at all.

We cannot provide assurance that we will be able to refinance, extend the maturity of, or otherwise amend the terms of our existing indebtedness, or that any refinancing, extension, or amendment will be on commercially reasonable terms. The indebtedness issued in any refinancing of our existing indebtedness could have a significantly higher rate of interest and greater costs than our existing indebtedness. There can be no assurance that the financial terms or covenants of any new credit facility or other indebtedness issued to refinance our existing indebtedness will be the same or as favorable as those under our existing indebtedness.



Our ability to complete a refinancing of our existing indebtedness prior to their respective maturities is subject to a number of conditions beyond our control. For example, if a disruption in the financial markets were to occur at the time that we intended to refinance this indebtedness, we might be restricted in our ability to access the financial markets. Also, if we were unable to make payments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as:







 

Our debt instruments may restrict, and market or business conditions may limit, our ability to employ some of our options.



---

 

In addition, under our credit agreements, a change in control may lead the lenders to exercise remedies such as acceleration of the loan, termination of their obligations to fund additional advances and collection against the collateral securing such loan.



We may be unable to generate sufficient cash to service all of our indebtedness and we may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations, certain of which have short-term maturities, depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions, as well as financial, business, and other factors beyond our control. We cannot provide assurance that we will maintain a level of cash flows from operating activities sufficient to permit us to pay or refinance our indebtedness.



Our debt instruments restrict our current and future operations.

The financing agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions limit our ability and the ability of our subsidiaries to, among other things:





 



 



 



 







 



 



 



 



 



 



 



 



In addition to the restrictions and covenants listed above, certain of our financing documents require us, under certain circumstances, to comply with specified financial maintenance covenants. Any of these restrictions or covenants could limit our ability to plan for or react to market conditions or meet certain capital needs and could otherwise restrict our corporate activities.



Substantially all of our subsidiaries’ assets are pledged as collateral under our secured financing arrangements.

As of December 31, 2017, we had $386.8 million (net of $8.2 million debt issue costs) of secured debt. Substantially all of our subsidiaries’ assets are pledged as collateral for our borrowings under our secured financing arrangements. Most of our domestic subsidiaries are either primary obligors or guarantors under a secured financing arrangement. Substantially all of our domestic subsidiaries’ assets are pledged as collateral for these obligations. If we are unable to repay all secured borrowings when due, whether at maturity or if declared due and payable following a default, the agent or the lenders, as applicable, would have the right to proceed against the collateral pledged to secure the indebtedness and may sell the assets pledged as collateral in order to repay those borrowings, which could have a material adverse effect on our businesses, financial condition, results of operations, and cash flows.





---

 

Risk Factors Relating to Our Common Stock

The price of our common stock may be volatile.

The price at which our common stock trades may be volatile due to a number of factors, including:





 



 



 



 



 



 



 



 



 



 



 

 

Broad market fluctuations may result in a material decline in the market price of our common stock and you may not be able to sell your shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies. Such litigation, if instituted against us, could result in substantial cost and the diversion of management attention.



Shares eligible for future sale may cause the market price of our common stock to decline, even if our business is doing well.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Our certificate of incorporation authorizes us to issue up to 350,000,000 shares of common stock and as of February 21, 2018 we had 20,542,397 shares of common stock outstanding.



Item 1B. Unresolved Staff Comments

None.



Item 2. Properties

We are headquartered in Livonia, Michigan in a 76,000 square foot facility, which we lease. This facility is utilized for management offices, as well as certain accounting, customer service, engineering, human resources, information technology, finance, purchasing, and treasury functions. We believe that this facility is suitable for the activities conducted there.



Our manufacturing is conducted in 23 manufacturing facilities strategically located throughout North America and Europe. Our manufacturing facilities are supported by six engineering and sales locations throughout the world. 

---

 

The following table sets forth selected information regarding each of our facilities:





Item 3.    Legal Proceedings

From time to time, we are involved in legal proceedings, claims, or investigations that are incidental to the conduct of our business. We vigorously defend ourselves against such claims. In future periods, we could be subject to cash costs or non-cash charges to earnings if a matter is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claims, we do not expect that our pending legal proceedings or claims will have a material impact on our future consolidated financial condition, results of operations, or cash flows.



Item 4.    Mine Safety Disclosures

---

 

Not applicable. 



PART II



Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Market Information — Our common stock trades on the New York Stock Exchange under the symbol “TOWR”. As of February 21, 2018, we had 20,542,397 shares of common stock ($0.01 par value) outstanding, 5,028 beneficial shareholders, and two holders of record of our common stock. The transfer agent and registrar for our common stock is Broadridge Financial Solutions, Inc.

 



The following table presents the reported high and low closing prices per share of our common stock during 2017 and 2016:

 





Performance Graph — The following chart shows the cumulative total stockholder return for our common stock from December 31, 2012 to December 31, 2017. The graph also shows the cumulative returns of the S&P 500 Index and the S&P Supercomposite Auto Parts and Equipment Index. The comparison assumes $100 was invested on December 31, 2012. Each of the indices shown assumes that all dividends paid were reinvested.









---

 

Dividends

The following table presents information regarding our quarterly dividends per common share. 





The payment of future quarterly dividends is subject to the discretion of our Board of Directors and depends on various factors, including our net earnings, financial condition, cash requirements, future prospects, and other factors that our Board of Directors deems relevant to its analysis and decision making.



Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

The following table presents information regarding shares of our common stock repurchased during the fourth quarter of 2017.







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

---

 

Item 6.    Selected Financial Data

The following tables set forth selected consolidated balance sheet data as of December 31, 2017 and 2016 and selected consolidated statement of operations data for the years ended December 31, 2017,  2016, and 2015, which have been derived from our audited Consolidated Financial Statements and related notes that are included in this Annual Report. The selected consolidated balance sheet data as of December 31, 2015, 2014, and 2013 and the selected consolidated statement of operations data for the years ended December 2014 and 2013 set forth below, have been derived from previously filed audited consolidated financial statements that are not presented in this Annual Report. As with our Consolidated Financial Statements for the years ended December 31, 2017,  2016, and 2015, we adjusted the information in the consolidated financial statements for the years ended December 31, 2014 and 2013, where appropriate, to account for discontinued operations.



You should read the following selected historical consolidated financial data in conjunction with the more detailed information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the related notes that we have presented elsewhere in this Annual Report.







 

---

 

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations



Company Overview

We are a leading integrated global manufacturer of engineered structural metal components and assemblies primarily serving original equipment manufacturers (“OEMs”). We offer our automotive customers a broad product portfolio, supplying body-structure stampings, frame and other chassis structures, as well as complex welded assemblies, for small and large cars, crossovers, pickups, and sport utility vehicles.  Our products are manufactured at 23 facilities strategically located near our customers in North America and Europe. We support our manufacturing operations through six engineering and sales locations around the world. Our products are offered on a diverse mix of vehicle platforms, reflecting the balanced portfolio approach of our business model and the breadth of our product capabilities. We supply products to approximately 130 vehicle models globally to 11 of the 12 largest OEMs based on 2017 production volumes.



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



Factors Affecting Our Industry

Our business and our revenues are primarily driven by the strength of the global automotive industry, which tends to be cyclical and highly correlated to general global macroeconomic conditions. The strength of the automotive market dictates the volume of purchases of our products by our OEM customers to ultimately satisfy consumer demand. We manufacture products pursuant to written agreements with each of our OEM customers. However, those agreements do not dictate the volume requirements of our customers; instead, OEMs monitor their inventory and the inventory levels of their dealers and adjust the volume of their purchases from us based on consumer demand for their products.



During 2017, industry production volumes increased from 2016 in the European market, but decreased in the North American market. According to IHS, industry production is projected to increase in 2018 in both of our markets. Any such changes may be offset by changes in production levels for our customers’ products.



Factors Affecting Our Revenues

While overall production volumes are largely driven by economic factors outside of our direct control, we believe that the following elements of our business also impact our revenues:



Life cycle of our agreements:    Agreements for new models of vehicles normally cover the lifetime of the platform, often awarded two to three years before these models are marketed to the public, while agreements covering design improvements to existing automobiles have shorter expected life cycles, typically with shorter pre-production and development periods. Typically, once a supplier has been designated to supply components for a new platform, an OEM will continue to purchase those parts from the designated manufacturer for the life of the program. For any given agreement, our revenues depend, in part, upon the life cycle status of the applicable product platform.



Product pricing:    Generally, our customers negotiate annual price reductions with us during the term of their contracts. When negotiated price reductions are expected to be retroactive, we accrue for such amounts as a reduction of revenues as products are shipped. The extent of our price reductions negatively affects our revenues. We have also been able to negotiate year-over-year price increases in select circumstances.



Steel pricing:    We require significant quantities of steel and aluminum in the manufacture of our products. The pricing of our products includes a component for these metals which increases as prices for these metals increase and decreases as prices for these metals decrease. Depending upon when a price change occurs, that change may have a disproportionate effect on our revenues within any particular fiscal period. We purchase a portion of our steel and aluminum from certain of our customers through various OEM resale programs, where our customers actually negotiate the cost for us. The purchases through customer resale programs have buffered the impact of price swings associated with the procurement of these metals. The remainder of our steel and aluminum purchasing requirements are met through contracts with mills, in which we negotiate our own price and seek to pass through price increases and decreases to our customers. 



Foreign exchange:   Our foreign exchange transaction risk is limited because we generally purchase materials and produce products in the same currency in which we sell those products to our final customers. However, the translation of foreign currencies, primarily the Euro, back to U.S. dollars may have a significant impact on our revenues, results of operations, cash flows, or stockholders’ equity. Foreign exchange has an unfavorable impact on revenues when the U.S. dollar is relatively strong when compared to foreign currencies and a favorable impact on revenues when the U.S. dollar is relatively weak when compared

---

 

to foreign currencies. The results of operations and financial condition of our businesses outside of the U.S. are principally measured in their respective local currency and translated into U.S. dollars. Assets and liabilities of our foreign operations are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each reporting period. Results of operations are translated at applicable average rates prevailing throughout the period. Translation gains or losses are reported as a separate component of accumulated other comprehensive income / (loss) in our Consolidated Statements of Equity / (Deficit). Gains and losses resulting from foreign currency transactions, the amounts of which were not material in any of the periods presented in this Annual Report, are included in net income.



Factors Affecting Our Expenses

Our largest expense is steel material, which is driven by the following factors:  



Cost of steel:   We utilize steel and various purchased steel products in virtually all of our products. We refer to the “net steel impact” as the combination of the change in steel prices that are reflected in the price of our products, the change in the cost to procure steel from mills, and the change in our recovery of offal. Our strategy is to be economically neutral to steel pricing by having these factors offset each other. While we strive to achieve a neutral net steel impact, we are not always successful in achieving that goal, in large part due to timing differences. The timing of a change in the price for steel may occur in separate periods and if a change occurs, that change may have a disproportionate effect, within any particular fiscal period, on our product pricing, our steel costs, and the results of our sales of offal. Net imbalances in any one particular fiscal period may be reversed in a subsequent fiscal period, although we cannot provide assurances that, or when, these reversals will occur. Over the past several years, we have not experienced a material net impact from these factors.



 Purchase of steel:   As noted above, we purchase a portion of our steel from certain of our customers through various OEM resale programs and the remaining portion of our steel directly from steel mills. Whether our customer negotiates the cost of steel for us in a customer resale program or we negotiate the cost of steel with the mills, the price we pay is charged directly to our cost of sales, just as the component of product pricing relating to steel is included within our revenues.



 Sale of offal:   A by-product of our production process is the generation of offal. We typically sell offal in secondary markets, which are influenced by similar market forces. We generally share our recoveries from sales of offal with our customers either through scrap sharing agreements, in cases in which we are participating in resale programs, or through product pricing, in cases in which we purchase steel directly from steel mills. In either situation, we may be affected by the fluctuation in scrap steel prices, either positively or negatively, in relation to our various customer agreements. As offal prices generally increase or decrease as steel prices increase or decrease, our sale of offal may mitigate the impact of the volatility of steel price increases, as well as limit the benefits reaped from steel price declines. Recoveries related to the sales of offal reduce cost of sales.



Adjusted EBITDA

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



Adjusted EBITDA is included in this Annual Report because it is one of the principal factors upon which our management assesses performance. Our Chief Executive Officer measures the performance of our segments on the basis of Adjusted EBITDA. As an analytical tool, Adjusted EBITDA assists us in comparing our performance over various reporting periods on a consistent basis because it excludes items that we do not believe reflect our core operating performance.



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



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

---

 

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



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



Our Segments

Our management reviews our operating results and makes decisions based upon two reportable segments: North America and Europe. Refer to Note 14 to our Consolidated Financial Statements for further information regarding our operating and reportable segments.



Results of Operations—Year Ended December 31, 2017 Compared with the Year Ended December 31, 2016

Automobile production volumes increased in Europe and decreased in North America during the year ended December 31, 2017 compared to the year ended December 31, 2016.  The following table presents production volumes in specified regions according to IHS for the year ended December 31, 2017 compared to the year ended December 31, 2016 (in millions of units produced):





The following table presents selected financial information for the years ended December 31, 2017 and 2016 (in millions).







---

 

Comparison of Periods – GAAP Analysis of Consolidated Results

Revenues

Total revenues increased during the year ended December 31, 2017 by $74.4 million, or 3.9%, from the year ended December 31, 2016, reflecting primarily higher volume in our North America segment ($53.9 million), favorable foreign exchange ($13.4 million), and favorable pricing ($14.7 million), principally the recovery of higher steel prices in Europe. Revenues were adversely impacted by lower volume in our Europe segment ($7.6 million).



Gross Profit

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



Total gross profit increased by $6.1 million from the year ended December 31, 2016 and our gross profit margin decreased from 12.5% during 2016 to 12.3% during 2017. The increase in gross profit reflected higher volume ($16.9 million), favorable foreign exchange ($3.4 million, excluding the impact on depreciation), and favorable product mix ($1.8 million), offset partially by higher fixed costs to support new business ($4.9 million). All other factors were net unfavorable by $11.1 million. Cost of sales was impacted by unfavorable pricing and economics ($26.3 million) and higher launch costs to support new business offset partially by favorable efficiencies ($26.9 million). 



Total gross profit was negatively impacted by an increase in the depreciation included in cost of sales from $68.1 million during the year ended December 31, 2016 to $73.5 million during the year ended December 31, 2017, reflecting primarily higher capital spending in 2016 and 2017.



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

Total SG&A decreased $13.5 million from the year ended December 31, 2016, reflecting primarily lower long-term incentive compensation costs primarily related to non-recurring CEO retirement expenses that were accrued in 2016, lower compensation costs primarily due to restructuring actions described below, and lower depreciation, offset partially by unfavorable foreign exchange.



Restructuring and Asset Impairment Expense

Total restructuring and asset impairment expense increased $5.3 million from the year ended December 31, 2016 which reflects the charges incurred in the North America and Europe segments related to severance charges to reduce corporate overhead and fixed costs. During 2017, we took numerous actions to better align the management teams to the remaining footprint of the continuing operations. These actions included a shift in composition of the executive leadership team as well as certain changes within the Corporate and Regional management teams.



Interest Expense, net

Interest expense, net decreased $7.6 million, or 36.2%, from the year ended December 31, 2016,  reflecting primarily favorable non-cash mark-to-market changes of $7.3 million on our derivative financial instruments.



Other Expense

Other expense decreased $5.9 million from the year ended December 31, 2016,  reflecting the non-recurrence of costs incurred during 2016 to support a potential divestiture that did not occur. The costs incurred in 2017 related to certain costs incurred to support the amendment of our Term Loan.



Provision for Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cut and Jobs Act Bill (the “TCJA”). Effective January 1, 2018, the new tax law results in a reduction to the statutory federal income tax rate for U.S. corporate taxable income from 35% to 21%. Upon enactment, we recorded a one-time deferred tax expense of $27.2 million related to the revaluation of our U.S. deferred tax assets. In 2018 and subsequent periods, we expect our worldwide effective tax rate to be significantly lower due to the new U.S. federal tax rate. In addition, the provisions to repeal the corporate alternative minimum tax and allow full expensing of new capital equipment, coupled with the retention of the research tax credit, will enable us to eliminate a material U.S. cash tax liability until at least 2022. We had previously estimated that we would incur a material U.S. cash tax liability in 2020. 

 

---

 

The new tax law also required a one-time "deemed repatriation" of accumulated foreign earnings for the year ended December 31, 2017. To determine the amount of the deemed repatriation and any associated repatriation tax, we must determine, in addition to other factors, the amount of post-1986 profits or losses of each foreign subsidiary, as well as the amount of foreign income taxes paid on such profits or losses. We have made a reasonable estimate that no transition tax is due; however, this represents a provisional estimate. We are gathering additional information to more precisely compute the amount of our deemed repatriation tax, if any. In future periods, we believe the move to a territorial system exempting the repatriation of post-2017 foreign profits to the U.S. will be neutral to us. In addition, we do not anticipate that the new provisions imposing U.S. taxes on foreign “excess returns” or other minimum tax anti-abuse provisions will materially impact our foreign profits since we have significant tangible assets at our foreign locations. 

 

Income tax expense from continuing operations increased $38.2 million from the year ended December 31, 2016, for an overall effective tax rate of 54.7%. Our adjusted effective rate was 27.8% after excluding the one-time charge of $27.2 million due to the revaluation of our deferred tax assets as described above. Our effective tax rate in 2016 was 23.5%. The effective tax rate increased in 2017 primarily related to a valuation allowance that we recorded in the third quarter of 2017 in one of our European subsidiaries. We continue to record significant research tax credit benefits from new launch activities in the United States. 

 

In 2017, the Internal Revenue Service performed an examination for the 2015 tax year, which was completed in January 2018, resulting in no adjustments. In Germany, we are subject to a tax audit for the years ended December 31, 2013 through December 31, 2015. In conjunction with this audit, we have tentatively agreed to make certain transfer pricing adjustments, for which we already have sufficient reserves recorded.



Noncontrolling Interest, Net of Tax

The adjustment to our earnings required to give effect to the elimination of noncontrolling interests decreased by $0.6 million from the year ended December 31, 2016, reflecting decreased earnings in our consolidated Chinese joint venture during 2017 as a result of the sale in the second quarter of 2017. 



Comparison of Periods—Non-GAAP Analysis of Adjusted EBITDA

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







 ____________

---

 

The following table presents revenues (a GAAP measure) and Adjusted EBITDA (a non-GAAP measure) for the years ended December 31, 2017 and 2016 (in millions) as well as explanations of variances:

 





 

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

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



Adjusted EBITDA

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



Consolidated Company: Consolidated Adjusted EBITDA increased by $8 million, or 4.0%, from the year ended December 31, 2016,  reflecting primarily higher volume and mix ($13.8 million) and favorable foreign exchange ($2.3 million). Volume and mix consisted of higher volume ($16.9 million) and favorable mix ($1.8 million) offset partially by higher fixed costs to support new business ($4.9 million). All other factors were net unfavorable by $8.1 million. Unfavorable pricing and economics ($24.6 million) and unfavorable SG&A expenses and other items ($10.4 million), reflecting primarily higher launch costs to support new business, were offset partially by favorable efficiencies ($26.9 million).



Europe Segment: In our Europe segment, Adjusted EBITDA decreased by $9.8 million, or 17.7%, from the year ended December 31, 2016, despite favorable foreign exchange ($2.3 million) and favorable volume and mix ($0.2 million). Volume and mix consisted of favorable product mix ($2.4 million) which was offset partially by lower volume ($2.2 million). All other factors were net unfavorable by $12.3 million. Unfavorable pricing and economics ($16.8 million), principally product pricing and labor costs, and unfavorable SG&A and other items ($4.6 million), were offset partially by favorable efficiencies ($9.1 million). The unfavorable SG&A and other items reflected primarily higher launch costs to support new business.



North America Segment: In our North America segment, Adjusted EBITDA increased by $17.8 million, or 12.2%, from the year ended December 31, 2016, reflecting primarily higher volume and mix ($13.6 million), which consisted of higher volumes ($19.1 million) offset partially by higher fixed costs to support new business ($4.9 million) and unfavorable product mix ($0.6 million). All other factors were net favorable by $4.2 million. Favorable efficiencies ($17.8 million) were offset partially by unfavorable pricing and economics ($7.8 million), principally product pricing and labor costs, and unfavorable SG&A expenses and other items ($5.8 million), principally higher launch costs to support new business.

---

 

Results of Operations—Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015

Automobile production volumes increased during the year ended December 31, 2016 in both of our major markets compared to the year ended December 31, 2015. The following table presents production volumes in specified regions according to IHS for the year ended December 31, 2016 compared to the year ended December 31, 2015 (in millions of units produced):





The following table presents select financial information for the years ended December 31, 2016 and 2015 (in millions).





Comparison of Periods – GAAP Analysis of Consolidated Results

Revenues

Total revenues increased during the year ended December 31, 2016 by $117.5 million, or 6.5%, from the year ended December 31, 2015, reflecting primarily higher volume in our North America segment ($145.6 million) and in our Europe segment ($2.5 million). Revenues were adversely impacted by unfavorable pricing ($30.1 million), and unfavorable foreign exchange ($0.5 million).



Gross Profit

Total gross profit increased by $20.5 million from the year ended December 31, 2015 and our gross profit margin increased from 12.1% during 2015 to 12.5% during 2016. The increase in gross profit reflected higher volume ($26.3 million), offset partially by unfavorable product mix ($6.5 million) and unfavorable foreign exchange ($1.3 million). All other factors were net favorable by $2 million. Cost of sales was positively impacted by favorable efficiencies ($28.7 million). These factors were offset partially by unfavorable pricing and economics ($20 million), and higher launch costs ($3.5 million).



Total gross profit was negatively impacted by an increase in the depreciation included in cost of sales from $67.5 million during the year ended December 31, 2015 to $68.1 million during the year ended December 31, 2016.



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

Total SG&A increased $7.1 million from the year ended December 31, 2015, reflecting primarily higher engineering costs to support new business.



---

 

Restructuring and Asset Impairment Expense

Total restructuring and asset impairment expense decreased $2.4 million from the year ended December 31, 2015. During 2016, we incurred charges in the North America segment related to the buyout of a lease on a previously closed facility, ongoing maintenance and lease exit costs of facilities closed as a result of prior actions, and severance charges to reduce fixed costs. During 2015, we incurred charges in the North America segment related to a liability established to reflect a change in estimated future rents on a previously closed facility, ongoing maintenance and expense of facilities closed as a result of prior actions, and severance charges to reduce fixed costs.



Interest Expense, net

Interest expense, net decreased $2.7 million, or 11.4%, from the year ended December 31, 2015, reflecting primarily lower expense on our Term Loan of $2.5 million.



Other Expense

Other expense increased $6.5 million from the year ended December 31, 2015, reflecting the costs incurred to support a  potential divestiture that did not occur.



Provision for Income Taxes

Income tax expense / (benefit) from continuing operations increased $141 million from the year ended December 31, 2015. In 2015, the Company recorded a one-time deferred tax benefit of $131 million by releasing valuation allowances on U.S. and Italy deferred tax assets. After excluding the 2015 deferred tax benefit, income tax expense increased $7.2 million in 2016 primarily due to increased profitability. Our worldwide effective tax rate was 23.5%. In the United States our effective rate was approximately 23.9%, which is lower than the U.S. statutory rate of 35% primarily because of the benefit of Federal research tax credits generated in 2016. In foreign jurisdictions our effective tax rate was approximately 23% primarily attributable to lower statutory rates.



The availability of U.S. net operating loss carryforwards generated in 2007-2013 has enabled the Company to effectively eliminate our U.S. cash tax liability, except for some immaterial amounts for U.S. alternative minimum tax and state income taxes. We are also generating significant Federal research credits from new U.S. launch activities. 



In 2016, the Internal Revenue Service completed the examination of the Company for tax years 2011-2013. Also in 2016 the German Federal Fiscal Court ruled against the Company's appeal of disallowed interest deductions taken in tax years 2004 and 2005. The court ruled the interest payments made by our Germany subsidiary to its parent were non-deductible dividends. The Company was fully reserved for its tax position.    



Noncontrolling Interest, Net of Tax

The adjustment to our earnings required to give effect to the elimination of noncontrolling interests decreased by $1 million from the year ended December 31, 2015, reflecting decreased earnings in our consolidated Chinese joint venture during 2016.

---

 

Comparison of Periods—Non-GAAP Analysis of Adjusted EBITDA

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









____________

---

 

The following table presents revenues (a GAAP measure) and Adjusted EBITDA (a non-GAAP measure) for the years ended December 31, 2016 and 2015 (in millions) as well as an explanation of variances:





 

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

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



Adjusted EBITDA

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



Consolidated Company: Consolidated Adjusted EBITDA increased by $13.4 million, or 7.1%, from the year ended December 31, 2015, reflecting primarily higher volume ($26.3 million) and favorable foreign exchange ($0.4 million), offset partially by unfavorable product mix ($6.5 million). All other factors were net unfavorable by $6.8 million. Unfavorable pricing and economics ($23.6 million) and unfavorable SG&A expenses and other items ($11.9 million), reflecting primarily higher engineering costs and launch costs to support new business, were offset partially by favorable efficiencies ($28.7 million).



Europe Segment: In our Europe segment, Adjusted EBITDA decreased by $1.8 million, or 3.2%, from the year ended December 31, 2015, reflecting the unfavorable product mix ($3.5 million) and unfavorable volume ($1 million), offset partially by favorable foreign exchange ($0.4 million). All other factors were net favorable by $2.3 million. Favorable efficiencies ($13.8 million) were offset partially by unfavorable pricing and economics ($8.8 million), principally product pricing and labor costs, and unfavorable SG&A and other items ($2.7 million).



North America Segment: In our North America segment, Adjusted EBITDA increased by $15.2 million, or 11.6%, from the year ended December 31, 2015, reflecting primarily higher volumes ($27.3 million), offset partially by unfavorable product mix ($3 million). All other factors were net unfavorable by $9.1 million. Unfavorable pricing and economics ($14.8 million), principally product pricing and labor costs, and unfavorable SG&A expenses and other items ($9.2 million), principally higher engineering costs and higher launch costs to support new business, were offset partially by favorable efficiencies ($14.9 million). 



Restructuring and Asset Impairments

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









---

 

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



The charges incurred in the North America and Europe segments related to severance charges to reduce corporate overhead and fixed costs. During 2017, we took numerous actions to better align the management teams to the remaining footprint of the continuing operations. These actions included a shift in composition of the executive leadership team as well as certain changes within the Corporate and Regional management teams.



The charges incurred in the North America segment during 2016 related to the buyout of a lease on a previously closed facility, ongoing maintenance expense of facilities closed as a result of prior actions and severance charges to reduce fixed costs. The charges incurred in the Europe segment related to severance charges to reduce fixed costs and a revision of a previous estimate.



The charges incurred in our North America segment during 2015 related to a liability established to reflect a change in estimated future rents on a previously closed facility, ongoing maintenance expense of facilities closed as a result of prior actions and severance charges to reduce fixed costs. The charges incurred in the Europe segment related to severance charges to reduce fixed costs and a revision of a previous estimate.



Liquidity and Capital Resources

General

We generally expect to fund expenditures for operations, administrative expenses, capital expenditures, and debt service obligations with internally generated funds from operations and we generally expect to satisfy working capital needs from time-to-time with borrowings under our revolving credit facility or cash on hand. As of December 31, 2017,  we had available liquidity of approximately $370 million, which we believe is adequate to fund our working capital requirements for at least the next twelve months. We believe that we will be able to meet our debt service obligations and fund operating requirements for at least the next twelve months with cash flow from operations, cash on hand, potential operating lease arrangements, and borrowings under our revolving credit facility.



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



Cash Flows and Working Capital

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





Net Cash Provided by Operating Activities

During the year ended December 31, 2017, we generated $164.7 million of cash flow from operations, compared with $137.7 million during the year ended December 31, 2016. The primary reasons for this increase were increased pre-tax earnings and a favorable net tooling position.



During the year ended December 31, 2016, we generated $137.7 million of cash flow from operations, compared with $101.4 million during the year ended December 31, 2015. The primary reasons for this increase were increased pre-tax earnings and a favorable fluctuation in working capital which resulted from favorable term changes from some of our customers.



---

 

Net Cash Used in Investing Activities

Net cash utilized in investing activities was $88.2 million during 2017, compared to $111.7 million during 2016. The  $23.5 million change in cash used reflects decreased capital expenditures, related primarily to the timing of program launches, and the proceeds received from the sale of a China joint venture.



Net cash utilized in investing activities was $111.7 million during 2016, compared to $141.5 million during 2015. The $29.8 million change in cash used reflects decreased capital expenditures, related primarily to the timing of program launches, cash used in 2015 to fund the acquisition of a facility in Mexico, and proceeds received from the sale of a China joint venture.



Net Cash Used In Financing Activities

Net cash used in financing activities was $20.1 million during 2017 compared to $83.2 million during 2016. The $63.1 million change was attributable primarily to the non-recurrence of a $50 million repayment on the Term Loan Credit facility during the first quarter of 2016 and lower treasury stock purchases during 2017.



Net cash used in financing activities was $83.2 million during 2016, compared to $11.5 million during 2015. The $71.7 million change was attributable primarily to net repayment of borrowings, purchase of treasury stock, dividend payments, and the non-recurrence of swap proceeds received in 2015.



Working Capital

We manage our working capital by monitoring key metrics principally associated with inventory, accounts receivable, and accounts payable. Our quarterly average inventory days on hand remained at 17 days during the fourth quarter of 2016 and the fourth quarter of 2017; however our inventory increased from $71.7 million at December 31, 2016 to $78.7 million at December 31, 2017, reflecting primarily the ramp up of production on recently awarded business and favorable foreign exchange.



Our accounts receivable balance increased from $178.3 million as of December 31, 2016 to $239.3 million as of December 31, 2017.  The increased accounts receivable reflects primarily higher revenues and the change of receivables related to customer-owned tooling.



Our accounts payable balance increased from $258.1 million as of December 31, 2016 to $323.3 million as of December 31, 2017.  The change reflects primarily higher revenues and the change of payables related to customer-owned tooling.



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



Our working capital is also impacted by our net position in regard to tooling owned by our customers. Tooling costs represent costs incurred by us in the development of new tooling used in the manufacture of our products. Generally, when a customer awards a contract to us, the customer agrees to reimburse us for certain of our tooling costs. As the tooling is developed, we experience cash outflows because we bear the costs and we typically do not receive reimbursement from our customers until the manufacture of the particular program commences. This timing delay causes our working capital to fluctuate between periods due to the timing of the cash inflows and outflows. We define our net tooling position as tooling in progress (see Note 3 of our Consolidated Financial Statements) plus accounts receivable related to tooling less accounts payable related to tooling. During 2017 our net tooling position decreased by $41 million from $77 million at December 31, 2016 to $36 million at December 31, 2017. This decrease reflects reimbursements from customers that exceeded spending on customer-owned tooling.



On December 31, 2017 and 2016, we had working capital balances of $41 million and $9.4 million, respectively. This increase reflects primarily positive cash generated in 2017 primarily due to higher earnings and a favorable net tooling position.



Sources and Uses of Liquidity 

Our available liquidity at December 31, 2017 was $369.7 million, which consisted of $123.7 million of cash on hand, and unutilized borrowing availability under our U.S. and foreign credit facilities of $192 million and $54 million, respectively. A portion of our cash balance ($53.4 million) is located at foreign subsidiaries and is presently being used to fund operations at and investment in those locations. As of December 31, 2016 and 2015, we had available liquidity of approximately $292.2 million and $350.6 million, respectively, excluding the cash and unutilized borrowing availability at our discontinued operations. 



As of December 31, 2017,  we had short-term debt, excluding capital leases, of $36.5 million, of which $32.9 million related to receivables factoring in Europe and $3.6 million related to current maturities of our Term Loan Credit Facility.  The receivables factoring

---

 

in Europe consists of uncommitted demand facilities, which are subject to termination at the discretion of the banks, although we have not experienced any terminations by the banks. We believe that we will be able to continue the receivables factoring in Europe.

 

We are currently experiencing organic growth well above industry as a result of major new business awards primarily in North America. To fund this growth, we continue to incur significant capital investment requirements for the purchase and installation of the machinery and equipment necessary to manufacture the awarded products. We have entered into operating leases to assist with a portion of the funding requirements for the related capital investments. We believe that these operating leases provide a diversified capital source for financing the capital investment requirements at competitive rates in relation to our existing debt arrangements and help to maintain our strong liquidity profile. These leasing arrangements bear a weighted average fixed interest rate of 5.4%.



Pursuant to the Board of Directors’ declaration on October 16, 2015, the Company commenced payment of a quarterly dividend of $0.10 per common share. This dividend was raised to $0.11 per common share on October 20, 2016 and to $0.12 per common share on October 20, 2017. During the years ended December 31, 2017,  2016,  and 2015, the Company paid dividends of $9.2 million,  $8.6 million, and $2.1 million, respectively.

 

As noted above, on June 17, 2016, the Company announced its Board of Directors’ authorization to repurchase up to $100 million of the Company’s issued and outstanding common stock from time to time in the open market, or in privately negotiated transactions. As of December 31, 2017, 829,648 shares have been purchased under the Repurchase Program at an aggregate cost of $18.9 million with no additional shares being purchased under that program during the year ended December 31, 2017.



Free Cash Flow

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





Free cash flow was $60.6 million during 2017, compared to $21.4 million during 2016. The $39.2 million difference in free cash flow reflects primarily a favorable fluctuation in our net tooling position, higher adjusted EBITDA, and lower capital spending.



Free cash flow was $21.4 million during 2016, compared to $18.3 million utilized during 2015. The $39.7 million difference in free cash flow reflects primarily a favorable fluctuation in working capital, higher adjusted EBITDA, lower capital spending, and favorable net tooling position.



Debt

As of December 31, 2017, we had outstanding indebtedness, excluding capital lease obligations, of approximately $381.2 million, which consisted of the following:



$356.5 million (net of a $2.3 million discount) indebtedness outstanding under our Term Loan Credit Facility

$32.9 million of foreign subsidiary indebtedness

$8.2 million of debt issue costs netted against our indebtedness



Term Loan Credit Facility

On April 23, 2013, we and our subsidiaries, Tower Automotive Holdings USA, LLC, Tower Automotive Holdings I, LLC, Tower Automotive Holdings II (a) LLC, Tower Automotive Holdings II (b) LLC and the domestic subsidiary and domestic affiliate guarantors named therein, entered into a Term Loan and Guaranty Agreement (the “Term Loan Credit Agreement”) whereby we obtained a term loan of $420 million. The maturity date for the initial term loan disbursed under the Term Loan Credit Agreement was April 23, 2020.



On January 31, 2014, we amended the Term Loan Credit Agreement by entering into the Second Refinancing Term Loan Amendment and Additional Term Loan Amendment (the “Second Term Loan Amendment”), pursuant to which, among other things, the outstanding term loans under the Term Loan Credit Agreement were refinanced in full, and additional term loans in an aggregate principal amount of approximately $33 million (the “Additional Term Loans”) were disbursed. After giving effect to the disbursement of the Additional

---

 

Term Loans, there were term loans (the “Term Loans”) in the aggregate principal amount of $450 million outstanding under the Term Loan Credit Agreement. The term loans bear interest at (i) the Alternate Base Rate plus a margin of 2.00% or (ii) the Adjusted LIBO Rate (calculated by multiplying the applicable LIBOR rate by a statutory reserve rate, with a floor of 1.00%) plus a margin of 3.00%.  



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



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



Amended Revolving Credit Facility

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



The Fourth Amended Revolving Credit Facility Agreement amended and restated, in its entirety, the Third Amended Revolving Credit Facility Agreement, dated as of September 17, 2014, by and among the Borrower, its domestic affiliate and domestic subsidiary guarantors named therein, and the lenders party thereto, and the Agent. The Fourth Amended Revolving Credit Facility Agreement provides for a cash flow revolving credit facility (the “Amended Revolving Credit Facility”) in the aggregate amount of up to $200 million. The Fourth Amended Revolving Credit Facility Agreement also provides for the issuance of letters of credit in an aggregate amount not to exceed $30 million, provided that the total amount of credit (inclusive of revolving loans and letters of credit) extended under the Fourth Amended Revolving Credit Facility Agreement is subject to an overall cap, on any date, of $200 million. We may request the issuance of Letters of Credit denominated in Dollars or Euros.  As of December 31, 2017, we had no borrowings outstanding under our Amended Revolving Credit Facility and $8 million of letters of credit outstanding under the Fourth Amended Revolving Credit Facility Agreement. Thus, we could have borrowed an additional $192 million under the Fourth Amended Revolving Credit Facility Agreement as of December 31, 2017, calculated as follows (in millions):







Advances under the Amended Revolving Credit Facility bear interest at an alternate base rate plus a base rate margin or LIBOR plus a Eurodollar margin. The applicable margins are determined by the Company’s Total Net Leverage Ratio (as defined in the Fourth Amended Revolving Credit Facility Agreement). As of December 31, 2017, the applicable margins were 1.50% per annum and 2.50% per annum for base rate and LIBOR based borrowings, respectively. Borrowings outstanding under our Amended Revolving Credit Facility may vary significantly from time to time, depending on our cash needs at any given time. Our Amended Revolving Credit Facility matures on March 7, 2022.



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



Foreign Subsidiary Indebtedness

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



---

 

Capital and Operating Leases

We maintain capital leases primarily for a manufacturing facility and certain manufacturing equipment. We have several operating leases, including leases for office and manufacturing facilities, as well as certain equipment, with lease terms expiring between the years 2018 and 2026. As of December 31, 2017, our total future operating lease payments amounted to $170.1 million. The present value of minimum lease payments under our capital leases amounted to $5.5 million. As of December 31, 2017, we were committed to making lease payments during 2018 of not less than $35.1 million on our operating leases and not less than $5.6 million on our capital leases. 



Beginning in 2019, FASB ASC No. 842, Leases, will change the financial reporting for leases. Certain of our manufacturing equipment leases currently classified as operating leases will be considered financing leases under the new standard which will require us to record the right of use asset as additional property, plant, and equipment and the associated liability as lease debt. As of December 31, 2017 the associated liability from these leases would have been approximately $72 million.



In addition, we have numerous real estate and equipment leases currently classified as operating that we believe will continue to be classified as operating under the new standard. We expect that the right of use assets and liabilities associated with these leases will be material, but have not yet quantified the total balance sheet impact for these leases.



Capital Expenditures

In general, we are awarded new automotive business two to three years prior to the launch of a particular program. During the pre-launch period, we typically invest significant resources in the form of capital expenditures for the purchase and installation of the machinery and equipment necessary to manufacture the awarded products. Some of our recent major awards in 2016 and 2015 have been on a more accelerated timing and have launched approximately six months after being awarded. Capital expenditures for the years ended December 31, 2017 and 2016 were $104.1 million and $116.3 million, respectively. The decrease reflects primarily the timing of customer program launches. Our capital spending for 2018 is expected to be approximately $150 million. In addition to this capital spending, we expect to fund approximately $75 - $85 million of incremental machinery and equipment purchases through leases over the next two years.



Off-Balance Sheet Obligations

In addition to the operating leases described above, our off-balance sheet obligations consist of obligations under our Third Amended Revolving Credit Facility. As of December 31, 2017,  letters of credit outstanding were $8 million under our Fourth Amended Revolving Credit Facility.



Covenants

As of December 31, 2017, the Company was in compliance with all financial covenants that govern its credit agreements.



Net Debt

Net debt is a non-GAAP financial measure that represents total debt less cash and cash equivalents. We believe that the presentation of net debt provides useful information because we understand that our investors perceive net debt as part of the management of our overall liquidity, financial flexibility, capital structure and leverage. Furthermore, certain debt rating agencies, creditors and credit analysts monitor our net debt as part of their assessments of our business. Net debt is used by management to help assess our exposure to our funding sources and to evaluate future needs for additional liquidity. Our use of the term “net debt” should not be understood to mean that we will use any cash on hand to repay debt. Net debt is calculated as follows (in millions):





As of December 31, 2017, our net debt was $263.1 million, compared to $327.5 million as of December 31, 2016.  The $64.4 million change reflects primarily favorable free cash flow and cash received from our discontinued operations offset partially by the remittance of dividends to our shareholders and debt issuance costs.



---

 

As of December 31, 2015, our net debt was $331.7 million. The $4.2 million change from 2015 to 2016 reflects primarily favorable free cash flow and cash received from our discontinued operations offset by our shares purchased as part of our stock buyback program and remittance of dividends to our shareholders.



Contractual Obligations and Commercial Commitments

Our contractual obligations and commercial commitments as of December 31, 2017 are summarized below (in millions):





___________

(a)   Represents expected future contributions required to fund our pension plan, based on current actuarial assumptions.

(b)   Represents payments expected to be made to various governmental agencies relating to certain tax positions taken pursuant to

FASB ASC No. 740, Income Taxes.  

(c)   Represents obligations under executory purchase orders related to capital and tooling expenditures.

(d)   Represents principal and interest payments on our capital lease obligations.



Our purchase orders for inventories are based on demand and do not require us to purchase minimum quantities.



Critical Accounting Policies and Estimates

The preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and disclosure of our contingent assets and liabilities at the date of the Consolidated Financial Statements, as well as the reported amounts of our revenues and expenses during the reporting period. Considerable judgment is often involved in making these estimates and assumptions. Critical estimates are those that require the most difficult, subjective, or complex judgments in the preparation of our financial statements and the accompanying notes. We evaluate these assumptions and estimates on a regular basis and we believe that they are reasonable and appropriate. However, actual results could differ from our estimates and the use of different assumptions could result in significantly different results. The following discussion of accounting estimates is intended to supplement the Summary of Significant Accounting Policies section of Note 3 to our Consolidated Financial Statements. Policies that are excluded from the discussion below are deemed to be either immaterial or not critical for the periods presented in this Annual Report.



Fair Value Measurements

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



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



Periodically, the Company uses derivative financial instruments to manage interest rate risk and net investment risk in foreign operations, and to limit exposure of foreign currency fluctuations related to certain intercompany payments.  Under FASB ASC No. 815, Derivatives and Hedging, all derivatives are recorded at fair value.

---

 



At December 31, 2017 and 2016, our derivative financial instruments include interest rate and cross currency swaps. These instruments are recorded in other assets, net or other non-current liabilities in our Consolidated Balance Sheets and the fair value is measured using Level 2 observable inputs such as foreign currency exchange rates, swap rates, cross currency basis swap spreads and interest rate spreads. At December 31, 2017, the foreign currency exchange hedge (net investment hedge of our European subsidiaries) and the interest rate swap had liability fair values of $27 million and $8.9 million respectively. At December 31, 2016, the foreign currency exchange hedge (net investment hedge of our European subsidiaries) had a liability fair value of $5 million. The interest rate swap (not designated for hedge accounting in 2016) had a liability fair value of $2.5 million. Refer to Note 8 to our Consolidated Financial Statements for further information regarding derivatives.



Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of net assets acquired. Goodwill is not amortized, but it is tested for impairment on, at a minimum, an annual basis. In accordance with FASB ASC No. 350, Intangibles – Goodwill and Other, a two-step process is utilized in reviewing for impairment. The first step in the process requires the identification of reporting units and comparison of the fair value of each reporting unit to its respective carrying value. We have identified our reporting units as North America and Europe. If the carrying value of a unit is less than its fair value, no impairment is deemed to exist and step two is not necessary. If the carrying value of a unit is greater than its fair value, step two is required. The second step in the impairment review process requires the computation of impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of its goodwill. In accordance with FASB ASC No. 350, which requires goodwill be tested for impairment annually and at the same time each year, we perform an annual impairment each year at year-end. We will also test goodwill for impairment when an event occurs or circumstances change such that it is reasonably possible that impairment may exist.



The evaluation of goodwill for possible impairment includes estimating the fair market value of each of the reporting units which have goodwill associated with their operations using discounted cash flow and multiples of cash earnings valuation techniques, plus valuation comparisons to recent public sale transactions of similar businesses, if any. These valuation methods require the Company to make estimates and assumptions regarding future operating results, cash flows, changes in working capital and capital expenditures, selling prices, profitability, and the cost of capital. Although the Company believes that the estimates and assumptions used were reasonable, actual results could differ from those estimates and assumptions.



The results of our 2017 and 2016 annual goodwill impairment analysis indicated that the fair values of the Europe and North American reporting units were substantially in excess of their carrying value; thus, no impairment existed at December 31, 2017 or December 31, 2016.



Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the Consolidated Financial Statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent we believe that these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Valuation allowances have been recorded where it has been determined that it is more likely than not that we will not be able to realize the net deferred tax assets. Previously established valuation allowances are reversed into income when there is compelling evidence, typically three or more consecutive years of cumulative profit or other positive evidence, that the future tax profitability will be sufficient to utilize the deferred tax asset. Due to the significant judgment involved in determining whether deferred tax assets will be realized, the ultimate resolution of these items may be materially different from the previously estimated outcome.

 

On December 22, 2017, the U.S. government enacted the Tax Cut and Jobs Act Bill. Effective January 1, 2018, the new tax law results in a reduction to the statutory federal income tax rate for U.S. corporate taxable income from 35% to 21%. Upon enactment, we recorded a one-time deferred tax expense of $27.2 million related to the revaluation of our U.S. deferred tax assets. In 2018 and subsequent periods, we expect our worldwide effective tax rate to be significantly lower due to the new U.S. federal tax rate.



Additional changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes, other than as described above, that would have a material effect on our results of operations, cash flows, or financial position.



The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations.

---

 



FASB ASC No. 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. FASB ASC No. 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.



We recognize tax liabilities in accordance with FASB ASC No. 740 and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.



Pension and Other Postretirement Benefits

We recognize net actuarial gains or losses in excess of 10% of the greater of the market-related value of the Tower International

Consolidated Pension Plan (the “Pension Plan”) assets or the Pension Plan’s projected benefit obligation (“the corridor”) annually, in the fourth quarter of each fiscal year, or at the date of a measurement event.



The calculations of the projected pension benefit obligation and other postretirement benefits obligation and the associated expenses are based upon certain assumptions made by third party actuaries. These assumptions include, among others, the discount rate, expected long-term rate of return on plan assets, mortality rates, and expected increases in compensation and healthcare costs. Refer to Note 10 to our Consolidated Financial Statements for a description of assumptions made. In accordance with GAAP, actual results that differ from these assumptions are accumulated and amortized over future periods and therefore, generally affect the expense recognized and obligation recorded in future periods. While we believe the current assumptions are appropriate based on available information, significant differences in actual experience or significant changes in assumptions may materially affect the projected pension obligation and other postretirement obligations, as well as the related future expenses.



Our Pension Plan and other postretirement costs are calculated based upon a number of actuarial assumptions, most notably the discount rates used to calculate our projected pension benefit obligations in 2017 and 2016, which were 3.42% and 3.84%, respectively, and the discount rates used in the calculation of our postretirement benefit obligations in 2017 and 2016, which were 3.47% and 3.94%, respectively. The discount rates used in the calculations are established based upon the results of a yield curve analysis performed annually by a third party, which calculates a yield to maturity that mirrors the timing and amounts of future benefit payments. The measurement dates of our post retirement plans are December 31 of each year.



The expected long-term rate of return assumptions are based upon modeling studies completed with the assistance of our actuaries and investment consultants. These models take into account inflation, asset class returns, and bond yields for both domestic and foreign markets. These studies, along with the history of returns for the Pension Plan, indicate that expected future returns, weighted by asset allocation, supported an expected long-term asset return assumption of 7.4% for 2017 and 2016.



Based on our assumptions as of December 31, 2017, a change in the discount rate or the expected long-term rate of return assumptions, holding all other assumptions constant, would have the following impact on our projected pension benefit obligation and net periodic benefit cost on an annual basis (in millions):









Our Pension Plan provides benefits for certain current and former U.S. employees. Benefits under the Pension Plan were frozen in October 2006.  We recognized income of $2.9 million during the year ended December 31, 2017.  We incurred expenses of $5.6 million during the year ended December 31, 2016, which includes the actuarial pension loss recorded in the fourth quarter of 2016 of $8.3 million. We incurred expenses of $4.6 million during the year ended December 31, 2015, which includes the actuarial pension loss recorded in the fourth quarter of 2015 of $9.1 million. We anticipate that we will have approximately $2.9 million of pension income in

---

 

2018, excluding any actuarial gain or loss, and we expect to contribute $6.1 million to our Pension Plan in 2018. It is difficult to reliably forecast whether a mark-to-market adjustment for net actuarial gains or losses will be required in 2018 and the amount of such an adjustment, if one is required. Mark-to-market adjustments are primarily driven by events and circumstances beyond our control, including changes in interest rates and the performance of financial markets. To the extent discount rates decrease or the value of our Pension Plan’s investments decrease, mark-to market charges to operations may be recorded during the fourth quarter of 2018, if the actuarial gain or loss is in excess of the corridor.



We anticipate our other post-employment benefit expense to be approximately $0.7 million and we expect to make benefit payments of $0.7 million in 2018. Refer to Note 10 to our Consolidated Financial Statements for further information regarding pension and other postretirement benefits.



Recent Accounting Pronouncements 

For information regarding recent accounting pronouncements, refer to Note 2 to our Consolidated Financial Statements.

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

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



Commodity Pricing Risk

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



Interest Rate Risk

At December 31, 2017, we had total debt, excluding capital leases, of $381.2 million (net of a $2.3 million discount and $8.2 million of debt issue costs), consisting of floating rate debt of $195.1 million (51%) and fixed rate debt of $186.1 million (49%) taking into account our $186.1 million variable rate to fixed rate swap (See Note 8 of our Consolidated Financial Statements for further information relating to our swaps). Assuming no changes in the monthly average variable rate debt levels of $232.5 million for the year ended December 31, 2017, we estimate that a hypothetical change of 100 basis points in the LIBOR and alternative base rate would not have a significant impact on interest expense due to the LIBOR floor in our Term Loan.



Foreign Exchange Risk

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



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

---

 



Our strategy for managing currency risk relies primarily upon conducting business in a foreign country in that country’s currency. We may, from time to time, also participate in hedging programs intended to reduce our exposure to currency fluctuations (See Note 8 of our Consolidated Financial Statements for further information relating to our swaps).  We believe that the effect of a 100 basis point movement in foreign currency rates against the U.S. dollar would not have materially impacted the results of our operations, our cash flows, or our stockholders’ equity for the year ended December 31, 2017.



Inflation

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



---

 

Item 8.    Financial Statements and Supplementary Data



Index to Consolidated Financial Statements and Supplementary Data





Audited Financial Statements for the Three Years Ended December 31, 2017:









---

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Stockholders and the Board of Directors of

Tower International, Inc.

Livonia, MI



Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Tower International, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income / (loss), equity / (deficit), and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2018 expressed an unqualified opinion on the Company's internal control over financial reporting.



Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ DELOITTE & TOUCHE LLP

Detroit, MI

February 28, 2018



We have served as the Company’s auditor since 2002.

---

 



TOWER INTERNATIONAL, INC. AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

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

---

 



TOWER INTERNATIONAL, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share amounts)





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



---

 



TOWER INTERNATIONAL, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
(Amounts in thousands)





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



---

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)



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