Cooper-Standard Holdings Inc. quarterly report, Q3 FY2011

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Cooper-Standard Holdings Inc. — Form 10-Q summary

Period clarification: The supplied filing is for the quarter ended September 30, 2011, filed November 10, 2011—not 2010 Q3 as stated in the request metadata. Financial amounts below are in U.S. dollars; amounts converted from thousands are shown in millions.

Business context and reporting period

Cooper-Standard manufactures fluid-handling, body-sealing and anti-vibration products, primarily for automotive OEMs and replacement markets. The filing reports Q3 and nine-month 2011 results. Comparisons with 2010 require care: the company emerged from Chapter 11 in May 2010 and adopted fresh-start accounting, creating predecessor and successor reporting periods that are not fully comparable. Q3 2010 and Q3 2011 are both successor periods.

Financial performance and position

  • Q3 revenue: $708.5 million, up 21% from $585.7 million. Management attributed the increase to higher volumes, $33.7 million of favorable foreign exchange, and $51.1 million of incremental sales from USi and the FMEA joint venture.
  • Q3 profitability: Gross profit was $108.6 million versus $102.1 million, but gross margin declined to 15.3% from 17.4%. Operating profit rose to $33.7 million from $28.8 million. Net income attributable to Cooper-Standard was $15.7 million versus $20.8 million; income available to common stockholders was $11.1 million versus $15.1 million. Basic and diluted EPS were $0.63 and $0.58, respectively, compared with $0.86 and $0.83.
  • Q3 costs and segments: Selling, administrative and engineering expense fell to $64.4 million (9.1% of sales) from $68.6 million (11.7%). Restructuring expense increased to $6.5 million from $0.8 million. North America segment profit was $31.9 million; International reported a $15.8 million segment loss.
  • Nine-month results: Sales were $2.158 billion; operating profit $102.3 million; net income attributable to the company $79.6 million; and diluted EPS $3.08. Restructuring charges totaled $48.1 million. 2010 split-period comparisons are not directly equivalent to this nine-month period.
  • Cash flow: Nine-month operating cash flow was $45.8 million, including a $100.4 million use from changes in operating assets and liabilities, chiefly higher receivables and inventory. Investing cash outflow was $33.5 million, including $70.3 million of capital expenditures. Financing cash outflow was $13.1 million. Cash declined $8.2 million, to $286.3 million.
  • Liquidity and debt: At September 30, cash was $286.3 million, current assets $1.018 billion and current liabilities $504.4 million. Total debt was $492.0 million, including $450 million of Senior Notes; $35.5 million was current. The $125 million ABL revolver had no borrowings, with approximately $31.2 million of letters of credit outstanding; availability is subject to borrowing-base limits. Pension and other postretirement obligations were $157.0 million and $80.8 million, respectively.
  • Other measures: Nine-month Adjusted EBITDA, a non-GAAP measure, was $257.5 million. The company cautions that EBITDA and Adjusted EBITDA are not substitutes for GAAP results or operating cash flow.

Material changes and unusual items

  • Q3 revenue growth did not translate proportionately into gross profit: higher volumes and lean savings were partly offset by raw-material inflation and integration and restructuring costs for USi and the FMEA venture.
  • Q3 other expense was $8.9 million, primarily reflecting $5.5 million of unrealized forward-contract losses and $2.8 million of foreign-currency losses. Nine-month other income included an $11.4 million gain on the partial sale of NISCO, partly offset by forward-contract and other losses.
  • The company acquired USi in March 2011 and formed CS France with FMEA in May, retaining 51% ownership. A put option allows the noncontrolling shareholders to require purchase of their remaining stake after four years; its estimated September 30 redemption value was $31.9 million.
  • New restructuring initiatives had estimated total costs of $9.6 million for a North American facility closure and European shared-services consolidation, $43.5 million for French body-sealing reorganization, and $1.9 million for a German business transfer. These initiatives were expected to be completed in 2012, 2012 and by year-end 2011, respectively.
  • The filing restated predecessor-period 2010 results to record cancellation of predecessor common stock as an equity adjustment rather than reorganization gain. The change did not affect successor-period results or operating cash flow.

Outlook, management commentary and risks

  • Management expected operating cash flow and ABL availability to be sufficient for working capital needs over the next 12 months and foreseeable funding requirements, while noting dependence on future performance, industry conditions, raw-material costs and compliance with facility covenants and borrowing-base limits.
  • Management forecast 2011 capital expenditures of approximately $100–$110 million. IHS Automotive estimates cited in the filing projected 2011 light-vehicle production of 13 million units in North America and 20.1 million in Europe. Q4 2011 production was estimated at 3.3 million units in North America and 4.9 million in Europe.
  • Key operating pressures include automotive production volatility, OEM pricing concessions and intense supplier competition, raw-material cost increases, customer concentration, foreign-exchange exposure, and the ability to realize cost savings and integrate acquired or joint-venture operations. Management also noted possible release of U.S. deferred-tax valuation allowances within the next 12 months; any release could materially affect earnings in the period recognized.
  • The filing reports ordinary-course legal and environmental matters; management did not believe their resolution would have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.

Important facts for investors to verify

  • Confirm the intended reporting period: this document covers Q3 2011, not Q3 2010.
  • Assess whether International operations can improve from the $15.8 million Q3 segment loss and whether acquisition and restructuring costs decline as integration proceeds.
  • Track gross margins against raw-material inflation, pricing pressure and volume changes; revenue growth was accompanied by lower Q3 gross margin.
  • Review cash conversion and working-capital needs, particularly the $100.4 million nine-month operating-asset-and-liability cash use, and confirm planned capital spending.
  • Verify usable ABL availability after borrowing-base limits and letters of credit, and monitor debt service, covenants and the CS France put-option exposure.
  • Evaluate the effects of foreign exchange and derivative losses, tax valuation allowances, and the timing and cash impact of restructuring charges.