CPS-2015.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
___________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
or
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¨
| 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: 000-54305
______________________________
COOPER-STANDARD HOLDINGS INC.
(Exact name of registrant as specified in its charter)
______________________________
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| | |
Delaware | | 20-1945088 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
39550 Orchard Hill Place Drive
Novi, Michigan 48375
(Address of principal executive offices)
(Zip Code)
(248) 596-5900
(Registrant’s telephone number, including area code)
______________________________
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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨ | | Accelerated filer | | ý |
Non-accelerated filer | | ¨ | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No ¨
As of July 27, 2015 there were 17,278,537 shares of the registrant’s common stock, $0.001 par value, outstanding.
COOPER-STANDARD HOLDINGS INC.
Form 10-Q
For the period ended June 30, 2015
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Sales | $ | 857,553 |
| | $ | 860,821 |
| | $ | 1,695,159 |
| | $ | 1,660,871 |
|
Cost of products sold | 711,444 |
| | 706,863 |
| | 1,414,791 |
| | 1,376,041 |
|
Gross profit | 146,109 |
| | 153,958 |
| | 280,368 |
| | 284,830 |
|
Selling, administration & engineering expenses | 81,873 |
| | 84,079 |
| | 161,244 |
| | 160,390 |
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Amortization of intangibles | 3,997 |
| | 3,672 |
| | 8,433 |
| | 7,220 |
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Restructuring | 3,756 |
| | 7,429 |
| | 6,845 |
| | 26,269 |
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Operating profit | 56,483 |
| | 58,778 |
| | 103,846 |
| | 90,951 |
|
Interest expense, net of interest income | (10,919 | ) | | (9,268 | ) | | (25,927 | ) | | (18,425 | ) |
Equity earnings | 1,745 |
| | 1,355 |
| | 2,981 |
| | 3,131 |
|
Other income (expense), net | (28,633 | ) | | 2,111 |
| | (28,803 | ) | | 13,188 |
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Income before income taxes | 18,676 |
| | 52,976 |
| | 52,097 |
| | 88,845 |
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Income tax expense | 4,424 |
| | 16,442 |
| | 16,488 |
| | 31,183 |
|
Net income | 14,252 |
| | 36,534 |
| | 35,609 |
| | 57,662 |
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Net income attributable to noncontrolling interests | (1,058 | ) | | (38 | ) | | (2,680 | ) | | (179 | ) |
Net income attributable to Cooper-Standard Holdings Inc. | $ | 13,194 |
| | $ | 36,496 |
| | $ | 32,929 |
| | $ | 57,483 |
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| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.78 |
| | $ | 2.14 |
| | $ | 1.96 |
| | $ | 3.37 |
|
Diluted | $ | 0.72 |
| | $ | 1.98 |
| | $ | 1.82 |
| | $ | 3.14 |
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| | | | | | | |
Comprehensive income | $ | 18,619 |
| | $ | 42,435 |
| | $ | 39,349 |
| | $ | 19,679 |
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Comprehensive income attributable to noncontrolling interests | (1,034 | ) | | (49 | ) | | (2,832 | ) | | (299 | ) |
Comprehensive income attributable to Cooper-Standard Holdings Inc. | $ | 17,585 |
| | $ | 42,386 |
| | $ | 36,517 |
| | $ | 19,380 |
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The accompanying notes are an integral part of these financial statements.
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except share amounts)
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| | | | | | | |
| December 31, 2014 | | June 30, 2015 |
| | | (unaudited) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 267,270 |
| | $ | 204,810 |
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Accounts receivable, net | 377,032 |
| | 468,502 |
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Tooling receivable | 124,015 |
| | 145,334 |
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Inventories | 166,531 |
| | 182,840 |
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Prepaid expenses | 25,626 |
| | 34,842 |
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Other | 93,524 |
| | 76,244 |
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Total current assets | 1,053,998 |
| | 1,112,572 |
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Property, plant and equipment, net | 716,013 |
| | 785,322 |
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Goodwill | 135,169 |
| | 151,978 |
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Intangibles, net | 82,309 |
| | 80,308 |
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Deferred tax assets | 41,059 |
| | 43,921 |
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Other assets | 104,219 |
| | 86,659 |
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Total assets | $ | 2,132,767 |
| | $ | 2,260,760 |
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| | | |
Liabilities and Equity | | | |
Current liabilities: | | | |
Debt payable within one year | $ | 36,789 |
| | $ | 60,259 |
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Accounts payable | 322,422 |
| | 347,246 |
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Payroll liabilities | 94,986 |
| | 120,392 |
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Accrued liabilities | 75,005 |
| | 101,994 |
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Total current liabilities | 529,202 |
| | 629,891 |
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Long-term debt | 749,085 |
| | 743,445 |
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Pension benefits | 191,805 |
| | 178,159 |
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Postretirement benefits other than pensions | 60,287 |
| | 58,595 |
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Deferred tax liabilities | 5,001 |
| | 17,497 |
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Other liabilities | 44,692 |
| | 42,014 |
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Total liabilities | 1,580,072 |
| | 1,669,601 |
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Redeemable noncontrolling interest | 3,981 |
| | — |
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7% Cumulative participating convertible preferred stock, $0.001 par value, 10,000,000 shares authorized at December 31, 2014, and June 30, 2015; no shares issued and outstanding | — |
| | — |
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Equity: | | | |
Common stock, $0.001 par value, 190,000,000 shares authorized at December 31, 2014 and June 30, 2015; 18,685,634 shares issued and 17,039,328 outstanding at December 31, 2014 and 18,919,531 shares issued and 17,273,225 outstanding at June 30, 2015 | 17 |
| | 17 |
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Additional paid-in capital | 492,959 |
| | 504,022 |
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Retained earnings | 195,233 |
| | 252,473 |
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Accumulated other comprehensive loss | (139,243 | ) | | (177,346 | ) |
Total Cooper-Standard Holdings Inc. equity | 548,966 |
| | 579,166 |
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Noncontrolling interests | (252 | ) | | 11,993 |
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Total equity | 548,714 |
| | 591,159 |
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Total liabilities and equity | $ | 2,132,767 |
| | $ | 2,260,760 |
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The accompanying notes are an integral part of these financial statements.
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
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| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2015 |
Operating Activities: | | | |
Net income | $ | 35,609 |
| | $ | 57,662 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 48,293 |
| | 48,754 |
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Amortization of intangibles | 8,433 |
| | 7,220 |
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Stock-based compensation expense | 7,829 |
| | 4,964 |
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Equity earnings, net of dividends related to earnings | (712 | ) | | (1,214 | ) |
Loss on extinguishment of debt | 30,488 |
| | — |
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Gain on divestiture | (1,882 | ) | | — |
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Gain on remeasurement of previously held equity interest | — |
| | (14,199 | ) |
Deferred income taxes | 3,284 |
| | 1,457 |
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Other | (297 | ) | | 823 |
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Changes in operating assets and liabilities | (76,846 | ) | | (48,863 | ) |
Net cash provided by operating activities | 54,199 |
| | 56,604 |
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Investing activities: | | | |
Capital expenditures | (110,827 | ) | | (95,904 | ) |
Acquisition of business, net of cash acquired | — |
| | (34,396 | ) |
Return on equity investments | 951 |
| | — |
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Proceeds from sale of investment | 3,216 |
| | — |
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Proceeds from sale of fixed assets and other | 2,173 |
| | 2,220 |
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Net cash used in investing activities | (104,487 | ) | | (128,080 | ) |
Financing activities: | | | |
Proceeds from issuance of long-term debt, net of debt issuance costs | 738,865 |
| | — |
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Repurchase of Senior Notes and Senior PIK Toggle Notes | (675,615 | ) | | — |
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Increase (decrease) in short-term debt, net | (394 | ) | | 1,509 |
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Borrowings on long-term debt | 6,497 |
| | — |
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Principal payments on long-term debt | (125 | ) | | (3,931 | ) |
Purchase of noncontrolling interests | — |
| | (1,262 | ) |
Proceeds from exercise of warrants | 6,892 |
| | — |
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Taxes withheld and paid on employees' share based payment awards
| (3,842 | ) | | (1,121 | ) |
Other | (317 | ) | | (133 | ) |
Net cash provided by (used in) financing activities | 71,961 |
| | (4,938 | ) |
Effects of exchange rate changes on cash and cash equivalents | 1,342 |
| | 13,954 |
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Changes in cash and cash equivalents | 23,015 |
| | (62,460 | ) |
Cash and cash equivalents at beginning of period | 184,370 |
| | 267,270 |
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Cash and cash equivalents at end of period | $ | 207,385 |
| | $ | 204,810 |
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The accompanying notes are an integral part of these financial statements.
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,” “Cooper-Standard,” “we,” “our,” or “us”), through its wholly-owned subsidiary Cooper-Standard Automotive Inc., is a leading manufacturer of sealing, fuel and brake delivery, fluid transfer and anti-vibration systems components, subsystems, and modules. 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 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, 2014 (the “2014 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 June 30, 2015 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.
Recent accounting pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU requires entities to measure most inventory at the lower of cost and net realizable value. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest: Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU changes the presentation of debt issuance costs in financial statements from an asset to a direct deduction from the related debt liability. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company's condensed consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU amends the consolidation guidance under U.S. GAAP. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of this ASU is not expected to have a material impact on the Company's condensed consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement: Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates the concept of extraordinary items from U.S. GAAP. The guidance is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company's condensed consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements: Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU requires management to perform interim and annual assessments of an entity's ability to continue as a going concern. This guidance is effective for annual and interim reporting periods ending after December 15, 2016. The adoption of this ASU is not expected to have a material impact on the Company's condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of this guidance is that a company should recognize revenue to depict the transfer of promised goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In July 2015, the FASB decided to delay the effective date of this guidance to annual and interim reporting periods beginning after December 15, 2017. Early adoption will be permitted as of the original effective date of annual and interim reporting periods beginning after December 15, 2016. The guidance allows for companies to use either a full retrospective or a modified retrospective approach when adopting. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
In April 2014, FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for reporting discontinued operations and requires expanded disclosures about discontinued operations. The Company adopted this guidance effective January 1, 2015. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.
2. Acquisitions
In the first quarter of 2015, the Company acquired the remaining equity interests of Metzler Automotive Profiles India Private Limited (26%) and Cooper Standard Jingda Changchun Automotive Co., Ltd. (20%) for a combined cash consideration of $1,262. These acquisitions were accounted for as equity transactions in accordance with ASC Topic 810 “Consolidations.”
In the first quarter of 2015, the Company completed the acquisition of an additional 47.5% of Huayu-Cooper Standard Sealing Systems Co. (“Shenya”), increasing its ownership to 95%, for cash consideration of $59,320. The final payment of $9,954 related to this acquisition was made in the second quarter of 2015. The business acquired in the transaction is operated from Shenya’s manufacturing locations in China. Shenya primarily supplies sealing systems and components to the automotive industry. This acquisition is directly aligned with the Company’s growth strategy by strengthening important customer relationships in the automotive sealing systems market. This acquisition was accounted for under ASC 805, “Business Combinations,” and the results of operations of Shenya are included in the Company’s consolidated financial statements from the date of acquisition, February 27, 2015. This acquisition does not meet the thresholds for a significant acquisition and therefore no pro forma financial information is presented.
Prior to the acquisition, the Company held a 47.5% unconsolidated equity interest in Shenya. The fair value of the equity interest prior to the date of acquisition was $41,378, resulting in a gain of $14,199 recorded in other income (expense), net for the six months ended June 30, 2015. The fair value of the Company's previous 47.5% equity interest, 47.5% purchased and 5% noncontrolling interest in Shenya were estimated using income and market approaches based on financial analysis methodologies (including the discounted cash flow analysis), projected financial information, management's estimates, available information, and reasonable and supportable assumptions. These fair value measurements are classified within level 3 of the fair value hierarchy.
The following table summarizes the estimated fair value of Shenya assets acquired and liabilities assumed at the date of acquisition: |
| | | |
Cash and cash equivalents | $ | 7,079 |
|
Accounts receivable | 24,197 |
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Inventories | 12,708 |
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Prepaid expenses | 13,045 |
|
Other current assets | 21,189 |
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Property, plant, and equipment | 80,914 |
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Goodwill | 18,066 |
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Intangibles | 7,367 |
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Other assets | 14,311 |
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Total assets acquired | 198,876 |
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Debt payable within one year | 19,164 |
|
Accounts payable | 41,059 |
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Other current liabilities | 16,599 |
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Other liabilities | 9,864 |
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Total liabilities assumed | 86,686 |
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Noncontrolling interest | 11,709 |
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Net assets acquired including noncontrolling interest | $ | 100,481 |
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Cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other current liabilities were stated at historical carrying values, which management believes approximates fair value given the short-term nature of these assets and liabilities. Inventories were recorded at fair value which is estimated for finished goods and work-in-process based upon the expected selling price less costs to complete, selling, and disposal costs, and a normal profit to the buyer. Raw material inventory was recorded at carrying value as such value approximates the replacement cost. Deferred income taxes have been provided in the condensed consolidated balance sheet based on the Company's estimates of the tax versus book basis of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
the estimated fair value of the assets acquired and liabilities assumed. The Company has estimated the fair value of property, plant and equipment, intangibles, other long-lived assets, certain liabilities and noncontrolling interest based upon financial estimates and projections prepared in conjunction with the transaction. These estimates are preliminary and may change in the future as information becomes available from third party valuations. The value assigned to all assets and liabilities did not exceed the acquisition price, therefore goodwill was recorded related to this transaction.
3. Goodwill and Intangibles
The changes in the carrying amount of goodwill by reportable operating segment for the six months ended June 30, 2015 are summarized as follows:
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| | | | | | | | | | | | | | | | | | | |
| North America | | Europe | | South America | | Asia Pacific | | Total |
Balance at January 1, 2015 | $ | 117,609 |
| | $ | 12,366 |
| | $ | — |
| | $ | 5,194 |
| | $ | 135,169 |
|
Acquisition | — |
| | — |
| | — |
| | 18,066 |
| | 18,066 |
|
Foreign exchange translation | (420 | ) | | (1,025 | ) | | — |
| | 188 |
| | (1,257 | ) |
Balance at June 30, 2015 | $ | 117,189 |
| | $ | 11,341 |
| | $ | — |
| | $ | 23,448 |
| | $ | 151,978 |
|
Goodwill is not amortized, but is tested for impairment by reporting unit either annually or when events or circumstances indicate that impairment may exist. There were no indicators of potential impairment as of June 30, 2015.
The following table presents intangible assets and accumulated amortization balances of the Company as of December 31, 2014 and June 30, 2015, respectively:
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| | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer relationships | $ | 133,471 |
| | $ | (59,773 | ) | | $ | 73,698 |
|
Developed technology | 9,252 |
| | (6,842 | ) | | 2,410 |
|
Other | 6,701 |
| | (500 | ) | | 6,201 |
|
Balance at December 31, 2014 | $ | 149,424 |
| | $ | (67,115 | ) | | $ | 82,309 |
|
| | | | | |
Customer relationships | $ | 137,227 |
| | $ | (64,901 | ) | | $ | 72,326 |
|
Developed technology | 8,941 |
| | (7,186 | ) | | 1,755 |
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Other | 10,777 |
| | (4,550 | ) | | 6,227 |
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Balance at June 30, 2015 | $ | 156,945 |
| | $ | (76,637 | ) | | $ | 80,308 |
|
Amortization expense totaled $3,997 and $3,672 for the three months ended June 30, 2014 and 2015, respectively, and $8,433 and $7,220 for the six months ended June 30, 2014 and 2015, respectively. Amortization expense is estimated to be approximately $14,500 for the year ending December 31, 2015.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
4. Restructuring
European Initiative
The Company has implemented a restructuring initiative of certain facilities in Europe based on current and anticipated market demands. The estimated cost of this initiative is approximately $125,000 and is expected to be completed by 2018. The Company has recognized $24,500 of costs related to this initiative since initiation in the first quarter of 2015. The restructuring effort aims to further improve the Company's European capability by removing excess capacity, improving cost structure and shifting some production to its Eastern European facilities. Actions include consolidation of operations to improve efficiencies and closure or downsizing of certain facilities with high costs and unutilized capacity in Western Europe, including Germany and France. A previous European restructuring initiative has been combined with this new initiative. The following table summarizes the restructuring expense for the three and six months ended June 30, 2014 and 2015:
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Employee separation costs | $ | 1,043 |
| | $ | 1,063 |
| | $ | 1,043 |
| | $ | 15,067 |
|
Other exit costs | 2,919 |
| | 4,635 |
| | 5,351 |
| | 9,005 |
|
Asset impairments | — |
| | 428 |
| | — |
| | 428 |
|
| $ | 3,962 |
| | $ | 6,126 |
| | $ | 6,394 |
| | $ | 24,500 |
|
The following table summarizes the activity in the restructuring liability for this initiative for the six months ended June 30, 2015:
|
| | | | | | | | | | | | | | | |
| Employee Separation Costs | | Other Exit Costs | | Asset Impairments | | Total |
Balance at January 1, 2015 | $ | 10,824 |
| | $ | — |
| | $ | — |
| | $ | 10,824 |
|
Expense | 15,067 |
| | 9,005 |
| | 428 |
| | 24,500 |
|
Cash payments and foreign exchange translation | (3,585 | ) | | (7,598 | ) | | (428 | ) | | (11,611 | ) |
Balance at June 30, 2015 | $ | 22,306 |
| | $ | 1,407 |
| | $ | — |
| | $ | 23,713 |
|
North America Initiative
In the first quarter of 2015, the Company initiated the restructure of a facility in North America. The estimated cost of this initiative is $8,500 and is expected to be completed in 2016. For the three and six months ended June 30, 2015, the Company has recorded $1,303 and $1,720 of other exit costs, respectively, related to this initiative. As of June 30, 2015, there was no liability associated with this initiative.
Other Initiatives
The Company implemented several restructuring initiatives in prior years including the closure or consolidation of facilities throughout the world, the establishment of a centralized shared services function in Europe and the reorganization of the Company's operating structure. These initiatives are substantially complete, however, the Company continues to incur costs on some of these initiatives related principally to the disposal of certain facilities. For the three and six months ended June 30, 2014, the Company reversed costs related to changes in estimates of $(206) and incurred costs of $451, respectively, related to these initiatives. For the six months ended June 30, 2015, the Company incurred costs of $49 related to these initiatives. No expense was recorded for the three months ended June 30, 2015.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
5. Inventories
Inventories were comprised of the following at December 31, 2014 and June 30, 2015:
|
| | | | | | | |
| December 31, 2014 | | June 30, 2015 |
Finished goods | $ | 45,485 |
| | $ | 52,760 |
|
Work in process | 36,498 |
| | 42,332 |
|
Raw materials and supplies | 84,548 |
| | 87,748 |
|
| $ | 166,531 |
| | $ | 182,840 |
|
In connection with the acquisition of Shenya, inventory was written up by $1,414 to fair value in the first quarter of 2015. Such inventory was sold as of March 31, 2015 and recorded as an increase to cost of products sold.
6. Debt
Outstanding debt consisted of the following at December 31, 2014 and June 30, 2015:
|
| | | | | | | |
| December 31, 2014 | | June 30, 2015 |
Term loan | $ | 742,902 |
| | $ | 739,420 |
|
Other borrowings | 42,972 |
| | 64,284 |
|
Total debt | $ | 785,874 |
| | $ | 803,704 |
|
Less current portion | (36,789 | ) | | (60,259 | ) |
Total long-term debt | $ | 749,085 |
| | $ | 743,445 |
|
Senior ABL Facility
On April 8, 2013, the Company and certain of its subsidiaries entered into the Amended and Restated Senior Loan and Security Agreement (the “Amended Senior ABL Facility”), with certain lenders, which amended and restated the then existing senior secured asset-based revolving credit facility of the Company, dated May 27, 2010. The Amended Senior ABL Facility provided for an aggregate revolving loan availability of up to $150,000, subject to borrowing base availability.
On April 4, 2014, the Company and certain of its subsidiaries entered into the Second Amended and Restated Loan Agreement (the “Senior ABL Facility”), which amended and restated the Amended Senior ABL Facility, in order to permit the Term Loan Facility (described below) and other related transactions. The Senior ABL Facility provided for an aggregate revolving loan availability of up to $150,000, subject to borrowing base availability, including a $60,000 letter of credit sub-facility and a $25,000 swing line sub-facility. The Senior ABL Facility also provided for an uncommitted $105,000 incremental loan facility, for a potential total Senior ABL Facility of $255,000 (if requested by the Company and one or more new or existing lenders agreed to fund such increase).
On June 11, 2014, the Company and certain of its subsidiaries entered into Amendment No. 1 to the Senior ABL Facility, which increased the aggregate revolving loan availability to $180,000, subject to borrowing base availability, principally by expanding a tooling receivable category of eligible borrowing base availability for the U.S. borrower and Canadian borrower. The Senior ABL Facility, as amended, also now provides for an uncommitted $75,000 incremental loan facility, for a potential total Senior ABL Facility of $255,000 (if requested by the Company and one or more new or existing lenders agreed to fund such increase). No consent of any lender (other than those participating in the increase) is required to effect any such increase. As of June 30, 2015, subject to borrowing base availability, the Company had $180,000 in availability under the Senior ABL Facility less outstanding letters of credit of $33,066.
Term Loan Facility
On April 4, 2014, certain subsidiaries of the Company entered into a term loan facility (the “Term Loan Facility”) in order to (i) refinance the Senior PIK Toggle Notes due 2018 of the Company (the “Senior PIK Toggle Notes”) and the 8 1/2% Senior Notes due 2018 of Cooper-Standard Automotive Inc. (the “Senior Notes”), including applicable call premiums and accrued and unpaid interest, (ii) pay related fees and expenses and (iii) provide for working capital and other general corporate purposes. The Term Loan Facility provides for loans in an aggregate principal amount of $750,000 and may be expanded (or a new term loan facility added) by an amount that will not cause the consolidated first lien debt ratio to exceed 2.25 to 1.00 plus $300,000. All obligations of the borrower are guaranteed jointly and severally on a senior secured basis by the direct parent company of the borrower and each existing and subsequently acquired or organized direct or indirect wholly-owned U.S. restricted subsidiary of the borrower. The obligations are secured by amongst other items (a) a first priority security interest (subject to permitted liens and other customary exceptions) on (i) all the capital stock in restricted subsidiaries directly held by the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
borrower and each of the guarantors, (ii) substantially all plant, material owned real property located in the U.S. and equipment of the borrower and the guarantors and (iii) all other personal property of the borrower and the guarantors, and (b) a second priority security interest (subject to permitted liens and other customary exceptions) in accounts receivable of the borrowers and the guarantors arising from the sale of goods and services, inventory, excluding certain collateral and subject to certain limitations. Loans under the Term Loan Facility bear interest at a rate equal to, at the Borrower’s option, LIBOR, subject to a 1.00% LIBOR Floor or the base rate option (the highest of the Federal Funds rate, prime rate, or one-month Eurodollar rate plus the appropriate spread), in each case, plus an applicable margin of 3.00%. The Term Loan Facility matures on April 4, 2021. On April 4, 2014, the aggregate principal amount of $750,000 was fully drawn. As of June 30, 2015, the principal amount of $742,500 was outstanding. Debt issuance costs of approximately $7,900 were incurred on this transaction, along with the original issue discount of $3,750. Both the debt issuance costs and the original issue discount will be amortized into interest expense over the term of the Term Loan Facility. As of June 30, 2015, the Company had $3,080 of unamortized original issue discount.
7. Pension and Postretirement Benefits other than Pensions
The following tables disclose the amount of net periodic benefit cost (income) for the three and six months ended June 30, 2014 and 2015 for the Company’s defined benefit plans and other postretirement benefit plans:
|
| | | | | | | | | | | | | | | |
| Pension Benefits |
| Three Months Ended June 30, |
| 2014 | | 2015 |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Service cost | $ | 213 |
| | $ | 867 |
| | $ | 232 |
| | $ | 876 |
|
Interest cost | 3,370 |
| | 1,812 |
| | 3,084 |
| | 1,289 |
|
Expected return on plan assets | (4,764 | ) | | (972 | ) | | (4,421 | ) | | (869 | ) |
Amortization of prior service cost and recognized actuarial loss | 16 |
| | 230 |
| | 276 |
| | 668 |
|
Other | — |
| | — |
| | — |
| | 121 |
|
Net periodic benefit cost (income) | $ | (1,165 | ) | | $ | 1,937 |
| | $ | (829 | ) | | $ | 2,085 |
|
| | | | | | | |
| Pension Benefits |
| Six Months Ended June 30, |
| 2014 | | 2015 |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Service cost | $ | 426 |
| | $ | 1,728 |
| | $ | 464 |
| | $ | 1,765 |
|
Interest cost | 6,740 |
| | 3,614 |
| | 6,168 |
| | 2,584 |
|
Expected return on plan assets | (9,528 | ) | | (1,930 | ) | | (8,842 | ) | | (1,729 | ) |
Amortization of prior service cost and recognized actuarial loss | 32 |
| | 461 |
| | 552 |
| | 1,347 |
|
Other | — |
| | — |
| | — |
| | 241 |
|
Net periodic benefit cost (income) | $ | (2,330 | ) | | $ | 3,873 |
| | $ | (1,658 | ) | | $ | 4,208 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
|
| | | | | | | | | | | | | | | |
| Other Postretirement Benefits |
| Three Months Ended June 30, |
| 2014 | | 2015 |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Service cost | $ | 106 |
| | $ | 138 |
| | $ | 109 |
| | $ | 99 |
|
Interest cost | 397 |
| | 190 |
| | 353 |
| | 176 |
|
Amortization of prior service credit and recognized actuarial gain | (481 | ) | | (73 | ) | | (396 | ) | | (5 | ) |
Other | 6 |
| | — |
| | 6 |
| | — |
|
Net periodic benefit cost | $ | 28 |
| | $ | 255 |
| | $ | 72 |
| | $ | 270 |
|
| | | | | | | |
| Other Postretirement Benefits |
| Six Months Ended June 30, |
| 2014 | | 2015 |
| U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Service cost | $ | 212 |
| | $ | 274 |
| | $ | 218 |
| | $ | 197 |
|
Interest cost | 794 |
| | 378 |
| | 706 |
| | 351 |
|
Amortization of prior service credit and recognized actuarial gain | (962 | ) | | (144 | ) | | (792 | ) | | (10 | ) |
Other | 12 |
| | — |
| | 12 |
| | — |
|
Net periodic benefit cost | $ | 56 |
| | $ | 508 |
| | $ | 144 |
| | $ | 538 |
|
8. Income Taxes
Under ASC Topic 270, “Interim Reporting,” the Company is required to determine its effective tax rate each quarter based upon its estimated annual effective tax rate. The Company is also required to record 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.
The effective tax rate for the three and six months ended June 30, 2015 was 31% and 35%, respectively. The effective rate for the three and six months ended June 30, 2014 was 24% and 32%, respectively. The effective tax rate for the three and six months ended June 30, 2015 as compared to the three and six months ended June 30, 2014 is higher primarily due to the tax benefits related to the loss on extinguishment of debt recorded discretely in the three months ended June 30, 2014 which are not reflected in the effective tax rate for the three and six months ended June 30, 2015. The income tax rate for the three and six months ended June 30, 2015 varies from statutory rates due to the impact of discrete items in the quarter, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, tax credits, income tax incentives, withholding taxes, and other permanent items. Further, the Company’s current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
9. Accumulated Other Comprehensive Income (Loss), Equity and Redeemable Noncontrolling Interests
The changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2014 and 2015, net of related tax, are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2014 |
| Cumulative currency translation adjustment | | Benefit plan liability | | Unrealized gain on investment securities (1) | | Fair value change of derivatives | | Accumulated other comprehensive loss |
Balance at April 1, 2014 | $ | 3,692 |
| | $ | (33,413 | ) | | $ | 1,146 |
| | $ | 78 |
| | $ | (28,497 | ) |
Other comprehensive income (loss) before reclassifications | 5,591 |
| | 175 |
| | — |
| | 76 |
| | 5,842 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (251 | ) | | (1,146 | ) | | (55 | ) | | (1,452 | ) |
Net current period other comprehensive income (loss)(2) | 5,591 |
| | (76 | ) | | (1,146 | ) | | 21 |
| | 4,390 |
|
Balance at June 30, 2014 | $ | 9,283 |
| | $ | (33,489 | ) | | $ | — |
| | $ | 99 |
| | $ | (24,107 | ) |
| | | | | | | | | |
| |
(1) | The unrealized gain on investment securities that was reclassified out of accumulated other comprehensive income (loss) related to the gain on sale of investment of $1,882, which is recorded in other expense, net, less income tax expense of $736. |
| |
(2) | Other comprehensive income (loss) related to the benefit plan liability is net of a tax effect of $(20). Other comprehensive income (loss) related to the unrealized gain on investment securities is net of a tax effect of $736. Other comprehensive income (loss) related to the fair value change of derivatives is net of a tax effect of $(22). |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2015 |
| Cumulative currency translation adjustment | | Benefit plan liability | | Fair value change of derivatives | | Accumulated other comprehensive loss |
Balance at April 1, 2015 | $ | (99,541 | ) | | $ | (81,100 | ) | | $ | (2,595 | ) | | $ | (183,236 | ) |
Other comprehensive income (loss) before reclassifications(1) | 7,177 |
| | (1,355 | ) | | (436 | ) | | 5,386 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | 415 |
| | 89 |
| | 504 |
|
Net current period other comprehensive income (loss)(2) | 7,177 |
| | (940 | ) | | (347 | ) | | 5,890 |
|
Balance at June 30, 2015 | $ | (92,364 | ) | | $ | (82,040 | ) | | $ | (2,942 | ) | | $ | (177,346 | ) |
| | | | | | | |
| |
(1) | Cumulative currency translation adjustment includes $385 of other comprehensive loss related to intra-entity foreign currency transactions that are of a long-term investment nature. |
| |
(2) | Other comprehensive income (loss) related to the benefit plan liability is net of a tax effect of $(264). Other comprehensive income (loss) related to the fair value change of derivatives is net of a tax effect of $124. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2014 |
| Cumulative currency translation adjustment | | Benefit plan liability | | Unrealized gain on investment securities (1) | | Fair value change of derivatives | | Accumulated other comprehensive loss |
Balance at January 1, 2014 | $ | 5,712 |
| | $ | (33,406 | ) | | $ | — |
| | $ | — |
| | $ | (27,694 | ) |
Other comprehensive income (loss) before reclassifications | 3,571 |
| | 334 |
| | 1,146 |
| | 149 |
| | 5,200 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | — |
| | (417 | ) | | (1,146 | ) | | (50 | ) | | (1,613 | ) |
Net current period other comprehensive income (loss)(2) | 3,571 |
| | (83 | ) | | — |
| | 99 |
| | 3,587 |
|
Balance at June 30, 2014 | $ | 9,283 |
| | $ | (33,489 | ) | | $ | — |
| | $ | 99 |
| | $ | (24,107 | ) |
| | | | | | | | | |
| |
(1) | The unrealized gain on investment securities that was reclassified out of accumulated other comprehensive income (loss) related to the gain on sale of investment of $1,882, which is recorded in other expense, net, less income tax expense of $736. |
| |
(2) | Other comprehensive income (loss) related to the benefit plan liability is net of a tax effect of $(94). Other comprehensive income (loss) related to the fair value change of derivatives is net of a tax effect of $(81). |
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2015 |
| Cumulative currency translation adjustment (1) | | Benefit plan liability | | Fair value change of derivatives | | Accumulated other comprehensive loss |
Balance at January 1, 2015 | $ | (50,371 | ) | | $ | (86,861 | ) | | $ | (2,011 | ) | | $ | (139,243 | ) |
Other comprehensive income (loss) before reclassifications(2) | (40,384 | ) | | 4,021 |
| | (1,119 | ) | | (37,482 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | (1,609 | ) | | 800 |
| | 188 |
| | (621 | ) |
Net current period other comprehensive income (loss)(3) | (41,993 | ) | | 4,821 |
| | (931 | ) | | (38,103 | ) |
Balance at June 30, 2015 | $ | (92,364 | ) | | $ | (82,040 | ) | | $ | (2,942 | ) | | $ | (177,346 | ) |
| | | | | | | |
| |
(1) | Includes $300 reclassed to paid-in capital related to the purchase of noncontrolling interests. |
| |
(2) | Cumulative currency translation adjustment includes $13,933 of other comprehensive loss related to intra-entity foreign currency transactions that are of a long-term investment nature. |
| |
(3) | Other comprehensive income (loss) related to the benefit plan liability is net of a tax effect of $(544). Other comprehensive income (loss) related to the fair value change of derivatives is net of a tax effect of $660. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
The reclassifications out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2014 and 2015 are as follows:
|
| | | | | | | | | | | | | | | | | |
| Gain (loss) reclassified | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
Details about accumulated other comprehensive income (loss) components | 2014 | | 2015 | | 2014 | | 2015 | | Location of gain (loss) reclassified into income |
Cumulative currency translation adjustment | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,609 |
| | Other income, net |
| | | | | | | | | |
Fair value change of derivatives | | | | | | | | | |
Foreign exchange contracts | $ | 81 |
| | $ | (122 | ) | | $ | 74 |
| | $ | (290 | ) | | Cost of products sold |
| 81 |
| | (122 | ) | | 74 |
| | (290 | ) | | Income before income taxes |
| (26 | ) | | 33 |
| | (24 | ) | | 102 |
| | Income tax expense |
| $ | 55 |
| | $ | (89 | ) | | $ | 50 |
| | $ | (188 | ) | | Consolidated net income |
| | | | | | | | | |
Amortization of defined benefit and other postretirement benefit plans | | | | | | | | | |
Prior service credits | $ | 169 |
| | $ | 85 |
| | $ | 251 |
| | $ | 172 |
| | (1) |
Actuarial gains (losses) | 226 |
| | (652 | ) | | 450 |
| | (1,265 | ) | | (1) |
| 395 |
| | (567 | ) | | 701 |
| | (1,093 | ) | | Income before income taxes |
| (144 | ) | | 152 |
| | (284 | ) | | 293 |
| | Income tax expense |
| $ | 251 |
| | $ | (415 | ) | | $ | 417 |
| | $ | (800 | ) | | Consolidated net income |
| | | | | | | | | |
Total reclassifications for the period | $ | 306 |
| | $ | (504 | ) | | $ | 467 |
| | $ | 621 |
| | |
| |
(1) | These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. (See Note 7. “Pension and Postretirement Benefits other than Pensions” for additional details.) |
The following table summarizes the Company’s equity and redeemable noncontrolling interest activity for the six months ended June 30, 2015:
|
| | | | | | | | | | | | | | | |
| Cooper-Standard Holdings Inc. | | Noncontrolling Interests | | Total Equity | | Redeemable Noncontrolling Interest |
Equity at January 1, 2015 | $ | 548,966 |
| | $ | (252 | ) | | $ | 548,714 |
| | $ | 3,981 |
|
Net income (loss) | 57,483 |
| | 224 |
| | 57,707 |
| | (45 | ) |
Warrant exercise(1) | 5,013 |
| | — |
| | 5,013 |
| | — |
|
Other comprehensive income (loss) | (38,103 | ) | | 120 |
| | (37,983 | ) | | — |
|
Stock-based compensation, net | 3,042 |
| | — |
| | 3,042 |
| | — |
|
Acquisition of Shenya | — |
| | 11,709 |
| | 11,709 |
| | — |
|
Shares issued under stock option plans(1) | (97 | ) | | — |
| | (97 | ) | | — |
|
Purchase of noncontrolling interest | 2,862 |
| | 192 |
| | 3,054 |
| | (3,936 | ) |
Equity at June 30, 2015 | $ | 579,166 |
| | $ | 11,993 |
| | $ | 591,159 |
| | $ | — |
|
| |
(1) | The Company issued 183,077 shares from the exercise of warrants and 9,165 shares under stock option plans during the six months ended June 30, 2015. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
10. Net Income Per Share Attributable to Cooper-Standard Holdings Inc.
Basic net income per share attributable to Cooper-Standard Holdings Inc. was computed by dividing net income attributable to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding during the period, excluding unvested restricted shares. Diluted net income per share attributable to Cooper-Standard Holdings Inc. was computed using the treasury stock method by dividing diluted net income 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.
A summary of information used to compute basic and diluted net income per share attributable to Cooper-Standard Holdings Inc. is shown below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Net income attributable to Cooper-Standard Holdings Inc. | $ | 13,194 |
| | $ | 36,496 |
| | $ | 32,929 |
| | $ | 57,483 |
|
| | | | | | | |
Increase in fair value of share-based awards | 94 |
| | 12 |
| | — |
| | 17 |
|
Diluted net income available to Cooper-Standard Holdings Inc. common stockholders | $ | 13,288 |
| | $ | 36,508 |
| | $ | 32,929 |
| | $ | 57,500 |
|
| | | | | | | |
Basic weighted average shares of common stock outstanding | 16,919,521 |
| | 17,077,732 |
| | 16,788,787 |
| | 17,057,620 |
|
Dilutive effect of: | | | | | | | |
Restricted common stock | 199,644 |
| | 183,640 |
| | 148,797 |
| | 189,337 |
|
Warrants | 1,008,182 |
| | 889,443 |
| | 1,023,260 |
| | 842,670 |
|
Options | 302,879 |
| | 259,652 |
| | 102,900 |
| | 234,445 |
|
Diluted weighted average shares of common stock outstanding | 18,430,226 |
| | 18,410,467 |
| | 18,063,744 |
| | 18,324,072 |
|
| | | | | | | |
Basic net income per share attributable to Cooper-Standard Holdings Inc. | $ | 0.78 |
| | $ | 2.14 |
| | $ | 1.96 |
| | $ | 3.37 |
|
| | | | | | | |
Diluted net income per share attributable to Cooper-Standard Holdings Inc. | $ | 0.72 |
| | $ | 1.98 |
| | $ | 1.82 |
| | $ | 3.14 |
|
The effect of certain common stock equivalents was excluded from the computation of weighted average diluted shares outstanding as inclusion would have been antidilutive. A summary of common stock equivalents excluded from the computation of weighted average diluted shares outstanding is shown below:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Number of options | 159,000 |
| | 147,600 |
| | 462,503 |
| | 147,600 |
|
Exercise price | $66.23-70.20 |
| | $64.74-70.20 |
| | $25.52-70.20 |
| | $64.74-70.20 |
|
Restricted common stock | — |
| | — |
| | 59,244 |
| | — |
|
11. Stock-Based Compensation
Under the Company's incentive plans, stock options, restricted common stock, restricted preferred stock, unrestricted common stock, restricted stock units and performance units have been granted to key employees and directors. Total compensation expense recognized was $3,923 and $2,335 for the three months ended June 30, 2014 and 2015, respectively, and $7,829 and $4,964 for the six months ended June 30, 2014 and 2015, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
12. Other Income (Expense), Net
The components of other income (expense), net are as follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Loss on extinguishment of debt | $ | (30,288 | ) | | $ | — |
| | $ | (30,488 | ) | | $ | — |
|
Gain on remeasurement of previously held equity interest | — |
| | 2,577 |
| | — |
| | 14,199 |
|
Foreign currency gains (losses) | 266 |
| | (185 | ) | | 798 |
| | (433 | ) |
Gains (losses) related to forward contracts | 4 |
| | — |
| | (34 | ) | | — |
|
Loss on sale of receivables | (497 | ) | | (281 | ) | | (961 | ) | | (578 | ) |
Gain on sale of investment | 1,882 |
| | — |
| | 1,882 |
| | — |
|
Other income (expense), net | $ | (28,633 | ) | | $ | 2,111 |
| | $ | (28,803 | ) | | $ | 13,188 |
|
13. Related Party Transactions
Sales to Nishikawa Standard Company (“NISCO”), a 40% owned joint venture, totaled $8,197 and $10,223 for the three months ended June 30, 2014 and 2015, respectively, and $19,046 and $18,137 for the six months ended June 30, 2014 and 2015, respectively. In March 2014, the Company received from NISCO a dividend of $1,760, consisting of $809 related to earnings and a $951 return of capital. In March 2015, the Company received from NISCO a dividend of $680, all of which was related to earnings.
Sales to Shenya Sealing (Guangzhou) Company Limited (“Guangzhou”), a 51% owned joint venture, totaled $860 and$1,240 for the three and six months ended June 30, 2015, respectively. There were no sales to Guangzhou for the three and six months ended June 30, 2014.
In the second quarter of 2014, the Company sold the remaining 17% of the common stock in Guyoung Technology Co. Ltd. for $3,216 and recorded a gain on the investment of $1,882. The gain is recorded in other income (expense), net on the Company's condensed consolidated statements of comprehensive income.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
14. Business Segments
ASC 280, “Segment Reporting,” establishes the standards for reporting information about operating segments in financial statements. In applying the criteria set forth in ASC 280, the Company has determined that it operates in four reportable segments, North America, Europe, South America and Asia Pacific. The Company’s principal product lines within each of these segments are sealing systems, fuel and brake delivery systems, fluid transfer systems, and anti-vibration systems. The Company evaluates segment performance based on segment profit before tax. The results of each segment include certain allocations for general, administrative, interest, and other shared costs.
The following tables detail information on the Company’s business segments:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Sales to external customers: | | | | | | | |
North America | $ | 452,187 |
| | $ | 453,548 |
| | $ | 884,792 |
| | $ | 870,910 |
|
Europe | 305,738 |
| | 270,283 |
| | 613,899 |
| | 537,112 |
|
South America | 41,406 |
| | 25,132 |
| | 81,172 |
| | 55,310 |
|
Asia Pacific | 58,222 |
| | 111,858 |
| | 115,296 |
| | 197,539 |
|
Consolidated | $ | 857,553 |
| | $ | 860,821 |
| | $ | 1,695,159 |
| | $ | 1,660,871 |
|
Intersegment sales: | | | | | | | |
North America | $ | 3,134 |
| | $ | 3,846 |
| | $ | 6,493 |
| | $ | 7,896 |
|
Europe | 2,123 |
| | 2,447 |
| | 4,350 |
| | 5,420 |
|
South America | — |
| | 17 |
| | — |
| | 17 |
|
Asia Pacific | 1,625 |
| | 1,658 |
| | 3,472 |
| | 2,836 |
|
Eliminations and other | (6,882 | ) | | (7,968 | ) | | (14,315 | ) | | (16,169 | ) |
Consolidated | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Segment profit (loss): | | | | | | | |
North America | $ | 36,469 |
| | $ | 55,639 |
| | $ | 74,929 |
| | $ | 98,651 |
|
Europe | (12,863 | ) | | 2,827 |
| | (16,045 | ) | | (1,611 | ) |
South America | (4,309 | ) | | (7,499 | ) | | (6,816 | ) | | (12,630 | ) |
Asia Pacific | (621 | ) | | 2,009 |
| | 29 |
| | 4,435 |
|
Income before income taxes | $ | 18,676 |
| | $ | 52,976 |
| | $ | 52,097 |
| | $ | 88,845 |
|
Restructuring cost included in segment profit (loss): | | | | | | | |
North America | $ | 79 |
| | $ | 1,303 |
| | $ | 177 |
| | $ | 1,720 |
|
Europe | 3,515 |
| | 6,126 |
| | 6,378 |
| | 24,549 |
|
South America | — |
| | — |
| | — |
| | — |
|
Asia Pacific | 162 |
| | — |
| | 290 |
| | — |
|
Consolidated | $ | 3,756 |
| | $ | 7,429 |
| | $ | 6,845 |
| | $ | 26,269 |
|
|
| | | | | | | |
| December 31, 2014 | | June 30, 2015 |
Segment assets: | | | |
North America | $ | 885,242 |
| | $ | 889,762 |
|
Europe | 591,743 |
| | 598,729 |
|
South America | 105,547 |
| | 85,451 |
|
Asia Pacific | 300,302 |
| | 493,437 |
|
Eliminations and other | 249,933 |
| | 193,381 |
|
Consolidated | $ | 2,132,767 |
| | $ | 2,260,760 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
15. Financial Instruments
Fair values of the Term Loan Facility approximated $723,401 and $734,798 at December 31, 2014 and June 30, 2015, respectively, based on quoted market prices, compared to the recorded value of $742,902 and $739,420 at December 31, 2014 and June 30, 2015, respectively. This fair value measurement was classified within Level 1 of the fair value hierarchy.
Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments, including forward and swap contracts, to manage its exposures to fluctuations in foreign exchange and interest rates. For a fair value hedge, both the effective and ineffective, if significant, portions are recorded in earnings and reflected in the condensed consolidated statements of comprehensive income. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive loss in the condensed consolidated balance sheet. The ineffective portion, if significant, is recorded in other income or expense. When the underlying hedged transaction is realized or the hedged transaction is no longer probable, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the condensed consolidated statements of comprehensive income on the same line as the gain or loss on the hedged item attributable to the hedged risk.
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. 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 enters into forward contracts to hedge currency risk of the U.S. Dollar against the Mexican Peso and the Euro against the Czech Koruna, the Polish Zloty, and the U.S. Dollar. The forward contracts are used 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. As of June 30, 2015, the notional amount of these contracts was $19,173. The amount reclassified from accumulated other comprehensive loss into cost of products sold was $122 and $290 for the three and six months ended June 30, 2015. These foreign currency derivative contracts consist of hedges of transactions up to December 2015.
Interest Rate Swap - In August 2014, the Company entered into interest rate swap transactions to manage cash flow variability associated with its variable rate Term Loan Facility. The interest rate swap contracts, which fix the interest payments of variable rate debt instruments, are used to manage exposure to fluctuations in interest rates. As of June 30, 2015, the notional amount of these contracts was $300,000 with maturities through September 2018. The fair market value of all outstanding interest rate swap and other derivative contracts is subject to changes in value due to changes in interest rates. The amount to be reclassified in the next twelve months is expected to be approximately $2,285.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
The location and fair value of the Company's derivative instruments qualifying as cash flow hedges as of December 31, 2014 and June 30, 2015 are as follows: |
| | | | | | | |
| December 31, 2014 | | June 30, 2015 |
Other current assets: | | | |
Forward foreign exchange contracts | $ | 370 |
| | $ | 571 |
|
Interest rate swaps | — |
| | 33 |
|
Other assets: | | | |
Interest rate swaps | 19 |
| | 58 |
|
Total assets | $ | 389 |
| | $ | 662 |
|
| | | |
Accrued liabilities: | | | |
Forward foreign exchange contracts | $ | (1,999 | ) | | $ | (1,261 | ) |
Interest rate swaps | (751 | ) | | (2,318 | ) |
Other liabilities: | | | |
Interest rate swaps | (903 | ) | | (1,936 | ) |
Total liabilities | $ | (3,653 | ) | | $ | (5,515 | ) |
Fair Value Measurements
ASC 820 clarifies that fair value is 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, ASC 820 establishes a three-tier fair value hierarchy, 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. |
Estimates of the fair value of foreign currency and interest rate 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 liabilities measured or disclosed at fair value on a recurring basis as of December 31, 2014 and June 30, 2015, are shown below:
|
| | | | | | | | | |
| December 31, 2014 | | June 30, 2015 | | Input |
Forward foreign exchange contracts - other current assets | $ | 370 |
| | $ | 571 |
| | Level 2 |
Forward foreign exchange contracts - accrued liabilities | (1,999 | ) | | (1,261 | ) | | Level 2 |
Interest rate swaps - other current assets | — |
| | 33 |
| | Level 2 |
Interest rate swaps - other assets | 19 |
| | 58 |
| | Level 2 |
Interest rate swaps - accrued liabilities | (751 | ) | | (2,318 | ) | | Level 2 |
Interest rate swaps - other liabilities | (903 | ) | | (1,936 | ) | | Level 2 |
Items measured at fair value on a non-recurring 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 non-recurring basis, which are not included in the table above. As these non-recurring 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 non-recurring basis, see Note 2. "Acquisitions" and Note 4. “Restructuring.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)
16. Accounts Receivable Factoring
As a part of its working capital management, the Company sells certain receivables through third party financial institutions with and without recourse. The amount sold varies each month based on the amount of underlying receivables and cash flow needs of the Company. The Company continues to service the receivables. These are permitted transactions under the Company’s credit agreement governing the Term Loan Facility and Senior ABL Facility, as amended.
At December 31, 2014 and June 30, 2015, the Company had $95,951 and $76,729, respectively, outstanding under receivable transfer agreements without recourse entered into by various locations. The total amount of accounts receivable factored were $276,523 and $149,319 for the six months ended June 30, 2014 and 2015, respectively. Costs incurred on the sale of receivables were $836 and $559 for the three months ended June 30, 2014 and 2015, respectively, and $1,551 and $1,190 for the six months ended June 30, 2014 and 2015, respectively. These amounts are recorded in other income (expense), net and interest expense, net of interest income in the condensed consolidated statements of comprehensive income.
At December 31, 2014 and June 30, 2015, the Company had $8,292 and $4,648, respectively, outstanding under receivable transfer agreements with recourse. The secured borrowings are recorded in debt payable within one year and receivables are pledged equal to the balance of the borrowings. The total amount of accounts receivable factored was $31,994 and $17,303 for the six months ended June 30, 2014 and 2015, respectively. Costs incurred on the sale of receivables were $95 and $29 for the three months ended June 30, 2014 and 2015, respectively, and $187 and $77 for the six months ended June 30, 2014 and 2015, respectively. These amounts are recorded in other income (expense), net and interest expense, net of interest income in the condensed consolidated statements of comprehensive income.
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 presents information related to the condensed consolidated results of operations of the Company, including the impact of restructuring costs on the Company’s results, a discussion of the past results and future outlook of each of the Company’s segments, and information concerning both the liquidity and capital resources of the Company. The following discussion and analysis, which should be read in conjunction with our condensed consolidated financial statements and the notes included elsewhere in this report, contains certain forward-looking statements relating to anticipated future financial condition and operating results of the Company and its current business plans. In the future, the financial condition and operating results of the Company could differ materially from those discussed herein and its current business plans could be altered in response to market conditions and other factors beyond the Company’s control. Important factors that could cause or contribute to such differences or changes include those discussed elsewhere in this report (see “Forward-Looking Statements” below) and in our 2014 Annual Report (see Item 1A. Risk Factors).
Business Environment and Outlook
Our business is directly affected by the automotive build rates in North America, Europe, South America and Asia Pacific. New vehicle demand is driven by macro-economic and other factors, such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends, government and tax incentives, as well as life expectancy.
Details on light vehicle production in certain regions for the three and six months ended June 30, 2014 and 2015 are provided in the following table:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions of units) | 2014(1,2) | | 2015(1) | | % Change | | 2014(1,2) | | 2015(1) | | % Change |
North America | 4.4 |
| | 4.5 |
| | 2.5% | | 8.6 |
| | 8.8 |
| | 2.0% |
Europe | 5.4 |
| | 5.3 |
| | (1.9)% | | 10.6 |
| | 10.7 |
| | 0.9% |
South America | 0.9 |
| | 0.8 |
| | (16.0)% | | 1.9 |
| | 1.6 |
| | (15.2)% |
Asia Pacific | 11.0 |
| | 11.1 |
| | 0.5% | | 22.4 |
| | 22.7 |
| | 1.4% |
| |
(1) | Production data based on IHS Automotive, June 2015. |
| |
(2) | Production data for 2014 has been updated to reflect actual production levels. |
The expected annualized light vehicle production volumes for 2015, compared to the actual production volumes for 2014 are provided in the following table:
|
| | | | | | | |
(In millions of units) | 2014(1) | | 2015(1) | | % Change |
North America | 17.0 |
| | 17.5 |
| | 2.9% |
Europe | 20.2 |
| | 20.3 |
| | 0.9% |
South America | 3.8 |
| | 3.3 |
| | (14.3)% |
Asia Pacific | 44.4 |
| | 45.6 |
| | 2.6% |
| |
(1) | Production data based on IHS Automotive, June 2015. |
The expected light vehicle production volume for the third quarter of 2015, compared to the actual production volumes for the third quarter of 2014 are provided in the following table:
|
| | | | | | | | |
(In millions of units) | Q3 2014(1) | | Q3 2015(1) | | % Change |
North America | 4.2 |
| | 4.4 |
| | 6.0 | % |
Europe | 4.6 |
| | 4.7 |
| | 3.4 | % |
South America | 1.0 |
| | 0.9 |
| | (11.5 | )% |
Asia Pacific | 10.5 |
| | 11.2 |
| | 6.8 | % |
| |
(1) | Production data based on IHS Automotive, June 2015. |
Competition in the automotive supplier industry is intense and has increased in recent years as OEMs have demonstrated a preference for stronger relationships with fewer suppliers. There are typically three or more significant competitors and numerous smaller competitors for most of the products we produce. Automotive suppliers with a global manufacturing footprint capable of fully servicing customers around the world will continue to shape the success of suppliers going forward.
OEMs have shifted some research and development, design and testing responsibility to suppliers, while at the same time shortening new product cycle times. To remain competitive, suppliers must have state-of-the-art engineering and design capabilities and must be able to continuously improve their engineering, design and manufacturing processes to effectively service the customer. Suppliers are increasingly expected to collaborate on, or assume the product design and development of, key automotive components and to provide innovative solutions to meet evolving technologies aimed at improved emissions and fuel economy.
Pricing pressure has continued as competition for market share has reduced the overall profitability of the industry and resulted in continued pressure on suppliers for price concessions. Consolidations and market share shifts among vehicle manufacturers continues to put additional pressures on the supply chain. These pricing and market pressures, along with reduced production volumes in certain regions, continue to drive our focus on reducing our overall cost structure through lean initiatives, capital redeployment, restructuring and other cost management processes.
Results of Operations
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
| (dollar amounts in thousands) |
Sales | $ | 857,553 |
| | $ | 860,821 |
| | $ | 1,695,159 |
| | $ | 1,660,871 |
|
Cost of products sold | 711,444 |
| | 706,863 |
| | 1,414,791 |
| | 1,376,041 |
|
Gross profit | 146,109 |
| | 153,958 |
| | 280,368 |
| | 284,830 |
|
Selling, administration & engineering expenses | 81,873 |
| | 84,079 |
| | 161,244 |
| | 160,390 |
|
Amortization of intangibles | 3,997 |
| | 3,672 |
| | 8,433 |
| | 7,220 |
|
Restructuring | 3,756 |
| | 7,429 |
| | 6,845 |
| | 26,269 |
|
Operating profit | 56,483 |
| | 58,778 |
| | 103,846 |
| | 90,951 |
|
Interest expense, net of interest income | (10,919 | ) | | (9,268 | ) | | (25,927 | ) | | (18,425 | ) |
Equity earnings | 1,745 |
| | 1,355 |
| | 2,981 |
| | 3,131 |
|
Other income (expense), net | (28,633 | ) | | 2,111 |
| | (28,803 | ) | | 13,188 |
|
Income before income taxes | 18,676 |
| | 52,976 |
| | 52,097 |
| | 88,845 |
|
Income tax expense | 4,424 |
| | 16,442 |
| | 16,488 |
| | 31,183 |
|
Net income | 14,252 |
| | 36,534 |
| | 35,609 |
| | 57,662 |
|
Net income attributable to noncontrolling interests | (1,058 | ) | | (38 | ) | | (2,680 | ) | | (179 | ) |
Net income attributable to Cooper-Standard Holdings Inc. | $ | 13,194 |
| | $ | 36,496 |
| | $ | 32,929 |
| | $ | 57,483 |
|
Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014
Sales. Sales were $860.8 million for the three months ended June 30, 2015 compared to $857.6 million for the three months ended June 30, 2014, an increase of $3.2 million, or 0.4%. Sales were impacted by improved volume and product mix in North America, Europe and Asia Pacific and our Shenya acquisition. These items were partially offset by unfavorable foreign exchange of $85.3 million, decreased volumes in South America and customer price concessions.
Cost of Products Sold. Cost of products sold is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization and other direct operating expenses. Cost of products sold was $706.9 million for the three months ended June 30, 2015 compared to $711.4 million for the three months ended June 30, 2014, a decrease of $4.5 million, or 0.6%. Raw materials comprise the largest component of our cost of products sold and represented approximately 51% and 49% of total cost of products sold for the three months ended June 30, 2015 and 2014, respectively. The three months ended June 30, 2015 was impacted by decreased volumes in South America and continuous improvement savings. These items were partially offset by improved volume and mix in North America, Europe and Asia Pacific and our Shenya acquisition.
Gross Profit. Gross profit for the three months ended June 30, 2015 was $154.0 million compared to $146.1 million for the three months ended June 30, 2014, an increase of $7.9 million, or 5.4%. As a percentage of sales, gross profit was 17.9% and 17.0% for the three months ended June 30, 2015 and 2014, respectively. The increase in gross profit margin was driven primarily by increased continuous improvement and material cost savings and improved volume and mix in North America,
Europe and Asia Pacific. These items were partially offset by unfavorable foreign exchange, customer price concessions and decreased volumes in South America.
Selling, Administration and Engineering. Selling, administration and engineering expense for the three months ended June 30, 2015 was $84.1 million, compared to $81.9 million for the three months ended June 30, 2014, but remained relatively flat at 9.8% of sales.
Restructuring. Restructuring charges were $7.4 million for the three months ended June 30, 2015, compared to $3.8 million for the three months ended June 30, 2014. The increase is primarily due to expenses incurred related to our recently announced European restructuring initiative.
Interest Expense, Net. Net interest expense of $9.3 million for the three months ended June 30, 2015 resulted primarily from interest and debt issuance amortization recorded on the Term Loan Facility. Net interest expense of $10.9 million for the three months ended June 30, 2014 consisted primarily of interest and debt issuance amortization recorded on the Term Loan Facility, Senior Notes and Senior PIK Toggle Notes.
Other Income (Expense), Net. Other income for the three months ended June 30, 2015 was $2.1 million, which consisted of the gain from the remeasurement of our previously held equity interest in Shenya of $2.6 million, partially offset by $0.2 million of foreign currency losses and a $0.3 million loss on sale of receivables. Other expense for the three months ended June 30, 2014 was $28.6 million, which consisted primarily of a loss on the extinguishment of debt of $30.3 million and a loss on sale of receivables of $0.5 million, partially offset by a gain on sale of investment of $1.9 million and foreign currency gains of $0.3 million.
Income Tax Expense. For the three months ended June 30, 2015, we recorded an income tax expense of $16.4 million on earnings before income taxes of $53.0 million. This compares to an income tax expense of $4.4 million on earnings before income taxes of $18.7 million for the same period of 2014. The higher effective tax rate of 31% for the three months ended June 30, 2015 as compared to 24% for the three months ended June 30, 2014 is primarily due to the tax benefits related to the the extinguishment of debt recorded as a discrete item in the three months ended June 30, 2014, which are not reflected in the effective tax rate for the three months ended June 30, 2015. Income tax expense for the three months ended June 30, 2015 differs from statutory rates due to the impact of discrete items in the quarter, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, tax credits, income tax incentives, withholding taxes and other permanent items. Further, the Company’s current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized.
Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014
Sales. Sales were $1,660.9 million for the six months ended June 30, 2015 compared to $1,695.2 million for the six months ended June 30, 2014, a decrease of $34.3 million, or 2.0%. Sales were impacted by unfavorable foreign exchange of $159.8 million, decreased volumes in South America and customer price concessions. These items were partially offset by improved volume and product mix in North America, Europe and Asia Pacific and our Shenya acquisition.
Cost of Products Sold. Cost of products sold is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization and other direct operating expenses. Cost of products sold was $1,376.0 million for the six months ended June 30, 2015 compared to $1,414.8 million for the six months ended June 30, 2014, a decrease of $38.8 million, or 2.7%. Raw materials comprise the largest component of our cost of products sold and represented approximately 50% and 49% of total cost of products sold for the six months ended June 30, 2015 and 2014, respectively. The six months ended June 30, 2015 was impacted by decreased volumes in South America and continuous improvement savings. These items were partially offset by improved volume and mix in North America, Europe and Asia Pacific and our Shenya acquisition.
Gross Profit. Gross profit for the six months ended June 30, 2015 was $284.8 million compared to $280.4 million for the six months ended June 30, 2014, an increase of $4.4 million, or 1.6%. As a percentage of sales, gross profit was 17.1% and 16.5% for the six months ended June 30, 2015 and 2014, respectively. The increase in gross profit margin was driven primarily by increased continuous improvement and material cost savings and improved volume and mix in North America, Europe and Asia Pacific. These items were partially offset by unfavorable foreign exchange, customer price concessions and decreased volumes in South America.
Selling, Administration and Engineering. Selling, administration and engineering expense for the six months ended June 30, 2015 was $160.4 million, compared to $161.2 million for the six months ended June 30, 2014, but remained relatively flat at 9.7% of sales.
Restructuring. Restructuring charges were $26.3 million for the six months ended June 30, 2015, compared to $6.8 million for the six months ended June 30, 2014. The increase is primarily due to expenses incurred related to our recently announced European restructuring initiative.
Interest Expense, Net. Net interest expense of $18.4 million for the six months ended June 30, 2015 resulted primarily from interest and debt issuance amortization recorded on the Term Loan Facility. Net interest expense of $25.9 million for the six months ended June 30, 2014 consisted primarily of interest and debt issuance amortization recorded on the Term Loan Facility, Senior Notes and Senior PIK Toggle Notes.
Other Income (Expense), Net. Other income for the six months ended June 30, 2015 was $13.2 million, which consisted of the gain from the remeasurement of our previously held equity interest in Shenya of $14.2 million, partially offset by $0.4 million of foreign currency losses and a $0.6 million loss on sale of receivables. Other expense for the six months ended June 30, 2014 was $28.8 million, which consisted primarily of a $30.5 million loss on extinguishment of debt and $1.0 million loss on sale of receivables, partially offset by a $1.9 million gain on sale of investment and foreign currency gains of $0.8 million.
Income Tax Expense. For the six months ended June 30, 2015, we recorded an income tax expense of $31.2 million on earnings before income taxes of $88.8 million. This compares to an income tax expense of $16.5 million on earnings before income taxes of $52.1 million for the same period of 2014. The higher effective tax rate of 35% for the six months ended June 30, 2015 as compared to 32% for the six months ended June 30, 2014 is primarily due to the tax benefits related to the loss on extinguishment of debt recorded as a discrete item in the three months ended June 30, 2014, which are not reflected in effective tax rate for the six months ended June 30, 2015. The income tax rate for the six months ended June 30, 2015 differs from statutory rates due to the impact of discrete items in the period, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, tax credits, income tax incentives, withholding taxes and other permanent items. Further, the Company’s current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized.
Segment Results of Operations
The following table presents sales and segment profit (loss) for each of the reportable segments for the three and six months ended June 30, 2014 and 2015:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
| (dollar amounts in thousands) |
Sales to external customers | | | | | | | |
North America | $ | 452,187 |
| | $ | 453,548 |
| | $ | 884,792 |
| | $ | 870,910 |
|
Europe | 305,738 |
| | 270,283 |
| | 613,899 |
| | 537,112 |
|
South America | 41,406 |
| | 25,132 |
| | 81,172 |
| | 55,310 |
|
Asia Pacific | 58,222 |
| | 111,858 |
| | 115,296 |
| | 197,539 |
|
Consolidated | $ | 857,553 |
| | $ | 860,821 |
| | $ | 1,695,159 |
| | $ | 1,660,871 |
|
| | | | | | | |
Segment profit (loss) | | | | | | | |
North America | $ | 36,469 |
| | $ | |