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6: EX-10.5 Material Contract HTML 55K
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18: R1 Document and Entity Information HTML 83K
19: R2 Condensed Consolidated Statements of Net Income HTML 111K
20: R3 Condensed Consolidated Statements of Comprehensive HTML 61K
Income (Loss)
21: R4 Condensed Consolidated Balance Sheets HTML 143K
22: R5 Condensed Consolidated Balance Sheets HTML 49K
(Parenthetical)
23: R6 Condensed Consolidated Statements of Changes in HTML 97K
Equity
24: R7 Condensed Consolidated Statements of Cash Flows HTML 111K
25: R8 Condensed Consolidated Statements of Cash Flows HTML 42K
Reconciliation of Cash, Cash Equivalents and
Restricted Cash
26: R9 Overview HTML 99K
27: R10 New Accounting Pronouncements HTML 43K
28: R11 Assets Held for Sale and Divestiture HTML 58K
29: R12 Revenue HTML 315K
30: R13 Restructuring HTML 79K
31: R14 Inventories HTML 41K
32: R15 Leases HTML 121K
33: R16 Property, Plant and Equipment HTML 49K
34: R17 Goodwill and Intangibles HTML 68K
35: R18 Debt HTML 61K
36: R19 Fair Value Measurements and Financial Instruments HTML 78K
37: R20 Accounts Receivable Factoring HTML 57K
38: R21 Pension and Postretirement Benefits other than HTML 130K
Pensions
39: R22 Other Expense, Net HTML 53K
40: R23 Income Taxes HTML 50K
41: R24 Net Income (Loss) Per Share Attributable to HTML 63K
Cooper-Standard Holdings Inc.
42: R25 Accumulated Other Comprehensive Income (Loss) HTML 99K
43: R26 Common Stock HTML 34K
44: R27 Share-Based Compensation HTML 51K
45: R28 Related Party Transactions HTML 49K
46: R29 Commitments and Contingencies HTML 34K
47: R30 Segment Reporting HTML 182K
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50: R33 Overview - Correction of errors (Tables) HTML 96K
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53: R36 Restructuring (Tables) HTML 82K
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57: R40 Goodwill and Intangibles (Tables) HTML 69K
58: R41 Debt (Tables) HTML 49K
59: R42 Fair Value Measurements and Financial Instruments HTML 73K
(Tables)
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61: R44 Pension and Postretirement Benefits other than HTML 126K
Pensions (Tables)
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63: R46 Income Taxes (Tables) HTML 46K
64: R47 Net Income (Loss) Per Share Attributable to HTML 62K
Cooper-Standard Holdings Inc. (Tables)
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66: R49 Share-Based Compensation (Tables) HTML 50K
67: R50 Related Party Transactions (Tables) HTML 48K
68: R51 Segment Reporting (Tables) HTML 177K
69: R52 Overview - Correction of Errors - Statement of HTML 73K
Operations (Details)
70: R53 Overview - Correction of Errors - Statement of HTML 48K
Comprehensive Income (Details)
71: R54 Overview - Correction of Errors (Details) HTML 86K
72: R55 Assets Held for Sale and Divestiture (Details) HTML 109K
73: R56 Revenue Revenue by end customer (Details) HTML 74K
74: R57 Revenue Revenue by type (Details) HTML 93K
75: R58 Revenue Net contract assets (Liabilities) HTML 44K
(Details)
76: R59 Revenue Revenue other (Details) HTML 39K
77: R60 Restructuring - Summary of Restructuring Expense HTML 47K
(Detail)
78: R61 Restructuring - Summary of Activity of HTML 53K
Restructuring (Detail)
79: R62 Inventories - Summary of Inventories (Detail) HTML 39K
80: R63 Leases Components of lease expense (Details) HTML 43K
81: R64 Leases Additional Lease Disclosure (Details) HTML 49K
82: R65 Leases Future minimum lease payments (Details) HTML 68K
83: R66 Leases Lease Amounts Recognized on Balance Sheet HTML 52K
(Details)
84: R67 Leases Leases (Details) HTML 31K
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86: R69 Property, Plant and Equipment Additional HTML 33K
Information (Details)
87: R70 Goodwill and Intangibles - Carrying Amount of HTML 43K
Goodwill by Reportable Operating Segment (Detail)
88: R71 Goodwill and Intangibles - Intangible Assets and HTML 43K
Accumulated Amortization Balances (Detail)
89: R72 Debt - Outstanding Debt (Detail) HTML 50K
90: R73 Debt - Additional Information (Detail) HTML 72K
91: R74 Fair Value Measurements and Financial Instruments HTML 39K
- Fair Value Hierarchy Level for Company's
Liabilities Measured (Detail)
92: R75 Fair Value Measurements and Financial Instruments HTML 35K
- Fair Values of Debt Instruments (Details)
93: R76 Fair Value Measurements and Financial Instruments HTML 35K
- Additional Information (Detail)
94: R77 Fair Value Measurements and Financial Instruments HTML 33K
- Gains (losses) on Cash Flow Hedges Reported in
Accumulated Other Comprehensive Income (Loss)
(Details)
95: R78 Fair Value Measurements and Financial Instruments HTML 33K
- Reclassifications out of accumulated other
comprehensive income (Loss) (Details)
96: R79 Accounts Receivable Factoring Amounts outstanding HTML 32K
under receivable transfer agreements (Details)
97: R80 Accounts Receivable Factoring Receivables Factored HTML 34K
and Costs Incurred (Details)
98: R81 Accounts Receivable Factoring Additional Detail HTML 34K
(Details)
99: R82 Pension and Postretirement Benefits other than HTML 59K
Pensions - Net Periodic Benefit Cost of Defined
Benefit Plans and Other Postretirement Benefit
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Other Income Expense, Net (Detail)
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102: R85 Income Taxes Additional Information (Details) HTML 36K
103: R86 Net Income (Loss) Per Share Attributable to HTML 53K
Cooper-Standard Holdings Inc. - Basic and Diluted
Net Income Per Share Attributable (Detail)
104: R87 Accumulated Other Comprehensive Loss - Changes in HTML 56K
Accumulated Other Comprehensive Income (Loss)
(Detail)
105: R88 Accumulated Other Comprehensive Loss - Changes in HTML 63K
Accumulated Other Comprehensive Income (Loss)
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106: R89 Common Stock (Details) HTML 50K
107: R90 Share-Based Compensation (Details) HTML 40K
108: R91 Share-Based Compensation - Additional Information HTML 34K
(Detail)
109: R92 Related Party Transactions (Details) HTML 38K
110: R93 Related Party Transactions - Additional HTML 33K
Information (Detail)
111: R94 Commitments and Contingencies - Additional HTML 32K
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112: R95 Segment Reporting Information on Company's HTML 72K
Business Segments (Detail)
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(Exact name of registrant as specified in its charter)
______________________________
iDelaware
i20-1945088
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i40300 Traditions Drive
iNorthville,
iMichigani48168
(Address of principal executive offices)
(Zip Code)
(i248)
i596-5900
(Registrant’s telephone number, including area code)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.001 per share
iCPS
iNew
York Stock Exchange
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth
company
i☐
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 i☐ No ☒
As of July 30, 2020, there were i16,896,453
shares of the registrant’s common stock, $0.001 par value, outstanding.
7%
Cumulative participating convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding
i—
i—
Equity:
Common
stock, $0.001 par value, 190,000,000 shares authorized; 18,959,899 shares issued and 16,894,090 shares outstanding as of June 30, 2020, and 18,908,566 shares issued and 16,842,757 outstanding as of December 31, 2019
i17
i17
Additional
paid-in capital
i494,628
i490,451
Retained
earnings
i373,068
i619,448
Accumulated
other comprehensive loss
(i277,296)
(i253,741)
Total
Cooper-Standard Holdings Inc. equity
i590,417
i856,175
Noncontrolling
interests
i15,774
i19,807
Total
equity
i606,191
i875,982
Total
liabilities and equity
$
i2,488,597
$
i2,635,582
The
accompanying notes are an integral part of these financial statements.
5
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(Dollar amounts in thousands except share amounts)
Total
cash, cash equivalents and restricted cash shown in the statement of cash flows
$
i390,787
$
i361,742
The
accompanying notes are an integral part of these financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
1. iOverview
i
Basis
of Presentation
Cooper-Standard Holdings Inc. (together with its consolidated subsidiaries, the “Company” or “Cooper Standard”), through its wholly-owned subsidiary, Cooper-Standard Automotive Inc. (“CSA U.S.”), is a leading manufacturer of sealing, fuel and brake delivery, and fluid transfer systems. The Company’s products are primarily for use in passenger vehicles and light trucks that are manufactured by global automotive original equipment manufacturers (“OEMs”) and replacement markets. The Company conducts substantially all of its activities through its subsidiaries.
During
the first quarter of 2019 and in prior periods, the Company also operated an anti-vibration systems (“AVS”) product line. On April 1, 2019, the Company completed the divestiture of its AVS product line.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2019 (the “2019 Annual Report”), as filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These financial statements include all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of the Company. The operating results for the interim period ended June 30, 2020 are not necessarily indicative of results for the full year. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the
financial statements were issued.
Immaterial Correction of Errors
During the year ended December 31, 2019, the Company identified errors primarily related to periods prior to fiscal year 2019. The Company concluded these errors were not material individually or in the aggregate to any of the previously reported periods and, therefore, amendments of previously filed reports were not required. Corrections were made to the applicable prior periods reflected in the financial information herein.
i
The
following table presents the impact of these corrections on the Company’s condensed consolidated statements of operations:
Comprehensive
loss attributable to noncontrolling interests
i1,199
(i27)
i1,172
i952
(i203)
i749
Comprehensive
income attributable to Cooper-Standard Holdings Inc.
i137,718
i167
i137,885
i138,713
(i2,004)
i136,709
/
8
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
The impact of these corrections on the balance as of June 30, 2019 in the Company’s condensed consolidated statements of changes in equity includes a decrease to total equity of $i9,828,
which consists of a decrease to retained earnings of $i8,856, a decrease to accumulated other comprehensive loss of $i193,
and a decrease to noncontrolling interests of $i1,165.
For the six months ended June 30, 2019, the impact of these corrections on the condensed consolidated statements of cash flows included a $i1,837
decrease in net income, a $i314 decrease in deferred income taxes, and a $i2,151 increase in changes in operating
assets and liabilities, resulting in no impact to net cash used in operating activities.
2. iNew Accounting Pronouncements
i
Recently
Issued Accounting Pronouncements
The Company considered the recently issued accounting pronouncement summarized as follows, which could have a material impact on its consolidated financial statements or disclosures:
Standard
Description
Impact
Effective Date
ASU 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes
Modifies ASC Topic 740 by removing certain exceptions and amending existing guidance in order to simplify the accounting for income taxes.
The Company is currently evaluating the impact of this guidance on its accounting policies and its consolidated financial statements.
In the fourth quarter of 2019, management approved a plan to sell its European rubber fluid transfer and specialty sealing businesses, as well as its Indian operations. The entities and the associated assets and liabilities met the criteria for presentation as held for sale as of March 31, 2020, and as such, the assets and liabilities associated with the transaction are separately classified as held for sale in the condensed consolidated balance sheet and depreciation of long-lived assets ceased. The planned divestiture did not meet the criteria for presentation as a discontinued operation.
i
The
major classes of assets and liabilities held for sale were as follows:
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
Upon meeting the criteria for held for sale classification and during the three months ended March 31, 2020 , the Company recorded a non-cash impairment charge of $i74,079
to reduce the carrying value of the held for sale entities to fair value less costs to sell. During the three months ended June 30, 2020, the Company recorded an additional non-cash charge of $i12,391 to reflect the changes in the carrying value of the net assets to fair value less costs to sell. Fair value, which is categorized within Level 3 of the fair value hierarchy, was determined
using a market approach, estimated based on expected proceeds. The fair value less cost to sell must be assessed each reporting period that the asset group remains classified as held for sale. The difference between the impairment of the carrying value on the assets held for sale compared to the impairment recorded in the statements of operations is due to foreign currency translation offset by costs to sell incurred in the second quarter.
The impairment charge, which is subject to adjustments as the transaction is finalized, includes the non-cash cumulative foreign currency translation losses recorded in equity related to the held for sale entities.
Subsequent Event
Subsequent to the end of the Company's second quarter, on July
1, 2020, the Company completed the divestiture of its European rubber fluid transfer and specialty sealing businesses, as well as its Indian operations, to Mutares SE & Co. KGaA (“Mutares”). The transaction includes payment denominated in Euro of €i9,000, which consists of €i6,500
in cash that was recorded as held for sale as of June 30, 2020, and €i2,500 in deferred payment obligations, payable in December 2021.
Divestiture
During the first quarter of 2019 and in prior periods, the Company also operated an AVS product line. On April
1, 2019, the Company completed its sale of the AVS product line to Continental AG. The total sale price of the transaction was $i265,500, subject to certain adjustments. Cash proceeds received in the second quarter of 2019 were $i243,362
after adjusting for certain liabilities assumed by the purchaser. The Company recognized a gain on the divestiture of $i189,910 during the three months ended June 30, 2019. Adjustments to the gain recorded in the second half of 2019 related primarily to working capital adjustments.
10
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
4. iRevenue
Revenue is recognized for manufactured parts at a point in time, generally when products are shipped or delivered. The Company usually enters
into agreements with customers to produce products at the beginning of a vehicle’s life. Blanket purchase orders received from customers and related documents generally establish the annual terms, including pricing, related to a vehicle model. Customers typically pay for parts based on customary business practices with payment terms generally between 30 and 90 days.
i
Revenue by customer group for the three months ended June 30, 2020 was as follows:
North
America
Europe
Asia Pacific
South America
Corporate, Eliminations and Other
Consolidated
Passenger and Light Duty
$
i120,939
$
i70,753
$
i104,307
$
i3,881
$
i—
$
i299,880
Commercial
i1,971
i3,223
i1,413
i—
i823
i7,430
Other
i3,427
i4,829
i6
i—
i24,895
i33,157
Revenue
$
i126,337
$
i78,805
$
i105,726
$
i3,881
$
i25,718
$
i340,467
Revenue
by customer group for the six months ended June 30, 2020 was as follows:
North America
Europe
Asia
Pacific
South America
Corporate, Eliminations and Other
Consolidated
Passenger and Light Duty
$
i446,921
$
i241,534
$
i183,049
$
i24,320
$
i—
$
i895,824
Commercial
i5,149
i8,780
i1,959
i10
i1,957
i17,855
Other
i9,068
i13,733
i62
i22
i58,793
i81,678
Revenue
$
i461,138
$
i264,047
$
i185,070
$
i24,352
$
i60,750
$
i995,357
Revenue
by customer group for the three months ended June 30, 2019 was as follows:
North America
Europe
Asia
Pacific
South America
Corporate, Eliminations and Other
Consolidated
Passenger and Light Duty
$
i368,952
$
i189,154
$
i118,401
$
i25,028
$
i5
$
i701,540
Commercial
i5,439
i7,872
i17
i60
i488
i13,876
Other
i4,730
i8,003
i77
i36
i36,436
i49,282
Revenue
$
i379,121
$
i205,029
$
i118,495
$
i25,124
$
i36,929
$
i764,698
Revenue
by customer group for the six months ended June 30, 2019 was as follows:
North America
Europe
Asia
Pacific
South America
Corporate, Eliminations and Other
Consolidated
Passenger and Light Duty
$
i805,818
$
i414,605
$
i243,756
$
i48,220
$
i5
$
i1,512,404
Commercial
i11,231
i16,297
i17
i83
i1,035
i28,663
Other
i9,790
i16,527
i174
i58
i75,077
i101,626
Revenue
$
i826,839
$
i447,429
$
i243,947
$
i48,361
$
i76,117
$
i1,642,693
/
The
passenger and light duty group consists of sales to automotive OEMs and automotive suppliers, while the commercial group represents sales to OEMs of on- and off-highway commercial equipment and vehicles. The other customer group includes sales related to specialty and adjacent markets.
Substantially all of the Company’s revenues were generated from sealing, fuel and brake delivery and fluid transfer systems for use in passenger vehicles and light trucks manufactured by global OEMs and, until March 31, 2019, anti-vibrations systems. On April 1, 2019, the Company completed the divestiture of its AVS product line.
11
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
A summary of the Company’s products is as follows:
Product Line
Description
Sealing Systems
Protect vehicle interiors from
weather, dust and noise intrusion for improved driving experience; provide aesthetic and functional class-A exterior surface treatment
Fuel & Brake Delivery Systems
Sense, deliver and control fluids to fuel and brake systems
Fluid Transfer Systems
Sense, deliver and control fluids and vapors for optimal powertrain & HVAC operation
The amount of revenue recognized is usually based on the purchase order price and adjusted for variable consideration, including pricing concessions. The Company accrues for pricing concessions by reducing revenue as products are shipped or delivered. The accruals are based on historical experience, anticipated performance and management’s best judgment. The Company also generally has ongoing adjustments to customer pricing arrangements based on the content and cost of its products. Such pricing accruals are adjusted as they are settled with customers. Customer returns are usually related to quality or shipment issues and are recorded as a reduction of revenue. The
Company generally does not recognize significant return obligations due to their infrequent nature.
The Company’s contract assets consist of unbilled amounts associated with variable pricing arrangements in its Asia Pacific region. Once pricing is finalized, contract assets are transferred to accounts receivable. As a result, the timing of revenue recognition and billings, as well as changes in foreign exchange rates, will impact contract
assets on an ongoing basis. Contract assets were not materially impacted by any other factors during the six months ended June 30, 2020.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
i
The
Company’s contract liabilities consist of advance payments received and due from customers. Net contract assets (liabilities) consisted of the following:
The
Company, at times, enters into agreements that provide for lump sum payments to customers. These payment agreements are recorded as a reduction of revenue during the period the commitment is made. Amounts related to commitments of future payments to customers on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 were current liabilities of $i7,533 and $i12,916,
respectively, and long-term liabilities of $i6,474 and $i9,502, respectively.
The
Company provides assurance-type warranties to its customers. Such warranties provide customers with assurance that the related product will function as intended and complies with any agreed-upon specifications, and are recognized in costs of products sold.
5. iRestructuring
On an ongoing basis, the
Company evaluates its business and objectives to ensure that it is properly configured and sized based on changing market conditions. Accordingly, the Company has implemented several restructuring initiatives, including closure or consolidation of facilities throughout the world and the reorganization of its operating structure.
The Company’s restructuring charges consist of severance, retention and outplacement services, and severance-related postemployment benefits (collectively, “employee separation costs”), other related exit costs and asset impairments related to restructuring activities. Employee separation costs are recorded based on existing union and employee contracts,
statutory requirements, completed negotiations and Company policy.
i
Restructuring expense by segment for the three and six months ended June 30, 2020 and 2019 was as follows:
The Company primarily has operating and finance leases for certain manufacturing facilities, corporate offices and certain equipment. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities and long-term operating lease liabilities on the Company’s condensed consolidated balance sheet as of June
30, 2020. Finance leases are included in property, plant and equipment, net, debt payable within one year, and long-term debt on the Company’s condensed consolidated balance sheets.
As
of June 30, 2020 and December 31, 2019, assets recorded under finance leases, net of accumulated depreciation were $i31,245 and $i32,571,
respectively. As of June 30, 2020, the Company’s operating leases that had not yet commenced related entirely to operating leases within held for sale subsidiaries. See Note 3. “Assets Held for Sale and Divestiture.”
8. iProperty,
Plant and Equipment
i
Property, plant and equipment consists of the following:
During
the six months ended June 30, 2020, the Company recorded impairment charges of $i1,140, which included a charge of $i977
during the three months ended March 31, 2020 due to the deterioration of financial results in a certain Asia Pacific location. The fair value was determined using estimated orderly liquidation value, which was deemed the highest and best use of the assets. The Company also recorded an impairment charge of $i163 due to idle assets in various locations during the three months ended June 30, 2020. The fair value was determined
using salvage value.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
Based on the Company’s interim impairment assessment, the Company has determined there were no additional indicators of impairment identified during the six months ended June 30, 2020. The Company continues
to monitor the significant global economic uncertainty as a result of COVID-19 to assess the outlook for demand for products and the impact on the Company’s business and overall financial performance. A lack of recovery or further deterioration in market conditions and production volumes, among other factors, as a result of the COVID-19 pandemic could result in an impairment charge in future periods.
During the six months ended June 30, 2019, the Company recorded an impairment charge related to machinery and equipment in certain Asia Pacific locations of $i2,188.
The fair value was determined using estimated orderly liquidation value, which was deemed the highest and best use of the assets.
9. iGoodwill and Intangible Assets
Goodwill
i
Changes
in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2020 were as follows:
The
Company’s organizational structure changed on January 1, 2020. See Note 22. “Segment Reporting” for further detail on this reorganization of the Company’s business. Prior to this reorganization, the Company’s North America operating segment was the only reporting unit in which goodwill was recorded. As a result of the reorganization, a portion of the goodwill that was previously attributable to the North America reporting unit was reallocated to the Industrial Specialty Group reporting unit based on the relative fair value approach. The Industrial Specialty Group reporting unit is a component of the Advanced Technology Group operating segment, which is reflected in “Corporate, eliminations and other”.
The
reorganization of the business represented a triggering event to test goodwill for impairment as of January 1, 2020. No impairment was identified as a result of completing the goodwill impairment test.
Goodwill is tested for impairment by reporting unit annually or more frequently if events or circumstances indicate that an impairment may exist. Other than the reorganization event noted above, there were no other indicators of potential impairment during the six months ended June 30, 2020. The Company continues to monitor the significant global economic uncertainty as a result of COVID-19 to assess the outlook for demand for products and the impact on the Company’s
business and overall financial performance. A lack of recovery or further deterioration in market conditions and production volumes, among other factors, as a result of the COVID-19 pandemic could result in an impairment charge in future periods.
In November 2016, the Company issued $i400,000 aggregate principal amount of its i5.625%
Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on iNovember 15, 2026. Interest on the Senior Notes is payable semi-annually in arrears in cash on May 15 and November 15 of each year.
Debt issuance costs related to the Senior Notes are amortized into interest expense over the term of the Senior Notes. As of June 30, 2020 and December 31, 2019, the
Company had $i4,529 and $i4,886 of unamortized debt issuance costs, respectively, related to the Senior Notes, which are presented as direct deductions from
the principal balance in the condensed consolidated balance sheets.
13.0% Senior Secured Notes due 2024
On May 29, 2020, Cooper Standard Automotive Inc. (the “Issuer”), a wholly-owned subsidiary of the Company, issued $i250,000 aggregate principal amount of its i13.0%
Senior Secured Notes due 2024 (the “Senior Secured Notes”), pursuant to the Indenture, dated as of May 29, 2020 (the “Indenture”), by and among the Issuer, the other guarantors party thereto and U.S. Bank National Association, as trustee, in a transaction exempt from registration under Rule 144A and Regulation S of the Securities Act of 1933. Proceeds from the Senior Secured Notes were used to provide additional liquidity for the Company.
The Senior Secured Notes are guaranteed on a senior secured basis by CS Intermediate HoldCo 1 LLC and each of the Issuer’s present and future subsidiaries
that are obligors or guarantee the Term Loan Facility and each of the Issuer’s wholly owned domestic subsidiaries that are obligors under, or guarantee, certain other indebtedness, subject to certain exceptions. The notes are also guaranteed on a senior unsecured basis by Cooper-Standard Latin America B.V.
The Issuer may redeem all or part of the Senior Secured Notes prior to maturity at the prices set forth in the Indenture. The Senior Secured Notes mature on June 1, 2024. Interest on the Senior Secured Notes is payable semi-annually in arrears in cash on June 1 and December 1 of each year, commencing on December 1, 2020.
The
Indenture contains certain covenants that limit the Issuer’s and its subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness or issue certain preferred stock; make restricted payments; sell assets; create or incur liens; and merge or consolidate with other entities. These covenants are subject to a number of important limitations and exceptions. The Indenture also provides for customary events of default for non-investment grade debt securities, which, if any occur, would permit or require the principal, interest and any other monetary obligations on all the then-outstanding Senior Secured Notes to be due and payable immediately.
The
Company paid approximately $i6,220 of debt issuance costs in connection with the transaction. Additionally, the Senior Secured Notes were issued at a discount of $i5,000.
As of June 30, 2020, the Company had $i6,145 of unamortized debt issuance costs and $i4,944
of unamortized original issue discount related to the Senior Secured Notes, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets. Both the debt issuance costs and the original issue discount are amortized into interest expense over the term of the Senior Secured Notes.
Term Loan Facility
In November 2016, the Company entered into Amendment No. 1 to its senior term loan facility (“Term Loan Facility”), which provides for loans in an aggregate principal amount of $i340,000.
On May 2, 2017, the Company entered into Amendment No. 2 to the Term Loan Facility to modify the interest rate. Subsequently, on March 6, 2018, the Company entered
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
into Amendment No. 3 to the Term Loan Facility to further modify the interest rate. In accordance
with this amendment, borrowings under the Term Loan Facility bear interest, at the Company’s option, at ieither (1) with respect to Eurodollar rate loans, the greater of the applicable Eurodollar rate and 0.75% plus 2.0% per annum, or (2) with respect to base rate loans, the base rate, (which is the highest of the then current federal funds rate plus 0.5%, the prime rate most recently announced by the administrative agent under the term loan, and the one-month Eurodollar rate plus 1.0%) plus 1.0% per annum. The Term Loan Facility matures on iNovember
2, 2023, unless earlier terminated.
As of June 30, 2020 and December 31, 2019, the Company had $i1,977 and $i2,273
of unamortized debt issuance costs, respectively, and $i1,274 and $i1,466 of unamortized original issue discount, respectively, related to the Term
Loan Facility, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets. Both the debt issuance costs and the original issue discount are amortized into interest expense over the term of the Term Loan Facility.
ABL Facility
In November 2016, the Company entered into a Third Amended and Restated Loan Agreement of its ABL Facility, which provided an aggregate revolving loan availability of up to $i210,000,
subject to borrowing base availability. In March 2020, the Company entered into the First Amendment of the Third Amended and Restated Loan Agreement (“the Amendment”). As a result of the Amendment, the senior asset-based revolving credit facility (“ABL Facility”) maturity was extended to March 2025 and the aggregate revolving loan availability was reduced to $i180,000. The aggregate revolving loan availability includes a $i100,000
letter of credit sub-facility and a $i25,000 swing line sub-facility. The ABL Facility also provides for an uncommitted $i100,000 incremental loan facility, for a potential total ABL Facility
of $i280,000, if requested by the borrowers under the ABL Facility and the lenders agree to fund such increase. No consent of any lender is required to effect any such increase, except for those participating in the increase.
As of June 30, 2020, there were no loans outstanding under the ABL Facility. The Company’s borrowing base was $i52,026.
Net of the greater of 10% of the borrowing base or $15,000 that cannot be borrowed without triggering the fixed charge coverage ratio maintenance covenant and $i5,264 of outstanding letters of credit, the Company effectively had $i31,762
available for borrowing under its ABL facility .
Any borrowings under the ABL Facility will mature, and the commitments of the lenders under the ABL Facility will terminate, on the earlier of iMarch 24, 2025 or the date 91 days prior to the maturity date of the Term Loan Facility (or another fixed asset facility replacing the Term Loan Facility).
As a result of the Amendment, the Company wrote off $i177
in unamortized debt issuance costs, which are presented in interest expense, net of interest income in the condensed consolidated statements of operations. As of June 30, 2020 and December 31, 2019, the Company had $i1,284 and $i657,
respectively, of unamortized debt issuance costs related to the ABL Facility, which are presented in other assets in the condensed consolidated balance sheets.
Debt Covenants
The Company was in compliance with all covenants of the Senior Notes, Senior Secured Notes, Term Loan Facility and ABL Facility as of June 30, 2020.
Other
Other borrowings as of June 30, 2020 and December 31, 2019 reflect borrowings under local bank lines classified in debt payable within one year on the condensed consolidated balance sheet.
19
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
11. iFair Value Measurements and Financial Instruments
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is utilized, which prioritizes the inputs used in measuring fair value as follows:
Level 1:
Observable inputs such as quoted prices in active markets;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable
inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Items Measured at Fair Value on a Recurring Basis
Estimates of the fair value of foreign currency and interest rate derivative instruments are determined using exchange traded prices and rates. The Company also considers the risk of non-performance in the estimation of fair value and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. In certain instances where market data is not available, the Company uses management judgment to develop assumptions that are used to determine fair value. iFair
value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 were as follows:
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, the
Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information on assets and liabilities measured at fair value on a nonrecurring basis see Note 3. “Assets Held for Sale and Divestiture” and Note 8. “Property, Plant and Equipment.”
Items Not Carried at Fair Value
i
Fair
values of the Company’s Senior Notes, Senior Secured Notes and Term Loan Facility were as follows:
(1)
Excludes unamortized debt issuance costs and unamortized original issue discount.
/
Fair values were based on quoted market prices and are classified within Level 1 of the fair value hierarchy.
Derivative Instruments and Hedging Activities
The Company is exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. The Company enters into derivative instruments primarily to hedge portions of its forecasted foreign currency denominated cash flows and
designates these derivative instruments as cash flow hedges in order to qualify for hedge accounting.
The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the cash flow hedges. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in the cash flows of the hedged item. Derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. For a cash flow hedge, the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”)
in the condensed consolidated balance sheet and reclassified into earnings when the underlying hedged transaction is realized. The realized gains and losses are recorded on the same line as the hedged transaction in the condensed consolidated statements of operations.
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
The Company is exposed to credit risk in the event of nonperformance by its counterparties on its derivative financial instruments. The
Company mitigates this credit risk exposure by entering into agreements directly with major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts.
Cash Flow Hedges
Forward Foreign Exchange Contracts - The Company uses forward contracts to mitigate the potential volatility to earnings and cash flow arising from changes in currency exchange rates that impact the
Company’s foreign currency transactions. The principal currencies hedged by the Company include various European currencies, the Canadian Dollar, and the Mexican Peso. As of June 30, 2020 and December 31, 2019, the notional amount of these contracts was $i57,898 and $i92,150,
respectively, and consisted of hedges of transactions up to December 2020.
Interest rate swaps - The Company has historically used interest rate swap contracts to manage cash flow variability associated with its variable rate Term Loan Facility. The interest rate swap contract, which fixes the interest payments of variable rate debt instruments, is used to manage exposure to fluctuations in interest rates. As of June 30, 2020, there were no interest rate swap contracts outstanding.
i
Pretax
amounts related to the Company’s cash flow hedges that were recognized in other comprehensive income (loss) (“OCI”) were as follows:
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
12. iAccounts Receivable Factoring
As a part of its working capital management, the Company sells certain receivables through a single third-party
financial institution in a pan-European program (the “Factor”). The amount sold varies each month based on the amount of underlying receivables and cash flow needs of the Company. These are permitted transactions under the Company’s credit agreements governing the ABL Facility and Term Loan Facility and the indentures governing the Senior Notes and Senior Secured Notes. The European factoring facility, which was renewed in March 2020, allows the Company to factor up to €i120
million of its Euro-denominated accounts receivable, accelerating access to cash and reducing credit risk. The factoring facility expires in December 2023.
Costs incurred on the sale of receivables are recorded in other expense, net in the condensed consolidated statements of operations. The sale of receivables under this contract is considered an off-balance sheet arrangement to the Company and is accounted for as a true sale and is excluded from accounts receivable in the condensed consolidated balance sheet. iAmounts
outstanding under receivable transfer agreements entered into by various locations as of the period end were as follows:
The
Company continues to service sold receivables and acts as collection agent for the Factor. As of June 30, 2020 and December 31, 2019, cash collections on behalf of the Factor that have yet to be remitted were $i12,474 and $i21,485,
respectively, and are reflected in cash and cash equivalents in the condensed consolidated balance sheet.
13. iPension and Postretirement Benefits Other Than Pensions
i
The
components of net periodic benefit (income) cost for the Company’s defined benefit plans and other postretirement benefit plans were as follows:
Amortization
of prior service credit and actuarial gain
(i966)
i211
(i1,308)
i131
Net
periodic benefit (income) cost
$
(i574)
$
i741
$
(i781)
$
i721
The
service cost component of net periodic benefit (income) cost is included in cost of products sold and selling, administrative and engineering expenses in the condensed consolidated statements of operations. All other components of net periodic benefit (income) cost are included in other expense, net in the condensed consolidated statements of operations for all periods presented.
14. iOther
Expense, Net
i
The components of other expense, net were as follows:
Components
of net periodic benefit cost other than service cost
(i46)
(i551)
(i109)
(i968)
Factoring
costs
(i162)
(i148)
(i471)
(i473)
Miscellaneous
(expense) income
(i702)
i90
(i538)
i320
Other
expense, net
$
(i4,701)
$
(i1,781)
$
(i8,141)
$
(i2,577)
/
15.
iIncome Taxes
The Company determines its effective tax rate each quarter based upon its estimated annual effective tax rate. The Company records the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition,
jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.
23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
i
Income
tax (benefit) expense, income (loss) before income taxes and the corresponding effective tax rate for the three and six months ended June 30, 2020 and 2019 were as follows:
The
effective tax rate for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 varied from prior periods primarily due to the geographic mix of pre-tax losses driven by the impairment charge on held for sale entities and the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions. Additionally, a discrete expense of $i12,871 for the initial
recognition of valuation allowances against net deferred tax assets in certain foreign jurisdictions was recorded in the six months ended June 30, 2020. In accordance with recent legislation, one of the business tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) allows net operating losses (“NOL”) generated by the Company in tax years to be carried back up to five years at the tax rates in effect during those periods, rather than carried forward at current federal tax rates of 21%. The Company has included a $i14,344
benefit in the estimated annual effective tax rate for this CARES Act provision which was used to calculate the income tax benefit recorded in the three and six months ended June 30, 2020. The income tax rate for the three and six months ended June 30, 2020 and 2019 varies from the U.S. statutory rate primarily due to the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, tax credits, the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, and other permanent items. Further, the Company’s current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances
in certain countries. The Company intends to maintain these valuation allowances until it is more likely than not that the deferred tax assets will be realized.
16. iNet (Loss) Income Per Share Attributable to Cooper-Standard Holdings Inc.
Basic net (loss) income per share attributable to Cooper-Standard
Holdings Inc. was computed by dividing net (loss) income attributable to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding during the period. Diluted net (loss) income per share attributable to Cooper-Standard Holdings Inc. was computed using the treasury stock method by dividing diluted net (loss) income available to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding, including the dilutive effect of common stock equivalents, using the average share price during the period.
i
Information
used to compute basic and diluted net (loss) income per share attributable to Cooper-Standard Holdings Inc. was as follows:
Other
comprehensive income (loss) before reclassifications
i6,699
(1)
(i9,025)
(1)
(i21,683)
(1)
(i7,426)
(1)
Amounts
reclassified from accumulated other comprehensive loss
i—
i3,824
i—
i3,824
Balance
at end of period
$
(i175,616)
$
(i144,706)
$
(i175,616)
$
(i144,706)
Benefit
plan liabilities
Balance at beginning of period
$
(i97,478)
$
(i102,988)
$
(i100,160)
$
(i104,375)
Other
comprehensive income (loss) before reclassifications
(i1,405)
(2)
(i3,225)
(2)
i619
(2)
(i2,348)
(2)
Amounts
reclassified from accumulated other comprehensive loss
i689
(3)
i278
(4)
i1,347
(5)
i788
(6)
Balance
at end of period
$
(i98,194)
$
(i105,935)
$
(i98,194)
$
(i105,935)
Fair
value change of derivatives
Balance at beginning of period
$
(i9,724)
$
i795
$
i352
$
(i458)
Other
comprehensive income (loss) before reclassifications
i2,828
(7)
i1,438
(7)
(i7,156)
(7)
i2,928
(7)
Amounts
reclassified from accumulated other comprehensive loss
i3,410
(8)
(i610)
(8)
i3,318
(8)
(i847)
(8)
Balance
at end of period
$
(i3,486)
$
i1,623
$
(i3,486)
$
i1,623
Accumulated
other comprehensive loss, ending balance
$
(i277,296)
$
(i249,018)
$
(i277,296)
$
(i249,018)
(1)Includes
other comprehensive income (loss) related to intra-entity foreign currency balances that are of a long-term investment nature of $i3,485 and $(i848)
for the three months ended June 30, 2020 and 2019, respectively, and $(i19,218) and $i1,966
for the six months ended June 30, 2020 and 2019, respectively.
(2)Net of tax (benefit) expense of $(i47) and $(i918)
for the three months ended June 30, 2020 and 2019, respectively, and $i290 and $(i907)
for the six months ended June 30, 2020 and 2019, respectively. Includes other comprehensive loss of $ii3,224/
for each of the three and six months ended June 30, 2019 related to benefit plan liability remeasurement due to the divestiture of the Company’s AVS product line. See Note 3. “Assets Held for Sale and Divestiture.”
(3)Includes the effect of the amortization of actuarial losses of $i915
and amortization of prior service cost of $i21, net of tax of $i247.
See Note 13. “Pension and Postretirement Benefits Other Than Pensions.”
(4)Includes the effect of the amortization of actuarial losses of $i970, offset by the amortization of prior service credits of $i34,
net settlement gain of $i65 and curtailment gain of $i204,
net of tax of $i389. The settlement and curtailment relate to the divestiture of the Company’s AVS product line. See Note 3. “Assets Held for Sale and Divestiture.”
(5)Includes the effect of the amortization of actuarial losses of $i1,787
and amortization of prior service cost of $i42, net of tax of $i482.
See Note 13. “Pension and Postretirement Benefits Other Than Pensions.”
(6)Includes the effect of the amortization of actuarial losses of $i1,743, offset by the amortization of prior service credits of $i113,
net settlement gain of $i65 and curtailment gain of $i204,
net of tax of $i573. The settlement and curtailment relate to the divestiture of the Company’s AVS product line. See Note 3. “Assets Held for Sale and Divestiture.”
(7)Net of tax expense (benefit) of $i544
and $i429 for the three months ended June 30, 2020 and 2019, respectively, and $(i2,343)
and $i882 for the six months ended June 30, 2020 and 2019, respectively. See Note 11. “Fair Value Measurements and Financial Instruments.”
/
(8)Net
of tax (benefit) expense of $(i1,256) and $i217
for the three months ended June 30, 2020 and 2019, respectively, and $(i1,233) and $i305
for the six months ended June 30, 2020 and 2019, respectively. See Note 11. “Fair Value Measurements and Financial Instruments.”
25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
18. iCommon
Stock
Share Repurchase Program
In June 2018, the Company’s Board of Directors approved a common stock repurchase program (the “2018 Program”) authorizing the Company to repurchase, in the aggregate, up to $i150,000 of its outstanding common
stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by management and in accordance with prevailing market conditions and federal securities laws and regulations. The Company expects to fund any future repurchases from cash on hand and future cash flows from operations. The Company is not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at the Company’s discretion. The 2018 Program became effective in November 2018. As of June 30, 2020,
the Company had approximately $i98,720 of repurchase authorization remaining under the 2018 Program.
In May 2019, the Company entered into an accelerated share repurchase (“ASR”) agreement with a third-party financial institution to repurchase the Company’s common stock pursuant to the 2018 Program. Under the ASR agreement, the Company made an up-front payment of $i30,000
and received an initial delivery of i626,305 shares of its common stock in the second quarter of 2019. The repurchase was completed in the third quarter of 2019 when the Company received final delivery of an additional i72,875
shares. A total of i699,180 shares were repurchased at a weighted average purchase price of $i42.91 per share.
In
addition to the repurchase under the ASR agreement, during the six months ended June 30, 2019, the Company repurchased i85,000 shares at an average purchase price of $i69.85
per share, excluding commissions, for a total cost of $i5,937.
19. iShare-Based
Compensation
The Company’s long-term incentive plans allow for the grant of various types of share-based awards to key employees and directors of the Company and its affiliates. The Company generally awards grants on an annual basis.
In February 2020, the Company granted Restricted Stock Units (“RSUs”), Performance Units (“PUs”) and stock options. The RSUs cliff vest after three years, the PUs vest ratably over three years after the initial two-year performance period, and the stock options vest ratably over three years.
The number of PUs that will vest depends on the Company’s achievement of target performance goals related to the Company’s return on invested capital (“ROIC”) and total shareholder return, which may range from i0% to i200%
of the target award amount.
The Company is periodically involved in claims, litigation and various legal matters that arise in the ordinary course of business. The Company accrues for litigation exposure when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. As of June 30, 2020, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for claims, litigation and various legal matters, if any, has
been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company’s financial condition, results of operations or cash flows could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
In addition, the Company conducts and monitors environmental investigations and remedial actions at certain locations. As of June 30, 2020 and December 31, 2019, the undiscounted reserve for environmental investigation and remediation was approximately $i7,607
and $i6,104, respectively. While the Company’s costs to defend and settle known claims arising under environmental laws have not been material in the past and are not currently estimated to be material, such costs may be material in the future.
22. iSegment
Reporting
The Company’s organizational structure changed on January 1, 2020, creating a global automotive business (“Automotive”) and Advanced Technology Group (“ATG”). The Company’s business is now organized in the following reportable segments: North America, Europe, Asia Pacific and South America. ATG and all other business activities are reported in Corporate, eliminations and other. The Corporate, eliminations and other External Sales and Intersegment Sales amounts previously reported for the three and six months ended June 30, 2019 have been reclassified from North America and Europe from the table below. The adjusted EBITDA amounts
previously reported for the three and six months ended June 30, 2019 and Segment Asset amounts previously reported as of December 31, 2019 have been reclassified from North America, Europe, Asia Pacific and South America from the tables below.
The Company’s principal products within each of these segments are sealing, fuel and brake delivery, and fluid transfer systems. During the first quarter of 2019 and in prior periods, the Company also operated an anti-vibration systems product line. On April 1, 2019, the Company completed
the divestiture of the AVS product line.
The Company uses Segment adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. The results of each segment include certain allocations for general, administrative and other shared costs. Segment adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
27
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
i
Certain financial information on the Company’s reportable segments was as follows:
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Our historical results may not indicate, and should not be relied upon as an indication of, our future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. See “Forward-Looking Statements” below for a discussion of risks associated with reliance on forward-looking statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but
are not limited to, those discussed below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (“2019 Annual Report”) see Item 1A. “Risk Factors.” The following should be read in conjunction with our 2019 Annual Report and the other information included herein. Our discussion of trends and conditions supplements and updates such discussion included in our 2019 Annual Report. References in this quarterly report on Form 10-Q (the “Report”) to “we,”“our,” or the “Company” refer to Cooper-Standard Holdings Inc., together with its consolidated subsidiaries.
Executive
Overview
Our Business
We design, manufacture and sell sealing, fuel and brake delivery, and fluid transfer systems for use primarily in passenger vehicles and light trucks manufactured by global automotive original equipment manufacturers (“OEMs”). We are primarily a “Tier 1” supplier, with approximately 83% of our sales in 2019 made directly to major OEMs. We operate our business along the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other.
During the first quarter of 2019 and in prior periods, we also operated an anti-vibration systems (“AVS”) business. On April 1, 2019, we completed the divestiture of the AVS business.
Recent
Trends and Conditions
General Economic Conditions and Outlook
The global automotive industry is susceptible to uncertain economic conditions that could adversely impact new vehicle demand and production. Business conditions may vary significantly from period to period or region to region. The COVID-19 pandemic created an unusually high degree of economic disruption during the first half of 2020 and is continuing to drive uncertainty for the economic outlook and the automotive industry around the world. Economists at the International Monetary Fund (IMF) are now expecting the global economy to contract by approximately 5.0% in 2020.
Economic conditions and consumer confidence in North America have been negatively impacted by concerns over the COVID-19
pandemic and government-imposed shutdowns to contain the spread of the disease. The United States government has taken historic measures to provide fiscal stimulus to the economy in an effort to sustain businesses, limit job losses and preempt deeper declines in consumer confidence. Despite these efforts, IMF economists now expect economic contraction of approximately 8.0% for the North America region in 2020.
While most states have begun to re-open their economies, continued rolling outbreaks of COVID-19 cases and uncertainty related to the presidential election in the United States will likely weigh on consumer confidence in North America well into the fourth quarter of 2020 and possibly into 2021.
In the European region, the IMF is projecting economic contraction of approximately 10.2% for 2020. Current and potential future impacts of the COVID-19 pandemic will continue to weigh
on the economies of the region. Due to the pandemic, certain European governments mandated closures of broad segments of the economy in the first half of the year. Re-opening of the economies has begun at varying times and rates across the region. Most automotive manufacturers resumed production by mid-May to early June. As part of a broad economic recovery program, the European Union is considering various incentives to stimulate automotive demand in the region. Even as businesses in the region return to work, geopolitical concerns and the implementation of new environmental regulations in the automotive industry will likely continue to impact economic growth.
In the Asia Pacific region, the IMF expects China’s economic growth rate to slow to just 1.0% in 2020, following two months of aggressive COVID-19 containment measures during the first quarter. While the containment measures have been lifted and many industries are once
again approaching normalized production levels, significant challenges remain for the Chinese economy. Consumer confidence is likely to remain suppressed for a period of time, dampening both investment and
30
consumption. In addition, potential new policies by the United States and other developed countries that would encourage the repatriation of production of certain strategically sensitive products in the wake of the COVID-19 pandemic could reduce export demand and further pressure employment levels within China.
In South America, the IMF estimates that the Brazilian economy will contract by approximately 9.1% in 2020 as compared
to 2019. Unemployment is projected to exceed 15.0%. In response to the COVID-19 pandemic, the Brazilian government has approved an aggressive fiscal spending package to stimulate economic activity. While seen as urgently necessary, this spending will add to the country’s already high national debt level and could lead to lower consumer confidence and foreign investment in the region going forward. We remain cautious for the mid to long-term outlook given the long history of political instability and economic volatility in the region.
Raw Materials
Our business is susceptible to inflationary pressures with respect to raw materials which may place operational and profitability burdens on the entire supply chain. Costs related to raw materials, such as steel, aluminum, and oil and oil-derived commodities, continue to be volatile. In addition, we continue to expect commodity cost volatility
to have an impact on future earnings and operating cash flows. As such, on an ongoing basis, we work with our customers and suppliers to mitigate both inflationary pressures and our material-related cost exposures.
Production Levels
Our business is directly affected by the automotive vehicle production rates in North America, Europe, Asia Pacific and South America. Beginning in the first quarter of 2020, as a result of COVID-19, we experienced the shutdown of effectively all of our facilities in Asia Pacific coinciding with the shutdown of our customer facilities in that region. Facility shutdowns then occurred in March 2020 for a majority of our facilities in North America, Europe and South America.
Production resumed in Asia Pacific by the end of the first quarter of 2020, albeit at a lower capacity and has steadily increased in production
capacity throughout the second quarter. For our North America and Europe facilities, production resumed in May 2020 at a lower capacity and has increased through the remainder of the second quarter. Finally, for our South America facilities, production resumed in the second quarter, but has remained at a lower capacity. We are collaborating closely with our customers as production volume continues to increase, while also adhering to enhanced safety standards and measures to protect our employees.
Light vehicle production in certain regions for the three and six months ended June 30, 2020 and 2019 was as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
(In millions of units)
2020(1)
2019(1)
% Change
2020(1)
2019(1)
%
Change
North America
1.3
4.2
(69.1)%
5.1
8.5
(39.9)%
Europe
2.1
5.6
(62.3)%
6.8
11.3
(39.7)%
Asia
Pacific
8.4
10.9
(22.8)%
16.7
22.6
(26.3)%
Greater China
6.0
5.5
9.1%
9.3
11.5
(19.6)%
South
America
0.2
0.9
(82.0)%
0.8
1.7
(51.0)%
(1)Production data based on IHS Automotive, July 2020.
Total vehicle production has decreased substantially across the globe. The COVID-19 pandemic has emerged
as the biggest risk factor facing the automotive industry. Plant shutdowns have greatly slowed production and have been accompanied by decreased demand for vehicles, as new vehicle sales are highly dependent on strong consumer confidence and low unemployment. While the outlook for the second half of the year remains uncertain, there are signs that the global economy is beginning to rebound from the impacts of the pandemic. Lower unemployment rates, improving consumer confidence and lower than normal light vehicle inventory levels could all have a positive impact on light vehicle production going forward.
Sales for the three months ended June 30, 2020 decreased 55.5%, compared to the three months ended June 30, 2019. The decline was almost entirely driven by the decrease in vehicle production volume due to government imposed global shutdowns related to the COVID-19 pandemic.
Three
Months Ended June 30,
Variance Due To:
2020
2019
Change
Volume / Mix*
Foreign Exchange
Divestiture
(dollar
amounts in thousands)
Total sales
$
340,467
$
764,698
$
(424,231)
$
(416,550)
$
(6,697)
$
(984)
*
Net of customer price reductions
32
Gross Profit
Three
Months Ended June 30,
Variance Due To:
2020
2019
Change
Volume / Mix*
Foreign Exchange
Cost Increases
/ (Decreases)
(dollar amounts in thousands)
Cost of products sold
$
400,838
$
666,828
$
(265,990)
$
(242,555)
$
(7,739)
$
(15,696)
Gross
profit (loss)
(60,371)
97,870
(158,241)
(173,995)
1,042
14,712
Gross profit percentage of sales
(17.7)
%
12.8
%
*
Net of customer price reductions
Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 39% and 50% of total cost of products sold for the three months ended June 30, 2020 and 2019, respectively. The change in the cost of products sold was driven by government imposed global shutdowns related to the COVID-19 pandemic, commodity price fluctuations, foreign exchange, and wage inflation.
Gross profit (loss) for the three months ended June 30, 2020 decreased $158.2 million or 161.7%
compared to the three months ended June 30, 2019. The decrease was driven by the decline in vehicle production volume due to government imposed global shutdowns related to the COVID-19 pandemic, customer price reductions, and wage inflation. These items were partially offset by net favorable operational performance, restructuring savings, material cost reductions and foreign exchange.
Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Sales, administration and engineering expense for the three months ended June 30, 2020 was 20.1% of sales compared to 9.7% for the three months ended June 30, 2019. The increase in
rate was driven by the significant decline in total sales. Selling, administration and engineering expenses were lower by $5.9 million. The decrease in amount was primarily due to savings generated from salaried employee initiatives resulting in lower compensation-related expenses and lower travel expenses, partially offset by general inflation.
Gain on Sale of Business. Gain on sale of business of $189.9 million for the three months ended June 30, 2019 related to the sale of our AVS product line within our North America, Europe and Asia Pacific segments. We completed the sale to Continental AG on April 1, 2019.
Restructuring. Restructuring charges for the three months ended June 30, 2020
increased $3.8 million compared to the three months ended June 30, 2019. The increase was driven by higher restructuring charges in North America, Asia Pacific and South America, primarily related to plant closures and other footprint rationalization initiatives.
Impairment Charges. Non-cash impairment charges for the three months ended June 30, 2020 increased $10.4 million compared to the three months ended June 30, 2019, primarily related to reducing the carrying value of the held for sale facilities to fair value less costs to sell. Fair value was determined using a market approach, estimated based on expected proceeds.
Interest Expense, Net. Net interest expense for the three months
ended June 30, 2020 increased $1.2 million compared to the three months ended June 30, 2019, primarily due to higher outstanding debt balances.
Other Expense, Net. Other expense for the three months ended June 30, 2020 increased $2.9 million compared to the three months ended June 30, 2019, primarily due to higher foreign currency losses.
Income Tax (Benefit) Expense. Income tax benefit for the three months ended June 30, 2020 was $39.0 million on a loss before income taxes of $175.0 million. This compares to an income tax expense of $44.2 million on earnings before income taxes of $188.9
million for the three months ended June 30, 2019. The effective tax rate for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 differed primarily due to the geographic mix of pre-tax losses driven by the impairment charge on held for sale entities, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions, as well as benefits recorded as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) net operating loss (“NOL”) carry back provision that allows NOLs generated in tax years to be carried back up to five years at the tax rates in effect during those periods, rather than carried forward at current federal tax rates of 21%.
Sales for the six months ended June 30, 2020 decreased 39.4%, compared to the six months ended June 30, 2019. The decline was mainly driven by the decrease in vehicle production volume due to government imposed global shutdowns related to the COVID-19 pandemic, customer price reductions and foreign exchange.
Six
Months Ended June 30,
Variance Due To:
2020
2019
Change
Volume / Mix*
Foreign Exchange
Acquisitions /
Divestiture, Net
(dollar amounts in thousands)
Total sales
$
995,357
$
1,642,693
$
(647,336)
$
(548,369)
$
(20,237)
$
(78,730)
*
Net of customer price reductions
Gross Profit
Six Months Ended
June 30,
Variance Due To:
2020
2019
Change
Volume / Mix*
Foreign Exchange
Cost Increases / (Decreases)**
(dollar
amounts in thousands)
Cost of products sold
$
1,012,585
$
1,429,318
$
(416,733)
$
(310,231)
$
(18,794)
$
(87,708)
Gross
profit (loss)
(17,228)
213,375
(230,603)
(238,138)
(1,443)
8,978
Gross profit percentage of sales
(1.7)
%
13.0
%
*
Net of customer price reductions
** Includes the net impact of acquisitions and divestiture
Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 44% of total cost of products sold for the six months ended June 30, 2020 and 51% of total cost of products sold for six months ended June 30, 2019. The change in the cost of products sold was driven by government imposed global shutdowns related to the COVID-19 pandemic, the sale of our AVS product line, continuous improvement and lean manufacturing, material cost reductions, commodity
price fluctuations, foreign exchanges, and wage inflation.
Gross profit (loss) for the six months ended June 30, 2020 decreased 108.1% compared to the six months ended June 30, 2019. The decrease was driven by the decline in vehicle production volume due to government imposed global shutdowns related to the COVID-19 pandemic, customer price reductions, commodity price inflation, foreign exchange pressures, and wage inflation. These items were partially offset by net favorable operational performance, restructuring savings, and material cost reductions.
Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Sales, administration
and engineering expense for the six months ended June 30, 2020 was 14.0% of sales compared to 9.8% for the six months ended June 30, 2019. This increase in rate was primarily due to the significant decline in total sales. The decrease in amount was primarily due to savings generated from salaried employee initiatives resulting in lower compensation-related expenses, the sale of our AVS product line and lower travel expenses, partially offset by general inflation.
Gain on Sale of Business. Gain on sale of business of $189.9 million for the six months ended June 30, 2019 related to the sale of our AVS product line within our North America, Europe and Asia Pacific segments.We completed the sale to Continental
AG on April 1, 2019.
Restructuring. Restructuring charges for the six months ended June 30, 2020 decreased $6.6 million compared to the six months ended June 30, 2019. The decrease was a result of lower restructuring charges in Europe, Asia Pacific and Corporate and other, as the first quarter of 2019 included certain salaried employee initiatives and footprint rationalization initiatives.
Impairment Charges. Non-cash impairment charges for the six months ended June 30, 2020 increased $85.4 million compared to the six months ended June 30, 2019. The increase primarily related to reducing
the carrying value of the held for
sale facilities to fair value less costs to sell. Fair value was determined using a market approach, estimated based on expected proceeds.
Interest Expense, Net. Net interest expense for the six months ended June 30, 2020 decreased $0.5 million compared to the six months ended June 30, 2019, due to interest expense related to the ABL Facility in the first quarter of 2019.
Other Expense, Net. Other expense for the six months ended June 30, 2020 increased $5.6
million compared to the six months ended June 30, 2019, primarily due to higher foreign currency losses.
Income Tax (Benefit) Expense. Income tax benefit for the six months ended June 30, 2020 was $53.1 million on a loss before income taxes of $301.5 million. This compares to income tax expense of $46.3 million on earnings before income taxes of $185.6 million for the six months ended June 30, 2019. The effective tax rate for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 differed primarily due to the geographic mix of pre-tax losses driven by the impairment charge on held for sale entities, the inability to record a tax
benefit for pre-tax losses in certain foreign jurisdictions, as well as benefits recorded as a result of the CARES Act net operating loss carry back provision. Additionally, a discrete expense of $12.9 million for the initial recognition of valuation allowances against net deferred tax assets in certain foreign jurisdictions was recorded in the six months ended June 30, 2020.
Segment Results of Operations
Our business is now organized into the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other. The Company uses Segment
adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We have defined adjusted EBITDA as net income before interest, taxes, depreciation, amortization, restructuring expense, and special items.
The following tables present sales and segment adjusted EBITDA for each of the reportable segments.
•Volume and mix, net of customer price reductions, almost entirely is driven by the decline in vehicle production volume as a result of government imposed global shutdowns related to the COVID-19 pandemic.
•The impact of foreign currency exchange primarily relates to the Chinese Renminbi, Brazilian Real, and Euro.
Segment adjusted EBITDA
Three
Months Ended June 30,
Variance Due To:
2020
2019
Change
Volume/ Mix*
Foreign Exchange
Cost
(Increases)/ Decreases
Divestiture
(dollar amounts in thousands)
Segment adjusted EBITDA
North
America
$
(42,874)
$
53,883
$
(96,757)
$
(106,401)
$
(515)
$
10,152
$
7
Europe
(41,403)
5,996
(47,399)
(50,698)
(602)
3,700
201
Asia
Pacific
(2,172)
(1,826)
(346)
(6,708)
922
5,679
(239)
South
America
(4,351)
(1,106)
(3,245)
(5,665)
(1,171)
3,591
—
Total
Automotive
(90,800)
56,947
(147,747)
(169,472)
(1,366)
23,122
(31)
Corporate,
eliminations and other
(2,952)
1,024
(3,976)
(4,523)
(645)
1,192
—
Consolidated
adjusted EBITDA
$
(93,752)
$
57,971
$
(151,723)
$
(173,995)
$
(2,011)
$
24,314
$
(31)
*
Net of customer price reductions
•Volume and mix, net of customer price reductions, almost entirely is driven by the decline in vehicle production volume as a result of government imposed global shutdowns related to the COVID-19 pandemic.
•The impact of foreign currency exchange is driven by the Euro, Mexican Peso, Canadian Dollar, Chinese Renminbi, Brazilian Real, Polish Zloty, and Czech Koruna.
◦Reduction in compensation-related expenses, purchasing savings through lean initiatives, restructuring savings;
◦Wage
increases;
◦Net manufacturing efficiencies of $21 million, weakened by the impact of COVID-19, primarily driven by our European, North America and Asia Pacific segments.
•Volume and mix, net of customer price reductions includes the impact of the decline in vehicle production volume as driven by government imposed global shutdowns related to the COVID-19 pandemic.
•The impact of foreign currency exchange primarily relates to the Chinese Renminbi, Euro and Brazilian Real.
36
Segment adjusted EBITDA
Six
Months Ended June 30,
Variance Due To:
2020
2019
Change
Volume/ Mix*
Foreign Exchange
Cost
(Increases) / Decreases
Acquisitions / Divestiture, Net
(dollar amounts in thousands)
Segment adjusted EBITDA
North
America
$
(5,855)
$
113,034
$
(118,889)
$
(133,228)
$
(388)
$
18,480
$
(3,753)
Europe
(46,026)
15,271
(61,297)
(68,218)
1,010
8,466
(2,555)
Asia
Pacific
(19,229)
(2,233)
(16,996)
(24,056)
(587)
8,237
(590)
South
America
(8,928)
(2,139)
(6,789)
(6,146)
(4,684)
4,041
—
Total
Automotive
(80,038)
123,933
(203,971)
(231,648)
(4,649)
39,224
(6,898)
Corporate,
eliminations and other
(5,435)
(1,828)
(3,607)
(6,490)
(1,697)
4,580
—
Consolidated
adjusted EBITDA
$
(85,473)
$
122,105
$
(207,578)
$
(238,138)
$
(6,346)
$
43,804
$
(6,898)
*
Net of customer price reductions
•Volume and mix, net of customer price reductions, includes the impact of the decline in vehicle production volume as driven by government imposed global shutdowns related to the COVID-19 pandemic.
•The impact of foreign currency exchange is driven by the Euro, Mexican Peso, Canadian Dollar, Chinese Renminbi, Brazilian Real, Euro, Polish Zloty, and Czech Koruna.
◦Reduction in compensation-related expenses, purchasing savings through lean initiatives, restructuring savings;
◦Commodity
cost fluctuations and wage increases;
◦Net manufacturing efficiencies of $35 million, weakened by the impact of COVID-19, primarily driven by our European, North America and Asia Pacific segments.
Liquidity and Capital Resources
Short and Long-Term Liquidity Considerations and Risks
We intend to fund our ongoing working capital, capital expenditures, debt service and other funding requirements through a combination of cash flows from operations, cash on hand, borrowings under our senior asset-based revolving credit facility (“ABL Facility”) and receivables factoring. The
Company utilizes intercompany loans and equity contributions to fund its worldwide operations. There may be country-specific regulations which may restrict or result in increased costs in the repatriation of these funds. See Note 10. “Debt” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for additional information.
Taking into account the ramp up of production thus far, our current expectations and projections for increasing OEM customer production plans and due to the aggressive actions we have taken to preserve cash and enhance liquidity, including significantly decreasing our capital expenditures, we believe that our cash flows from operations, cash on hand, borrowings under our ABL Facility and receivables factoring will enable us to meet our ongoing working capital, capital expenditures, debt service and other funding requirements for the next twelve months,
despite the challenges presented by the COVID-19 pandemic. We continuously monitor and forecast our liquidity situation, take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. Our ability to fund our working capital needs, debt payments and other obligations, and to comply with the financial covenants, including borrowing base limitations, under our ABL Facility, depend on our future operating performance and cash flows and many factors outside of our control, including the costs of raw materials, the state of the overall automotive industry and financial and economic conditions, including the impact of COVID-19, and other factors.
Cash Flows
Operating
Activities. Net cash used in operations was $126.2 million for the six months ended June 30, 2020, compared to net cash used in operations of $9.0 million for the six months ended June 30, 2019. The net outflow was primarily due to decreased cash earnings, partially offset by working capital improvements.
Investing Activities. Net cash used in investing activities was $62.1 million for the six months ended June 30, 2020, compared to net cash provided by investing activities of $149.5 million for the six months ended June 30, 2019. Significant decreases in capital expenditures occurred in the second quarter of 2020, in order to preserve liquidity in response to the COVID-19 pandemic.
Additionally, lower capital expenditures are expected in the second half of 2020. Cash provided by investing activities in 2019 consisted primarily of gross proceeds of $243.4 million from the sale of our AVS product line, partially offset by capital spending.
Financing Activities. Net cash provided by financing activities totaled $232.7 million for the six months ended June 30, 2020, compared to net cash used in financing activities of $91.2 million for the six months ended June 30, 2019. The inflow was primarily due to proceeds from issuance of our Senior Secured Notes during the six months ended June 30, 2020. There were no share repurchases during the six months ended June 30, 2020. Cash used for share
repurchases was $36.6 million for the six months ended June 30, 2019.
Share Repurchase Program
In June 2018, our Board of Directors approved a new common stock repurchase program (the “2018 Program”) authorizing us to repurchase, in the aggregate, up to $150.0 million of our outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by us and in accordance with prevailing market conditions and federal securities laws and regulations. We expect to fund any future repurchases from cash on hand and future cash flows from operations. The specific timing and amount of any future repurchase will vary based on market and business conditions and other
factors. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at our discretion. As of June 30, 2020, we had approximately $98.7 million of repurchase authorization remaining under the 2018 Program. We currently have no plans to repurchase shares in the foreseeable future.
We did not make any repurchases during the six months ended June 30, 2020.
2019 Repurchases
In May 2019, we entered into an accelerated share repurchase (“ASR”) agreement with a third-party financial institution to repurchase our common stock pursuant to the 2018 Program. Under the ASR agreement, we made an up-front payment of $30.0 million and received an initial delivery of 626,305 shares of our
common stock in the second quarter of 2019. The repurchase was completed in the third quarter of 2019 when we received final delivery of an additional 72,875 shares. A total of 699,180 shares were repurchased at a weighted average purchase price of $42.91 per share.
In addition to the repurchase under the ASR agreement, during the six months ended June 30, 2019, we repurchased 85,000 shares at an average purchase price of $69.85 per share, excluding commissions, for a total cost of $5.9 million.
Non-GAAP Financial Measures
In evaluating our business, management considers EBITDA and Adjusted EBITDA to be key indicators of our operating performance. Our management also uses
EBITDA and Adjusted EBITDA:
•because similar measures are utilized in the calculation of the financial covenants and ratios contained in our financing arrangements;
•in developing our internal budgets and forecasts;
•as a significant factor in evaluating our management for compensation purposes;
•in evaluating potential acquisitions;
•in comparing our current operating results with corresponding historical periods and with the operational performance of other companies in our industry; and
•in presentations to the members of our board of directors to enable our board
of directors to have the same measurement basis of operating performance as is used by management in their assessments of performance and in forecasting and budgeting for our company.
In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in evaluating our performance. We define Adjusted EBITDA as net income (loss) plus income tax expense (benefit), interest expense, net of interest income, depreciation and amortization or EBITDA, as adjusted
38
for items that management does not consider to be reflective of our core operating performance.
These adjustments include, but are not limited to, restructuring costs, impairment charges, non-cash fair value adjustments and acquisition-related costs.
EBITDA and Adjusted EBITDA are not financial measurements recognized under U.S. GAAP, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA as a supplement to, and not as alternatives for, net income (loss), operating income, or any other performance measure derived in accordance with U.S. GAAP, nor as an alternative to cash flow from operating activities as a measure of our liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of our results of operations as reported under U.S. GAAP. These limitations include:
•they do not reflect our
cash expenditures or future requirements for capital expenditure or contractual commitments;
•they do not reflect changes in, or cash requirements for, our working capital needs;
•they do not reflect interest expense or cash requirements necessary to service interest or principal payments under our ABL Facility, Term Loan Facility, Senior Notes and Senior Secured Notes;
•they do not reflect certain tax payments that may represent a reduction in cash available to us;
•although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
•other
companies, including companies in our industry, may calculate these measures differently and, as the number of differences in the way companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.
In addition, in evaluating Adjusted EBITDA, it should be noted that in the future, we may incur expenses similar to the adjustments in the below presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by special items.
The following table provides a reconciliation of EBITDA and Adjusted EBITDA from net income (loss), which is the most comparable financial measure in accordance with U.S. GAAP:
Net
(loss) income attributable to Cooper-Standard Holdings Inc.
$
(134,219)
$
145,205
$
(244,807)
$
139,790
Income tax (benefit) expense
(38,982)
44,222
(53,099)
46,256
Interest
expense, net of interest income
12,771
11,575
23,008
23,507
Depreciation and amortization
42,460
37,868
80,223
74,473
EBITDA
$
(117,970)
$
238,870
$
(194,675)
$
284,026
Impairment
of assets held for sale
12,391
—
86,470
—
Restructuring charges
9,774
5,927
17,050
23,642
Project
costs (1)
1,809
405
4,234
1,668
Other impairment charges (2)
163
2,188
847
2,188
Lease
termination costs (3)
81
491
601
491
Gain on sale of business (4)
—
(189,910)
—
(189,910)
Adjusted
EBITDA
$
(93,752)
$
57,971
$
(85,473)
$
122,105
(1)Project costs recorded in selling, administration and engineering expense related to assets held for sale in 2020 and acquisitions and divestiture costs in 2019.
(2)Non-cash
impairment charges of $847 related to fixed assets, net of approximately $293 attributable to our noncontrolling interests for the six months ended June 30, 2020.
(3)Lease termination costs no longer recorded as restructuring charges in accordance with ASC 842.
(4)Gain on sale of AVS product line.
39
Contingencies and Environmental Matters
The information concerning contingencies,
including environmental contingencies and the amount currently held in reserve for environmental matters, contained in Note 21. “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, is incorporated herein by reference.
Recently Issued Accounting Pronouncements
See Note 2. “New Accounting Pronouncements” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.
Critical Accounting Estimates
There
have been no significant changes in our critical accounting estimates during the six months ended June 30, 2020.
Forward-Looking Statements
This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of U.S. federal securities laws, and we intend that such forward-looking statements be subject to the safe harbor created thereby. Our use of words “estimate,”“expect,”“anticipate,”“project,”“plan,”“intend,”“believe,”“outlook”, “guidance”, “forecast,” or future or conditional verbs, such as “will,”“should,”“could,”“would,” or “may,” and variations of such words or
similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs and projections will be achieved. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements. Among other items, such factors may include: the impact, and expected continued impact, of the recent COVID-19 outbreak on our financial condition and results of operations; significant risks to our liquidity presented by the COVID-19 pandemic risk; prolonged or material contractions in automotive
sales and production volumes; our inability to realize sales represented by awarded business; escalating pricing pressures; loss of large customers or significant platforms; our ability to successfully compete in the automotive parts industry; availability and increasing volatility in costs of manufactured components and raw materials; disruption in our supply base; competitive threats and commercial risks associated with our diversification strategy through Advanced Technology Group; possible variability of our working capital requirements; risks associated with our international operations, including changes in laws, regulations, and policies governing the terms of foreign trade such as increased trade restrictions and tariffs; foreign currency exchange rate fluctuations; our ability to control the operations of our joint ventures for our sole benefit; our substantial amount of indebtedness; our ability to obtain adequate financing sources in the future; operating
and financial restrictions imposed on us under our debt instruments; the underfunding of our pension plans; significant changes in discount rates and the actual return on pension assets; effectiveness of continuous improvement programs and other cost savings plans; manufacturing facility closings or consolidation; our ability to execute new program launches; our ability to meet customers’ needs for new and improved products; the possibility that our acquisitions and divestitures may not be successful; product liability, warranty and recall claims brought against us; laws and regulations, including environmental, health and safety laws and regulations; legal proceedings, claims or investigations against us; work stoppages or other labor disruptions; the ability of our intellectual property to withstand legal challenges; cyber-attacks, data privacy concerns, other disruptions in, or the inability to implement upgrades to, our information technology systems; the possible
volatility of our annual effective tax rate; changes in our assumptions as a result of IRS issuing guidance on the Tax Cuts and Jobs Act; the possibility of a failure to maintain effective controls and procedures; the possibility of future impairment charges to our goodwill and long-lived assets; our dependence on our subsidiaries for cash to satisfy our obligations.
You should not place undue reliance on these forward-looking statements. Our forward-looking statements speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except where we are expressly required to do so by law.
This quarterly report on Form 10-Q also
contains estimates and other information that is based on industry publications, surveys, and forecasts. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of the information.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except for the broad effects of COVID-19 on the global economy and major financial markets, which has and could continue to cause interest rates, currency exchange rates and commodity prices to fluctuate, there have been no material changes to the quantitative and qualitative
information about the Company’s market risk from those previously disclosed in the Company’s 2019 Annual Report.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has evaluated, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Based on that evaluation, the Company’s Chief Executive Officer along with the Chief Financial Officer
have concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
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PART
II — OTHER INFORMATION
Item 1A.Risk Factors
The Company is supplementing the risk factors set out under “Part I. Item 1A. Risk Factors” in its 2019 Annual Report, as updated by the risk factors set out under “Part II. Item 1A. Risk Factors” in its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020 (the “First Quarter Form 10-Q”), with the risk factors set forth below. The risk factors below should be read in conjunction with the factors set out in the 2019 Annual Report and the First Quarter Form 10-Q.
We
have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to react to changes in our business.
For discussion of our debt and financing arrangements, including our Term Loan Facility, ABL Facility, Senior Notes and Senior Secured Notes, see “Liquidity and Capital Resources – Short and Long-Term Liquidity Considerations and Risks” in Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10. “Debt” to the unaudited condensed consolidated financial statements included under Part I. Item 1. “Financial Statements” of this Report.
Our substantial amount of debt and our debt service obligations could limit our ability to satisfy our obligations, limit our ability to operate our business and impair
our competitive position. For example, it could:
•increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings is at variable rates of interest;
•require us to dedicate a substantial portion of our cash flows from operations to payments on our debt, which would reduce the availability of cash to fund working capital, capital expenditures or other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and industry;
•place us at a disadvantage compared to competitors that may have proportionately less debt;
•limit
our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements; and
•increase our cost of borrowing.
Our ability to make scheduled payments on our debt or to refinance these obligations depends on our financial condition, operating performance and our ability to generate cash in the future. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell material assets, seek additional capital or restructure or refinance our indebtedness, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability
to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the credit agreements governing the Term Loan Facility and the ABL Facility and the indentures governing the Senior Notes and the Senior Secured Notes, may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. An inability to generate sufficient
cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations in respect of the Term Loan Facility, the ABL Facility, the Senior Notes or the Senior Secured Notes.
Although the credit agreements governing the Term Loan Facility and the ABL Facility contain certain limitations on our ability to incur additional indebtedness, they do not prohibit us from incurring obligations that do not constitute indebtedness as defined therein. To the extent that we incur additional indebtedness or such other obligations, the risk associated with our substantial indebtedness described above, including our potential inability to service our debt, will increase.
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Our
debt instruments impose significant operating and financial restrictions on us and our subsidiaries.
The credit agreements governing the Term Loan Facility and the ABL Facility impose significant operating and financial restrictions and limit our ability, among other things, to:
•incur, assume or permit to exist additional indebtedness (including guarantees thereof);
•pay dividends or certain other distributions on our capital stock or repurchase our capital stock or prepay subordinated indebtedness;
•incur liens on assets;
•make certain investments or other restricted
payments;
•allow to exist certain restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
•engage in transactions with affiliates;
•alter the business that we conduct; and
•sell certain assets or merge or consolidate with or into other companies.
Moreover, our ABL Facility provides the agent considerable discretion to impose reserves, which could materially reduce the amount of borrowings that would otherwise be available to us.
The indentures
governing the Senior Notes and the Senior Secured Notes also impose restrictions and limit our ability, among other things, to:
•incur or guarantee additional indebtedness or issue certain preferred stock;
•create or incur liens;
•make certain restricted payments;
•sell certain assets or merge or consolidate with or into other companies; and
•enter into certain sale-leaseback transactions.
As a result of these covenants and restrictions (including borrowing base availability), we are limited in how we conduct our business, and we may be unable to raise additional debt or equity financing
to compete effectively or to take advantage of new business opportunities or acquisitions. The terms of any future indebtedness we may incur could include more restrictive covenants. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, we may not be able to obtain waivers from the lenders and/or amend the covenants in such agreements. Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our financial condition, results of operations and cash flows could be adversely affected.
If there were an event of default under any of the agreements relating to our outstanding
indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. Our assets or cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon occurrence of an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could exercise remedies against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. As a result, any default by us on our indebtedness could have a material adverse effect on our business, financial condition and results of operation.
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We
may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures
may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any future refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. Additionally, the credit agreements governing the ABL Facility and the Term Loan Facility and the indentures governing the Senior Notes and the Senior Secured
Notes limit the use of the proceeds from any disposition of our assets. As a result, the credit agreements governing the ABL Facility and the Term Loan Facility and the indentures governing the Senior Notes and the Senior Secured Notes may prevent us from using the proceeds from such dispositions to satisfy our debt service obligations.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
The borrowings under the ABL Facility and the Term Loan Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and
cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities By the Issuer and Affiliated Purchasers
The Company is authorized to purchase, in the aggregate, up to $150 million of our outstanding common stock under our common stock repurchase program, which was effective in November 2018. As of June
30, 2020, we had approximately $98.7 million of repurchase authorization remaining under our ongoing common stock share repurchase program as discussed in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Share Repurchase Program,” and Note 18. “Common Stock” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.
A summary of our shares of common stock repurchased during the three months ended June 30, 2020 is shown below:
Period
Total
Number of Shares Purchased(1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions)
(1)Includes
shares repurchased by the Company to satisfy employee tax withholding requirements due upon the vesting of restricted stock awards.
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Item 6. Exhibits
Exhibit No.
Description
of Exhibit
4.1
Indenture, dated as of May 29, 2020, by and among Cooper-Standard Automotive Inc., the Guarantors part thereto and U.S. Bank National Association, as Trustee and Collateral Agent (incorporated by reference to Exhibit 4.1 to Cooper-Standard Holdings Inc.'s Current Report on Form 8-K filed June 1, 2020 (File No. 001-36127)).
Inline XBRL Instance Document - the instance document does not
appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive
Data File, formatted in Inline XBRL
*
Filed with this Report.
**
Furnished with this Report.
***
Submitted electronically with this Report in accordance with the provisions of Regulation S-T.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
