Cooper-Standard Holdings Inc. - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from __________ to __________.
Commission File Number: 001-36127
______________________________
COOPER-STANDARD HOLDINGS INC.
(Exact name of registrant as specified in its charter)
______________________________
| Delaware | 20-1945088 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
40300 Traditions Drive
Northville, Michigan 48168
(Address of principal executive offices)
(Zip Code)
(248) 596-5900
(Registrant’s telephone number, including area code)
______________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.001 per share | CPS | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2021, there were 16,942,878 shares of the registrant’s common stock, $0.001 par value, outstanding.
1
COOPER-STANDARD HOLDINGS INC.
Form 10-Q
For the period ended March 31, 2021
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2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollar amounts in thousands except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Sales | $ | 668,967 | $ | 654,890 | |||||||
| Cost of products sold | 600,675 | 611,747 | |||||||||
| Gross profit | 68,292 | 43,143 | |||||||||
| Selling, administration & engineering expenses | 58,054 | 70,671 | |||||||||
| Gain on sale of business | (891) | — | |||||||||
| Amortization of intangibles | 1,772 | 4,450 | |||||||||
| Restructuring charges | 21,047 | 7,276 | |||||||||
| Impairment of assets held for sale | — | 74,079 | |||||||||
| Other impairment charges | — | 977 | |||||||||
| Operating loss | (11,690) | (114,310) | |||||||||
| Interest expense, net of interest income | (17,784) | (10,237) | |||||||||
| Equity in earnings of affiliates | 786 | 1,431 | |||||||||
| Other expense, net | (5,089) | (3,440) | |||||||||
| Loss before income taxes | (33,777) | (126,556) | |||||||||
| Income tax expense (benefit) | 936 | (14,117) | |||||||||
| Net loss | (34,713) | (112,439) | |||||||||
| Net loss attributable to noncontrolling interests | 849 | 1,851 | |||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | (33,864) | $ | (110,588) | |||||||
| Loss per share: | |||||||||||
| Basic | $ | (2.00) | $ | (6.55) | |||||||
| Diluted | $ | (2.00) | $ | (6.55) | |||||||
The accompanying notes are an integral part of these financial statements.
3
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(Dollar amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net loss | $ | (34,713) | $ | (112,439) | |||||||
| Other comprehensive loss: | |||||||||||
| Currency translation adjustment | (6,572) | (28,889) | |||||||||
| Benefit plan liabilities adjustment, net of tax | 2,739 | 2,682 | |||||||||
| Fair value change of derivatives, net of tax | (571) | (10,076) | |||||||||
| Other comprehensive loss, net of tax | (4,404) | (36,283) | |||||||||
| Comprehensive loss | (39,117) | (148,722) | |||||||||
| Comprehensive loss attributable to noncontrolling interests | 1,101 | 2,358 | |||||||||
| Comprehensive loss attributable to Cooper-Standard Holdings Inc. | $ | (38,016) | $ | (146,364) | |||||||
The accompanying notes are an integral part of these financial statements.
4
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 398,847 | $ | 438,438 | |||||||
| Accounts receivable, net | 383,692 | 379,564 | |||||||||
| Tooling receivable, net | 77,728 | 82,150 | |||||||||
| Inventories | 171,086 | 143,742 | |||||||||
| Prepaid expenses | 30,639 | 29,748 | |||||||||
| Income tax receivable and refundable credits | 83,761 | 85,977 | |||||||||
| Other current assets | 100,208 | 100,110 | |||||||||
| Total current assets | 1,245,961 | 1,259,729 | |||||||||
| Property, plant and equipment, net | 857,609 | 892,309 | |||||||||
| Operating lease right-of-use assets, net | 106,670 | 109,795 | |||||||||
| Goodwill | 142,307 | 142,250 | |||||||||
| Intangible assets, net | 65,863 | 67,679 | |||||||||
| Other assets | 146,951 | 140,182 | |||||||||
| Total assets | $ | 2,565,361 | $ | 2,611,944 | |||||||
| Liabilities and Equity | |||||||||||
| Current liabilities: | |||||||||||
| Debt payable within one year | $ | 43,441 | $ | 40,731 | |||||||
| Accounts payable | 364,168 | 385,284 | |||||||||
| Payroll liabilities | 103,394 | 112,727 | |||||||||
| Accrued liabilities | 124,469 | 110,827 | |||||||||
| Current operating lease liabilities | 25,666 | 21,711 | |||||||||
| Total current liabilities | 661,138 | 671,280 | |||||||||
| Long-term debt | 981,486 | 982,760 | |||||||||
| Pension benefits | 146,790 | 152,230 | |||||||||
| Postretirement benefits other than pensions | 49,735 | 49,613 | |||||||||
| Long-term operating lease liabilities | 86,113 | 90,517 | |||||||||
| Other liabilities | 54,153 | 41,433 | |||||||||
| Total liabilities | 1,979,415 | 1,987,833 | |||||||||
| Equity: | |||||||||||
| Common stock, $0.001 par value, 190,000,000 shares authorized; 19,008,361 shares issued and 16,942,552 shares outstanding as of March 31, 2021, and 18,962,894 shares issued and 16,897,085 outstanding as of December 31, 2020 | 17 | 17 | |||||||||
| Additional paid-in capital | 499,671 | 498,719 | |||||||||
| Retained earnings | 316,406 | 350,270 | |||||||||
| Accumulated other comprehensive loss | (246,048) | (241,896) | |||||||||
| Total Cooper-Standard Holdings Inc. equity | 570,046 | 607,110 | |||||||||
| Noncontrolling interests | 15,900 | 17,001 | |||||||||
| Total equity | 585,946 | 624,111 | |||||||||
| Total liabilities and equity | $ | 2,565,361 | $ | 2,611,944 | |||||||
The accompanying notes are an integral part of these financial statements.
5
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(Dollar amounts in thousands except share amounts)
| Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Cooper-Standard Holdings Inc. Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 16,897,085 | $ | 17 | $ | 498,719 | $ | 350,270 | $ | (241,896) | $ | 607,110 | $ | 17,001 | $ | 624,111 | ||||||||||||||||||||||||||||||||
| Share-based compensation, net | 45,467 | — | 952 | — | — | 952 | — | 952 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (33,864) | — | (33,864) | (849) | (34,713) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (4,152) | (4,152) | (252) | (4,404) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 16,942,552 | $ | 17 | $ | 499,671 | $ | 316,406 | $ | (246,048) | $ | 570,046 | $ | 15,900 | $ | 585,946 | ||||||||||||||||||||||||||||||||
| Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Cooper-Standard Holdings Inc. Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 16,842,757 | $ | 17 | $ | 490,451 | $ | 619,448 | $ | (253,741) | $ | 856,175 | $ | 19,807 | $ | 875,982 | ||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | — | (1,573) | — | (1,573) | — | (1,573) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | 41,785 | — | 1,874 | — | — | 1,874 | — | 1,874 | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (110,588) | — | (110,588) | (1,851) | (112,439) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (35,776) | (35,776) | (507) | (36,283) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | 16,884,542 | $ | 17 | $ | 492,325 | $ | 507,287 | $ | (289,517) | $ | 710,112 | $ | 17,449 | $ | 727,561 | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
6
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities: | |||||||||||
| Net loss | $ | (34,713) | $ | (112,439) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation | 31,756 | 33,313 | |||||||||
| Amortization of intangibles | 1,772 | 4,450 | |||||||||
| Gain on sale of business | (891) | — | |||||||||
| Impairment of assets held for sale | — | 74,079 | |||||||||
| Other impairment charges | — | 977 | |||||||||
| Share-based compensation expense | 2,178 | 2,374 | |||||||||
| Equity in earnings of affiliates, net of dividends related to earnings | (786) | 3,814 | |||||||||
| Deferred income taxes | (1,434) | (20,191) | |||||||||
| Other | 130 | 1,138 | |||||||||
| Changes in operating assets and liabilities | (5,096) | 10,455 | |||||||||
| Net cash used in operating activities | (7,084) | (2,030) | |||||||||
| Investing activities: | |||||||||||
| Capital expenditures | (38,617) | (50,591) | |||||||||
| Proceeds from sale of fixed assets and other | 2,363 | 482 | |||||||||
| Net cash used in investing activities | (36,254) | (50,109) | |||||||||
| Financing activities: | |||||||||||
| Principal payments on long-term debt | (1,797) | (1,498) | |||||||||
| Increase in short-term debt, net | 3,429 | 3,021 | |||||||||
| Taxes withheld and paid on employees' share-based payment awards | (729) | (512) | |||||||||
| Other | 385 | (625) | |||||||||
| Net cash provided by financing activities | 1,288 | 386 | |||||||||
| Effects of exchange rate changes on cash, cash equivalents and restricted cash | 5,358 | (6,200) | |||||||||
| Changes in cash, cash equivalents and restricted cash | (36,692) | (57,953) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 443,578 | 361,742 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 406,886 | $ | 303,789 | |||||||
| Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheet: | |||||||||||
| Balance as of | |||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | 398,847 | $ | 438,438 | |||||||
| Restricted cash included in other current assets | 6,801 | 4,089 | |||||||||
| Restricted cash included in other assets | 1,238 | 1,051 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 406,886 | $ | 443,578 | |||||||
The accompanying notes are an integral part of these financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
1. Overview
Basis of Presentation
Cooper-Standard Holdings Inc. (together with its consolidated subsidiaries, the “Company” or “Cooper Standard”), through its wholly-owned subsidiary, Cooper-Standard Automotive Inc. (“CSA U.S.”), is a leading manufacturer of sealing, fuel and brake delivery, and fluid transfer systems. The Company’s products are primarily for use in passenger vehicles and light trucks that are manufactured by global automotive original equipment manufacturers (“OEMs”) and replacement markets. The Company conducts substantially all of its activities through its subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”), as filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These financial statements include all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of the Company. The operating results for the interim period ended March 31, 2021 are not necessarily indicative of results for the full year. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
The Company adopted the following Accounting Standard Updates (“ASU”) during the three months ended March 31, 2021, which did not have a material impact on its condensed consolidated financial statements.
| Standard | Description | Effective Date | ||||||
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | Modifies ASC Topic 740 by removing certain exceptions and amending existing guidance in order to simplify the accounting for income taxes. | January 1, 2021 | ||||||
ASU 2021-01, Reference Rate Reform (Topic 848): Scope | Clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition and tailors the existing guidance to derivative instruments affected by the discounting transition. | January 1, 2021 | ||||||
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
3. Divestiture
2020 Divestiture
In the fourth quarter of 2019, management approved a plan to sell its European rubber fluid transfer and specialty sealing businesses, as well as its Indian operations. The entities and the associated assets and liabilities met the criteria for presentation as held for sale as of March 31, 2020, and depreciation of long-lived assets ceased. The divestiture did not meet the criteria for presentation as a discontinued operation.
Upon meeting the criteria for held for sale classification and during the three months ended March 31, 2020, the Company recorded non-cash impairment charges of $74,079 to reduce the carrying value of the held for sale entities to fair value less costs to sell. Fair value, which is categorized within Level 3 of the fair value hierarchy, was determined using a market approach, estimated based on expected proceeds. The fair value less costs to sell were assessed each reporting period that the asset group remained classified as held for sale.
On July 1, 2020, the Company completed the divestiture of its European rubber fluid transfer and specialty sealing businesses, as well as its Indian operations, to Mutares SE & Co. KGaA (“Mutares”). The transaction included payment denominated in Euro of €9,000, which consisted of €6,500 in cash paid and €2,500 in deferred payment obligations, payable in December 2021.
During the three months ended March 31, 2021, the Company recorded subsequent adjustments resulting in a gain of $891.
4. Revenue
Revenue is recognized for manufactured parts at a point in time, generally when products are shipped or delivered. The Company usually enters into agreements with customers to produce products at the beginning of a vehicle’s life. Blanket purchase orders received from customers and related documents generally establish the annual terms, including pricing, related to a vehicle model. Customers typically pay for parts based on customary business practices with payment terms generally between 30 and 90 days.
Revenue by customer group for the three months ended March 31, 2021 was as follows:
| North America | Europe | Asia Pacific | South America | Corporate, Eliminations and Other | Consolidated | ||||||||||||||||||||||||||||||
| Passenger and Light Duty | $ | 331,613 | $ | 159,781 | $ | 113,041 | $ | 15,479 | $ | — | $ | 619,914 | |||||||||||||||||||||||
| Commercial | 4,281 | 5,881 | 1,182 | 7 | 1,251 | 12,602 | |||||||||||||||||||||||||||||
| Other | 3,142 | 114 | 2 | — | 33,193 | 36,451 | |||||||||||||||||||||||||||||
| Revenue | $ | 339,036 | $ | 165,776 | $ | 114,225 | $ | 15,486 | $ | 34,444 | $ | 668,967 | |||||||||||||||||||||||
Revenue by customer group for the three months ended March 31, 2020 was as follows:
| North America | Europe | Asia Pacific | South America | Corporate, Eliminations and Other | Consolidated | ||||||||||||||||||||||||||||||
| Passenger and Light Duty | $ | 325,982 | $ | 170,781 | $ | 78,742 | $ | 20,439 | $ | — | $ | 595,944 | |||||||||||||||||||||||
| Commercial | 3,178 | 5,557 | 546 | 10 | 1,134 | 10,425 | |||||||||||||||||||||||||||||
| Other | 5,641 | 8,904 | 56 | 22 | 33,898 | 48,521 | |||||||||||||||||||||||||||||
| Revenue | $ | 334,801 | $ | 185,242 | $ | 79,344 | $ | 20,471 | $ | 35,032 | $ | 654,890 | |||||||||||||||||||||||
The passenger and light duty group consists of sales to automotive OEMs and automotive suppliers, while the commercial group represents sales to OEMs of on- and off-highway commercial equipment and vehicles. The other customer group includes sales related to specialty and adjacent markets.
Substantially all of the Company’s revenues were generated from sealing, fuel and brake delivery and fluid transfer systems for use in passenger vehicles and light trucks manufactured by global OEMs.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
A summary of the Company’s products is as follows:
| Product Line | Description | |||||||
| Sealing Systems | Protect vehicle interiors from weather, dust and noise intrusion for improved driving experience; provide aesthetic and functional class-A exterior surface treatment | |||||||
| Fuel & Brake Delivery Systems | Sense, deliver and control fluids to fuel and brake systems | |||||||
| Fluid Transfer Systems | Sense, deliver and control fluids and vapors for optimal powertrain & HVAC operation | |||||||
Revenue by product line for the three months ended March 31, 2021 was as follows:
| North America | Europe | Asia Pacific | South America | Corporate, Eliminations and Other | Consolidated | ||||||||||||||||||||||||||||||
| Sealing systems | $ | 121,175 | $ | 129,361 | $ | 69,673 | $ | 11,274 | $ | — | $ | 331,483 | |||||||||||||||||||||||
| Fuel and brake delivery systems | 112,656 | 30,790 | 28,369 | 2,865 | — | 174,680 | |||||||||||||||||||||||||||||
| Fluid transfer systems | 105,205 | 5,625 | 16,183 | 1,347 | — | 128,360 | |||||||||||||||||||||||||||||
| Other | — | — | — | — | 34,444 | 34,444 | |||||||||||||||||||||||||||||
| Consolidated | $ | 339,036 | $ | 165,776 | $ | 114,225 | $ | 15,486 | $ | 34,444 | $ | 668,967 | |||||||||||||||||||||||
Revenue by product line for the three months ended March 31, 2020 was as follows:
| North America | Europe | Asia Pacific | South America | Corporate, Eliminations and Other | Consolidated | ||||||||||||||||||||||||||||||
| Sealing systems | $ | 124,556 | $ | 127,246 | $ | 49,024 | $ | 13,549 | $ | — | $ | 314,375 | |||||||||||||||||||||||
| Fuel and brake delivery systems | 104,934 | 28,562 | 19,818 | 5,747 | — | 159,061 | |||||||||||||||||||||||||||||
| Fluid transfer systems | 105,311 | 21,945 | 10,502 | 1,175 | — | 138,933 | |||||||||||||||||||||||||||||
| Other | — | 7,489 | — | — | 35,032 | 42,521 | |||||||||||||||||||||||||||||
| Consolidated | $ | 334,801 | $ | 185,242 | $ | 79,344 | $ | 20,471 | $ | 35,032 | $ | 654,890 | |||||||||||||||||||||||
Contract Estimates
The amount of revenue recognized is usually based on the purchase order price and adjusted for variable consideration, including pricing concessions. The Company accrues for pricing concessions by reducing revenue as products are shipped or delivered. The accruals are based on historical experience, anticipated performance and management’s best judgment. The Company also generally has ongoing adjustments to customer pricing arrangements based on the content and cost of its products. Such pricing accruals are adjusted as they are settled with customers. Customer returns are usually related to quality or shipment issues and are recorded as a reduction of revenue. The Company generally does not recognize significant return obligations due to their infrequent nature.
Contract Balances
The Company’s contract assets consist of unbilled amounts associated with variable pricing arrangements in its Asia Pacific region. Once pricing is finalized, contract assets are transferred to accounts receivable. As a result, the timing of revenue recognition and billings, as well as changes in foreign exchange rates, will impact contract assets on an ongoing basis. Contract assets were not materially impacted by any other factors during the three months ended March 31, 2021.
The Company’s contract liabilities consist of advance payments received and due from customers. Net contract assets (liabilities) consisted of the following:
| March 31, 2021 | December 31, 2020 | Change | ||||||||||||||||||
| Contract assets | $ | 5,274 | $ | 777 | $ | 4,497 | ||||||||||||||
| Contract liabilities | (21) | (27) | 6 | |||||||||||||||||
| Net contract assets | $ | 5,253 | $ | 750 | $ | 4,503 | ||||||||||||||
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
Other
The Company, at times, enters into agreements that provide for lump sum payments to customers. These payment agreements are recorded as a reduction of revenue during the period the commitment is made. Amounts related to commitments of future payments to customers on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 were current liabilities of $15,882 and $16,932, respectively, and long-term liabilities of $6,427 and $6,828, respectively.
The Company provides assurance-type warranties to its customers. Such warranties provide customers with assurance that the related product will function as intended and complies with any agreed-upon specifications, and are recognized in costs of products sold.
5. Restructuring
On an ongoing basis, the Company evaluates its business and objectives to ensure that it is properly configured and sized based on changing market conditions. Accordingly, the Company has implemented several restructuring initiatives, including closure or consolidation of facilities throughout the world and the reorganization of its operating structure.
The Company’s restructuring charges consist of severance, retention and outplacement services, and severance-related postemployment benefits (collectively, “employee separation costs”), other related exit costs and asset impairments related to restructuring activities. Employee separation costs are recorded based on existing union and employee contracts, statutory requirements, completed negotiations and Company policy.
Restructuring expense by segment for the three months ended March 31, 2021 and 2020 was as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| North America | $ | 2,363 | $ | 3,703 | |||||||
| Europe | 16,397 | 2,193 | |||||||||
| Asia Pacific | 369 | 133 | |||||||||
| South America | 1,587 | 1,202 | |||||||||
| Total Automotive | 20,716 | 7,231 | |||||||||
| Corporate and other | 331 | 45 | |||||||||
| Total | $ | 21,047 | $ | 7,276 | |||||||
Restructuring activity for the three months ended March 31, 2021 was as follows:
| Employee Separation Costs | Other Exit Costs | Total | |||||||||||||||
| Balance as of December 31, 2020 | $ | 15,029 | $ | 8,406 | $ | 23,435 | |||||||||||
| Expense | 18,152 | 2,895 | 21,047 | ||||||||||||||
| Cash payments | (4,416) | (5,646) | (10,062) | ||||||||||||||
| Non-cash fixed asset impairments included in expense | — | (182) | (182) | ||||||||||||||
| Foreign exchange translation and other | (603) | 1,928 | 1,325 | ||||||||||||||
| Balance as of March 31, 2021 | $ | 28,162 | $ | 7,401 | $ | 35,563 | |||||||||||
6. Inventories
Inventories consist of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Finished goods | $ | 46,675 | $ | 39,136 | |||||||
| Work in process | 41,153 | 35,477 | |||||||||
| Raw materials and supplies | 83,258 | 69,129 | |||||||||
| $ | 171,086 | $ | 143,742 | ||||||||
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
7. Leases
The Company primarily has operating and finance leases for certain manufacturing facilities, corporate offices and certain equipment. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities and long-term operating lease liabilities on the Company’s condensed consolidated balance sheets. Finance leases are included in property, plant and equipment, net, debt payable within one year, and long-term debt on the Company’s condensed consolidated balance sheets.
The components of lease expense were as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating lease expense | $ | 7,344 | $ | 8,605 | |||||||
| Short-term lease expense | 1,640 | 1,010 | |||||||||
| Variable lease expense | 248 | 250 | |||||||||
| Finance lease expense: | |||||||||||
| Amortization of right-of-use assets | 546 | 681 | |||||||||
| Interest on lease liabilities | 366 | 385 | |||||||||
| Total lease expense | $ | 10,144 | $ | 10,931 | |||||||
Other information related to leases was as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental Cash Flows Information | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases | $ | 7,346 | $ | 7,933 | |||||||
| Operating cash flows for finance leases | 362 | 410 | |||||||||
| Financing cash flows for finance leases | 652 | 648 | |||||||||
| Non-cash right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | 2,932 | 37,205 | |||||||||
| Finance leases | — | 61 | |||||||||
| Weighted Average Remaining Lease Term (in years) | |||||||||||
| Operating leases | 7.6 | 8.2 | |||||||||
| Finance leases | 10.4 | 11.1 | |||||||||
| Weighted Average Discount Rate | |||||||||||
| Operating leases | 5.4 | % | 5.3 | % | |||||||
| Finance leases | 5.7 | % | 6.1 | % | |||||||
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
Future minimum lease payments under non-cancellable leases as of March 31, 2021 were as follows:
| Year | Operating Leases | Finance Leases | ||||||||||||
| Remainder of 2021 | $ | 24,400 | $ | 2,442 | ||||||||||
| 2022 | 22,224 | 3,181 | ||||||||||||
| 2023 | 17,837 | 3,092 | ||||||||||||
| 2024 | 13,616 | 3,370 | ||||||||||||
| 2025 | 10,416 | 3,442 | ||||||||||||
| Thereafter | 50,890 | 21,120 | ||||||||||||
| Total future minimum lease payments | 139,383 | 36,647 | ||||||||||||
| Less imputed interest | (27,604) | (9,624) | ||||||||||||
| Total | $ | 111,779 | $ | 27,023 | ||||||||||
Amounts recognized on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Operating Leases | |||||||||||
| Operating lease right-of-use assets, net | 106,670 | 109,795 | |||||||||
| Current operating lease liabilities | 25,666 | 21,711 | |||||||||
| Long-term operating lease liabilities | 86,113 | 90,517 | |||||||||
| Finance Leases | |||||||||||
| Debt payable within one year | 2,193 | 2,300 | |||||||||
| Long-term debt | 24,830 | 26,152 | |||||||||
As of March 31, 2021 and December 31, 2020, assets recorded under finance leases, net of accumulated depreciation were $29,837 and $30,847, respectively. As of March 31, 2021, the Company had additional operating and finance leases, primarily for real estate, that have not yet commenced with undiscounted lease payments of approximately $5,563. These leases will commence in 2021 with lease terms up to five years.
8. Property, Plant and Equipment
Property, plant and equipment consists of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Land and improvements | $ | 58,334 | $ | 61,226 | |||||||
| Buildings and improvements | 291,272 | 298,431 | |||||||||
| Machinery and equipment | 1,283,381 | 1,277,624 | |||||||||
| Construction in progress | 78,362 | 96,706 | |||||||||
| 1,711,349 | 1,733,987 | ||||||||||
| Accumulated depreciation | (853,740) | (841,678) | |||||||||
| Property, plant and equipment, net | $ | 857,609 | $ | 892,309 | |||||||
Based on the Company’s interim impairment assessment, the Company determined there were no indicators of impairment identified during the three months ended March 31, 2021.
During the three months ended March 31, 2020, the Company recorded an impairment charge related to machinery and equipment of $977 due to the deterioration of financial results in a certain Asia Pacific location. The fair value of machinery and equipment was determined using estimated orderly liquidation value, which was deemed the highest and best use of the assets.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
9. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by reporting unit for the three months ended March 31, 2021 were as follows:
| North America | Industrial Specialty Group | Total | |||||||||||||||
| Balance as of December 31, 2020 | $ | 128,214 | $ | 14,036 | $ | 142,250 | |||||||||||
| Foreign exchange translation | 57 | — | 57 | ||||||||||||||
| Balance as of March 31, 2021 | $ | 128,271 | $ | 14,036 | $ | 142,307 | |||||||||||
Goodwill is tested for impairment by reporting unit annually or more frequently if events or circumstances indicate that an impairment may exist. There were no indicators of potential impairment during the three months ended March 31, 2021.
Intangible Assets
Intangible assets and accumulated amortization balances as of March 31, 2021 and December 31, 2020 were as follows:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
| Customer relationships | $ | 154,510 | $ | (122,837) | $ | 31,673 | |||||||||||
| Other | 44,725 | (10,535) | 34,190 | ||||||||||||||
| Balance as of March 31, 2021 | $ | 199,235 | $ | (133,372) | $ | 65,863 | |||||||||||
| Customer relationships | $ | 155,409 | $ | (122,657) | $ | 32,752 | |||||||||||
| Other | 44,826 | (9,899) | 34,927 | ||||||||||||||
| Balance as of December 31, 2020 | $ | 200,235 | $ | (132,556) | $ | 67,679 | |||||||||||
10. Debt
A summary of outstanding debt as of March 31, 2021 and December 31, 2020 is as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Senior Notes | $ | 396,008 | $ | 395,829 | |||||||
| Senior Secured Notes | 240,043 | 239,567 | |||||||||
| Term Loan | 323,030 | 323,636 | |||||||||
| ABL Facility | — | — | |||||||||
| Finance leases | 27,023 | 28,452 | |||||||||
| Other borrowings | 38,823 | 36,007 | |||||||||
| Total debt | 1,024,927 | 1,023,491 | |||||||||
| Less current portion | (43,441) | (40,731) | |||||||||
| Total long-term debt | $ | 981,486 | $ | 982,760 | |||||||
5.625% Senior Notes due 2026
In November 2016, the Company issued $400,000 aggregate principal amount of its 5.625% Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on November 15, 2026. Interest on the Senior Notes is payable semi-annually in arrears in cash on May 15 and November 15 of each year.
Debt issuance costs related to the Senior Notes are amortized into interest expense over the term of the Senior Notes. As of March 31, 2021 and December 31, 2020, the Company had $3,992 and $4,171 of unamortized debt issuance costs, respectively, related to the Senior Notes, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
13.0% Senior Secured Notes due 2024
In May 2020, the Company issued $250,000 aggregate principal amount of its 13.0% Senior Secured Notes due 2024 (the “Senior Secured Notes”). The Senior Secured Notes mature on June 1, 2024. Interest on the Senior Secured Notes is payable semi-annually in arrears in cash on June 1 and December 1 of each year.
The Company paid approximately $6,431 of debt issuance costs in connection with the transaction. Additionally, the Senior Secured Notes were issued at a discount of $5,000. As of March 31, 2021 and December 31, 2020, the Company had $5,547 and $5,828 of unamortized debt issuance costs, respectively, and $4,410 and $4,605 of unamortized original issue discount, respectively, related to the Senior Secured Notes, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets. Both the debt issuance costs and the original issue discount are amortized into interest expense over the term of the Senior Secured Notes.
Term Loan Facility
In November 2016, the Company entered into Amendment No. 1 to its senior term loan facility (“Term Loan Facility”), which provides for loans in an aggregate principal amount of $340,000. On May 2, 2017, the Company entered into Amendment No. 2 to the Term Loan Facility to modify the interest rate. Subsequently, on March 6, 2018, the Company entered into Amendment No. 3 to the Term Loan Facility to further modify the interest rate. In accordance with this amendment, borrowings under the Term Loan Facility bear interest, at the Company’s option, at either (1) with respect to Eurodollar rate loans, the greater of the applicable Eurodollar rate and 0.75% plus 2.0% per annum, or (2) with respect to base rate loans, the base rate, (which is the highest of the then current federal funds rate plus 0.5%, the prime rate most recently announced by the administrative agent under the term loan, and the one-month Eurodollar rate plus 1.0%) plus 1.0% per annum. The Term Loan Facility matures on November 2, 2023, unless earlier terminated.
As of March 31, 2021 and December 31, 2020, the Company had $1,532 and $1,680 of unamortized debt issuance costs, respectively, and $998 and $1,084 of unamortized original issue discount, respectively, related to the Term Loan Facility, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets. Both the debt issuance costs and the original issue discount are amortized into interest expense over the term of the Term Loan Facility.
ABL Facility
In November 2016, the Company entered into a Third Amended and Restated Loan Agreement of its ABL Facility, which provided an aggregate revolving loan availability of up to $210,000, subject to borrowing base availability. In March 2020, the Company entered into the First Amendment of the Third Amended and Restated Loan Agreement (“the Amendment”). As a result of the Amendment, the senior asset-based revolving credit facility (“ABL Facility”) maturity was extended to March 2025 and the aggregate revolving loan availability was reduced to $180,000. The aggregate revolving loan availability includes a $100,000 letter of credit sub-facility and a $25,000 swing line sub-facility. The ABL Facility also provides for an uncommitted $100,000 incremental loan facility, for a potential total ABL Facility of $280,000, if requested by the borrowers under the ABL Facility and the lenders agree to fund such increase. No consent of any lender is required to effect any such increase, except for those participating in the increase.
As of March 31, 2021, there were no loans outstanding under the ABL Facility. The Company’s borrowing base was $163,208. Net of the greater of 10% of the borrowing base or $15,000 that cannot be borrowed without triggering the fixed charge coverage ratio maintenance covenant and $5,530 of outstanding letters of credit, the Company effectively had $141,357 available for borrowing under its ABL facility.
Any borrowings under the ABL Facility will mature, and the commitments of the lenders under the ABL Facility will terminate, on the earlier of March 24, 2025 or the date 91 days prior to the maturity date of the Term Loan Facility (or another fixed asset facility replacing the Term Loan Facility).
As a result of the Amendment in March 2020, the Company wrote off $177 in unamortized debt issuance costs, which are presented in interest expense, net of interest income in the condensed consolidated statements of operations. As of March 31, 2021 and December 31, 2020, the Company had $967 and $1,029, respectively, of unamortized debt issuance costs related to the ABL Facility, which are presented in other assets in the condensed consolidated balance sheets.
Debt Covenants
The Company was in compliance with all covenants of the Senior Notes, Senior Secured Notes, Term Loan Facility and ABL Facility as of March 31, 2021.
Other
Other borrowings as of March 31, 2021 and December 31, 2020 reflect borrowings under local bank lines classified in debt payable within one year on the condensed consolidated balance sheet.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
11. Fair Value Measurements and Financial Instruments
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is utilized, which prioritizes the inputs used in measuring fair value as follows:
| Level 1: | Observable inputs such as quoted prices in active markets; | ||||
| Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and | ||||
| Level 3: | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. | ||||
Items Measured at Fair Value on a Recurring Basis
Estimates of the fair value of foreign currency derivative instruments are determined using exchange traded prices and rates. The Company also considers the risk of non-performance in the estimation of fair value and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. In certain instances where market data is not available, the Company uses management judgment to develop assumptions that are used to determine fair value. Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 were as follows:
| March 31, 2021 | December 31, 2020 | Input | |||||||||||||||
| Forward foreign exchange contracts - other current assets | $ | 1,129 | $ | 1,826 | Level 2 | ||||||||||||
| Forward foreign exchange contracts - accrued liabilities | (788) | (750) | Level 2 | ||||||||||||||
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information on assets and liabilities measured at fair value on a nonrecurring basis see Note 3. “Divestiture” and Note 8. “Property, Plant and Equipment.”
Items Not Carried at Fair Value
Fair values of the Company’s Senior Notes, Senior Secured Notes and Term Loan Facility were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Aggregate fair value | $ | 942,438 | $ | 965,052 | |||||||
Aggregate carrying value (1) | 975,550 | 976,400 | |||||||||
(1) Excludes unamortized debt issuance costs and unamortized original issue discount.
Fair values were based on quoted market prices and are classified within Level 1 of the fair value hierarchy.
Derivative Instruments and Hedging Activities
The Company is exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. The Company enters into derivative instruments primarily to hedge portions of its forecasted foreign currency denominated cash flows and designates these derivative instruments as cash flow hedges in order to qualify for hedge accounting.
The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the cash flow hedges. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in the cash flows of the hedged item. Derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. For a cash flow hedge, the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) in the condensed consolidated balance sheet and reclassified into earnings when the
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
underlying hedged transaction is realized. The realized gains and losses are recorded on the same line as the hedged transaction in the condensed consolidated statements of operations.
The Company is exposed to credit risk in the event of nonperformance by its counterparties on its derivative financial instruments. The Company mitigates this credit risk exposure by entering into agreements directly with major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts.
Cash Flow Hedges
Forward Foreign Exchange Contracts - The Company uses forward contracts to mitigate the potential volatility to earnings and cash flow arising from changes in currency exchange rates that impact the Company’s foreign currency transactions. The principal currencies hedged by the Company include various European currencies, the Canadian Dollar, and the Mexican Peso. As of March 31, 2021 and December 31, 2020, the notional amount of these contracts was $66,133 and $97,503, respectively, and consisted of hedges of transactions up to December 2021.
Pretax amounts related to the Company’s cash flow hedges that were recognized in other comprehensive income (loss) (“OCI”) were as follows:
| Gain (Loss) Recognized in OCI | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Forward foreign exchange contracts | $ | (548) | $ | (12,871) | |||||||
Pretax amounts related to the Company’s cash flow hedges that were reclassified from AOCI and recognized in cost of products sold were as follows:
| Gain (Loss) Reclassified from AOCI to Income | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Forward foreign exchange contracts | $ | 188 | $ | 115 | |||||||
12. Accounts Receivable Factoring
As a part of its working capital management, the Company sells certain receivables through a single third-party financial institution in a pan-European program (the “Factor”). The amount sold varies each month based on the amount of underlying receivables and cash flow needs of the Company. These are permitted transactions under the Company’s credit agreements governing the ABL Facility and Term Loan Facility and the indentures governing the Senior Notes and Senior Secured Notes. The European factoring facility, which was renewed in March 2020, allows the Company to factor up to €120 million of its Euro-denominated accounts receivable, accelerating access to cash and reducing credit risk. The factoring facility expires in December 2023.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
Costs incurred on the sale of receivables are recorded in other expense, net in the condensed consolidated statements of operations. The sale of receivables under this contract is considered an off-balance sheet arrangement to the Company and is accounted for as a true sale and is excluded from accounts receivable in the condensed consolidated balance sheet. Amounts outstanding under receivable transfer agreements entered into by various locations as of the period end were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Off-balance sheet arrangements | $ | 80,461 | $ | 85,108 | |||||||
Accounts receivable factored and related costs throughout the period were as follows:
| Off-Balance Sheet Arrangements | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Accounts receivable factored | $ | 117,271 | $ | 176,508 | |||||||
| Costs | 154 | 309 | |||||||||
As of March 31, 2021 and December 31, 2020, cash collections on behalf of the Factor that have yet to be remitted were $6,174 and $1,786, respectively, and are reflected in other current assets as restricted cash in the condensed consolidated balance sheet.
13. Pension and Postretirement Benefits Other Than Pensions
The components of net periodic benefit (income) cost for the Company’s defined benefit plans and other postretirement benefit plans were as follows:
| Pension Benefits | |||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||||||||||
| Service cost | $ | 223 | $ | 914 | $ | 213 | $ | 989 | |||||||||||||||
| Interest cost | 1,629 | 648 | 2,033 | 782 | |||||||||||||||||||
| Expected return on plan assets | (3,564) | (334) | (3,421) | (577) | |||||||||||||||||||
| Amortization of prior service cost and actuarial loss | 418 | 932 | 485 | 794 | |||||||||||||||||||
| Net periodic benefit (income) cost | $ | (1,294) | $ | 2,160 | $ | (690) | $ | 1,988 | |||||||||||||||
| Other Postretirement Benefits | |||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||||||||||
| Service cost | $ | 26 | $ | 90 | $ | 26 | $ | 96 | |||||||||||||||
| Interest cost | 133 | 177 | 170 | 173 | |||||||||||||||||||
| Amortization of prior service credit and actuarial (gain) loss | (349) | 190 | (483) | 107 | |||||||||||||||||||
| Net periodic benefit (income) cost | $ | (190) | $ | 457 | $ | (287) | $ | 376 | |||||||||||||||
The service cost component of net periodic benefit (income) cost is included in cost of products sold and selling, administrative and engineering expenses in the condensed consolidated statements of operations. All other components of net periodic benefit (income) cost are included in other expense, net in the condensed consolidated statements of operations for all periods presented.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
14. Other Expense, Net
The components of other expense, net were as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Foreign currency losses | $ | (5,264) | $ | (3,232) | |||||||
| Components of net periodic benefit income (cost) other than service cost | 120 | (63) | |||||||||
| Factoring costs | (154) | (309) | |||||||||
| Miscellaneous income | 209 | 164 | |||||||||
| Other expense, net | $ | (5,089) | $ | (3,440) | |||||||
15. Income Taxes
The Company determines its effective tax rate each quarter based upon its estimated annual effective tax rate. The Company records the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.
Income tax expense (benefit), loss before income taxes and the corresponding effective tax rate for the three months ended March 31, 2021 and 2020 were as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Income tax expense (benefit) | $ | 936 | $ | (14,117) | |||||||
| Loss before income taxes | (33,777) | (126,556) | |||||||||
| Effective tax rate | (3) | % | 11 | % | |||||||
The effective tax rate for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 varied from prior periods primarily due to the geographic mix of pre-tax losses, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions and U.S. states, and due to a benefit in the three months ended March 31, 2020 for net operating losses carried back up to five years at tax rates in effect during those periods under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), rather than carried forward at current federal tax rates of 21%. The incremental loss in the three months ended March 31, 2020 was driven by impairment charges on held for sale entities for which no tax benefit was recognized. Additionally, a discrete expense of $13,309 for the initial recognition of valuation allowances against net deferred tax assets in certain foreign jurisdictions was recorded in the three months ended March 31, 2020.
The income tax rate for the three months ended March 31, 2021 and 2020 varied from the U.S. statutory rate primarily due to the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions and U.S. states, tax credits, the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, and other permanent items. Additionally, the income tax rate for the three months ended March 31, 2020 varied from the U.S. statutory rate as a result of benefits from net operating loss carry backs under the CARES Act. Further, the Company’s current and future provision for income taxes is impacted by the initial recognition of and changes in valuation allowances in certain countries. The Company intends to maintain these valuation allowances until it is more likely than not that the deferred tax assets will be realized.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
16. Net Loss Per Share Attributable to Cooper-Standard Holdings Inc.
Basic net loss per share attributable to Cooper-Standard Holdings Inc. was computed by dividing net loss attributable to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share attributable to Cooper-Standard Holdings Inc. was computed using the treasury stock method by dividing diluted net loss available to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding, including the dilutive effect of common stock equivalents, using the average share price during the period.
Information used to compute basic and diluted net loss per share attributable to Cooper-Standard Holdings Inc. was as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net loss available to Cooper-Standard Holdings Inc. common stockholders | $ | (33,864) | $ | (110,588) | |||||||
| Basic weighted average shares of common stock outstanding | 16,951,190 | 16,883,717 | |||||||||
| Dilutive effect of common stock equivalents | — | — | |||||||||
| Diluted weighted average shares of common stock outstanding | 16,951,190 | 16,883,717 | |||||||||
| Basic net loss per share attributable to Cooper-Standard Holdings Inc. | $ | (2.00) | $ | (6.55) | |||||||
| Diluted net loss per share attributable to Cooper-Standard Holdings Inc. | $ | (2.00) | $ | (6.55) | |||||||
Approximately 189,000 and 13,000 securities were excluded from the calculation of diluted loss per share for the three months ended March 31, 2021 and 2020, respectively, because the inclusion of such securities in the calculation would have been anti-dilutive.
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
17. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of related tax, were as follows:
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Foreign currency translation adjustment | ||||||||||||||
| Balance at beginning of period | $ | (136,579) | $ | (153,933) | ||||||||||
| Other comprehensive loss before reclassifications | (6,320) | (1) | (28,382) | (1) | ||||||||||
| Balance at end of period | $ | (142,899) | $ | (182,315) | ||||||||||
| Benefit plan liabilities | ||||||||||||||
| Balance at beginning of period | $ | (106,079) | $ | (100,160) | ||||||||||
| Other comprehensive income before reclassifications | 1,643 | (2) | 2,024 | (2) | ||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 1,096 | (3) | 658 | (4) | ||||||||||
| Balance at end of period | $ | (103,340) | $ | (97,478) | ||||||||||
| Fair value change of derivatives | ||||||||||||||
| Balance at beginning of period | $ | 762 | $ | 352 | ||||||||||
| Other comprehensive loss before reclassifications | (432) | (5) | (9,984) | (5) | ||||||||||
| Amounts reclassified from accumulated other comprehensive loss | (139) | (6) | (92) | (6) | ||||||||||
| Balance at end of period | $ | 191 | $ | (9,724) | ||||||||||
| Accumulated other comprehensive loss, ending balance | $ | (246,048) | $ | (289,517) | ||||||||||
(1)Includes other comprehensive loss related to intra-entity foreign currency balances that are of a long-term investment nature of $4,389 and $22,703 for the three months ended March 31, 2021 and 2020, respectively.
(2)Net of tax (benefit) expense of $(245) and $337 for the three months ended March 31, 2021 and 2020, respectively.
(3)Includes the effect of the amortization of actuarial losses of $1,124 and amortization of prior service cost of $65, net of tax of $93.
(4)Includes the effect of the amortization of actuarial losses of $872 and amortization of prior service cost of $21, net of tax of $235.
(5)Net of tax benefit of $116 and $2,887 for the three months ended March 31, 2021 and 2020, respectively.
(6)Net of tax expense of $49 and $23 for the three months ended March 31, 2021 and 2020, respectively.
18. Common Stock
Share Repurchase Program
In June 2018, the Company’s Board of Directors approved a common stock repurchase program (the “2018 Program”) authorizing the Company to repurchase, in the aggregate, up to $150,000 of its outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by management and in accordance with prevailing market conditions and federal securities laws and regulations. The Company expects to fund any future repurchases from cash on hand and future cash flows from operations. The Company is not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at the Company’s discretion. The 2018 Program became effective in November 2018. As of March 31, 2021, the Company had approximately $98,720 of repurchase authorization remaining under the 2018 Program.
The Company did not make any repurchases under the 2018 Program during the three months ended March 31, 2021 or during the three months ended March 31, 2020.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
19. Share-Based Compensation
The Company’s long-term incentive plans allow for the grant of various types of share-based awards to key employees and directors of the Company and its affiliates. The Company generally awards grants on an annual basis.
In February 2021, the Company granted Restricted Stock Units (“RSUs”), Performance Units (“PUs”) and stock options. The RSUs cliff vest after three years, the PUs vest ratably over three years after the initial two-year performance period, and the stock options vest ratably over three years. The number of PUs that will vest depends on the Company’s achievement of target performance goals related to the Company’s return on invested capital (“ROIC”) and total shareholder return, which may range from 0% to 200% of the target award amount.
Share-based compensation expense was as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| PUs | $ | 339 | $ | 74 | |||||||
| RSUs | 1,246 | 1,643 | |||||||||
| Stock options | 593 | 657 | |||||||||
| Total | $ | 2,178 | $ | 2,374 | |||||||
20. Commitments and Contingencies
The Company is periodically involved in claims, litigation and various legal matters that arise in the ordinary course of business. The Company accrues for litigation exposure when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. As of March 31, 2021, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for claims, litigation and various legal matters, if any, has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company’s financial condition, results of operations or cash flows could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
In addition, the Company conducts and monitors environmental investigations and remedial actions at certain locations. As of March 31, 2021 and December 31, 2020, the Company had approximately $12,012 and $13,302, respectively, reserved in accrued liabilities and other liabilities on the condensed consolidated balance sheets on an undiscounted basis. While the Company’s costs to defend and settle known claims arising under environmental laws have not been material in the past and are not currently estimated to have a material adverse effect on the Company’s financial condition, such costs may be material to the Company’s financial statements in the future.
21. Segment Reporting
The Company’s business is organized in the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other. The Company’s principal products within each of the reportable segments are sealing, fuel and brake delivery, and fluid transfer systems.
The Company uses Segment adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. The results of each segment include certain allocations for general, administrative and other shared costs. Segment adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
Certain financial information on the Company’s reportable segments was as follows:
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| External Sales | Intersegment Sales | Adjusted EBITDA | External Sales | Intersegment Sales | Adjusted EBITDA | |||||||||||||||||||||||||||||||||
| North America | $ | 339,036 | $ | 2,633 | $ | 41,233 | $ | 334,801 | $ | 4,468 | $ | 37,019 | ||||||||||||||||||||||||||
| Europe | 165,776 | 2,979 | (1,489) | 185,242 | 3,091 | (4,623) | ||||||||||||||||||||||||||||||||
| Asia Pacific | 114,225 | 630 | 3,552 | 79,344 | 457 | (17,057) | ||||||||||||||||||||||||||||||||
| South America | 15,486 | 12 | (2,608) | 20,471 | 68 | (4,577) | ||||||||||||||||||||||||||||||||
| Total Automotive | 634,523 | 6,254 | 40,688 | 619,858 | 8,084 | 10,762 | ||||||||||||||||||||||||||||||||
| Corporate, eliminations and other | 34,444 | (6,254) | (2,148) | 35,032 | (8,084) | (2,483) | ||||||||||||||||||||||||||||||||
| Consolidated | $ | 668,967 | $ | — | $ | 38,540 | $ | 654,890 | $ | — | $ | 8,279 | ||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Adjusted EBITDA | $ | 38,540 | $ | 8,279 | ||||||||||
| Restructuring charges | (21,047) | (7,276) | ||||||||||||
| Gain on sale of business | 891 | — | ||||||||||||
| Impairment of assets held for sale | — | (74,079) | ||||||||||||
| Project costs | — | (2,425) | ||||||||||||
| Other impairment charges | — | (684) | ||||||||||||
| Lease termination costs | — | (520) | ||||||||||||
| EBITDA | $ | 18,384 | $ | (76,705) | ||||||||||
| Income tax (expense) benefit | (936) | 14,117 | ||||||||||||
| Interest expense, net of interest income | (17,784) | (10,237) | ||||||||||||
| Depreciation and amortization | (33,528) | (37,763) | ||||||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | (33,864) | $ | (110,588) | ||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Segment assets: | |||||||||||
| North America | $ | 941,996 | $ | 907,652 | |||||||
| Europe | 447,340 | 465,031 | |||||||||
| Asia Pacific | 543,970 | 587,610 | |||||||||
| South America | 61,714 | 64,800 | |||||||||
| Total Automotive | 1,995,020 | 2,025,093 | |||||||||
| Corporate, eliminations and other | 570,341 | 586,851 | |||||||||
| Consolidated | $ | 2,565,361 | $ | 2,611,944 | |||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Our historical results may not indicate, and should not be relied upon as an indication of, our future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. See “Forward-Looking Statements” below for a discussion of risks associated with reliance on forward-looking statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (“2020 Annual Report”), including Item 1A. “Risk Factors.” The following should be read in conjunction with our 2020 Annual Report and the other information included herein. Our discussion of trends and conditions supplements and updates such discussion included in our 2020 Annual Report. References in this quarterly report on Form 10-Q (the “Report”) to “we,” “our,” or the “Company” refer to Cooper-Standard Holdings Inc., together with its consolidated subsidiaries.
Executive Overview
Our Business
We design, manufacture and sell sealing, fuel and brake delivery, and fluid transfer systems for use primarily in passenger vehicles and light trucks manufactured by global automotive original equipment manufacturers (“OEMs”). We are primarily a “Tier 1” supplier, with approximately 83% of our sales in 2020 made directly to major OEMs. We operate our business along the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other.
Recent Trends and Conditions
General Economic Conditions and Outlook
The global automotive industry is susceptible to uncertain economic conditions that could adversely impact new vehicle demand and production. Business conditions may vary significantly from period to period or region to region. The global COVID-19 pandemic created an unusually high degree of economic disruption and uncertainty during 2020, which has continued into 2021. Although optimism for an economic recovery has increased in the first quarter of 2021, a considerable amount of uncertainty remains. The rate of recovery has varied across regions, and, in some cases, rapid growth and spikes in consumer and industrial demand have outpaced production and supply chain capacity. These supply/demand imbalances have added another layer of uncertainty for the broader economic outlook and for the automotive industry around the world. Despite these uncertainties, economists at the International Monetary Fund (IMF) remain positive in their outlook and have recently increased their forecasts for global economic growth. They are now expecting the global economy to grow by approximately 6.0% in 2021.
In North America, the United States government has injected historic levels of fiscal stimulus into its economy to sustain businesses, create jobs and drive consumer confidence and spending. In addition, rapid distribution and administration of COVID-19 vaccines have enabled large segments of the economy to return to near normal activity, spurring growth. IMF economists now expect economic growth of approximately 6.0% for the North America region in 2021. Further, the IMF expects unemployment to decline to approximately 6.0% in 2021, compared to more than 8.0% in 2020.
In Europe, the IMF is projecting economic growth of approximately 4.4% for 2021. The region continues to experience recurring outbreaks of COVID-19 and some localized increases in pandemic related restrictions. However, vaccinations are increasing throughout the region and this is expected to drive additional economic activity in the second half of the year. Despite the improving health outlook, the IMF expects unemployment in the region to increase to 8.0% in 2021, keeping consumer confidence and economic growth rates below those of other developed regions.
In Asia Pacific, the IMF expects China’s economy to grow by 8.4% in 2021. Unemployment is expected to decline slightly to 3.6%. China’s central government has pledged to maintain continuity of macroeconomic policies during 2021. In addition, it has extended certain loan repayment deferral policies for small and medium businesses, an indication that it does not yet believe its post pandemic economic recovery is complete.
In South America, the IMF estimates that the Brazilian economy will grow by approximately 3.7% in 2021. Unemployment is expected to decline slightly to 10.6% from 11.4% in 2020. Despite the high unemployment rate and continuing regional outbreaks of COVID-19, Brazil is beginning to experience upward price pressures. With inflation now expected to exceed 4.5%, the country’s central bank has recently raised its benchmark interest rate to 2.75% from 2.00%,
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suggesting that aggressive monetary incentives are no longer necessary to support economic activity. Given the long history of political instability and economic volatility, we remain cautious for the mid to long-term economic outlook in the region.
Raw Materials
Our business is susceptible to inflationary pressures with respect to raw materials which may place operational and profitability burdens on the entire supply chain. Costs related to raw materials, such as steel, aluminum, and oil and oil-derived commodities, continue to be volatile. In addition, we continue to expect commodity cost volatility to have an impact on future earnings and operating cash flows. As such, on an ongoing basis, we work with our customers and suppliers to mitigate both inflationary pressures and our material-related cost exposures.
Production Levels
Our business is directly affected by the automotive vehicle production rates in North America, Europe, Asia Pacific and South America. Beginning in the first quarter of 2020, as a result of COVID-19, we experienced the shutdown of effectively all of our facilities coinciding with the shutdown of our customer facilities in all regions. Production subsequently resumed in all regions, at steadily increasing rates throughout the year. We collaborate closely with our customers as production volumes continue to increase and approach pre-COVID-19 levels, while also adhering to enhanced safety standards and measures to protect our employees.
In the first quarter of 2021, OEM production volumes were disrupted by the global shortage of semiconductors, as well as weather-induced shutdowns in North America and the resulting chemical shortages. The shortage of semiconductors and chemicals has resulted in slowdowns and occasional stoppages in the final production of vehicles. While the supply issues are expected to improve in the second half of 2021, we are collaborating closely with our customers to minimize production inefficiencies while supporting their needs.
Light vehicle production in certain regions for the three months ended March 31, 2021 and 2020 was as follows:
| Three Months Ended March 31, | |||||||||||||||||
| (In millions of units) | 2021(1) | 2020(1) | % Change | ||||||||||||||
| North America | 3.6 | 3.8 | (4.5)% | ||||||||||||||
| Europe | 4.7 | 4.7 | (0.9)% | ||||||||||||||
| Asia Pacific | 10.9 | 8.2 | 32.6% | ||||||||||||||
| Greater China | 5.8 | 3.3 | 77.1% | ||||||||||||||
| South America | 0.7 | 0.7 | 3.9% | ||||||||||||||
(1)Production data based on IHS Automotive, April 2021.
In North America and Europe, first quarter vehicle production declined in 2021 compared to the prior year period, primarily due to the impact of semiconductor supply issues. In Asia Pacific, first quarter vehicle production increased significantly in 2021 compared to the prior year period primarily due to the impact of COVID-19 plant shutdowns in the prior year, which affected the region for much of the first quarter of 2020. The largest increases in production have been in China, which has had strong production volumes since industry wide shutdowns in the prior year. In South America, vehicle production slightly increased, as the region continues steady volume increases after industry wide shutdowns in the prior year.
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Results of Operations
| Three Months Ended March 31, | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| (dollar amounts in thousands) | |||||||||||||||||
| Sales | $ | 668,967 | $ | 654,890 | $ | 14,077 | |||||||||||
| Cost of products sold | 600,675 | 611,747 | (11,072) | ||||||||||||||
| Gross profit | 68,292 | 43,143 | 25,149 | ||||||||||||||
| Selling, administration & engineering expenses | 58,054 | 70,671 | (12,617) | ||||||||||||||
| Gain on sale of business | (891) | — | (891) | ||||||||||||||
| Amortization of intangibles | 1,772 | 4,450 | (2,678) | ||||||||||||||
| Restructuring charges | 21,047 | 7,276 | 13,771 | ||||||||||||||
| Impairment of assets held for sale | — | 74,079 | (74,079) | ||||||||||||||
| Other impairment charges | — | 977 | (977) | ||||||||||||||
| Operating loss | (11,690) | (114,310) | 102,620 | ||||||||||||||
| Interest expense, net of interest income | (17,784) | (10,237) | (7,547) | ||||||||||||||
| Equity in earnings of affiliates | 786 | 1,431 | (645) | ||||||||||||||
| Other expense, net | (5,089) | (3,440) | (1,649) | ||||||||||||||
| Loss before income taxes | (33,777) | (126,556) | 92,779 | ||||||||||||||
| Income tax expense (benefit) | 936 | (14,117) | 15,053 | ||||||||||||||
| Net loss | (34,713) | (112,439) | 77,726 | ||||||||||||||
| Net loss attributable to noncontrolling interests | 849 | 1,851 | (1,002) | ||||||||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | (33,864) | $ | (110,588) | $ | 76,724 | |||||||||||
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
Sales
Sales for the three months ended March 31, 2021 increased 2.1%, compared to the three months ended March 31, 2020. Vehicle production volume increases in China, due to the impact of COVID-19 plant shutdowns in 2020, and foreign exchange drove the increase in sales, which were partially offset by customer shutdowns in North America and Europe primarily due to semiconductor supply shortages in 2021, and by the prior year divestiture of our European rubber fluid transfer and specialty sealing businesses and Indian operations.
| Three Months Ended March 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | Volume / Mix* | Foreign Exchange | Divestitures | |||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||
| Total sales | $ | 668,967 | $ | 654,890 | $ | 14,077 | $ | 40,941 | $ | 20,081 | $ | (46,945) | ||||||||||||||||||||||||||
* Net of customer price reductions
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Gross Profit
| Three Months Ended March 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | Volume / Mix* | Foreign Exchange | Cost Increases / (Decreases)** | |||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||
| Cost of products sold | $ | 600,675 | $ | 611,747 | $ | (11,072) | $ | 34,786 | $ | 18,655 | $ | (64,513) | ||||||||||||||||||||||||||
| Gross profit | 68,292 | 43,143 | 25,149 | 6,155 | 1,426 | 17,568 | ||||||||||||||||||||||||||||||||
| Gross profit percentage of sales | 10.2 | % | 6.6 | % | ||||||||||||||||||||||||||||||||||
* Net of customer price reductions
** Includes the net impact of divestitures
Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 48% and 47% of total cost of products sold for the three months ended March 31, 2021 and 2020, respectively. The change in the cost of products sold was impacted by vehicle volume and mix, the prior year divestiture of our European rubber fluid transfer and specialty sealing businesses and Indian operations, continuous improvement and lean manufacturing, material cost reductions, commodity price fluctuations, foreign exchange and wage inflation.
Gross profit for the three months ended March 31, 2021 increased $25.1 million or 58.3% compared to the three months ended March 31, 2020. The increase was driven by net favorable operational performance, restructuring savings and material cost reductions, the prior year divestiture of our European rubber fluid transfer and specialty sealing businesses and Indian operations. These items were partially offset by wage inflation, employee incentives and foreign exchange.
Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Selling, administration and engineering expense for the three months ended March 31, 2021 was 8.7% of sales compared to 10.8% for the three months ended March 31, 2020. Selling, administration and engineering expenses were lower by $12.6 million. The decrease was primarily due to savings generated from salaried headcount initiatives, net divestitures and lower travel expenses, partially offset by general inflation and higher variable employee compensation expenses.
Gain on Sale of Business. The gain on sale of business of $0.9 million for the three months ended March 31, 2021 related primarily to deconsolidation adjustments for the sale of our European fluid transfer and specialty sealing businesses and Indian operations. We completed the sale on July 1, 2020.
Amortization of Intangibles. Intangible amortization for the three months ended March 31, 2021 decreased $2.7 million compared to the three months ended March 31, 2020. The decrease was primarily driven by a customer relationship intangible asset in the North America region that was fully amortized during the second quarter of 2020.
Restructuring. Restructuring charges for the three months ended March 31, 2021 increased $13.8 million compared to the three months ended March 31, 2020. The increase was driven by higher restructuring charges in Europe, primarily related to headcount initiatives and footprint rationalization.
Impairment Charges. There were no non-cash impairment charges for the three months ended March 31, 2021. Impairment charges during the three months ended March 31, 2020 primarily related to reducing the carrying value of our held for sale facilities to fair value less costs to sell. Other non-cash impairment charges also related to property, plant and equipment in the Asia Pacific region.
Interest Expense, Net. Net interest expense for the three months ended March 31, 2021 increased $7.5 million compared to the three months ended March 31, 2020, primarily due to higher outstanding debt balances.
Other Expense, Net. Other expense for the three months ended March 31, 2021 increased $1.6 million compared to the three months ended March 31, 2020, primarily due to higher foreign currency losses.
Income Tax Expense (Benefit). Income tax expense for the three months ended March 31, 2021 was $0.9 million on losses before income taxes of $33.8 million. This compares to an income tax benefit of $14.1 million on losses before income taxes of $126.6 million for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 differed primarily due to the geographic mix of pre-tax losses, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions and U.S. states, as well as due to benefits recorded in the three month period ended March 31, 2020 as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES
27
Act”) net operating loss (“NOL”) carry back provision that allows NOLs generated to be carried back up to five years at the tax rates in effect during those periods, rather than carried forward at current federal tax rates of 21%.
Segment Results of Operations
Our business is organized into the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other. The Company uses Segment adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We have defined adjusted EBITDA as net income before interest, taxes, depreciation, amortization, restructuring expense, and special items.
The following tables present sales and segment adjusted EBITDA for each of the reportable segments.
Three Months Ended March 31, 2021 Compared with Three Months Ended March 31, 2020
Sales
| Three Months Ended March 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | Volume/ Mix* | Foreign Exchange | Divestitures | |||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||
| Sales to external customers | ||||||||||||||||||||||||||||||||||||||
| North America | $ | 339,036 | $ | 334,801 | $ | 4,235 | $ | 3,497 | $ | 738 | $ | — | ||||||||||||||||||||||||||
| Europe | 165,776 | 185,242 | (19,466) | 279 | 14,077 | (33,822) | ||||||||||||||||||||||||||||||||
| Asia Pacific | 114,225 | 79,344 | 34,881 | 40,087 | 7,917 | (13,123) | ||||||||||||||||||||||||||||||||
| South America | 15,486 | 20,471 | (4,985) | (1,377) | (3,608) | — | ||||||||||||||||||||||||||||||||
| Total Automotive | 634,523 | 619,858 | 14,665 | 42,486 | 19,124 | (46,945) | ||||||||||||||||||||||||||||||||
| Corporate, eliminations and other | 34,444 | 35,032 | (588) | (1,545) | 957 | — | ||||||||||||||||||||||||||||||||
| Consolidated | $ | 668,967 | $ | 654,890 | $ | 14,077 | $ | 40,941 | $ | 20,081 | $ | (46,945) | ||||||||||||||||||||||||||
* Net of customer price reductions
•Volume and mix, net of customer price reductions, was driven by volume increases in China due to the impact of COVID-19 plant shutdowns in 2020, partially offset by the impact of customer shutdowns primarily due to semiconductor supply shortages in both North American and Europe in 2021.
•The impact of foreign currency exchange primarily related to the Euro, Renminbi, and Brazilian Real.
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Segment adjusted EBITDA
| Three Months Ended March 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | Volume/ Mix* | Foreign Exchange | Cost (Increases)/ Decreases | Divestitures | ||||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Segment adjusted EBITDA | ||||||||||||||||||||||||||||||||||||||||||||
| North America | $ | 41,233 | $ | 37,019 | $ | 4,214 | $ | (2,362) | $ | (4,719) | $ | 11,295 | $ | — | ||||||||||||||||||||||||||||||
| Europe | (1,489) | (4,623) | 3,134 | 914 | (860) | 2,908 | 172 | |||||||||||||||||||||||||||||||||||||
| Asia Pacific | 3,552 | (17,057) | 20,609 | 6,994 | 1,631 | 9,133 | 2,851 | |||||||||||||||||||||||||||||||||||||
| South America | (2,608) | (4,577) | 1,969 | 1,430 | 882 | (343) | — | |||||||||||||||||||||||||||||||||||||
| Total Automotive | 40,688 | 10,762 | 29,926 | 6,976 | (3,066) | 22,993 | 3,023 | |||||||||||||||||||||||||||||||||||||
| Corporate, eliminations and other | (2,148) | (2,483) | 335 | (821) | 428 | 728 | — | |||||||||||||||||||||||||||||||||||||
| Consolidated adjusted EBITDA | $ | 38,540 | $ | 8,279 | $ | 30,261 | $ | 6,155 | $ | (2,638) | $ | 23,721 | $ | 3,023 | ||||||||||||||||||||||||||||||
* Net of customer price reductions
•Volume and mix, net of customer price reductions, was driven by the regional mix of vehicle production in each of our segments and includes increases in China due to the impact of COVID-19 plant shutdowns in 2020, partially offset by the impact of customer shutdowns primarily due to the semiconductor supply shortages in both North America and Europe in 2021.
•The impact of foreign currency exchange was driven by the Mexican Peso, Polish Zloty, Czech Koruna, and Chinese Renminbi.
•The Cost (Increases) / Decreases category above includes:
◦Reduction in compensation-related expenses due to salaried headcount initiatives, lower travel expenses, purchasing savings through lean initiatives, and restructuring savings;
◦Commodity cost, wage and variable employee compensation increases;
◦Manufacturing efficiencies of $18 million, primarily driven by our North America and Asia Pacific segments.
Liquidity and Capital Resources
Short and Long-Term Liquidity Considerations and Risks
We intend to fund our ongoing working capital, capital expenditures, debt service and other funding requirements through a combination of cash flows from operations, cash on hand, borrowings under our senior asset-based revolving credit facility (“ABL Facility”) and receivables factoring. The Company utilizes intercompany loans and equity contributions to fund its worldwide operations. There may be country-specific regulations which may restrict or result in increased costs in the repatriation of these funds. See Note 10. “Debt” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for additional information.
We continue to actively preserve cash and enhance liquidity, including decreasing our capital expenditures. Based on those actions and current projections of OEM customer production, we believe that our cash flows from operations, cash on hand, borrowings under our ABL Facility and receivables factoring will enable us to meet our ongoing working capital, capital expenditures, debt service and other funding requirements for the next twelve months, despite the challenges presented by the COVID-19 pandemic and supply chain issues facing the industry. We continuously monitor and forecast our liquidity situation, take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. Our ability to fund our working capital needs, debt payments and other obligations, and to comply with the financial covenants, including borrowing base limitations, under our ABL Facility, depend on our future operating performance and cash flows and many factors outside of our control, including the costs of raw materials, the state of the overall automotive industry and financial and economic conditions, including the impact of COVID-19, and other factors.
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Cash Flows
Operating Activities. Net cash used in operations was $7.1 million for the three months ended March 31, 2021, compared to net cash used in operations of $2.0 million for the three months ended March 31, 2020. The net outflow was primarily due to working capital outflows, partially offset by higher cash earnings.
Investing Activities. Net cash used in investing activities was $36.3 million for the three months ended March 31, 2021, compared to net cash used in investing activities of $50.1 million for the three months ended March 31, 2020. The reduction was primarily due to lower capital expenditures. In response to the COVID-19 pandemic, significant decreases in capital expenditures occurred throughout 2020. We expect lower expenditures will continue in 2021, primarily as part of initiatives to consistently reduce overall capital spending. We anticipate that we will spend approximately $100 million to $125 million on capital expenditures in 2021.
Financing Activities. Net cash provided by financing activities totaled $1.3 million for the three months ended March 31, 2021, compared to net cash provided by financing activities of $0.4 million for the three months ended March 31, 2020. The inflow was primarily due to increases in short-term debt during the three months ended March 31, 2021.
Share Repurchase Program
In June 2018, our Board of Directors approved a new common stock repurchase program (the “2018 Program”) authorizing us to repurchase, in the aggregate, up to $150.0 million of our outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by us and in accordance with prevailing market conditions and federal securities laws and regulations. We expect to fund any future repurchases from cash on hand and future cash flows from operations. The specific timing and amount of any future repurchase will vary based on market and business conditions and other factors. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at our discretion. As of March 31, 2021, we had approximately $98.7 million of repurchase authorization remaining under the 2018 Program.
We did not make any repurchases under the 2018 Program during the three months ended March 31, 2021 or during the three months ended March 31, 2020.
Non-GAAP Financial Measures
In evaluating our business, management considers EBITDA and Adjusted EBITDA to be key indicators of our operating performance. Our management also uses EBITDA and Adjusted EBITDA:
•because similar measures are utilized in the calculation of the financial covenants and ratios contained in our financing arrangements;
•in developing our internal budgets and forecasts;
•as a significant factor in evaluating our management for compensation purposes;
•in evaluating potential acquisitions;
•in comparing our current operating results with corresponding historical periods and with the operational performance of other companies in our industry; and
•in presentations to the members of our board of directors to enable our board of directors to have the same measurement basis of operating performance as is used by management in their assessments of performance and in forecasting and budgeting for our company.
In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in evaluating our performance. We define Adjusted EBITDA as net income (loss) plus income tax expense (benefit), interest expense, net of interest income, depreciation and amortization or EBITDA, as adjusted for items that management does not consider to be reflective of our core operating performance. These adjustments include, but are not limited to, restructuring costs, impairment charges, non-cash fair value adjustments and acquisition-related costs.
EBITDA and Adjusted EBITDA are not financial measurements recognized under U.S. GAAP, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA as a supplement to, and not as alternatives for, net income (loss), operating income, or any other performance measure derived in accordance with U.S. GAAP, nor as an alternative to cash flow from operating activities as a measure of our liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of our results of operations as reported under U.S. GAAP. These limitations include:
•they do not reflect our cash expenditures or future requirements for capital expenditure or contractual commitments;
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•they do not reflect changes in, or cash requirements for, our working capital needs;
•they do not reflect interest expense or cash requirements necessary to service interest or principal payments under our ABL Facility, Term Loan Facility, Senior Notes and Senior Secured Notes;
•they do not reflect certain tax payments that may represent a reduction in cash available to us;
•although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
•other companies, including companies in our industry, may calculate these measures differently and, as the number of differences in the way companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.
In addition, in evaluating Adjusted EBITDA, it should be noted that in the future, we may incur expenses similar to the adjustments in the below presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by special items.
The following table provides a reconciliation of EBITDA and Adjusted EBITDA from net loss, which is the most comparable financial measure in accordance with U.S. GAAP:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (dollar amounts in thousands) | |||||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | (33,864) | $ | (110,588) | |||||||
| Income tax expense (benefit) | 936 | (14,117) | |||||||||
| Interest expense, net of interest income | 17,784 | 10,237 | |||||||||
| Depreciation and amortization | 33,528 | 37,763 | |||||||||
| EBITDA | $ | 18,384 | $ | (76,705) | |||||||
| Restructuring charges | 21,047 | 7,276 | |||||||||
Gain on sale of business (1) | (891) | — | |||||||||
Impairment of assets held for sale (2) | — | 74,079 | |||||||||
Project costs (3) | — | 2,425 | |||||||||
Other impairment charges (4) | — | 684 | |||||||||
Lease termination costs (5) | — | 520 | |||||||||
| Adjusted EBITDA | $ | 38,540 | $ | 8,279 | |||||||
(1)Gain on sale of business related to divestitures in 2020.
(2)Non-cash impairment charges related to reducing the carrying value of the held for sale entities to fair value less costs to sell.
(3)Project costs recorded in selling, administration and engineering expense related to divestitures in 2020.
(4)Non-cash impairment charges of $684 related to fixed assets, net of approximately $293 attributable to our noncontrolling interests.
(5)Lease termination costs no longer recorded as restructuring charges in accordance with ASC 842.
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Contingencies and Environmental Matters
The information concerning contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters, contained in Note 20. “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, is incorporated herein by reference.
Recently Issued Accounting Pronouncements
See Note 2. “New Accounting Pronouncements” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.
Critical Accounting Estimates
There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2021.
Forward-Looking Statements
This quarterly report on Form 10-Q includes “forward-looking statements” within the meaning of U.S. federal securities laws, and we intend that such forward-looking statements be subject to the safe harbor created thereby. Our use of words “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “outlook”, “guidance”, “forecast,” or future or conditional verbs, such as “will,” “should,” “could,” “would,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs and projections will be achieved. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements. Among other items, such factors may include: the impact, and expected continued impact, of the recent COVID-19 outbreak on our financial condition and results of operations; significant risks to our liquidity presented by the COVID-19 pandemic risk; prolonged or material contractions in automotive sales and production volumes; our inability to realize sales represented by awarded business; escalating pricing pressures; loss of large customers or significant platforms; our ability to successfully compete in the automotive parts industry; availability and increasing volatility in costs of manufactured components and raw materials; disruption in our supply base; competitive threats and commercial risks associated with our diversification strategy through Advanced Technology Group; possible variability of our working capital requirements; risks associated with our international operations, including changes in laws, regulations, and policies governing the terms of foreign trade such as increased trade restrictions and tariffs; foreign currency exchange rate fluctuations; our ability to control the operations of our joint ventures for our sole benefit; our substantial amount of indebtedness and variable rates of interest; our ability to obtain adequate financing sources in the future; operating and financial restrictions imposed on us under our debt instruments; the underfunding of our pension plans; significant changes in discount rates and the actual return on pension assets; effectiveness of continuous improvement programs and other cost savings plans; manufacturing facility closings or consolidation; our ability to execute new program launches; our ability to meet customers’ needs for new and improved products; the possibility that our acquisitions and divestitures may not be successful; product liability, warranty and recall claims brought against us; laws and regulations, including environmental, health and safety laws and regulations; legal and regulatory proceedings, claims or investigations against us; work stoppages or other labor disruptions; the ability of our intellectual property to withstand legal challenges; cyber-attacks, data privacy concerns, other disruptions in, or the inability to implement upgrades to, our information technology systems; the possible volatility of our annual effective tax rate; the possibility of a failure to maintain effective controls and procedures; the possibility of future impairment charges to our goodwill and long-lived assets; our ability to identify, attract, develop and retain a skilled, engaged and diverse workforce; our ability to procure insurance at reasonable rates; and our dependence on our subsidiaries for cash to satisfy our obligations.
You should not place undue reliance on these forward-looking statements. Our forward-looking statements speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except where we are expressly required to do so by law.
This quarterly report on Form 10-Q also contains estimates and other information that is based on industry publications, surveys, and forecasts. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of the information.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously disclosed in the Company’s 2020 Annual Report.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Based on that evaluation, the Company’s Chief Executive Officer along with the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Report.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities By the Issuer and Affiliated Purchasers
The Company is authorized to purchase, in the aggregate, up to $150 million of our outstanding common stock under our common stock repurchase program, which was effective in November 2018. As of March 31, 2021, we had approximately $98.7 million of repurchase authorization remaining under our ongoing common stock share repurchase program as discussed in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Share Repurchase Program,” and Note 18. “Common Stock” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.
A summary of our shares of common stock repurchased during the three months ended March 31, 2021 is shown below:
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (in millions) | ||||||||||||||||||||||
| January 1, 2021 through January 31, 2021 | — | $ | — | — | $ | 98.7 | ||||||||||||||||||||
| February 1, 2021 through February 28, 2021 | 17,138 | 37.19 | — | 98.7 | ||||||||||||||||||||||
| March 1, 2021 through March 31, 2021 | 5,324 | 42.69 | — | 98.7 | ||||||||||||||||||||||
| Total | 22,462 | — | ||||||||||||||||||||||||
(1)Represents shares repurchased by the Company to satisfy employee tax withholding requirements due upon the vesting of restricted stock awards and the exercise of stock option awards.
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Item 6. Exhibits
| Exhibit No. | Description of Exhibit | |||||||
| 10.1* | ||||||||
| 10.2* | ||||||||
| 10.3* | ||||||||
| 10.4* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32** | ||||||||
| 101.INS*** | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH*** | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL*** | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF*** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB*** | Inline XBRL Taxonomy Label Linkbase Document | |||||||
| 101.PRE*** | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104*** | Cover Page Interactive Data File, formatted in Inline XBRL | |||||||
| * | Filed with this Report. | ||||
| ** | Furnished with this Report. | ||||
| *** | Submitted electronically with this Report in accordance with the provisions of Regulation S-T. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COOPER-STANDARD HOLDINGS INC. | ||||||||||||||
| May 7, 2021 | /S/ JONATHAN P. BANAS | |||||||||||||
| Date | Jonathan P. Banas Chief Financial Officer (Principal Financial Officer) | |||||||||||||
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