Cooper-Standard Holdings Inc. — Form 10-Q summary
Period discrepancy: The request identifies 2015 Q3, but the supplied filing is for the quarter and nine months ended September 30, 2016, compared with 2015. This summary covers the filing provided.
Business context and reporting period
Cooper-Standard manufactures sealing, fuel and brake delivery, fluid transfer, and anti-vibration systems, primarily for automotive OEMs and replacement markets. Its reportable segments are North America, Europe, Asia Pacific, and South America. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $855.7 million | $827.5 million | $2,597.5 million | $2,488.4 million |
| Gross profit / margin | $164.7 million / 19.2% | $148.4 million / 17.9% | $496.5 million / 19.1% | $433.3 million / 17.4% |
| Operating profit | $58.4 million | $57.2 million | $184.4 million | $148.2 million |
| Net income attributable to Cooper-Standard | $36.4 million | $32.7 million | $107.9 million | $90.2 million |
| Diluted earnings per share | $1.94 | $1.78 | $5.77 | $4.92 |
| Adjusted EBITDA | $100.8 million | $93.3 million | $312.9 million | $271.1 million |
Q3 operating margin was approximately 6.8% versus 6.9% a year earlier; nine-month operating margin was approximately 7.1% versus 6.0%. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow was $182.0 million, versus $110.0 million. Investing activities used $150.7 million, including $116.8 million of capital expenditures and $37.5 million for acquisitions. Financing activities used $41.3 million. Cash declined $17.8 million to $360.4 million.
- Liquidity: Current assets were $1,255.4 million and current liabilities $740.2 million at September 30, 2016. The company reported no ABL borrowings and $180.0 million of revolving availability, less $57.1 million of letters of credit, subject to borrowing-base availability.
- Debt: Total debt was $779.8 million, including $53.1 million current and $726.7 million long-term, compared with $777.9 million at year-end 2015.
Material changes versus prior comparable periods
- Sales rose 3.4% in Q3 and 4.4% for the nine-month period. Management attributed growth to volume and mix, acquisitions, and consolidation of a joint venture; foreign exchange, customer price reductions, divestiture of the hard-coat plastic exterior trim business, and weaker South American volumes offset growth.
- Gross profit increased 10.9% in Q3 and 14.6% year to date, with margin improvement attributed primarily to continuous-improvement and material-cost savings and better volume and mix.
- Q3 sales increased strongly in Asia Pacific (+34.4%) but declined in North America and Europe. Nine-month South American sales fell 20.4%; Europe and North America reported segment losses in Q3 and Europe and South America reported losses year to date.
- For the nine months, other expense was $8.6 million versus other income of $9.9 million in 2015. The comparison includes $5.9 million of secondary-offering fees and excludes the prior-year $14.2 million Shenya remeasurement gain.
Outlook, commentary, risks, and unusual items
- Management expected funding from operating cash flow, cash on hand, ABL availability, and receivables factoring to meet needs for the next 12 months, while noting dependence on operating performance, cash flow, borrowing-base limits, and covenant compliance. Planned 2016 capital expenditures were approximately $155–$165 million.
- Management cited uncertain global economic conditions, China’s slower growth, Brazilian volatility, foreign-exchange fluctuations, automotive production and demand, pricing pressure, raw-material costs, and intense supplier competition as business factors.
- The European restructuring program, expected to be completed in 2017, has estimated total costs of approximately $125 million; about $78 million had been incurred by September 30, 2016. Nine-month 2016 restructuring charges were $33.5 million.
- In Q3, the company acquired AMI Industries’ North American fuel and brake business for $32.0 million and gained control of its 51%-owned Guangzhou joint venture. The China fuel and brake acquisition was pending regulatory approval and expected to close in Q1 2017.
- Subsequent debt refinancing: On November 2, 2016, the company issued $400 million of 5.625% senior notes due 2026, repaid the non-extended term loan, extended the remaining $340 million term loan to November 2023, and extended and increased ABL availability to $210 million, subject to borrowing-base availability.
- A putative Ontario class action alleges price-fixing of automotive body-sealing products. The company says the claims are without merit and does not consider a material loss probable and reasonably estimable; outcomes remain uncertain. The company also notes ordinary-course litigation and environmental matters.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended filing period: the supplied document is 2016 Q3, not 2015 Q3.
- Review the November 2 refinancing terms, debt repayment and extension, and resulting interest costs and liquidity.
- Assess whether improved margins and cash generation can persist amid restructuring costs, compensation and growth-related expense, pricing pressure, and regional production trends.
- Track acquisition integration, the pending China transaction, and the preliminary purchase-price allocations and goodwill recorded for acquisitions and the consolidated joint venture.
- Monitor European restructuring costs and timing, South American performance, the Ontario litigation, and compliance with debt covenants and borrowing-base requirements.