Cooper-Standard Holdings Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2012; filed August 9, 2012. The request metadata says “2011 Q2,” but the filing itself covers 2012 Q2.
Business context and financial performance
The company manufactures fluid-handling, body-sealing and anti-vibration components, primarily for automotive OEMs and replacement markets. Its reportable segments are North America and International. Dollar figures below are in millions unless otherwise stated.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales | $734.5 | $760.5 | $1,499.8 | $1,449.2 |
| Gross profit / margin | $114.4 / 15.6% | $123.7 / 16.3% | $236.1 / 15.7% | $244.5 / 16.9% |
| Operating profit | $42.1 | $17.2 | $81.8 | $68.6 |
| Net income attributable to Cooper-Standard | $77.3 | $19.0 | $101.1 | $64.0 |
| Diluted EPS attributable to Cooper-Standard | $3.28 | $0.71 | $4.15 | $2.49 |
Consolidated net income was $75.8 million in Q2 and $99.9 million for the first half of 2012. The difference from parent-attributable income reflects losses attributable to noncontrolling interests.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $34.8 million, versus positive $26.5 million a year earlier. The company attributed the outflow chiefly to a $157.8 million use from changes in operating assets and liabilities, including a $101 million increase in receivables; it also made $25.7 million of pension contributions.
- Investing cash outflow was $51.3 million, including $58.5 million of capital expenditures. Financing cash outflow was $24.5 million, including $18.5 million of common- and preferred-stock repurchases, debt payments and dividends.
- Cash fell to $252.1 million at June 30 from $361.7 million at year-end 2011. Total debt was $485.9 million, down from $488.7 million; $450 million was senior notes. Net debt was approximately $233.8 million.
- Current assets were $1,013.3 million and current liabilities $471.1 million. No borrowings were outstanding under the $125 million asset-based revolving facility; approximately $27.6 million of letters of credit were outstanding, subject to borrowing-base availability.
- Management said cash, operating cash flows and ABL availability should cover working capital, capital expenditures, debt service and other requirements for the foreseeable future, while noting performance, market, covenant and borrowing-base dependencies.
Changes versus comparable periods
- Q2 sales declined 3.4%, reflecting $58.6 million of unfavorable foreign exchange and lower International volumes, partly offset by North American volume growth and an additional month of FMEA joint-venture sales. First-half sales rose 3.5%, despite $76.1 million of unfavorable foreign exchange, with North American growth and acquisitions contributing.
- Gross margin contracted in both comparisons, with higher material costs, launch and expansion expenses, unfavorable currency effects and below-base-business acquisition margins among the pressures. Lean savings and stronger North American volumes partly offset them.
- Operating profit increased substantially, principally because restructuring costs were far lower than in 2011. Q2 restructuring was a $0.5 million credit versus $37.0 million of expense; first-half expense was $5.6 million versus $41.6 million.
- International segment losses improved: $13.6 million in Q2 versus $37.6 million, and $19.4 million in the first half versus $34.3 million. North American segment profit was $43.1 million in Q2 versus $45.8 million and $81.1 million in the first half versus $100.0 million.
- Reported earnings benefited significantly from a $53.4 million discrete U.S. deferred-tax valuation-allowance release. The filing estimates total 2012 U.S. valuation-allowance-related tax benefit of approximately $68.1 million. Excluding the discrete release, the reported effective tax rates were 24% for Q2 and 25% for the first half.
Outlook, commentary and risks
- Management estimated 2012 capital expenditures of $110–$120 million. It cited IHS Automotive forecasts of 2012 annualized light-vehicle production of 14.9 million units in North America and 18.9 million in Europe. For Q3 2012, it cited estimated production of 3.4 million North American units and 4.2 million European units.
- A March 2012 explosion at a German chemical supplier disrupted PA-12 resin supply. The company said it had continued supplying customers using approved alternatives and expected the facility and capacity to recover in Q4 2012, but warned that supply-chain interruptions could materially affect customer deliveries and results.
- The company described intense supplier competition, OEM pricing pressure, raw-material cost exposure, foreign-exchange volatility, automotive production dependence and acquisition/joint-venture integration as ongoing challenges. Other disclosed risks include customer concentration, pensions, debt covenants, legal and environmental matters, and the ability to generate cash and realize cost savings.
- Restructuring included a new European-footprint initiative estimated at $14 million, expected to finish in 2013; $5.3 million was recorded in the first half. Previously planned German-business and North American facility closures were reversed after the initiatives were abandoned or a union contract was negotiated. The filing also notes a $1.5 million postretirement-benefit curtailment gain.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It did not expect ordinary-course legal matters to have a material adverse effect, while acknowledging outcomes are uncertain.
Most important facts for investors to verify
- Confirm the period: this is the quarter ended June 30, 2012, notwithstanding the request’s “2011 Q2” label.
- Assess underlying earnings apart from the substantial deferred-tax valuation-allowance benefit and the prior-year restructuring and joint-venture-sale comparisons.
- Track working-capital conversion, receivables and operating cash flow after the first-half cash outflow, alongside planned capital spending.
- Monitor European production, foreign-exchange effects, raw-material costs and the PA-12 supply recovery and contingency arrangements.
- Review debt-service and covenant capacity, ABL borrowing-base availability, and the $28.9 million estimated redemption value of the CS France noncontrolling-shareholder put option, guaranteed by the company.