Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A and the cautionary statements and discussion of risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2013 and the information contained in the Consolidated Financial Statements and Notes to Consolidated Statements in Part 1, Item 1 of this report.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of us. Forward-looking statements can be identified by the use of terms such as “expects,” “should,” “may,” “believes,” “anticipates,” “will,” and other future tense and forward-looking terminology, or by the fact that they appear under the caption “Outlook.” Our forward-looking statements generally relate to our future performance, including our anticipated operating results and liquidity sources and requirements, our business strategies and goals, and the effect of laws, rules, regulations, new accounting pronouncements and outstanding litigation, on our business, operating results, and financial condition.
Readers are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) our history of losses and our ability to maintain adequate liquidity in total and within each foreign operation; ii) our ability to develop successful new products in a timely manner; iii) the success of our ongoing effort to improve productivity and restructure our operations to reduce costs and bring them in line with projected production levels and product mix; iv) the extent of any business disruption that may result from the restructuring and realignment of our manufacturing operations and personnel or system implementations, the ultimate cost of those initiatives and the amount of savings actually realized; v) loss of, or substantial decline in, sales to any of our key customers; vi) current and future global or regional political and economic conditions and the condition of credit markets, which may magnify other risk factors; vii) increased or unexpected warranty claims; viii) actions of competitors in markets with intense competition; ix) financial market changes, including fluctuations in foreign currency exchange rates and interest rates; x) the ultimate cost of defending and resolving legal and environmental matters, including any liabilities resulting from the regulatory antitrust investigations commenced by the United States Department of Justice Antitrust Division and the Secretariat of Economic Law of the Ministry of Justice of Brazil, both of which could preclude commercialization of products or adversely affect profitability and/or civil litigation related to such investigations; xi) local governmental, environmental, trade and energy regulations; xii) availability and volatility in the cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; xiii) significant supply interruptions or cost increases; xiv) loss of key employees; xv) the extent of any business disruption caused by work stoppages initiated by organized labor unions; xvi) risks relating to our information technology systems; xvii) impact of future changes in accounting rules and requirements on our financial statements; xviii) default on covenants of financing arrangements and the availability and terms of future financing arrangements; xix) reduction or elimination of credit insurance; xx) potential political and economic adversities that could adversely affect anticipated sales and production; xxi) in India, potential military conflict with neighboring countries that could adversely affect anticipated sales and production; xxii) weather conditions affecting demand for replacement products; and xxiii) the effect of terrorist activity and armed conflict. These forward-looking statements are made only as of the date of this report, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see our most recently filed Annual Report on Form 10-K, Part I, Item 1A, “Risk Factors.”
EXECUTIVE SUMMARY
In addition to the relative competitiveness of our products, our business is significantly influenced by several specific economic factors: the strength of the overall global economy, which can have a significant impact on our sales; our product costs, especially the price of copper, steel and aluminum; and the relative value compared to the U.S. Dollar of those foreign currencies of countries where we operate.
Furthermore, we continuously monitor future changes in local governmental regulations with regards to allowable refrigerants we can use in our compressors and condensing units. These future changes may also have a significant impact on our sales and our product costs.
Economy
Our sales depend significantly on worldwide economic conditions, which directly impact consumers' demand for the products in which our products are used. Adverse conditions like a volatility in currencies, weak economic data in China and the U.S.'s troubled economy, have been present for at least the last year; other risks impacting the global economy, and therefore our sales, include signs of weakness in the global banking system and the economy in the European Union.
Our net sales in the
first quarter
of
2014
continued to be impacted by these ongoing challenging global macroeconomic conditions, warranty issues that were discovered in 2013, as well as increased competition. Sales decreased in the first
three months
of
2014
compared to the first
three months
of
2013
primarily due to the lower volumes and unfavorable changes in sales mix from our Indian and Brazilian air conditioning applications, from our Brazilian household refrigeration and freezer applications and from our French and Indian commercial refrigeration and aftermarket applications as well as the unfavorable impact of changes in foreign currency exchange rates. This decrease was partially offset by net price increases and new customers for our Indian household refrigeration and freezer applications. Exclusive of the effects of currency translation, sales in the first
three months
of
2014
were approximately 9.9% lower compared to the first
three months
of
2013
.
Liquidity
Challenges remain with respect to our ability to generate appropriate levels of liquidity solely from cash flows from operations, particularly related to uncertainties of future sales levels, global economic conditions, currency exchange rates and commodity pricing as discussed above. In the first
three months
of
2014
, cash used in operating activities was
$19.2 million
, which included
$9.4 million
used for inventories and
$5.0 million
used for receivables, partially offset by
$3.8 million
provided by payables and accrued expenses.
In the first
three months
of
2014
, we did not receive any amounts related to our outstanding refundable non-income taxes. We expect to receive refunds of outstanding Indian and Brazilian non-income taxes through the end of
2016
. Due to changes in exchange rates, the actual amounts received as expressed in U.S. Dollars will vary depending on the exchange rate at the time of receipt or future reporting date. We expect to recover approximately
$17.1 million
of the
$29.2 million
outstanding refundable taxes in the next twelve months, primarily related to the short-term portion of the outstanding refundable taxes of
$12.1 million in Brazil and $4.1 million in India
. The tax authorities will not commit to an actual date of payment and the timing of receipt may be different than planned if the tax authorities change their pattern of payment or past practices.
We realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or sales or economic conditions improve. As a result, we continued to adjust our workforce levels as conditions demanded in 2014 in order to reduce our aggregate salary, wages and employee benefits. Our estimated realized savings on an annual basis are approximately
$0.7 million
. We incurred a charge of
$1.2 million
associated with further layoffs which took place in the
three months ended March 31, 2014
. The realized savings in the first quarter of 2014 are consistent with our initial estimates. We have recently hired a Chief Restructuring Officer and additional restructuring actions may be necessary during the next several quarters. Any actions we embark upon could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, any future restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and future operating results. Cash required for any future restructuring activities might be provided by our cash balances, cash proceeds from the sale of assets or new financing arrangements. If such actions are taken, there is a risk that the costs of the restructuring and cash required will exceed our original estimates or the benefits received from such activities.
In December 2013, we amended our Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), subject to the terms and conditions of the agreement, to extend the maturity of our facilities to December 11, 2018, to add a new Term Loan for up to $15.0 million, subject to closing conditions which were met in the first quarter of 2014, and to continue our revolving credit facility up to
$34.0 million
(formerly $45.0 million), which includes up to
$10.0 million
in letters of credit, subject to a borrowing base formula, lender reserves and PNC’s reasonable discretion. The loans under the facilities bear interest at either LIBOR or an alternative base rate, plus a margin that varies with borrowing availability. As a result of meeting all of the closing conditions in the first quarter of 2014, we reclassified the Term Loan proceeds from "Restricted cash and cash equivalents" to "Cash and cash equivalents" on our Consolidated Balance Sheets. Interest started to accrue on the entire Term Loan balance prior to us meeting all of the closing conditions and the monthly installments of $250,000 to repay the principal on the Term Loan began January 2, 2014. We were in compliance with all covenants and terms of the agreement at March 31, 2014. At March 31, 2014, our borrowings under these facilities totaled
$14.7 million
, with
$10.5 million
outstanding on the term loan and
$4.2 million
outstanding on the revolver. We also had
$3.4 million
in outstanding letters of credit. A fixed charge coverage ratio covenant applies if our availability falls below a specified level for more than five business days. We had
$9.6 million
of additional borrowing capacity under this facility as of March 31, 2014, after giving effect to our fixed charge coverage ratio covenant and our outstanding borrowings and letters of credit under this facility.
We also continue to maintain various credit facilities in most jurisdictions in which we operate outside the U.S. While we believe that current cash balances and available borrowings under our credit facilities and cash inflows related to non-income tax refunds will produce adequate liquidity to implement our business strategy over the foreseeable future, there can be no assurance that such amounts will ultimately be adequate if sales or economic conditions deteriorate. We anticipate that we will continue to monitor non-essential uses of our cash balances until cash provided by normal operations improves.
Our business exposes us to potential litigation, such as product liability lawsuits or other lawsuits related to anti-competitive practices and securities law or other types of business disputes. These claims can be expensive to defend and an unfavorable outcome from any such litigation could adversely affect our cash flows and liquidity.
In addition, while our past business dispositions have improved our liquidity position, many of the sale agreements provide for certain retained liabilities and indemnities including liabilities that relate to environmental issues and product warranties. While we believe we have properly accounted for such contingent liabilities based on currently available information, future events could result in the recognition of additional liabilities that could consume available liquidity and management attention.
Commodities
Our results of operations are very sensitive to the prices of commodities due to the high content of steel, copper and aluminum in our compressor products.
The average market costs for the types of copper and aluminum used in our products decreased in the
first quarter of 2014
as compared to the
first quarter of 2013
, with copper and aluminum decreasing by 10.2% and 14.4%, respectively, while the cost of steel increased by 5.5%. After consideration of our hedge positions our average cost of copper and aluminum decreased in the
first quarter of 2014
by 9.9% and 12.8%, respectively, compared to the
first quarter of 2013
. Our average cost of copper and aluminum in the
first quarter of 2014
are lower in our results of operations when compared to the
first quarter of 2013
, primarily due to market price reductions. Volatility in market prices of these commodities create substantial challenges to our ability to control the cost of our products, as the final product cost can depend greatly on our ability to secure optimally priced derivative contracts. While aluminum is typically not as volatile as copper and steel, it can demonstrate significant price swings. We execute derivative contracts for aluminum to help mitigate the risk of rising aluminum prices.
Any increase in steel prices may have a particularly negative impact on our product costs, as there is currently no well-established global market for hedging against increases in the price of steel. In the past, we had been successful in securing a few contracts to help mitigate the risk of the rising steel market, but this market is not very liquid and is only available against our purchases of steel in the U.S. We currently have no steel contracts outstanding.
We are proactive in addressing the volatility of copper and aluminum costs by executing derivatives contracts. As of
March 31, 2014
, we have derivative contracts outstanding to cover approximately
50.8%
and
26.2%
of our remaining anticipated
2014
copper and aluminum usage, respectively. Continued volatility of these costs could nonetheless have an adverse effect on our results of operations both in the near and long term as our anticipated needs are not 100% hedged.
We expect to continue our approach of mitigating the effect of short-term swings of commodities through the appropriate use of hedging instruments, price increases and modified pricing structures with our customers, where available, to allow us to recover our costs in the event that the prices of commodities escalate. Due to competitive markets for our finished products, we are typically not able to quickly recover product cost increases through price increases or other cost savings. For a discussion of the risks to our business associated with commodity price risk fluctuations, refer to “Quantitative and Qualitative Disclosures about Market Risk” in Part I, Item 3 of this report.
Currency Exchange
The compressor industry, and our business in particular, are characterized by global and regional markets that are served by manufacturing locations positioned throughout the world. Most of our manufacturing presence is in international locations. During the first
three months
of
2014
and
2013
, approximately 80% and 84%, respectively, of our sales activity took place outside the U.S., including Brazil, Europe and India. As a result of these factors, our consolidated financial results are sensitive to changes in foreign currency exchange rates, especially the Brazilian Real, the Euro and the Indian Rupee. During the first three months of 2014, the Brazilian Real strengthened against the U.S. Dollar by 3.4%, the Indian Rupee strengthened against the U.S. Dollar by 2.8% and the Euro strengthened against the U.S. Dollar by 0.2%.
Ultimately, long-term changes in currency exchange rates have lasting effects on the relative competitiveness of operations located in certain countries versus competitors located in different countries. Our Brazilian and European manufacturing and sales presence is significant and changes in the Brazilian Real and the Euro have been significant to our results of operations when compared to prior periods.
For further discussion of the risks to our business associated with currency fluctuations, refer to “Quantitative and Qualitative Disclosures about Market Risk” in Part I, Item 3 of this report.
RESULTS OF OPERATIONS
A summary of our operating results as a percentage of net sales is shown below:
Three Months Ended March 31, 2014
vs.
Three Months Ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2014
|
|
%
|
|
2013
|
|
%
|
Net sales
|
$
|
179.3
|
|
|
100.0
|
%
|
|
$
|
207.6
|
|
|
100.0
|
%
|
Cost of sales
|
(162.2
|
)
|
|
(90.5
|
)%
|
|
(185.5
|
)
|
|
(89.4
|
)%
|
Gross profit
|
17.1
|
|
|
9.5
|
%
|
|
22.1
|
|
|
10.6
|
%
|
Selling and administrative expenses
|
(23.0
|
)
|
|
(12.8
|
)%
|
|
(29.1
|
)
|
|
(14.0
|
)%
|
Other income (expense), net
|
4.2
|
|
|
2.3
|
%
|
|
5.0
|
|
|
2.4
|
%
|
Impairments, restructuring charges, and other items
|
(4.1
|
)
|
|
(2.2
|
)%
|
|
(3.4
|
)
|
|
(1.6
|
)%
|
Operating loss
|
(5.8
|
)
|
|
(3.2
|
)%
|
|
(5.4
|
)
|
|
(2.6
|
)%
|
Interest expense
|
(2.3
|
)
|
|
(1.3
|
)%
|
|
(2.3
|
)
|
|
(1.1
|
)%
|
Interest income
|
0.4
|
|
|
0.2
|
%
|
|
0.3
|
|
|
0.1
|
%
|
Loss from continuing operations before taxes
|
(7.7
|
)
|
|
(4.3
|
)%
|
|
(7.4
|
)
|
|
(3.6
|
)%
|
Tax expense
|
(0.1
|
)
|
|
(0.1
|
)%
|
|
(0.1
|
)
|
|
—
|
%
|
Loss from continuing operations
|
$
|
(7.8
|
)
|
|
(4.4
|
)%
|
|
$
|
(7.5
|
)
|
|
(3.6
|
)%
|
Net sales in the first
three months
of
2014
decreased
$28.3 million
, or
13.6%
, versus the same period of 2013. Excluding the decrease in sales due to the effect of unfavorable changes in foreign currency translation of
$7.8 million
, net sales decreased by
9.9%
compared to the first
three months
of 2013, primarily as a result of lower net volume and unfavorable changes in sales mix, partially offset by net price increases. The lower volumes and unfavorable mix were primarily as a result of the quality issues discovered in 2013 at our Indian location as well as increased competition in Brazil.
Sales of compressors used in commercial refrigeration and aftermarket applications represented
64%
of our total sales and
decreased
2.8%
compared to the first
three months
of 2013 to
$115.3 million
. This decrease was primarily driven by net lower volumes and unfavorable changes in sales mix of
$3.2 million
and unfavorable changes in currency exchange rates of
$0.2 million
, partially offset by price increases of
$0.1 million
. The lower volume and unfavorable changes in sales mix are primarily due to declines at our French and Indian locations.
Sales of compressors used in household refrigeration and freezer (“R&F”) applications represented
21%
of our total sales and
decreased
9.5%
compared to the first
three months
of 2013 to
$38.0 million
. This decrease was primarily due to unfavorable changes in currency exchange rates of
$5.5 million
, partially offset by price increases of
$1.1 million
and higher volumes and favorable changes in sales mix of
$0.4 million
. The higher volumes and favorable changes in sales mix were primarily due to new customers at our Indian location, partially offset by declines at our Brazilian location due to increased competition.
Sales of compressors for air conditioning applications and all other applications represented
15%
of our total sales and
decreased
44.7%
compared to the first
three months
of 2013 to
$26.0 million
. This decrease is primarily due to net lower volumes and unfavorable changes in sales mix of
$19.2 million
and unfavorable currency exchange rate changes of
$2.1 million
which were partially offset by net price increases of
$0.3 million
. The lower volumes were primarily as a result of the quality issues discovered in 2013 at our Indian location as well as increased competition in Brazil.
Gross profit
decreased
by
$5.0 million
, or
22.6%
, from
$22.1 million
in the first
three months
of 2013 to
$17.1 million
in the first
three months
of 2014. Our gross profit margin
decreased
from
10.6%
to
9.5%
in the first
three months
of 2013 and 2014, respectively. The decrease in gross profit in the first
three months
of 2014 was primarily attributable to unfavorable changes in other material and manufacturing costs of
$4.3 million
, net unfavorable changes in volume and sales mix of
$4.2 million
and increases in commodity costs, primarily steel, of
$0.2 million
. These decreases were partially offset by favorable changes in currency exchange effect of
$2.2 million
and price increases of
$1.5 million
.
Selling and administrative (“S&A”) expenses
decreased
by
$6.1 million
from
$29.1 million
in the first
three months
of 2013 to
$23.0 million
in the first
three months
of 2014. As a percentage of net sales, S&A expenses were
12.8%
in the first
three months
of 2014 compared to
14.0%
in the first
three months
of 2013. The decrease was primarily due to a decline in depreciation expense of $1.9 million due to an information technology asset that became fully depreciated in late 2013, a decline of $1.9 million related to our incentive compensation awards, a decrease of $0.7 million in payroll and other employee benefits, lower professional fees of $0.7 million and a net decrease of $0.9 million in other miscellaneous expenses. We record
expense related to our incentive compensation plan awards when we estimate that it is more likely than not that we will achieve the threshold level of performance as outlined in the incentive compensation awards. As of
March 31, 2014
, we estimate that it is more likely than not that we will achieve only some of our target levels of performance, which resulted in less expense than our assumptions for the quarter ended March 31, 2013. The decrease related to our incentive compensation awards was also due to the re-measurement of the value of our outstanding share-based compensation awards, as our Class A Common Stock closing price at
March 31, 2014
was
$6.90
compared with
$9.05
at December 31, 2013.
Other income (expense), net,
decreased
$0.8 million
from
$5.0 million
in the first
three months
of 2013 to
$4.2 million
in the first
three months
of 2014. This decrease is primarily due to recording no net amortization of gains related to our postretirement benefits due to the curtailment of these benefits that was effective after December 31, 2013, as well as lower income related to various Indian government incentives, partially offset by a gain of $3.4 million on the sale of fixed assets at one of our U.S. locations.
We recorded
$4.1 million
in impairments, restructuring charges, and other items in the first
three months
of 2014 compared to
$3.4 million
in the same period of 2013. In the first
three months
of 2014, this expense included
$1.2 million
related to severance,
$1.5 million
related to a legal settlement signed in the first quarter of 2014, a $1.2 million environmental reserve with respect to a sold building and
$0.2 million
related to business process re-engineering. The severance expense was associated with a reduction in force at our Brazilian (
$1.0 million
) and French (
$0.2 million
) locations. (See Note 10, “Impairments, Restructuring Charges and Other Items”, in Part I, Item 1 of this report for additional information.)
Interest expense was
$2.3 million
in the first
three months
of 2014 and 2013. Our weighted average borrowings were slightly higher and carried a higher weighted average interest rate in the first quarter of 2014 compared to the first quarter of 2013. These increases were offset however, by a decrease in interest expense due to a lower level in the average amount of accounts receivable factored, primarily at our Brazilian and Indian locations.
For both the first quarter of 2014 and 2013, we recorded tax expense of
$0.1 million
from continuing operations. For the first quarter of 2014 the tax expense was comprised of U.S. federal tax expense of $0.2 million, and a foreign tax benefit of $0.1 million, while the tax expense for the first quarter of 2013 was attributable to our foreign locations.
Loss from continuing operations for the
three months ended March 31, 2014
was
$7.8 million
, or a net loss per share of
$0.42
, as compared to a net loss from continuing operations of
$7.5 million
, or a net loss per share of
$0.40
, in the same period of 2013. The change was primarily related to lower gross profit due to lower volume and unfavorable sales mix for the
three months ended March 31, 2014
compared to the three months ended March 31, 2013, partially offset by lower S&A expenses as well as the other factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service indebtedness, support working capital requirements, and, when needed, fund operating losses. In general, our principal sources of liquidity are cash and cash equivalents on hand, cash flows from operating activities, borrowings under available credit facilities and cash inflows related to non-income taxes. In addition, we believe that factoring our receivables is an alternative way of freeing up working capital and providing sufficient cash to pay off debt that may mature within a year.
A substantial portion of our operating income is generated by foreign operations. As a result, we are dependent on the earnings, cash flows and the combination of dividends, distributions, intercompany loan payments and advances from our foreign operations to provide the funds necessary to meet our obligations in each of our legal jurisdictions. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions.
Cash Flow
In the first
three months
of
2014
, cash
used in
operations was
$19.2 million
as compared to
$10.2 million
of cash
used in
operations in the first
three months
of
2013
. Cash
used in
operating activities for the
three months ended March 31, 2014
included our net loss of
$11.1 million
, a gain from the disposal of property and equipment of
$3.4 million
, non-cash share-based compensation income of
$0.2 million
and non-cash deferred income taxes of
$0.1 million
, partially offset by depreciation and amortization of
$6.4 million
and non-cash expense due to employee retirement benefits of
$0.1 million
.
With respect to working capital, increased inventory levels were primarily due to seasonal needs in Europe, increased inventory at our Indian location due to the quality issue from 2013, utilizing a new steel supplier from South Korea as well as timing of raw material purchases, which resulted in cash
used
of
$9.4 million
for the
three months ended March 31, 2014
. Our inventory days on hand
worsened
by
3
days to
80
days at
March 31, 2014
compared to December 31, 2013, primarily due to lower sales in the three months ended March 31, 2014 as compared to the three months ended December 31, 2013.
Accounts receivable changes resulted in cash
used
of
$5.0 million
during the first
three months
of
2014
mainly due the timing of sales in the first quarter of 2014 compared to the fourth quarter of 2013 at our U.S. and French locations, partially offset by an
improvement
in days sales outstanding of
6
days to
46
days at
March 31, 2014
compared to December 31, 2013. The improvement in days sales outstanding primarily related to higher accounts receivables factoring in Europe and negotiated improved payment terms with several of our Indian customers.
Payables and accrued expenses generated
$3.8 million
of cash flows from operating activities for the
three months ended March 31, 2014
, mainly as a result of an increase in environmental, restructuring accruals and legal settlements, as well as an increase in payables due to purchases of inventories and the timing of those purchases, partially offset by the payment of employee-related accruals made during the first quarter of 2014. Days outstanding
increase
d by
3
day to
62
days at
March 31, 2014
compared to December 31, 2013.
Recoverable non-income taxes used cash of
$1.0 million
, which is primarily due to accruals of additional recoverable non-income taxes.
Employee retirement benefits used
$0.2 million
of cash, primarily due to benefit payments and contributions related to our non-U.S. pension plans.
Cash
provided by
investing activities was
$13.4 million
in the first
three months
of
2014
as compared to cash
used in
investing activities of
$1.4 million
for the same period of
2013
. The
2014
cash
provided by
investing activities is primarily related to the release of restricted cash of
$12.1 million
and proceeds received from the sale of fixed assets of
$4.1 million
, partially offset by capital expenditures of
$2.8 million
. The release of restricted cash included the reclassification of the proceeds from the PNC Term Loan in the amount of $12.7 million due to satisfying all of the closing conditions related to this loan in the first quarter of 2014 and $0.3 million that became available to fund our 401(k) matching contributions, partially offset by a $0.5 million increase in cash pledged for our derivatives and a $0.4 million increase due to a factoring agreement at our Brazilian location which required a certificate of deposit.
Cash
used in
financing activities was
$5.9 million
in the first
three months
of
2014
as compared to
$2.2 million
for the same period of 2013. The cash used during the first three months of 2014 was primarily related to a $2.1 million prepayment on the PNC Term Loan because of a sale of fixed assets that were collateral for the loan, the agreement to use $1.6 million of the released Term Loan proceeds to prepay the Term Loan and $2.0 million of other net repayments of other borrowings and capital leases.
Liquidity Sources
Credit Facilities and Cash on Hand
In addition to cash on hand, cash provided by operating activities and cash inflows related to non-operating activities, we use bank debt and other foreign credit facilities, such as accounts receivable factoring programs, when available, to fund our working capital requirements. We have an agreement with PNC pursuant to which, subject to the terms and conditions of our Revolving Credit and Security Agreement, as amended, PNC provides senior secured revolving credit financing up to
$34.0 million
, which includes up to
$10.0 million
in letters of credit, subject to a borrowing base formula, lender reserves and PNC's reasonable discretion and a Term Loan, originally up to an aggregate of $
15.0 million
.
During the first quarter of 2014, $12.7 million of the funds received from the PNC Term Loan were released from a blocked account and the net proceeds after a prepayment were recorded in "Cash and cash equivalents" on our Consolidated Balance Sheets. Interest began accruing on the entire $15.0 million Term Loan balance in December 2013, and the monthly installments of $250,000 to repay the remaining principal on the Term Loan began January 2, 2014. The facility matures on December 11, 2018. The agreement contains various covenants, including limitations on dividends, investments and additional indebtedness and liens, and a minimum fixed charge coverage ratio, which would apply only if average undrawn borrowing availability, as defined by the credit agreement, falls below a specified level. We were in compliance with all covenants and terms of the agreement as of
March 31, 2014
. As of
March 31, 2014
, we had
$14.7 million
of borrowings outstanding with
$3.4 million
in outstanding letters of credit under our PNC financing facilities. A fixed charge coverage ratio covenant applies if our availability falls below a specified level for more than five business days. We had
$9.6 million
of additional borrowing capacity under this facility as of
March 31, 2014
, after giving effect to our fixed charge coverage ratio covenant and our outstanding borrowings and letters of credit under this facility. For a more detailed description of the facilities see Note 8 “Debt", of the Notes to Consolidated Financial Statements in Item 1 of this report.
In the U.S., we have also entered into an agreement with the Mississippi Development Authority for low interest rate financing up to
$1.5 million
in aggregate draws to be utilized to purchase specific capital equipment. This loan is to encourage business development in the State of Mississippi. As of
March 31, 2014
, we have drawn
$1.2 million
of the available funds and requested the final draw, which we received in the second quarter of 2014.
We have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings which provide advantageous lending rates. (See Note 8 “Debt”, of the Notes to Consolidated Financial Statements in Item 1 of this report, for additional information.) We also use these cash resources to fund capital expenditures, and when necessary, to fund operating losses.
For the
three months ended March 31, 2014
and the year ended
December 31, 2013
, our average outstanding debt balance was
$62.9 million
and
$55.2 million
, respectively. The weighted average interest rate was
8.8%
and
8.3%
for the
three months ended
March 31, 2014
and
March 31, 2013
, respectively.
As of
March 31, 2014
, our cash and cash equivalents on hand were
$43.1 million
. Our borrowings under current credit facilities, including capital lease obligations, totaled
$62.8 million
at
March 31, 2014
, with an uncommitted additional borrowing capacity of
$26.2 million
. Included in our debt balance at
March 31, 2014
are capital lease obligations of
$1.6 million
. (See Note 8 “Debt”, of the Notes to Consolidated Financial Statements in Item 1 of this report, for additional information.)
In the U.S., only a small portion of our cash balances are insured by the Federal Deposit Insurance Corporation ("FDIC"). All cash that we hold in the U.S. is held at two major financial institutions. Any cash we hold in the U.S. that is not utilized for day-to-day working capital requirements is primarily invested in secure, institutional money market funds, which are strictly regulated by the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets.
Cash inflows related to taxes
We expect to receive refunds of outstanding refundable non-income taxes. The actual amounts received as expressed in U.S. Dollars will vary depending on the exchange rate at the time of receipt or future reporting date. Based on applicable foreign currency exchange rates as of
March 31, 2014
, we expect to recover approximately
$17.1 million
of the
$29.2 million
outstanding refundable taxes in the next twelve months, primarily related to the short-term portion of the outstanding refundable taxes of
$12.1 million in Brazil and $4.1 million in India
. The tax authorities will not commit to an actual date of payment and the timing of receipt may be different than planned if the tax authorities change their pattern of payment or past practices.
Accounts Receivable Sales
Our Brazilian and European subsidiaries periodically factor their accounts receivable with financial institutions for seasonal and other working capital needs. Such receivables are factored both with limited and without recourse to us and are excluded from accounts receivable in our Consolidated Balance Sheets. The amount of factored receivables, including both with limited and without recourse amounts, was
$39.2 million
and $42.7 million at
March 31, 2014
and
December 31, 2013
, respectively. The amount of factored receivables sold with limited recourse through our Brazilian subsidiary which results in a contingent liability to us, was
$2.3 million
and
$12.1 million
as of
March 31, 2014
and
December 31, 2013
, respectively. The amount of factored receivables sold without recourse at our Brazilian and European subsidiaries, which is recorded as a sale of the related receivables, was
$36.9 million
and $30.6 million as of
March 31, 2014
and
December 31, 2013
, respectively. In addition to the credit facilities described above, our Brazilian subsidiary also has an additional $22.8 million uncommitted, discretionary factoring credit facility with respect to its local (without recourse) and foreign (with recourse) accounts receivable, subject to the availability of its accounts receivable balances eligible for sale under the facility. We use these factoring facilities, when available, for seasonal and other working capital needs.
Our Indian subsidiary has the ability to collect receivables that are backed by letters of credit sooner than the receivables would otherwise be paid by the customer. Furthermore, some of our large customers offer a non-recourse factoring program relating to their receivables only, under which we can collect these receivables at a discount sooner than they would otherwise be paid by the customer. We consider these programs similar to the factoring programs in Brazil and Europe as it relates to our liquidity. We collected a total of
$7.6 million
and
$6.0 million
that would otherwise have been outstanding as receivables, under these programs at
March 31, 2014
and
December 31, 2013
, respectively.
Adequacy of Liquidity Sources
In the near term, and in particular over the next twelve months, we expect that our liquidity sources described above, will be sufficient to meet our liquidity requirements, including debt service, capital expenditure, working capital requirements and warranty claims, and, when needed, cash to fund operating losses and any additional restructuring activities we may implement. However, we also anticipate challenges with respect to generating positive cash flows from operations, most significantly due to challenges driven by possible volume declines, ability to generate savings from our restructuring activities, as well as currency exchange and commodity pricing volatility.
In addition, our business exposes us to potential litigation, such as product liability lawsuits or other lawsuits related to anti-competitive practices and securities law or other types of business disputes. These claims can be expensive to defend and an unfavorable outcome from any such litigation could adversely affect our cash flows and liquidity.
As of
March 31, 2014
, we had
$43.1 million
of cash and cash equivalents, and
$62.8 million
in debt and capital lease obligations, of which
$12.4 million
was long-term in nature. The short-term debt primarily consists of current maturities of long-term debt as well as committed and uncommitted revolving lines of credit, which we intend to maintain for the foreseeable future. We believe our cash on hand and availability under our borrowing facilities is sufficient to meet our debt service requirements. We do not expect any material differences between cash availability and cash outflows previously described in our Annual Report on form 10-K for the year ended
December 31, 2013
, except as described above.
OFF-BALANCE SHEET ARRANGEMENTS
Other than operating leases, we do not have any off-balance sheet financing. We do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on us. However, a portion of accounts receivable at our Brazilian subsidiary is sold with limited recourse at a discount, which creates a contingent liability for the business. Discounted receivables sold with limited recourse were
$2.3 million
and
$12.1 million
at
March 31, 2014
and
December 31, 2013
, respectively. We maintain a reserve for anticipated losses against these sold receivables and losses have not historically resulted in the recording of a liability greater than the reserved amount. Under our factoring program in Europe, we may discount receivables with recourse; however, at
March 31, 2014
there were no receivables sold with recourse.
CONTRACTUAL OBLIGATIONS
As of
March 31, 2014
, there have been no material changes outside the ordinary course of business in the contractual obligations disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2013
under the caption “Contractual Obligations”.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of our critical accounting estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates,” and Note 1, “Accounting Policies,” to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
There have been no significant changes to our critical accounting estimates during the first
three months
of
2014
, except as otherwise disclosed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OUTLOOK
Information in this “Outlook” section should be read in conjunction with the cautionary statements and discussion of risk factors included elsewhere in this report and in our Annual Report on Form 10-K for the year ended
December 31, 2013
and in conjunction with the “Outlook” section in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
Sales decreased in the first
three months
of
2014
compared to the first
three months
of
2013
mainly due to lower volumes and unfavorable changes in sales mix primarily due to lower Brazilian market demand and reduced volumes at our Indian location stemming from a warranty claim that occurred in the second quarter of 2013. This sales decrease was also due to unfavorable foreign currency exchange rate impacts, partially offset by net price increases. We expect to see continued demand volatility in the remainder of 2014 as a result of increased competition, quality issues, the changing regulatory landscape and continued uncertainties with current events around the world. For 2014, we currently expect net sales to decrease by 7% to 10% from 2013 levels primarily due to lower volumes in India as a result of the quality issue that originated in the second quarter of 2013 and lower volumes in Brazil due to a decline in orders from one of our key customers.
This current outlook for 2014 is based on our internal projections about the market and related economic conditions, expected price increases to our customers, continued economic impact from the Indian quality issue, the changing regulatory landscape, estimated foreign currency exchange rate effects, as well as our continued efforts in sales and marketing. If our key markets become weaker than we currently expect, this could have an adverse impact on our outlook for the remainder of 2014. In addition, based on a recent review of the strategic initiatives we discussed in May 2013, we no longer believe we will achieve the targets by 2015 as outlined in the May 2013 strategic call.
The outlook for 2014 is subject to many of the same variables that have negatively impacted us in recent years. The condition of, and uncertainties regarding, the global economy, commodity costs and key currency rates are all important to our future performance, as is our ability to match our hedging activity with actual levels of transactions. The extent to which adverse trends in recent years continue, will ultimately determine our 2014 results. We can give no guarantees regarding what impact future exchange rates, commodity prices and other economic changes will have on our 2014 results. For a discussion of the
sensitivity analysis associated with our key commodities and currency hedges see “Quantitative and Qualitative Disclosures About Market Risk” in Part I, Item 3 of this report.
The prices of some of our key commodities, specifically copper, aluminum and steel, remain volatile. The weighted average market prices of copper and aluminum decreased 10.2% and 14.4%, while the market prices of steel increased by 5.5%, respectively, in the first three months of 2014 compared to first three months of 2013. We expect the full year change in average cost of our purchased materials in 2014, including the impact of our hedging activities, to have a slightly negative impact in 2014 when compared to 2013. We expect to continue our approach of mitigating the effect of short-term price swings through the appropriate use of hedging instruments, price increases and modified pricing structures.
The Euro, Brazilian Real and the Indian Rupee have strengthened against the U.S. Dollar in the first quarter of 2014. We have entered into forward purchase contracts to cover a portion of our exposure to additional fluctuations in value during 2014. See “Executive Summary-Currency Exchange”. In the aggregate, we expect the changes in foreign currency exchange rates, after giving consideration to our hedging contracts and including the impact of balance sheet transactions, to have a slightly positive impact on our net income in 2014 when compared to 2013.
After giving recognition to the factors discussed above, we expect that the full year 2014 operating (loss) income could be flat to a slight improvement compared to 2013, if we are successful at offsetting volatility in commodity costs and foreign exchange rates, implementing initiatives for re-engineering our product lines to reduce our costs, price increases, improving our operating efficiency, restructuring activities and other cost reductions. We expect our cash flow from operating activities for the full year 2014 to be slightly negative if the tax authorities do not significantly change their pattern of payments or past practices for the expected outstanding refundable Brazilian and Indian non-income taxes. We expect capital spending in 2014 to be approximately
$15.0 million to $20.0 million
.
Based on our assessment of ongoing economic activity, we realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or sales or economic conditions improve. We are in the process of assessing our strategic initiatives and their respective impacts on our future results. Additional restructuring actions may be necessary during the next several quarters and might include changing our current footprint, consolidation of facilities, other reductions in manufacturing capacity, reductions in our workforce, sales of assets and other restructuring activities. These actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, these restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and future operating results. Cash required by these restructuring activities might be provided by our cash balances, cash proceeds from the sale of assets or new financing arrangements. If these restructuring actions are taken, there is a risk that the costs of the restructuring and cash required will exceed our original estimates or the benefits received from such activities.
As we look to the second quarter of 2014, we expect our sales and cash flow from operations to be lower than the second quarter of 2013. However, we currently expect our operating profit in the second quarter of 2014 could be slightly higher than the second quarter of 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk during the normal course of business from credit risk associated with cash investments and accounts receivable and from changes in interest rates, commodity prices and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and financing activities, which include the use of derivative financial instruments in the form of foreign currency forward exchange contracts and commodity futures contracts. Commodity prices and foreign currency exchange rates can be volatile, and our risk management activities do not totally eliminate these risks. Consequently, these fluctuations can have a significant effect on results.
Credit Risk –
Financial instruments which potentially subject us to concentrations of credit risk are primarily cash investments, both restricted and unrestricted, and accounts receivable. In the U.S., only a small portion of our cash balances are insured by the FDIC. Any cash we hold in the U.S. that is not utilized for day-to-day working capital requirements is primarily invested in secure, institutional money market funds, which are strictly regulated by the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets. There have been no material changes in these market risks from those described in our Annual Report on Form 10-K for the year ended
December 31, 2013
, in Part II, Item 7A under the caption “Credit Risk.”
A portion of accounts receivable at our Brazilian subsidiary is sold with limited recourse at a discount. Our European and Brazilian subsidiaries also discount certain receivables without recourse. Such receivables factored by us, both with and without limited recourse, are excluded from accounts receivable in our Consolidated Balance Sheets. Discounted receivables sold in these subsidiaries, including both with limited and without recourse were
$39.2 million
and $42.7 million at
March 31, 2014
and
December 31, 2013
, respectively, and the weighted average discount rate was 6.3% and 6.0% for the
three months ended March 31, 2014
and
2013
. The amount of factored receivables sold with limited recourse, which results in a contingent liability to us, was
$2.3 million
and
$12.1 million
as of
March 31, 2014
and
December 31, 2013
, respectively.
In India, we have the ability to collect receivables that are backed by letters of credit sooner than the receivables would otherwise be paid by the customer. Furthermore, some of our large customers offer a non-recourse factoring program relating to their receivables only, under which we can collect these receivables, at a discount, sooner than they would otherwise be paid by the customer. We consider these programs similar to the factoring programs in Brazil and Europe as it relates to our liquidity. We collected a total of
$7.6 million
and
$6.0 million
that would otherwise have been outstanding as accounts receivable, under both of these programs at
March 31, 2014
and
December 31, 2013
, respectively, and the weighted average discount rate was 10.7% for the
three months ended March 31, 2014
and 11.6% for the
three months ended March 31, 2013
.
Interest Rate Risk –
We are subject to interest rate risk, primarily associated with our borrowings and our investments of excess cash. Our current borrowings by our foreign subsidiaries consist of variable and fixed rate loans that are based on either the London Interbank Offered Rate (LIBOR), European Offered Interbank Rate or the BNDES TJLP fixed rate. We also record interest expense associated with the accounts receivable factoring facilities described above. While changes in interest rates do not affect the fair value of our variable-interest rate debt or cash investments, they do affect future earnings and cash flows. Based on our debt and invested cash balances at
March 31, 2014
, a 1% increase in interest rates would increase interest expense for the year by approximately $0.6 million and a 1% decrease in interest rates would have an immaterial effect on investments.
Commodity Price Risk –
Our exposure to commodity cost risk is related primarily to the price of copper, steel and aluminum, as these are major components of our product cost.
We use commodity derivatives to provide us with greater flexibility in managing the substantial volatility in commodity pricing. Our policy allows management to utilize commodity derivative contracts for a limited percentage of projected raw materials requirements up to 18 months in advance. At
March 31, 2014
and
December 31, 2013
, we held a total notional value of $16.4 million and $12.2 million, respectively, in commodity derivative contracts. Derivatives are designated at the inception of the contract as cash flow hedges against the future prices of copper, steel and aluminum, which are accounted for as hedges on our Consolidated Balance Sheets unless they are subsequently de-designated. While the use of derivatives can mitigate the risks of short-term price increases associated with these commodities by “locking in” prices at a specific level, we do not realize the full benefit of a rapid decrease in commodity prices. If market pricing becomes significantly deflationary, our level of commodity hedging could result in lower operating margins and reduced profitability.
As of
March 31, 2014
, we have been proactive in addressing the volatility of copper prices, including executing derivative contracts to cover approximately
50.8%
of our anticipated remaining copper requirements for
2014
.
Any rapid increases of steel prices has a particularly negative impact, as there is currently no well-established global market for hedging against increases in the cost of steel; however, in the past, we have been successful at securing a few steel derivative contracts in the U.S. to help mitigate this risk. At
March 31, 2014
, we had no derivative contracts outstanding to cover our anticipated steel requirements in the U.S.
Similar to copper and steel, over the last several years our results of operations have become more sensitive to the price changes in aluminum due to the recent redesign of some of our products. We have proactively addressed this price volatility by executing derivative contracts that cover
26.2%
of our anticipated remaining aluminum requirements for
2014
.
Based on our current level of activity, and before consideration of our outstanding commodity derivatives contracts, a 10% increase in the price, as of
March 31,
of copper, steel or aluminum used in production of our products would have adversely affected our annual operating profit on an annual basis as indicated in the table below:
|
|
|
|
|
|
|
|
|
(in millions)
|
10% increase in commodity prices
|
March 31, 2014
|
|
March 31, 2013
|
Copper
|
$
|
(4.1
|
)
|
|
$
|
(5.6
|
)
|
Steel
|
(9.0
|
)
|
|
(10.5
|
)
|
Aluminum
|
(0.6
|
)
|
|
(0.7
|
)
|
Total
|
$
|
(13.7
|
)
|
|
$
|
(16.8
|
)
|
Based on our current level of commodity derivatives contracts, a 10% decrease in the price as of
March 31,
of copper, steel or aluminum used in production of our products would have resulted in losses under these contracts that would have adversely impacted our annual operating results as indicated in the table below:
|
|
|
|
|
|
|
|
|
(in millions)
|
10% decrease in commodity prices
|
March 31, 2014
|
|
March 31, 2013
|
Copper
|
$
|
(1.5
|
)
|
|
$
|
(2.0
|
)
|
Steel
|
—
|
|
|
—
|
|
Aluminum
|
(0.1
|
)
|
|
(0.3
|
)
|
Total
|
$
|
(1.6
|
)
|
|
$
|
(2.3
|
)
|
Foreign Currency Exchange Risk –
We are exposed to significant exchange rate risk since the majority of all our revenue, expenses, assets and liabilities are derived from operations conducted outside the U.S. in local and other currencies. For purposes of financial reporting, the results are translated into U.S. Dollars based on currency exchange rates prevailing during or at the end of the reporting period. We are also exposed to significant exchange rate risk when an operation has sales or expense transactions in a currency that differs from its local, functional currency or when the sales and expenses are denominated in different currencies. This risk applies to all of our foreign locations since a large percentage of their receivables are transacted in a currency other than their local currency, mainly U.S. Dollars. In those cases, if the receivable is ultimately paid in less valuable U.S. Dollars, the foreign location realizes less proceeds in its local currency, which can adversely impact its margins. The periodic adjustment of these receivable balances based on the prevailing foreign exchange rates is recognized in our Consolidated Statements of Operations. As the U.S. Dollar strengthens, our reported net revenues, operating profit (loss) and assets are reduced because the local currency will translate into fewer U.S. Dollars, and during times of a weakening U.S. Dollar, our reported expenses and liabilities are increased because the local currency will translate into more U.S. Dollars. Translation of our Consolidated Statement of Operations into U.S. Dollars affects the comparability of revenue, expenses, operating income (loss), and earnings (loss) per share between years. Because of the geographic diversity of our operations, weaknesses in some currencies might be offset by strengths in others over time. However, fluctuations in foreign currency exchange rates, particularly the weakening of the U.S. Dollar against major currencies, as shown in the table below, could materially affect our financial results.
We have developed strategies to mitigate or partially offset these impacts, primarily hedging against transactional exposure where the risk of loss is greatest. This involves entering into short-term derivative contracts to sell or purchase U.S. Dollars at specified rates based on estimated currency cash flows. In particular, we have entered into foreign currency derivative contracts to hedge the Brazilian, European and Indian export sales, which are predominately denominated in U.S. Dollars. However, these hedging programs only reduce exposure to currency movements over the limited time frame of up to 18 months. Ultimately, long-term changes in currency exchange rates have lasting effects on the relative competitiveness of operations located in certain countries versus competitors located in different countries. Additionally, if the currencies weaken against the U.S. Dollar, any hedge contracts that have been entered into at higher rates result in losses recognized in our Consolidated Statements of Operations when they are settled. From January 1 to
March 31, 2014
, the
Brazilian Real
strengthened against the U.S. Dollar by
3.4%
, the
Indian Rupee
strengthened against the U.S. Dollar by
2.8%
, and the
Euro
strengthened against the U.S. Dollar by 0.2%.
At
March 31, 2014
and
December 31, 2013
, we held foreign currency derivative contracts with a total notional value of $12.6 million and $22.3 million, respectively. The decline in notional value of our currency contracts was primarily due to changes in our business practices to better utilize U.S. Dollars collected by our Brazilian, Indian, and French locations. At March 31, based on our current level of activity, and including any mitigation as the result of hedging activities, we believe that a 10% strengthening of the Brazilian Real, the Euro, or the Indian Rupee against the U.S. Dollar would have negatively impacted our operating profit on an annual basis as indicated in the table below:
|
|
|
|
|
|
|
|
|
(in millions)
|
10% Strengthening against U.S. $
|
March 31, 2014
|
|
March 31, 2013
|
Real
|
$
|
(2.4
|
)
|
|
$
|
(2.7
|
)
|
Euro
|
(9.5
|
)
|
|
(8.7
|
)
|
Rupee
|
(0.2
|
)
|
|
0.1
|
|
Total
|
$
|
(12.1
|
)
|
|
$
|
(11.3
|
)
|
At March 31, based on our current foreign currency forward contracts, a 10% weakening in the value of the Brazilian Real, Euro or the Indian Rupee against the U.S. Dollar would have resulted in losses under such foreign currency derivative contracts that would adversely impact our operating results as indicated in the table below:
|
|
|
|
|
|
|
|
|
(in millions)
|
10% Weakening against U.S. $
|
March 31, 2014
|
|
March 31, 2013
|
Real
|
$
|
(0.4
|
)
|
|
$
|
(2.2
|
)
|
Euro
|
—
|
|
|
(0.3
|
)
|
Rupee
|
—
|
|
|
—
|
|
Total
|
$
|
(0.4
|
)
|
|
$
|
(2.5
|
)
|
The decrease in 2014 compared to 2013 is primarily due to the decrease in notional amount of foreign currency derivative contracts held in 2014.
Item 4. Controls and Procedures.
Our management evaluated, with the participation of our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of
March 31, 2014
and any change in our internal control over financial reporting that occurred during the
first quarter
ended
March 31, 2014
, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based upon this evaluation, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of
March 31, 2014
.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal control over our financial reporting is a process designed by, or under the supervision of, our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. and includes those policies and procedures that:
1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets,
2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and
3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on the financial statements.
Changes In Internal Control Over Financial Reporting
There have been no change in our internal control over financial reporting identified in connection with our evaluation described above that occurred during the
first quarter
ended
March 31, 2014
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations On The Effectiveness Of Controls And Procedures
Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will detect or prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected.
In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies and procedures included in such controls may deteriorate.