Cooper-Standard Holdings Inc. — Form 10-Q Summary
Period clarification: The request metadata identifies 2013 Q2, but the supplied filing is for the quarter and six months ended June 30, 2014. Comparisons below are to the corresponding 2013 periods. Dollar figures are in millions unless noted.
Business context and reporting period
Cooper-Standard manufactures automotive sealing and trim, fuel and brake delivery, fluid transfer, and anti-vibration products for global OEMs and replacement markets. The filing reports unaudited results for Q2 and the first half of 2014.
In June 2014, the company agreed to sell its thermal and emissions product line to focus on its four core product groups. The sale closed in Q3 2014; the assets were classified as held for sale at June 30, and the business was not reported as discontinued operations.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales | $857.6 | $784.7 | $1,695.2 | $1,532.3 |
| Gross profit / gross margin | $146.1 / 17.0% | $132.3 / 16.9% | $280.4 / 16.5% | $252.6 / 16.5% |
| Operating profit | $56.5 | $54.6 | $103.8 | $91.1 |
| Net income attributable to Cooper-Standard | $13.2 | $27.4 | $32.9 | $48.1 |
| Diluted EPS | $0.72 | $1.34 | $1.82 | $2.19 |
| Adjusted EBITDA (non-GAAP) | $91.8 | $82.5 | $172.3 | $159.2 |
Sales rose 9.3% in Q2 and 10.6% in the first half. Growth reflected higher volumes in North America and Europe, Jyco acquisition sales, and, for Q2, favorable foreign exchange; price concessions and weaker South American volumes were offsets. Gross margin was broadly stable. Higher sales and continuous-improvement savings supported gross profit, while staffing, other operating costs, and customer pricing pressure weighed on results.
Reported earnings fell substantially year over year, primarily because Q2 2014 included a $30.3 million debt-extinguishment loss. Q2 other expense was $28.6 million versus $6.0 million in Q2 2013. The first-half effective tax rate was 32% versus 30%; the company cited the absence of the U.S. R&D tax credit in 2014, partly offset by tax benefits associated with the debt loss.
For the six months ended June 30, operating cash flow was $54.2 million, compared with cash used of $27.5 million in 2013. The 2014 figure included $76.8 million of cash used by changes in operating assets and liabilities, mainly receivables and inventories, partly offset by higher payroll liabilities. Capital expenditures were $110.8 million, compared with $70.1 million; operating cash flow less capital expenditures was therefore negative $56.6 million.
At June 30, cash was $207.4 million; total debt was $792.5 million, including $29.5 million current and $763.0 million long-term. Total debt at year-end 2013 was $684.4 million. Current assets were $1,118.7 million and current liabilities $551.6 million. The company reported a $180 million Senior ABL revolving facility, subject to borrowing-base availability, with $35.6 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Q2 North American sales increased 13.0%; Europe increased 7.8%; Asia Pacific increased 14.9%; South America declined 17.6%. First-half sales increased in North America, Europe, and Asia Pacific but declined 15.2% in South America.
- Europe recorded a Q2 segment loss of $12.9 million, versus $1.2 million a year earlier; South America’s loss was $4.3 million versus $0.5 million. North America remained profitable, with Q2 segment profit of $36.5 million versus $37.6 million. Asia Pacific reported a Q2 segment loss of $0.6 million versus profit of $2.5 million.
- On April 4, 2014, the company drew a $750 million term loan to refinance its Senior Notes and Senior PIK Toggle Notes, pay related costs, and provide for general corporate purposes. The term loan matures in 2021 and bears interest at LIBOR (subject to a 1% floor) or the base rate, plus a 3% margin. Debt refinancing and repayments contributed to the increase in reported total debt.
- First-half capital spending increased, and the company moved from negative to positive operating cash flow, though working-capital changes continued to consume cash.
Outlook, commentary, and risks
- Management expected 2014 capital expenditures of approximately $195–$205 million. It stated that cash on hand, operating cash flow, and ABL availability should meet funding needs for the next 12 months, while noting dependence on operating performance, cash flow, borrowing-base limits, and covenant compliance.
- Management cited expected 2014 light-vehicle production growth versus 2013 of 5.0% in North America, 2.2% in Europe, and 4.3% in Asia Pacific, with an 11.4% decline in South America. These are industry forecasts, not company financial guidance. The filing provides no clear full-year revenue or earnings guidance.
- Competition, OEM pricing pressure, raw-material costs, production cyclicality, customer and platform concentration, supply constraints, foreign exchange, international operations, pension funding, and the ability to service debt and comply with financing terms were identified as risks. The company also noted that repatriating cash may be restricted or costly in some countries.
- European restructuring continued: the 2013 facility initiative had estimated total costs of $20.9 million, with $19.4 million recognized by June 30 and completion expected in 2016. Additional European facility initiatives begun in 2014 were estimated to cost $2.9 million and were expected to be completed in 2014.
- Management reported no material change in market-risk disclosures, effective disclosure controls, and no material change in internal control over financial reporting. It did not believe a material litigation loss beyond amounts recognized was reasonably possible, while noting outcomes remain unpredictable.
Important facts for investors to verify
- Confirm the filing period: the supplied 10-Q is for June 30, 2014, notwithstanding the request metadata’s 2013 Q2 label.
- Review the full terms, covenants, amortization, and borrowing-base availability of the new term loan and amended ABL facility, including the implications of the company’s leverage and debt-service requirements.
- Assess whether sales growth and cost savings can offset pricing pressure, rising staffing and operating costs, and continued losses in Europe and South America.
- Track working-capital requirements, capital spending, and cash conversion, and confirm the actual proceeds and financial effects of the thermal and emissions product-line sale.
- Consider that Adjusted EBITDA is a non-GAAP measure and does not capture capital spending, working-capital needs, or debt service.