Business context and reporting period
Period clarification: The supplied filing is Cooper-Standard Holdings Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed February 26, 2020—not a 2018 Q4 filing. Comparisons below are principally with fiscal 2018.
The company manufactures automotive sealing, fuel and brake delivery, and fluid transfer systems, with operations in 21 countries. It completed the sale of its anti-vibration systems (AVS) business to Continental AG on April 1, 2019; 2019 results therefore include AVS only through the sale date. Approximately 83% of 2019 sales were to OEMs, and Ford, GM and FCA together accounted for about 55% of sales.
Financial results and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Sales | $3,108.4 million | $3,624.0 million |
| Gross profit / margin | $359.1 million / 11.6% | $548.3 million / 15.1% |
| Operating profit | $156.0 million | $110.3 million |
| Net income attributable to Cooper-Standard Holdings | $67.5 million; diluted EPS $3.92 | $103.6 million; diluted EPS $5.66 |
| Operating cash flow | $97.7 million | $149.4 million |
| Capital expenditures | $164.5 million | $218.1 million |
| Total debt | $807.6 million | $831.1 million |
| Cash and cash equivalents | $359.5 million | $265.0 million |
Sales fell 14.2%. Management attributed the decline to lower volume/mix ($310.4 million unfavorable), foreign exchange ($86.8 million unfavorable), and net acquisition/divestiture effects ($118.5 million unfavorable). Gross margin contracted by 3.5 percentage points. The company cited weaker vehicle production and mix, delayed customer program ramp-ups, the GM UAW work stoppage, China commercial settlements, commodity inflation, foreign exchange, tariffs and wage inflation. Operating profit included a $191.6 million AVS sale gain; it should not be viewed as a recurring operating contribution.
Adjusted EBITDA, a non-GAAP measure, was $201.6 million versus $372.7 million in 2018. The 2019 figure excludes the AVS gain and adjusts for restructuring, impairments, pension settlements and other items. Segment adjusted EBITDA was $212.5 million in North America, $22.7 million in Europe, a loss of $29.5 million in Asia Pacific and a loss of $4.1 million in South America.
At year-end, current assets were $1,202.3 million and current liabilities were $719.9 million. Reported net working capital, as defined by the company, was $184.3 million. The $210 million ABL facility had no borrowings and $178.3 million of availability, before $5.3 million of outstanding letters of credit. The company reported compliance with its debt covenants. Pension plans were underfunded by approximately $140.9 million.
Material changes and unusual items
- AVS divestiture generated $243.4 million of cash proceeds in 2019 and a reported $191.6 million gain; expected net cash proceeds after taxes, adjustments and transaction costs were approximately $215–$220 million.
- 2019 included $51.1 million of restructuring charges, $23.1 million of asset impairment charges and $15.8 million of non-cash pension settlement charges. Management expects a further $15–$20 million of restructuring costs for facility closures approved by year-end.
- Income tax expense was $36.1 million in 2019, compared with a $29.4 million tax benefit in 2018. The 2019 effective tax rate was 36.7%; valuation allowances on losses in certain foreign jurisdictions and tax effects related to the AVS sale were among the drivers.
- The company identified prior-period errors relating primarily to the timing of Asia Pacific customer pricing concessions and corrected comparative statements. It said the errors were immaterial individually and in aggregate to previously reported periods. A third-quarter 2019 out-of-period adjustment increased sales by $10.5 million and net income by $9.2 million.
- Fourth-quarter 2019 sales were $726.2 million and the quarter recorded a net loss attributable to Cooper-Standard of $67.4 million, including fixed-asset impairment and non-cash pension settlement charges.
- Auditors issued unqualified opinions on the financial statements and internal controls. The audit highlighted property, plant and equipment impairment valuation and accounting for customer payment commitments as critical audit matters.
Outlook, management commentary and risks
Management expected 2020 capital expenditures of approximately $140–$150 million and forecast the company could meet its needs for the next 12 months using operating cash flow, cash on hand, ABL availability and receivables factoring. This assessment was conditional on operating performance, industry conditions, raw-material costs and covenant/borrowing-base availability. The filing’s February 2020 outlook cited IHS estimates for 2020 light-vehicle production ranging from growth of 1.3% in North America and 4.2% in South America to declines of 1.9% in Europe and 3.1% in Asia Pacific. These are industry forecasts, not company revenue or earnings guidance.
Principal risks include automotive production cyclicality and customer concentration; pricing pressure; raw-material cost and supply volatility; foreign exchange, tariffs and international political or economic conditions; debt-service and covenant constraints; underfunded pensions; program-launch, warranty and recall exposure; and execution risk in restructuring, acquisitions, divestitures and expansion into adjacent markets. The filing also flagged the emerging coronavirus outbreak’s potential to disrupt China operations. The company paid no common dividends and stated it did not anticipate dividends in the foreseeable future.
Important facts for investors to verify
- Confirm the filing and period: this is FY 2019, not 2018 Q4; review the 2018 comparison figures as corrected for the disclosed prior-period errors.
- Assess underlying earnings and cash generation apart from the AVS sale gain, restructuring, impairments and pension settlement charges; compare GAAP results with the company’s non-GAAP adjusted EBITDA reconciliation.
- Examine the ongoing margin and cash-flow decline, including the causes and sustainability of the Asia Pacific segment loss and the effects of lower vehicle production, customer mix, tariffs and commodities.
- Validate liquidity and debt headroom against borrowing-base restrictions, the $786.5 million of nominal debt obligations in the contractual-obligations schedule, and substantial scheduled interest and lease payments.
- Review the assumptions and timing for AVS sale proceeds, restructuring savings and additional closure costs, pension funding, and recovery of the Brazil indirect-tax claim.
- Monitor customer concentration, customer pricing commitments, the $22.4 million accrued for future customer payments, receivables factoring, and any further updates to the 2020 outlook or COVID-related exposures.