Cooper-Standard Holdings Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2017 Q3, but the supplied filing is for the quarter ended September 30, 2018, with comparisons to 2017.
Business context and reporting period
Cooper-Standard designs and manufactures sealing, fuel and brake delivery, fluid transfer, and anti-vibration systems, primarily for global automotive OEMs. It reports four segments: North America, Europe, Asia Pacific and South America. Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $861.7 million | $869.0 million | $2,757.3 million | $2,680.2 million |
| Gross profit / margin | $119.7 million / 13.9% | $150.8 million / 17.4% | $441.9 million / 16.0% | $493.0 million / 18.4% |
| Operating profit | $41.7 million | $49.7 million | $183.3 million | $189.6 million |
| Net income attributable to Cooper-Standard | $32.2 million | $24.6 million | $130.8 million | $106.8 million |
| Diluted EPS | $1.77 | $1.32 | $7.13 | $5.67 |
| Adjusted EBITDA | $69.6 million | $96.0 million | $300.1 million | $320.8 million |
- Q3 sales declined 0.8%; nine-month sales increased 2.9%. Nine-month growth was driven mainly by foreign exchange, while reported volume/mix contributed modestly.
- Gross margin weakened in both comparison periods. Management cited customer price reductions, unfavorable volume and mix, material cost pressure and wage inflation; these were partly offset by operating efficiencies of $10.4 million in Q3 and $57.4 million year to date.
- Nine-month operating cash flow was $78.0 million, down from $105.1 million. Investing used $250.6 million, including $160.1 million of capital expenditures and business acquisitions; financing used $57.0 million. Cash, cash equivalents and restricted cash ended at $285.8 million, versus $518.5 million at year-end 2017.
- At September 30, cash and cash equivalents were $282.4 million. Total debt was $764.1 million, including $36.9 million due within one year. The company reported $205.2 million of ABL availability before $7.5 million of outstanding letters of credit, subject to borrowing-base limits; it had no ABL borrowings and was in compliance with debt covenants.
- Current assets were $1,306.5 million and current liabilities $782.2 million. Receivables sold under off-balance-sheet factoring arrangements were $94.0 million at period end.
Material changes versus prior comparable periods
- Q3 operating profit fell $7.9 million despite higher net income attributable to the company. The quarter included a $10.7 million gain on sale of European land and a $1.2 million income tax benefit; these items helped reported net income and should be considered alongside the decline in gross profit.
- Nine-month net income attributable to the company rose $24.0 million, while operating profit declined $6.3 million and Adjusted EBITDA declined $20.7 million. Lower taxes and other expense supported net income.
- North America sales grew in Q3 and year to date. Europe and Asia Pacific sales declined in Q3; Asia Pacific pretax results turned to a loss of $11.6 million in Q3 versus income of $3.1 million a year earlier. North America remained profitable; Europe and South America reported pretax losses.
- Cash declined substantially, reflecting operating cash use from working-capital movements, higher capital spending, acquisitions, share repurchases and foreign-exchange effects. A $15.0 million discretionary U.S. pension contribution also affected operating cash flow.
Outlook, management commentary, risks and unusual items
- Management expected 2018 capital expenditures of approximately $215–$225 million and said cash, operating cash flow, ABL availability and receivables factoring should fund requirements for the next twelve months, subject to operating performance, market conditions and borrowing-base limits.
- Management expected North American light-vehicle production to be down only slightly for 2018, Europe roughly flat, and Asia Pacific to show slight growth. It noted disruption from new European emissions-testing protocols and uncertainty from trade tensions, tariffs, Brexit and slowing Chinese growth.
- Raw-material volatility, wage inflation, customer pricing pressure, production volumes, foreign exchange, working-capital needs, pension funding and substantial indebtedness are key risks. Management anticipated tariffs could increase material costs.
- In Q3, management classified the anti-vibration systems (AVS) product line as held for sale. A definitive sale agreement was signed November 2, 2018, for an expected price of approximately $265.5 million, subject to adjustments and customary approvals; closing was expected in the first half of 2019. The planned sale was not reported as a discontinued operation.
- The company acquired Lauren Manufacturing and Lauren Plastics in August for a base price of $92.7 million. After quarter-end it acquired LS Mtron’s automotive parts business for approximately $25.1 million and Hutchings Automotive Products for approximately $41.6 million.
- The company repurchased $43.5 million of shares in the first nine months and authorized a new $150 million repurchase program effective November 2018. It also reported the COO’s planned retirement effective April 2, 2019.
- U.S. tax-law adjustments produced tax benefits, including a $7.1 million benefit from adjustments to provisional Tax Cuts and Jobs Act amounts during the first nine months. Estimates remained subject to refinement; management expected to incur GILTI tax in 2018.
- European restructuring was expected to be substantially complete by December 31, 2018; estimated total costs were $121–$125 million, of which approximately $113.5 million had been incurred. Environmental remediation reserves were approximately $6.4 million. Management did not believe material additional litigation losses were reasonably possible, but noted outcomes remain uncertain.
Important facts for investors to verify
- Confirm the period: the supplied filing is 2018 Q3, not 2017 Q3.
- Track whether gross-margin pressure, customer pricing and material-cost inflation persist, and whether efficiency savings continue to offset them.
- Assess cash conversion and working-capital trends, planned capital spending, acquisition funding and reliance on receivables factoring.
- Review debt maturities, ABL borrowing-base availability, covenant headroom and liquidity after the AVS divestiture and subsequent acquisitions.
- Verify AVS transaction completion, final proceeds and adjustments, regulatory approvals, and any resulting changes to segment results.
- Monitor tax estimates and effective tax rate, pension obligations, restructuring costs, and exposure to tariffs, foreign exchange and vehicle-production changes.