Cooper-Standard Holdings Inc. — FY 2018 Form 10-K
Reporting-period note: The request identifies “2017 Q4,” but the supplied filing is the annual report for the fiscal year ended December 31, 2018. It includes quarterly data for 2018 and 2017.
Business context
Cooper-Standard manufactures automotive sealing, fuel and brake delivery, fluid transfer and anti-vibration systems. It operated in 21 countries, with about 32,000 employees and 159 facilities. Approximately 85% of 2018 sales were to OEMs; Ford, GM and FCA together represented about 57% of sales.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Sales | $3,629.3 million | $3,618.1 million |
| Gross profit / margin | $553.6 million / 15.3% | $671.4 million / 18.6% |
| Operating profit | $115.6 million | $266.5 million |
| Net income | $104.6 million | $138.6 million |
| Net income attributable to Cooper-Standard Holdings | $107.8 million; diluted EPS $5.89 | $135.3 million; diluted EPS $7.21 |
| Operating cash flow | $149.4 million | $313.1 million |
| Capital expenditures | $218.1 million | $186.8 million |
| Cash and cash equivalents at year-end | $265.0 million | $516.0 million |
| Total debt at year-end | $831.1 million | $758.2 million |
2018 sales rose 0.3%, while gross profit fell $117.9 million. Management attributed margin pressure to vehicle production mix, customer price reductions, commodity costs and foreign exchange, partly offset by operational improvements and acquisitions. Operating results included $45.3 million of goodwill impairment, $43.7 million of other impairment charges, $29.7 million of restructuring charges and a $10.4 million gain on land sale. The income tax benefit was $29.7 million, including valuation-allowance releases and other discrete items.
Adjusted EBITDA, a non-GAAP measure, was $376.5 million versus $452.0 million. Operating cash flow declined substantially; cash use in investing was $383.0 million, including $171.7 million for acquisitions. Cash declined by $251.0 million during the year. Year-end debt comprised $394.4 million of 5.625% Senior Notes due 2026, $328.5 million under the term loan and other borrowings. The ABL facility had $50.0 million drawn and reported availability of $155.1 million, before $10.8 million of outstanding letters of credit. The company reported compliance with debt covenants.
Material changes and unusual items
- Europe and Asia Pacific reported segment losses of $63.3 million and $75.2 million, respectively, compared with losses of $18.9 million in Europe and profit of $9.9 million in Asia Pacific in 2017. North America remained profitable at $224.6 million.
- In the fourth quarter, Cooper-Standard agreed to sell its anti-vibration systems business for approximately $265.5 million, subject to adjustments and closing conditions. The sale was expected in the first half of 2019; the business was classified as held for sale, not discontinued operations.
- The company acquired Lauren Manufacturing and Lauren Plastics, 80.1% of LS Mtron’s automotive parts business, Hutchings Automotive Products and the remaining interest in its INOAC joint venture.
- Fourth-quarter 2018 net loss was $28.7 million, compared with net income of $29.0 million in fourth-quarter 2017. The filing cites impairment charges and tax valuation-allowance releases among the fourth-quarter items.
Outlook, risks and contingencies
Management expected 2019 capital expenditures of approximately $180–$190 million and pension contributions of approximately $8.7 million. The filing projected broadly stable light-vehicle production in North America and Europe, growth in South America, and a 1.9% increase in Asia Pacific production for 2019. Management stated that cash flows, cash on hand, ABL borrowings and receivables factoring were expected to cover funding needs for the next 12 months, while noting that results and covenant compliance depend on operating performance and market conditions.
Key risks include automotive cyclicality and customer concentration, pricing pressure, raw-material inflation and tariffs, supply disruptions, foreign-exchange exposure, international and Brexit-related uncertainty, substantial indebtedness and financing restrictions, underfunded pensions, execution risks in acquisitions and divestitures, product warranty or recall claims, and environmental and legal matters. Pension plans were underfunded by $159.4 million at year-end. A Canadian class action alleging price fixing of body-sealing products remained subject to court approval of a settlement that provided for dismissal of claims against the company defendants. Environmental reserves were $4.7 million.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded the three 2018 acquired businesses, which represented 8% of assets, 2% of revenue and 1% of net income.
Most important facts for investors to verify
- Whether the AVS divestiture closed as expected, its final proceeds and use of proceeds, and the resulting impact on revenue, earnings and debt.
- Whether the sharp decline in gross margin and operating cash flow persisted, and how much was attributable to ongoing business conditions versus one-time impairments and other items.
- ABL borrowing-base availability, factoring dependence, debt maturities and interest-rate exposure; year-end cash was down $251.0 million while total debt increased.
- Whether Europe and Asia Pacific operations recovered after the 2018 losses and impairments.
- Integration outcomes for recent acquisitions and the effectiveness of planned cost savings, restructuring and capital spending.
- Resolution of the antitrust settlement and any changes in pension funding needs, tax valuation allowances or environmental and other contingencies.