Item 1. Business
Cooper-Standard Holdings Inc. (together with its consolidated subsidiaries, the “Company,” “Cooper Standard,” “we,” “our” or “us”) is a leading manufacturer of sealing and trim, fuel and brake delivery, fluid transfer, thermal and emissions and anti-vibration systems (“AVS”) components, systems, subsystems, and modules. Our products are primarily for use in passenger vehicles and light trucks that are manufactured by global automotive original equipment manufacturers (“OEMs”) and replacement markets. We conduct substantially all of our activities through our subsidiaries.
Cooper Standard is a New York Stock Exchange (“NYSE”) listed company under the ticker symbol “CPS”. The Company has approximately 25,300 employees with 84 facilities in 19 countries. We believe we are the largest global producer of body sealing systems, the second largest global producer of the types of fuel and brake delivery products that we manufacture and one of the largest North American producers of fluid transfer systems (IRN 2012 Market Position Study). We design and manufacture our products in each major region of the world through a disciplined and sustained approach to engineering and operational excellence. We operate in 74 manufacturing locations and 10 design, engineering, and administrative locations.
Approximately 77% of our sales in 2013 were to OEMs, including Ford Motor Company (“Ford”), General Motors Company (“GM”), Fiat Chrysler Automobiles (“FCA”), PSA Peugeot Citroën, Volkswagen Group, Daimler, Renault/Nissan, BMW, Toyota, Volvo, Jaguar/Land Rover and Honda. The remaining 23% of our 2013 sales were primarily to Tier I and Tier II automotive suppliers and non-automotive manufacturers. In 2013, our products were found in 18 of the 20 top-selling models in North America and in 18 of the 20 top-selling models in Europe. Our principal executive offices are located at 39550 Orchard Hill Place Drive, Novi, Michigan 48375, and our telephone number is (248) 596-5900. Additional information is available at our website at www.cooperstandard.com, which is not a part of this Annual Report on Form 10-K.
Corporate History and Business Developments
Cooper-Standard Holdings Inc. was established in 2004 as a Delaware corporation and began operating on December 23, 2004 when it acquired the automotive segment of Cooper Tire & Rubber Company (the “2004 Acquisition”). Cooper-Standard Holdings Inc. operates the business primarily through its principal operating subsidiary, Cooper-Standard Automotive Inc. (“CSA U.S.”). Since the 2004 Acquisition, the Company has expanded and diversified its customer base through a combination of organic growth and strategic acquisitions.
In February 2006, the Company acquired fluid handling systems operations in North America, Europe and China (collectively, “FHS”) from ITT Industries, Inc. In August 2007, we acquired certain Metzeler Automotive Profile Systems sealing systems operations in Europe (“MAPS”) together with a MAPS joint venture interest in China from Automotive Sealing Systems S.A. We completed a related acquisition of a MAPS joint venture interest in India (“MAP India”) in December 2007. In addition to these transactions, we acquired a hose manufacturing operation in Mexico from the Gates Corporation and a fuel rail manufacturing operation in Mexico from Automotive Component Holdings, LLC, in 2005 and 2007, respectively.
In August 2009, following the onset of the financial crisis and economic downturn that severely impacted the global automotive industry, Cooper-Standard Holdings Inc. and its wholly-owned subsidiaries in the United States and Canada commenced reorganization proceedings in the United States (the “Chapter 11 proceedings”) and Canada. In May 2010, the Company consummated its reorganization pursuant to a court-confirmed plan of reorganization (the “Plan of Reorganization”) and emerged from the Chapter 11 proceedings and the Canadian proceedings.
In March 2011, the Company acquired USi, Inc., a supplier of coatings for plastic injection molding products, from Ikyuo Co. Ltd. of Japan. In May 2011, we established a joint venture with Fonds de Modernisation des Equipementiers Automobiles (“FMEA”) that combined the Company’s body sealing operations in France with the operations of Société des Polymères Barre-Thomas (“SPBT”), a French supplier of
automotive anti-vibration systems and low pressure hoses, as well as body sealing products. In the fourth quarter of 2011, we acquired the automotive sealing business of Sigit S.p.A. that we integrated with our operations in Italy and Poland. In the third quarter of 2013, we acquired the Jyco Sealing Technologies business (“Jyco”) which supplies automotive sealing systems and components to the automotive industry from facilities in Canada, Mexico and China.
The Company has four operating segments: North America, Europe, South America and Asia Pacific. This operating structure allows us to offer our full portfolio of products and support our regional and global customers with complete engineering and manufacturing expertise in all major regions of the world. We have implemented a number of operational restructuring initiatives in recent years, including the global reorganization of our operating structure in 2009, the closure or consolidation of facilities in North America, Europe, South America, Australia and Asia, the reorganization of our French body sealing operations pursuant to our joint venture agreement with FMEA, and the consolidation of certain functions into a centralized shared services group in Europe. See Note 4. “Restructuring” to the consolidated financial statements for additional information.
In May 2013, the Company completed the purchase of approximately 26.1% of its then outstanding shares of its common stock for an aggregate cost of approximately $200 million pursuant to a cash tender offer. The Company repurchased additional shares of its common stock and 7% cumulative participating convertible preferred stock (“7% preferred stock”) in 2012 and 2013 on the open market or through private transactions. In November 2013, the Company completed the conversion, at its election, of all of its outstanding shares of 7% preferred stock that had been issued upon the Company’s emergence from the Chapter 11 proceedings for 3,518,366 shares of the Company’s common stock.
In October 2013, Cooper Standard’s common stock was listed on the NYSE and began trading under the ticker symbol “CPS.” Prior to the NYSE listing, the Company’s common stock was traded on the Over-the-Counter (“OTC”) Bulletin Board under the symbol “COSH.”
Business Strategy
In 2013, following an extensive strategic review, Cooper Standard re-articulated its corporate vision: to drive for profitable growth and become one of the thirty largest global automotive suppliers in terms of sales, and among the top 5% in terms of return on invested capital (Top 30 / Top 5). The Company’s strategic plan is geared to realize this vision by matching our priorities and strengths to the emerging global industry environment. We will continue to invest:
•
to expand our global footprint to serve customers in emerging (as well as the mature) markets, and to ensure we are well positioned to fully participate on large global vehicle platforms;
•
to drive innovation and development of new technologies that meet the industry’s future needs;
•
to build upon our expertise and offerings in our core product platforms; and
•
to maintain strong business partnerships with key global customers positioned for growth.
The Company has identified three product lines of core importance to its growth strategy: Sealing and Trim Systems, Fuel and Brake Delivery Systems and Fluid Transfer Systems (including hose, transmission oil cooling and air conditioning lines). By focusing resources and levering our leading positions in these segments, we believe we will be able to realize currently untapped growth potential, both in new business and technology innovation. The Company will continue to serve customers of its highly capable AVS and Thermal and Emissions businesses while strategies relating to these businesses are evaluated.
Operational and Strategic Initiatives
As part of its growth strategy, the Company implemented the Cooper Standard Operating System (“CSOS”) to fully position the Company for growth and ensure global consistency in engineering design, program management, manufacturing process, purchasing and IT systems. Standardization across all regions is especially critical in support of customers’ global platforms that require the same design, quality and delivery everywhere in the world.
The CSOS consists of the following functional areas. Each area has a strategic focus that aligns with the Company’s growth strategy.
Leverage Technology for Innovative Solutions
We utilize our technical expertise to provide customers with innovative solutions. Our engineers combine product design with a broad understanding of material characteristics for enhanced vehicle performance. We believe our reputation for successful innovation in product design and various materials is the reason our customers consult us early in their vehicle development and design process of their next generation vehicles.
Cooper Standard has evolved and further energized its approach to innovation with its Imagine, Initiate, Innovate (“i3”) process. This approach is used as a mechanism to capture ideas from across our Company and our supply partners while promoting a culture of innovation.
Ideas are carefully evaluated by a Global Technology Council and those that are selected are put on an accelerated development cycle with a dedicated innovation team focused on skip generation ideas.
Continued emphasis on global platforms and emerging markets
We believe that by focusing on global platforms and emerging markets, we will be able to solidify and expand our global leadership position.
•
Global platforms. Our global presence and technological capabilities makes us one of the select few manufacturers in our product areas who can take advantage of the many business opportunities that are becoming available worldwide as a result of the OEMs expanding emphasis on global platforms. Ten of the top twenty vehicles on which we had the most content in 2013 were based on global platforms, which is evidence that customers look to us for support on their key global platforms. Going forward, it is predicted that the top ten global platforms produced by automakers will account for about 20% of the world’s light vehicle volume by 2020, which further highlights the importance of being well positioned to participate in global platforms.
•
Emerging markets. According to the December 2013 IHS Global Vehicle Production, global vehicle sales will grow to 105 million vehicles by 2020. The largest growth will be in China which will make up 30% of the world market, followed by India which will produce five million units annually by 2020. We have strong positions in both countries with plans to expand to meet the demand.
Developing systems solutions and other value-added products
We believe that significant opportunities exist to grow by providing complete systems and modules across our core product groups. As a design leader with a culture focused on providing innovative solutions through our i3 process, we offer unique, innovative designs which focus on improving performance and/or enhancing appearance. Our systems approach enables us to utilize our vertical integration and design expertise to provide system solutions across our core products. One example in the Sealing and Trim Systems product group is the
Premium Automotive Suppliers’ Contribution to Excellence Award (“PACE Award”) winning for our Daylight Opening (DLO) module which reduces the number of purchased parts, while also reducing operator installation efforts all while providing a system with increased sealing performance and improved aesthetics. This same methodology carries to our Fluid Transfer and Fuel and Brake Delivery Systems’ products. The PACE Award winning coolant and hose assembly, highlights a Fluid Transfer product in which we were able to utilize a patented innovation, our design expertise and vertical integration (of hose, tube and electromechanical products) to provide a complete module reducing the number of purchased components from 25 to 1 and suppliers from 6 to 1. Possibly the best representative product to highlight the blend of vertical integration and innovative design is the diesel supply and return system supplied to Ford. This system includes multiple products we produce: metallic and nylon tube and quick connects. Seeing an opportunity to improve the performance of the purchased sensor, we opted to redesign the sensor. The new design, built on our existing quick connects, improves performance of the sensor and eases assembly. These as well as many other products highlight the benefit we offer in providing systems and modules with our expertise in design and vertical product integration.
Pursue acquisitions and alliances to enhance capabilities and accelerate growth
We intend to continue to selectively pursue complementary acquisitions and joint ventures to enhance our customer base, geographic penetration, scale and technology. Consolidation is an industry trend and is encouraged by the OEMs desire for fewer supplier relationships. We believe we have a strong platform for growth through acquisitions based on our past integration successes, experienced management team, global presence and operational excellence. We believe joint ventures allow us to penetrate new markets with less risk and capital investments than acquisitions. We currently operate through several successful joint ventures. Key joint venture partners include Nishikawa Rubber Company (Thailand and North America), Huayu-Cooper Standard Sealing Systems Co. Ltd. (“Huayu”) an affiliate of Shanghai Automotive Industrial Corporation (China) and FMEA (France and Poland).
Overview of Our Business
Markets Served
The passenger car and light truck market, better known as the light vehicle market is our largest market accounting for approximately 95% of our global sales.
Light Vehicle:
The focus of this market is on passenger cars and light trucks up to and including Class 3 Full Size Full Frame trucks.
In addition to the global team focused on the light vehicle market we also established dedicated sales and engineering teams in North America and Europe to leverage core product technology into adjacent markets to profitably grow Cooper Standard and generate discretionary cash. The adjacent markets are tightly defined as:
Commercial Vehicle (On-Highway):
The focus of this market is on Class 4-8 On-Highway trucks as well as buses. This segment includes customers such as Daimler, MAN, Navistar, PACCAR, Scandia, TATA, and Volvo.
Commercial Vehicle (Off-Highway):
The focus of this market is on construction and agricultural vehicles. This segment includes customers such as Case New Holland, CAT, Cummins, John Deere, and Volvo Industrial Company.
Specialty Markets:
Consisting of two distinct customer channels. The first of which is a small number of customers who are neither light vehicle or commercial vehicle market customers. These customers, such as Tesla and Polaris, offer growth opportunities as they require and value the innovative engineered products we supply to the light vehicle market. The second customer group is our catalog business in which we utilize our core competency in sealing products to provide a wide range of standard profiles for various customers across multiple industries.
Technical Rubber:
This market is split into aviation flooring and technical sheeting. We are differentiated as the only one of three global suppliers for Non-Textile flooring (NTF) providing a rubber solution versus PVC. Examples of aviation customers include Boeing, Airbus, and British Airways. Technical sheeting is a consolidation of a number of industries which utilize rubber products for various applications. Examples of major customers include 3M for road markings and Firestone for rubber roofs.
Products
We have five distinct product groups, three of which we view as core given their importance to the industries we serve as well as our market leadership position in each of these three. These products are produced and supplied globally to a broad range of customers in multiple markets. For the years ended December 31, 2011, 2012 and 2013, sealing and trim systems products accounted for 49%, 49% and 51%, respectively, of our sales. For the years ended December 31, 2011, 2012 and 2013, fuel and brake delivery systems products accounted for 23%, 22% and 23%, respectively, of our sales. For the years ended December 31, 2011, 2012 and 2013, fluid transfer systems products accounted for 13%, 14% and 13%, respectively, of our sales. For the years ended December 31, 2011, 2012 and 2013, anti-vibration systems products accounted for 9%, 10% and 9%, respectively, of our sales.
Product Groups
Market Position*
SEALING & TRIM SYSTEMS
Protect vehicle interiors from weather, dust and noise intrusion for improved driving experience; provide aesthetic and functional class-A exterior surface treatment
Global leader
Products:
-
Dynamic seals
-
Static seals
-
Exterior trim
FUEL & BRAKE DELIVERY SYSTEMS
Sense, deliver and control fluids to fuel and brake systems
Top 2 globally
Products:
-
Chassis and tank fuel lines and bundles
-
Metallic brake lines and bundles
-
Direct injection & port fuel rails
-
Quick connects
FLUID TRANSFER SYSTEMS
Sense, deliver and control fluid and vapors for optimal powertrain & HVAC operation
North America Leader
Products:
-
Coolant hoses (with quick connects)
-
Powertrain lines
-
Transmission hose, hose and tube assemblies
THERMAL AND EMISSIONS
Manage and control vapors and coolant to increase powertrain performance & passenger comfort enabling increased emissions performance to aid in meeting increasing regulations
Top 10 globally for Emissions and emerging as a leader globally for Thermal
Products:
-
Electromechanical devices (pumps, valves & wastegate actuators)
-
Thermal devices (heat exchangers & passive thermostats)
-
Emissions devices (EGR valves, EGR coolers, EGR modules)
ANTI-VIBRATION SYSTEMS
Control and isolate noise and vibration in the vehicle to improve ride and
handling
Top 5 globally
Products:
-
Engine (elastomeric, conventional hydraulic & multi-state)
-
Body mounts (conventional & hydraulic)
-
Dampers, isolators and springs
* Market position study conducted by IRN, Inc. February, 2012
Supplies and Raw Materials
The principal raw materials for our business include synthetic rubber, components manufactured from carbon steel, plastic resins and components, carbon black, process oils, components manufactured from aluminum and natural rubber. Raw material prices have fluctuated greatly in recent years. We have implemented strategies with both our suppliers and our customers to help manage increases in raw material prices. These actions include material substitutions and leveraging global purchases. Global supply chain optimization includes using benchmarks and selective sourcing from low cost regions. We have also made process improvements to ensure the efficient use of materials through scrap reduction, as well as standardization of material specifications to maximize leverage over higher volume purchases. With some customers on certain raw materials we have implemented indexes that allow price changes as underlying material costs move.
Patents and Trademarks
We believe one of our competitive advantages is our application of technological innovation to customer challenges. We hold approximately 560 patents in key product technologies, such as Daylight Opening Modules, Engineered Stretched Plastics, Low Fuel Permeation Nylon Tubing and Quick Connect Fluid Couplings, as well as core process methods, such as molding, joining, and coating. Our patents are grouped into two major categories: (1) products, which relate to specific product invention claims for products which can be produced, and (2) processes, which relate to specific manufacturing processes that are used for producing products. The vast majority of our patents fall within the products category. We consider these patents to be of value and seek to protect our rights throughout the world against infringement. While in the aggregate these patents are important to our business, we do not believe that the loss or termination of any one patent would materially affect our company. We continue to seek patent protection for our new products. Additionally, we develop significant technologies that we treat as trade secrets and choose not to disclose to the public through the patent process, but which nonetheless provide significant competitive advantages and contribute to our global leadership position in various markets.
We also have technology sharing and licensing agreements with various third parties, including Nishikawa Rubber Company, one of our joint venture partners in body sealing products. We have mutual agreements with Nishikawa Rubber Company for sales, marketing and engineering services on certain body sealing products we sell. Under those agreements, each party pays for services provided by the other and royalties on certain products for which the other party provides design or development services.
We own or have licensed several trademarks that are registered in many countries, enabling us to protect and market our products worldwide. Key trademarks include StanPro® (aftermarket trim seals), SafeSeal™ (obstacle detection sensors), and Stratlink™ (proprietary TPV polymer).
Seasonality
Historically, sales to automotive customers are lowest during the months prior to model changeovers and during assembly plant shutdowns. However, economic conditions and consumer demand may change the traditional seasonality of the industry and lower production may prevail without the impact of seasonality. Historically, model changeover periods have typically resulted in lower sales volumes during July, August and December. During these periods of lower sales volumes, profit performance is reduced but working capital often improves due to the continued collection of accounts receivable.
Competition
We believe that the principal competitive factors in our industry are price, quality, service, performance, design and engineering capabilities, innovation, timely delivery and financial stability. We believe that our capabilities in these core competencies are integral to our position as a market leader in each of our product lines. Our sealing and trim products compete with Toyoda Gosei, Trelleborg/Vibracoustic, Tokai, Paulstra, Hutchinson, Henniges and Standard Profil, among others. Our fluid handling products compete with TI Automotive, Martinrea, Hutchinson, Conti-Tech, Pierburg and Gustav Wahler, along with numerous smaller companies in this competitive market.
Industry
The automotive industry is one of the world’s largest and most competitive. Consumer demand for new vehicles largely determines sales and production volumes of global OEMs.
The automotive supplier industry is generally characterized by high barriers to entry, significant start-up costs and long-standing customer relationships. The criteria by which OEMs judge automotive suppliers include price, quality, service, performance, design and engineering capabilities, innovation, timely delivery and financial stability. Over the last decade, suppliers that have been able to achieve manufacturing scale, reduce structural costs, diversify their customer base and establish a global manufacturing footprint have been successful.
The severe decline in vehicle sales and production in 2009 led to major restructuring activity in the industry, particularly in North America. GM and Chrysler reorganized through Chapter 11 bankruptcy proceedings and undertook other strategic actions, including the divestiture or discontinuance of non-core businesses and brands and the acceleration or broadening of operational and financial restructuring activities. A number of significant automotive suppliers, including us, restructured through Chapter 11 bankruptcy proceedings or through other means.
Several significant trends and developments have contributed to improvement in the automotive supplier industry. These include increased light vehicle sales of approximately 7% and light vehicle production increase of approximately 5% in North America in 2013 compared to 2012, a more positive credit environment, the continued growth of new markets in Asia, particularly China, and increased emphasis on “green” and other innovative technologies. These favorable trends, however, have been offset in part by recent difficulties in the European market resulting in decreased light vehicle sales of approximately 2% in Europe in 2013 compared to 2012.
Customers
We are a leading supplier to the following manufacturers in each of our product categories and are increasing our presence with all major OEMs throughout the world. The following table shows approximate percentage of sales to our top customers for the years ended December 31, 2012 and 2013:
Our other major customers include OEMs such as Renault/Nissan, Daimler, BMW and various Indian and Chinese OEMs. We also sell products to Visteon, Toyota, and through Nishikawa Standard Company (“NISCO”), Honda. Our business with any given customer is typically split among several contracts for different parts on a number of platforms.
Backlog
Our OEM sales are generally based upon purchase orders issued by the OEMs, with updated releases for volume adjustments, and as such we do not have a backlog of orders at any point in time. Once selected to supply products for a particular platform, we typically supply those products for the platform life, which is normally three to five years, although there is no guarantee that this will occur. In addition, when we are the incumbent supplier to a given platform, we believe we have a competitive advantage in winning the redesign or replacement platform.
Research and Development
We operate 10 design, engineering, and administration facilities throughout the world and employ 695 research and development personnel, some of whom are located at our customers’ facilities. We utilize Design for Six Sigma and other methodologies that emphasize manufacturability and quality. We are aggressively pursuing innovations which assist in resource conservation with particular attention to developing materials that are lighter weight and made of recyclable materials. Our development teams are also working closely with our customers to design and deliver thermal management solutions for cooling electric motors and batteries for new hybrids. Our highly experienced AVS engineering teams work closely with our customers to provide high value state of the art solutions. These activities are applied not only in our AVS product lines, but also in vehicle sealing (noise transmission isolation and abatement via vehicle windows and doors), fuel delivery systems (isolation of fuel injectors on fuel rails) and thermal management (noise and vibration free coolant pumps and valves). We spend significantly each year to maintain and enhance our technical centers, enabling us to quickly and effectively respond to customer demands. We spent $83.9 million, $94.2 million, and $103.5 million in 2011, 2012, and 2013, respectively, on engineering, research and development.
Joint Ventures and Strategic Alliances
Joint ventures represent an important part of our business, both operationally and strategically. We have used joint ventures to enter into new geographic markets such as China, Korea, India and Thailand, to acquire new customers and to develop new technologies. In entering new geographic markets, teaming with a local partner can reduce capital investment by leveraging pre-existing infrastructure. In addition, local partners in these markets can provide knowledge and insight into local practices and access to local suppliers of raw materials and components.
The following table shows our significant unconsolidated joint ventures:
Geographic Information
In 2013, we generated approximately 52% of our sales in North America, 35% in Europe, 6% in South America and 7% in Asia Pacific. Approximately 27% of our sales were generated from our United States operations and approximately 73% of our sales were generated from our operations in all other countries, including 16%, 10%, 9% and 8% generated from our Mexican, French, Canadian and German operations, respectively.
In 2012, we generated approximately 52% of our sales in North America, 35% in Europe, 5% in South America and 8% in Asia Pacific. Approximately 28% of our sales were generated from our United States operations and approximately 72% of our sales were generated from our operations in all other countries, including 15%, 11%, 10% and 9% generated from our Mexican, French, Canadian and German operations, respectively.
In 2011, we generated approximately 50% of our sales in North America, 38% in Europe, 5% in South America and 7% in Asia Pacific. Approximately 26% of our sales were generated from our United States operations and approximately 74% of our sales were generated from our operations in all other countries, including 13%, 11%, 10% and 10% generated from our Mexican, French, German and Canadian operations, respectively.
See Note 19. “Business Segments” to the consolidated financial statements for additional geographic information.
Employees
As of December 31, 2013, we had approximately 25,300 full-time and temporary employees. We maintain good relations with both our union and non-union employees and, in the past ten years, have not experienced any major work stoppages. We renegotiated some of our domestic and non-domestic union agreements in 2013 and have several contracts set to expire in the next twelve months. As of December 31, 2013, approximately 32% of our employees were represented by unions and approximately 7% of the unionized employees were located in the United States.
Environmental
We are subject to a broad range of federal, state, and local environmental and occupational safety and health laws and regulations in the United States and other countries, including regulations governing: emissions to air, discharges to water, noise and odor emissions; the generation, handling, storage, transportation, treatment, reclamation and disposal of chemicals and waste materials; the cleanup of contaminated properties; and human health and safety. We have made and will continue to make expenditures to comply with environmental requirements. While our costs to defend and settle known claims arising under environmental laws are not currently estimated to be material, such costs may be material in the future.
Market Data
Some market data and other statistical information used throughout this Annual Report on Form 10-K is based on data available from IHS Automotive, an independent market research firm. Other data is based on good faith estimates, which are derived from our review of internal surveys, as well as third party sources. Although we believe these third party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness. To the extent that we have been unable to obtain information from third party sources, we have expressed our belief on the basis of our own internal analyses of our products and capabilities in comparison to our competitors.
Available Information
We make available free of charge on or through our Internet website (www.cooperstandard.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”).
Executive Officers
Set forth below is certain information with respect to the current executive officers of the Company.
Jeffrey S. Edwards is our Chairman and Chief Executive Officer, a position he has held since May 2013, previously serving as Chief Executive Officer and member of the Board of Directors of the Company since October 2012. Prior to joining the Company, Mr. Edwards gained more than 28 years of automotive industry
experience through various positions of increasing responsibility at Johnson Controls, Inc. He led the Automotive Experience Asia Group, serving as Corporate Vice President, Group Vice President and General Manager from 2004 to 2012. Prior to this, he served as Group Vice President and General Manager for Automotive Experience North America from 2002 to 2004. Mr. Edwards completed an executive training program at INSEAD and earned a BS from Clarion University.
Allen J. Campbell is our Executive Vice President and Chief Financial Officer, a position he has held since March 17, 2011, previously having served as Vice President and Chief Financial Officer since the 2004 Acquisition. He was Vice President, Asian Operations of the Cooper Standard Automotive division of Cooper Tire & Rubber Company from 2003 until the 2004 Acquisition and served as Vice President, Finance of the division from 1999 to 2003. Prior to joining Cooper Tire, Mr. Campbell was with The Dow Chemical Company for 18 years and held executive finance positions for both U.S. and Canadian operations. Mr. Campbell is a certified public accountant and received his MBA in Finance from Xavier University and a Bachelor of Arts from Ball State University.
Keith D. Stephenson is our Executive Vice President and Chief Operating Officer, a position he has held since January 2014, previously serving as Chief Operating Officer since December 2010. He served as President, International from March 2009 to December 2010. He served as President, Global Body & Chassis Systems from June 2007 to March 2009. Mr. Stephenson was Chief Development Officer at Boler Company from January 2004 until October 2006. From 1985 to January 2004, he held various senior positions at Hendrickson, a division of Boler Company, including President of International Operations, Senior Vice President of Global Business Operations and President of the Truck Systems Group.
Juan Fernando de Miguel Posada is our Corporate Senior Vice President and President, Europe, a position he has held since January 2014, previously serving as President, Europe since March 2013. Mr. de Miguel served as western European Chief Executive Officer of Avincis Emergency Services from September 2012 until joining the Company. From May 2011 to September 2012, he served as Consulting President for Europe for Argo Consulting. Mr. de Miguel served as managing director of the Paper Division of SAICA in Spain from 2009 to 2011. From 2007 to 2009, he served as President of the Protective Packaging division of Pregis in Belgium. Mr. de Miguel served as Senior Vice President of Northern Europe for Alstom Transport in France from 2006 to 2007. Previously, Mr. de Miguel held numerous senior level positions at Johnson Controls, Inc., beginning in 1988, ultimately serving as Group Vice President and General Manager, Electronics, Europe and International. Mr. de Miguel received an electrical engineering degree and a Master’s Degree in industrial engineering from Universidad Politecnica de Barcelona, as well as an Executive Master’s degree in Business Administration from the IESE Business School - University of Navarra in Spain.
Song Min Lee is our Corporate Senior Vice President and President, Asia Pacific, a position he has held since January 2014, previously serving as President, Asia Pacific since January 2013. Prior to joining the Company, Mr. Lee served as Vice President and General Manager of Johnson Controls, Inc. from 2007 to 2012. From 2006 to 2007, Mr. Lee served as Vice President and President, Korea, for Autoliv, Inc. Mr. Lee served as Plant Manager for Lear Corporation from 2004 to 2006 and held various engineering positions at Ford Motor Company from 1994 to 2004. Mr. Lee completed the Advanced Management Program at Seoul National University. Mr. Lee also earned a Masters of Science in Management Technology from Rensselaer Polytechnic Institute and a Bachelor of Science in Chemistry from Washburn University.
D. William Pumphrey, Jr. is our Corporate Senior Vice President and President, North America, a position he has held since January 2014, previously serving as President, North America since August 2011. Mr. Pumphrey served as President, Americas for Tower Automotive from 2008 through August 2011. From 2005 to 2008, he served as President of Tower’s North America operations. From 1999 to 2004, Mr. Pumphrey held various positions at Lear Corporation in Southfield, Michigan, most recently, serving as President of the company’s Asia Pacific operations. Mr. Pumphrey earned an MBA from the University of Michigan and a Bachelor of Arts from Kenyon College.
Aleksandra A. Miziolek is our Senior Vice President, General Counsel and Secretary, a position she has held since February 2014. Previously, Ms. Miziolek was the Director of the Automotive Industry Group of Dykema Gossett, PLLC, a national law firm, from 2010. From 2003 to 2010, Ms. Miziolek served on Dykema’s Executive Board and as the Director of its Business Services Department. She joined Dykema in 1982 after serving as a law clerk for a Federal Court Judge in the Eastern District of Michigan, Southern Division. Ms. Miziolek received her JD from Wayne State University Law School.
Larry E. Ott is our Senior Vice President and Chief Human Resources Officer, a position he has held since January 2014, previously serving as Vice President, Global Human Resources since August 2013. Prior to joining the Company, Mr. Ott served as Senior Vice President, Human Resources for Meritor, Inc. from 2010 until 2013. Prior to this, he held a similar position at Ally Financial Inc. from 2006 until July 2010. Mr. Ott spent 20 years at General Motors in a variety of progressive human resources functions. Mr. Ott earned an MBA with a concentration in Organizational Behavior and Industrial Relations from the University of Michigan in Ann Arbor and a Bachelor of Science degree in Business Administration and English from the University of Wisconsin at Stevens Point.
Helen T. Yantz is our Senior Vice President, Chief Accounting Officer and Assistant Secretary, a position she has held since January 2014, previously serving as the Vice President, Corporate Controller and Assistant Secretary, a position she has held since January 2005. Previously, Ms. Yantz held the position of Director of Accounting and Assistant Vice President from 2001 to 2005. Prior to joining the Company, Ms. Yantz was Manager of Financial Reporting at Trinity Health Systems from 2000 to 2001. Previously, Ms. Yantz held various positions in finance at CMS Generations Co., a subsidiary of CMS Energy, from 1990 to 2000, ultimately serving as the Director of Accounting. Ms. Yantz is a certified public accountant and has a BS from Arizona State University.
Forward-Looking Statements
This Annual Report on Form 10-K 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. We make forward-looking statements in this Annual Report on Form 10-K and may make such statements in future filings with the SEC. We may also make forward-looking statements in our press releases or other public or stockholder communications. These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information and, in particular, appear under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and “Business.” When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” or future or conditional verbs, such as “will,” “should,” “could,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data 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, no assurances can be made 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.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in this Annual Report on Form 10-K, including under Item 1A.
Item 1A. Risk Factors
Our business and financial condition can be impacted by a number of factors, including the risks described below and elsewhere in this Annual Report on Form 10-K. Any of these risks could cause our actual results to vary materially from recent or anticipated results and could materially and adversely affect our business, results of operations and financial condition.
We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could materially adversely affect our liquidity, the viability of our supply base and the financial conditions of our customers and could have a material adverse effect on our business, results of operations and financial condition.
Automotive sales and production are highly cyclical and depend, among other things, on general economic conditions and consumer spending, vehicle demand and preferences (which can be affected by a number of factors, including fuel costs, employment levels and the availability of consumer financing). As the volume of automotive production fluctuates, the demand for our products also fluctuates. Prolonged or material contraction in automotive sales and production volume, especially in Europe and North America, which accounted for approximately 35% and 52%, respectively of our 2013 sales, could have a material adverse effect on our results of operations and liquidity.
Our supply base has also been adversely affected by the industry environment. Volatile global automotive production, turmoil in the credit markets and extreme volatility over the past several years in raw material, energy and commodity costs have resulted in financial distress within our supply base and an increase in the risk of supply disruption. In addition, several automotive suppliers filed for bankruptcy protection or have ceased operations. If a significant supplier’s viability was to become impaired, it could impact the supplier’s ability to perform as we expect and consequently our ability to meet our own commitments. While we have developed and implemented strategies to mitigate the negative effects of these factors, these strategies may offset only a portion of the adverse impact. The continuation or worsening of these industry conditions could adversely affect our financial condition, operating results and cash flows, thereby making it more difficult for us to make payments under our indebtedness.
In addition, if our suppliers were to reduce normal trade credit terms, our liquidity could be adversely impacted. Likewise, our liquidity could be adversely impacted if our customers were to extend their normal payment terms, whether or not permitted under our contracts. If either of these situations occurs, we may need to rely on other sources of funding to bridge the additional gap between the time we pay our suppliers and the time we receive corresponding payments from our customers.
Global economic uncertainty, particularly in Europe, sovereign debt issues and over capacity at certain OEMs may adversely affect our results of operations and financial condition.
Lower global production levels, particularly in Europe, overcapacity issues, economic and financial turmoil related to sovereign debt issues in certain countries, especially in Europe and tightened liquidity have combined to cause severe financial distress among many of our customers and have forced those companies to implement various forms of restructuring actions. In some cases, these actions have involved significant capacity reductions, the discontinuation of entire vehicle brands or even closure of manufacturing facilities. As a result, the Company has experienced and may continue to experience a decrease of production levels in the affected regions. Continued overcapacity and instability could adversely affect our results of operations and financial condition.
Our business could be materially adversely affected if we lost any of our largest customers or significant platforms.
While we provide parts to virtually every major global OEM for use on a multitude of different platforms, sales to our three largest customers, Ford, GM and FCA, on a worldwide basis represented approximately 49% of our sales. Although business with each customer is typically split among numerous contracts, loss of a major customer, significant reduction in purchases of our products by such customer, or any discontinuance or resourcing of a significant platform (whether as a result of a decline in such customer’s market share due to increased competition from successful vertical integration by other OEMs or otherwise) could have a materially adverse effect on our business, results of operations and financial condition.
Our capital structure includes a substantial amount of indebtedness, which impose demands on our liquidity that could have a material adverse effect on our financial condition or on our ability to obtain financing in the future.
We have a substantial amount of debt outstanding, including our 8 1/2% Senior Notes due 2018 (“Senior Notes”), 7 3/8% Senior PIK Toggle Notes (“Senior PIK Toggle Notes”) and the debt of certain foreign subsidiaries, aggregating approximately $684.4 million that requires significant principal and interest payments. We are permitted by the terms of the Senior Notes, Senior PIK Toggle Notes and our $150 million senior asset-based revolving credit facility (“Senior ABL Facility”) to incur substantial additional indebtedness, subject to the restrictions therein, which could:
•
make it more difficult for us to satisfy our obligations under the Senior Notes, Senior PIK Toggle Notes and the Senior ABL facility;
•
increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, since a portion of our borrowings are at variable rates of interest;
•
require us to dedicate a substantial portion of our cash flow from operations to principal and interest payments on our debt, which would reduce the availability of our cash flow from operations to service additional debt or to fund working capital, capital expenditures or other general corporate purposes; and
•
increase our cost of borrowing.
We may not be able to generate sufficient cash to service all of our indebtedness.
Our ability to make scheduled payments on our debt or to refinance these obligations depends on our financial condition and operating performance. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell material assets, seek additional capital or restructure or refinance our indebtedness, which could have a material adverse effect on our business, results of operations and financial condition.
The indentures governing the Senior Notes and the Senior PIK Toggle Notes and the credit agreement governing our Senior ABL Facility impose significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.
The indentures governing the Senior Notes and the Senior PIK Toggle Notes and the credit agreement governing our Senior ABL Facility impose significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
•
incur additional indebtedness or issue certain disqualified stock and preferred stock;
•
pay dividends or certain other distributions on our capital stock or repurchase our capital stock;
•
make certain investments or other restricted payments;
•
place restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
•
engage in transactions with affiliates;
•
sell certain assets or merge with or into other companies;
•
guarantee indebtedness; and
•
create liens.
There are limitations on our ability to incur the full $150 million of commitments under our Senior ABL Facility. Borrowings under our Senior ABL Facility are limited by a specified borrowing base consisting of a percentage of eligible accounts receivable and eligible inventory, less customary reserves imposed by the agent under our Senior ABL Facility. In addition, under our Senior ABL Facility, a monthly fixed charge maintenance covenant would become applicable if excess availability under our Senior ABL Facility is at any time less than a specified percentage (or amount) of the total revolving loan commitments. If the covenant trigger were to occur, Cooper-Standard Holdings Inc. would be required to satisfy and maintain, on a consolidated basis, on the last day of each month a fixed charge coverage ratio of at least 1.0 to 1.0. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure that we will meet this ratio. A breach of any of these covenants could result in a default under our Senior ABL Facility.
Moreover, our Senior ABL Facility provides the lenders considerable discretion to impose reserves, which could materially reduce the amount of borrowings that would otherwise be available to us. There can be no assurance that the lenders under our Senior ABL Facility will not impose such reserves during the term of our Senior ABL Facility and further, were they to do so, the resulting impact of this action could materially and adversely impair our ability to make interest payments on the Senior Notes and the Senior PIK Toggle Notes. Also, when (and for as long as) the availability under our Senior ABL Facility is less than a specified amount for a certain period of time, the agent under our Senior ABL Facility would exercise cash dominion.
As a result of these covenants and restrictions, we are limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or holders of the Senior Notes and the Senior PIK Toggle Notes and/or amend the covenants.
Our pension plans are currently underfunded and we may have to make cash payments to the plans, reducing the cash available for our business.
We sponsor various pension plans worldwide that are underfunded and will require cash payments. Additionally, if the performance of the assets in our pension plans does not meet our expectations, or if other actuarial assumptions are modified, our required contributions may be higher than we expect. If our cash flow from operations is insufficient to fund our worldwide pension liabilities, we may be forced to reduce or delay capital expenditures, seek additional capital or seek to restructure or refinance our indebtedness or sell assets.
As of December 31, 2013, our $293.5 million projected benefit obligation (“PBO”), for U.S. pension benefit obligations exceeded the fair value of the relevant plans’ assets, which totaled $269.6 million, by $23.9 million. Additionally, the international employees’ plans’ PBO exceeded plan assets by approximately $125.6 million as of December 31, 2013. The PBO for other postretirement benefits (“OPEB”), was $52.7 million as of December 31, 2013. Our estimated funding requirement for pensions and OPEB during 2014 is approximately $17.6 million. Net periodic benefit costs for U.S. and international plans, including pension benefits and OPEB, were $8.4 million and $9.7 million for the years ended December 31, 2012 and 2013, respectively. See Note 8. “Pensions,” and Note 9. “Postretirement Benefits Other Than Pensions,” to the consolidated financial statements for additional information.
We could be adversely affected by any shortage of supplies.
In the event of a rapid increase in production demands, either we or our customers or other suppliers may experience supply shortages of raw materials or components. This could be caused by a number of factors, including a lack of production line capacity or manpower or working capital constraints. In order to manage and
reduce the cost of purchased goods and services, we and others within our industry have been rationalizing and consolidating our supply base. In addition, due to the turbulence in the automotive industry, several suppliers have restructured or ceased operations. As a result, there is greater dependence on fewer sources of supply for certain components and materials, which could increase the possibility of a supply shortage of any particular component. If any of our customers experience a material supply shortage, either directly or as a result of a supply shortage at another supplier, that customer may halt or limit the purchase of our products. Similarly, if we or one of our own suppliers experience a supply shortage, we may become unable to produce the affected products if we cannot procure the components from another source. Such production interruptions could impede a ramp-up in vehicle production and could have a material adverse effect on our business, results of operations and financial condition.
Escalating pricing pressures and decline of volume requirements from our customers may adversely affect our business.
Pricing pressure in the automotive supply industry has been substantial and is likely to continue. Virtually all vehicle manufacturers seek price reductions in both the initial bidding process and during the term of the contract. Price reductions have adversely impacted our sales and profit margins and are expected to do so in the future. If we are not able to offset continued price reductions through improved operating efficiencies and reduced expenditures, those price reductions may have a material adverse effect on our results of operations. Our agreements with our customers are generally requirements contracts and a decline in volume for our customers could adversely impact our revenues and profitability.
We may be at risk of not being able to meet significant increases in demand.
If demand continues to increase significantly from what has been a historical low for production in recent years, we may have difficulty meeting such demand, particularly if such increase in demand occurs rapidly. This difficulty may include not having sufficient manpower or relying on suppliers who may not be able to respond quickly to a changed environment when demand significantly increases. Our inability to meet significant increases in demand could require us to delay delivery dates and could result in customers cancelling their orders, requesting discounts or ceasing to do business with us. In addition, as demand and volumes increase, we will need to purchase more inventory, which will increase our working capital needs. If our working capital needs exceed our cash flows from operations, we will be required to use our cash balances and available borrowings, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all, to satisfy those needs.
Increasing costs for, or reduced availability of, manufactured components and raw materials may adversely affect our profitability.
The principal raw materials we purchase include synthetic rubber, components manufactured from carbon steel, plastic resins and components, carbon black, process oils, components manufactured from aluminum and natural rubber. Raw materials comprise the largest component of our costs, representing approximately 49% of our total cost of products in 2013. A significant increase in the price of these items could materially increase our operating costs and materially and adversely affect our profit margins because it is generally difficult to pass through these increased costs to our customers. Raw material costs remain volatile and could have an adverse impact on our profitability in the foreseeable future.
We consider the production capacities and financial condition of suppliers in our selection process and expect that they will meet our delivery requirements. However, there can be no assurance that strong demand, capacity limitations, shortages of raw materials or other problems will not result in any shortages or delays in the supply of components to us.
Some of our raw materials and other supplies used in our operations are not normally available from a variety of suppliers, therefore leaving our business vulnerable to increasing costs. In addition, our need to maintain a continuing supply of raw materials and components has made it difficult, in some cases, to resist price increases and surcharges imposed by our suppliers.
We could be materially adversely affected if we are unable to continue to compete successfully in the highly competitive automotive parts industry.
The automotive parts industry is highly competitive. We face numerous competitors in each of the product lines we serve. In general, there are three or more significant competitors and numerous smaller competitors for most of the products we offer. We also face increased competition for certain of our products from suppliers producing in lower-cost regions such as Asia and Eastern Europe. We may not be able to continue to compete favorably with such competitors, and increased competition in our markets may have a material adverse effect on our business.
We are subject to other risks associated with our non-U.S. operations.
We have significant manufacturing operations outside the United States, including joint ventures and other alliances. Our operations are located in 19 countries, and we export to several other countries. In 2013, approximately 73% of our sales were attributable to products manufactured outside the United States. Risks are inherent in international operations, including:
•
exchange controls and currency restrictions;
•
currency fluctuations and devaluations;
•
changes in local economic conditions;
•
repatriation restrictions (including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries);
•
global sovereign uncertainty and hyperinflation in certain foreign countries, including the sovereign debt crisis in certain European countries;
•
changes in laws and regulations, including export and import restrictions and the imposition of embargos;
•
exposure to possible expropriation or other government actions; and
•
exposure to local political or social unrest including resultant acts of war, terrorism, drug related violence or similar events.
These and other factors may have a material adverse effect on our international operations and on our business, results of operations and financial condition. For example, we are faced with potential difficulties in staffing and managing local operations and we have to design local solutions to manage credit risks of local customers and distributors. In certain areas, such as Mexico, drug related violence and social unrest may directly affect our employees and may cause them to relocate out of the region or may otherwise present risks to our business operations in the region. Also, the cost and complexity of streamlining operations in certain European countries is greater than would be the case in the United States, due primarily to labor laws in those countries that can make reducing employment levels more time-consuming and expensive than in the United States. Our flexibility in our foreign operations can also be somewhat limited by agreements we have entered into with our foreign joint venture partners.
Foreign currency exchange rate fluctuations could materially impact our results from operations.
Our sales outside the United States expose us to currency risks. Our sales and earnings denominated in foreign currencies are translated into U.S. dollars for our consolidated financial statements. This translation is calculated based on average exchange rates during the reporting period. Our reported international sales and earnings could be adversely impacted in periods of a strengthening U.S. dollar.
We generally produce in the same geographic region as our products are sold. Some of our commodities are purchased in or pegged to the U.S. dollar therefore; our earnings could be adversely impacted during the periods of a strengthening U.S. dollar to other foreign currencies. We employ financial instruments to hedge certain portions of our foreign currency exposures however this will not completely insulate us from the effects of currency fluctuation.
A portion of our operations are conducted by joint ventures that cannot be operated for our sole benefit.
Many of our operations are carried on by joint ventures. In joint ventures we share the management of the company with one or more owners who may not have the same goals, resources or priorities as we do. Joint
ventures require attention to be paid to the relationships with our co-owners which influences each owner’s decisions. Joint ventures are intended to operate for the benefit of all owners and therefore we do not receive all the benefits from our joint ventures.
Our continuous improvement program and other cost savings plans may not be effective.
Our operations strategy includes cutting costs by reducing production errors, inventory levels, operator motion, overproduction and operator waiting while fostering the increased flow of material, information and communication. The cost savings that we anticipate from these initiatives may not be achieved on schedule or at the level anticipated by management. If we are unable to realize these anticipated savings, our operating results and financial condition may be materially adversely affected. Moreover, the implementation of cost saving plans and facilities integration may disrupt our operations and performance.
We may incur material losses and costs as a result of product liability and warranty and recall claims that may be brought against us.
We may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability expenses in the future and incur significant costs to defend against these claims. In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or the alleged defect relates to automotive safety. Product recalls could cause us to incur material costs and could harm our reputation or cause us to lose customers, particularly if any such recall causes customers to question the safety or reliability of our products. As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, customers are increasingly seeking to change contract terms and conditions concerning warranty and recall participation. Also, while we possess considerable historical warranty and recall data with respect to the products we currently produce, we do not have such data relating to new products, assembly programs or technologies, including any new fuel and emissions technology and systems being brought into production to allow us to accurately estimate future warranty or recall costs. In addition, the increased focus on systems integration platforms utilizing fuel and emissions technology with more sophisticated components from multiple sources could result in an increased risk of component warranty costs over which we have little or no control and for which we may be subject to an increasing share of liability to the extent any of the other component suppliers are in financial distress or are otherwise incapable of fulfilling their warranty or product recall obligations. Our costs associated with providing product warranties and responding to product recall claims could be material and we do not have insurance covering product recalls. Product liability, warranty and recall costs may have a material adverse effect on our business, results of operations and financial condition.
Work stoppages or similar difficulties could disrupt our operations.
We may be subject to work stoppages and may be affected by other labor disputes. A number of our collective bargaining agreements expire in any given year, including several in 2014. There is no certainty that we will be successful in negotiating new agreements with these unions that extend beyond the current expiration dates, or that these new agreements will be on terms as favorable to us as past labor agreements. Failure to renew these agreements when they expire or to establish new collective bargaining agreements on terms acceptable to us and the unions could result in work stoppages or other labor disruptions which may have a material adverse effect on customer relationships and our business and results of operations. Additionally, a work stoppage at one or more of our suppliers, our customers or our customers’ suppliers could materially adversely affect our operations if an alternative source of supply were not readily available. Work stoppages by employees of our customers also could result in reduced demand for our products and could have a material adverse effect on our business. As of December 31, 2013, approximately 32% of our employees were represented by unions, approximately 7% of the unionized employees were located in the United States. It is possible that our workforce will become more unionized in the future. A work stoppage at one or more of our plants may have a material adverse effect on our business. Unionization activities could also increase our costs, which could have a material adverse effect on our profitability.
Certain natural disasters may adversely affect our business.
Natural disasters such as earthquakes, tsunamis and coastal flooding or other adverse climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including energy shortages and public health issues, may adversely affect our business. Such natural disasters could cause damage or disruption to our business operations or the operations of our customers, suppliers or joint venture affiliates or result in economic instability.
Our success depends in part on our development of improved products, and our efforts may fail to meet the needs of customers on a timely or cost-effective basis.
Our continued success depends on our ability to maintain advanced technological capabilities, machinery and knowledge necessary to adapt to changing market demands as well as to develop and commercialize innovative products. We may be unable to develop new products as successfully as in the past or to keep pace with technological developments by our competitors and the industry generally. In addition, we may develop specific technologies and capabilities in anticipation of customers’ demands for new innovations and technologies. If such demand does not materialize, we may be unable to recover the costs incurred in such programs. If we are unable to recover these costs or if any such programs do not progress as expected, our business, results of operations and financial condition could be materially adversely affected.
If our acquisition strategy is not successful, we may not achieve our growth and profit objectives.
We may selectively pursue complementary acquisitions in the future as part of our growth strategy. While we will evaluate business opportunities on a regular basis, we may not be successful in identifying any attractive acquisitions. We may not have, or be able to raise on acceptable terms, sufficient financial resources to make acquisitions. Our ability to make investments may also be limited by the terms of our existing or future financing arrangements. In addition, any acquisitions we make will be subject to all of the risks inherent in an acquisition strategy, including integrating financial and operational reporting systems, establishing satisfactory budgetary and other financial controls, funding increased capital needs and overhead expenses, obtaining management personnel required for expanded operations and funding cash flow shortages that may occur if anticipated sales are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties.
Our intellectual property portfolio is subject to legal challenges and considerable uncertainty.
We have developed and actively pursue the development of proprietary technology in the automotive industry and rely on intellectual property laws and a number of patents in many jurisdictions to protect such technology. There can be no assurances that the protections we have available for our proprietary technology in the United States and other countries will be available to us in many places we sell our products. Therefore, we may be unable to prevent third parties from using our intellectual property without authorization. Any infringement or misappropriation of our technology that we cannot control could have a material adverse effect on our business and results of operations. If we had to litigate to protect our intellectual property rights, any proceedings could be costly, and we may not prevail. We also face increasing exposure to the claims of others for infringement of intellectual property rights. We may have material intellectual property claims asserted against us in the future and could incur significant costs or losses related to such claims. These claims, regardless of their merit or resolution, are frequently costly to prosecute, defend or settle and divert the efforts and attention of our management and employees. Claims of this sort also could harm our reputation and our relationships with our customers and might deter future customers from doing business with us. If any such claim were to result in an adverse outcome, we could be required to take actions which may include: cease the manufacture, use or sale of the infringing products; pay substantial damages to third parties, including to customers to compensate them for the discontinued use of a product or to replace infringing technology with non-infringing technology; or expend significant resources to develop or license non-infringing products.
We are subject to a broad range of environmental, health and safety laws and regulations, which could adversely affect our business and results of operations.
We are subject to a broad range of federal, state and local environmental and occupational safety and health laws and regulations in the United States and other countries, including those governing: emissions to air;
discharges to water; noise and odor emissions; the generation, handling, storage, transportation, treatment, reclamation and disposal of chemicals and waste materials; the cleanup of contaminated properties; and human health and safety. We may incur substantial costs associated with hazardous substance contamination or exposure, including cleanup costs, fines and civil or criminal sanctions, third party property or natural resource damage, personal injury claims or costs to upgrade or replace existing equipment as a result of violations of or liabilities under environmental laws or the failure to maintain or comply with environmental permits required at our locations. In addition, many of our current and former facilities are located on properties with long histories of industrial or commercial operations and some of these properties have been subject to certain environmental investigations and remediation activities. We maintain environmental reserves for certain of these sites. As of December 31, 2013, we have $7.7 million reserved in accrued liabilities and other liabilities on the consolidated balance sheet on an undiscounted basis which we believe are adequate. Because some environmental laws (such as the Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws) can impose joint and several liability retroactively and regardless of fault on potentially responsible parties for the entire cost of cleanup at currently or formerly owned or operated facilities, as well as sites at which such parties disposed or arranged for disposal of hazardous waste, we could become liable for investigating or remediating contamination at our current or former properties or other properties (including offsite waste disposal locations). We may not always be in complete compliance with all applicable requirements of environmental law or regulation, and we may receive notices of violation or become subject to enforcement actions or incur material costs or liabilities in connection with such requirements. In addition, new environmental requirements or changes to interpretations of existing requirements, or in their enforcement, could have a material adverse effect on our business, results of operations and financial condition. We have made and will continue to make expenditures to comply with environmental requirements. While our costs to defend and settle known claims arising under environmental laws have not been material in the past and are not currently estimated to be material, such costs may be material in the future.
Our expected annual effective tax rate could be volatile and could materially change as a result of changes in many items including mix of earnings, debt and capital structure and other factors.
Many items could impact our effective tax rate including changes in our debt and capital structure, mix of earnings and many other factors. Our overall effective tax rate is based upon the consolidated tax expense as a percentage of consolidated earnings before tax. However, tax expenses and benefits are not recognized on a consolidated or global basis, but rather on a jurisdictional, legal entity basis. Further, certain jurisdictions in which we operate generate losses where no current financial statement benefit is realized. In addition, certain jurisdictions have statutory rates greater than or less than the United States statutory rate. As such, changes in the mix and source of earnings between jurisdictions could have a significant impact on our overall effective tax rate in future years. Changes in rules related to accounting for income taxes, changes in tax laws and rates or adverse outcomes from tax audits that occur regularly in any of our jurisdictions could also have a significant impact on our overall effective tax rate in future periods.
Significant changes in discount rates, the actual return on pension assets and other factors could adversely affect our liquidity, results of operations and financial condition.
Our earnings may be positively or negatively impacted by the amount of income or expense recorded related to our qualified pension plans. Accounting principles generally accepted in the United States (“U.S. GAAP”) require that income or expense related to the pension plans be calculated at the annual measurement date using actuarial calculations, which reflect certain assumptions. The most significant of these assumptions relate to interest rates, the capital markets and other economic conditions. Changes in key economic indicators can change these assumptions. These assumptions, as well as the actual value of pension assets at the measurement date, will impact the calculation of pension expense for the year. Although U.S. GAAP expense and pension contributions are not directly related, the key economic indicators that affect U.S. GAAP expense also affect the amount of cash that we will contribute to our pension plans. Because the values of these pension assets have fluctuated and will continue to fluctuate in response to changing market conditions, the amount of gains or losses that will be recognized in subsequent periods, the impact on the funded status of the pension plans
and the future minimum required contributions, if any, could adversely affect our liquidity, results of operations and financial condition.
Impairment charges relating to our goodwill and long-lived assets could adversely affect our results of operations.
We regularly monitor our goodwill and long-lived assets for impairment indicators. In conducting our goodwill impairment testing, we compare the fair value of each of our reporting units to the related net book value. In conducting our impairment analysis of long-lived assets, we compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill or long-lived assets. In the event that we determine that our goodwill or long-lived assets are impaired, we may be required to record a significant charge to earnings, which could adversely affect our results of operations.
The ownership of our stock is concentrated, with a few owners who may, individually or collectively, exert significant control over us.
Certain stockholders own a substantial portion of our outstanding common stock. As long as such major stockholders (whether or not acting in a coordinated manner) and any other substantial stockholder own, directly or indirectly, a substantial portion of our outstanding shares, they will be able to exert significant influence over matters requiring stockholder approval, including the composition of our Board of Directors. Further, to the extent that the substantial stockholders were to act in concert, they could potentially control any action taken by our stockholders.
The concentration of ownership of our outstanding equity in such major stockholders may make some transactions more difficult or impossible without the support of such stockholders or more likely with the support of such stockholders. The interests of any of such stockholders, any other substantial stockholder or any of their respective affiliates could conflict with or differ from the interests of our other stockholders or the interests of holders of the Senior Notes and Senior PIK Toggle Notes.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties
As of December 31, 2013, our operations were conducted through 84 facilities in 19 countries, of which 74 are manufacturing facilities and 10 are used for multiple purposes, including design, engineering and administration. Our corporate headquarters is located in Novi, Michigan. Our manufacturing facilities are located in North America, Europe, Asia, South America and Australia. We believe that substantially all of our properties are in generally good condition and that we have sufficient capacity to meet our current and projected manufacturing and design needs. The following table summarizes our key property holdings by geographic region:
(a) Includes design, engineering or administrative locations.
Our principal owned and leased properties, and the number of facilities in each location with more than one facility is set forth below.
Location
Principal Products
Owned/Leased
North America
United States
Auburn, Indiana
Anti-Vibration Systems
Owned
Auburn Hills, Michigan(2)
Design, engineering and administration
Leased
Bowling Green, Ohio
Body Sealing and Fluid Handling
Owned
Bremen, Indiana(a)
Body Sealing
Owned
East Tawas, Michigan
Fluid Handling
Owned
Fairview, Michigan
Fluid Handling
Owned
Farmington Hills, Michigan
Design, engineering and administration
Leased
Gaylord, Michigan
Body Sealing
Owned
Goldsboro, North Carolina(2)
Body Sealing
Owned
Leonard, Michigan
Fluid Handling
Owned
Mt. Sterling, Kentucky
Fluid Handling
Owned
New Lexington, Ohio
Fluid Handling
Owned
Novi, Michigan
Design, engineering and administration
Leased
Oscoda, Michigan
Fluid Handling
Owned
Rockford, Tennessee
Body Sealing
Owned
Spartanburg, South Carolina
Body Sealing
Owned
Surgoinsville, Tennessee
Fluid Handling
Leased
Topeka, Indiana(a)
Body Sealing
Owned
Canada
Georgetown, Ontario
Body Sealing
Owned
Glencoe, Ontario
Fluid Handling
Owned
Mitchell, Ontario
Anti-Vibration Systems
Owned
Sherbrooke, Quebec
Body Sealing
Leased
Stratford, Ontario(2)
Body Sealing
Owned
Mexico
Aguascalientes
Body Sealing
Leased
Atlacomulco
Fluid Handling
Owned
Guaymas(2)
Body Sealing and Fluid Handling
Leased
Juarez
Fluid Handling
Owned
Saltillo
Fluid Handling
Leased
Torreon
Fluid Handling
Owned
South America
Brazil
Atibaia
Body Sealing
Leased
Camaçari
Fluid Handling
Leased
Sao Bernardo
Sales & Administration
Leased
Varginha(2)
Body Sealing and Fluid Handling
Owned/Leased
Europe
Czech Republic
Zdar
Fluid Handling
Owned
France
Creutzwald
Fluid Handling
Owned
Lillebonne(a)
Body Sealing
Owned
Rennes(a)
Body Sealing
Owned
Vitré(a)
Body Sealing
Owned
Location
Principal Products
Owned/Leased
Germany
Grünberg
Fluid Handling
Owned
Hockenheim
Fluid Handling
Owned
Lindau
Body Sealing
Owned
Mannheim
Body Sealing
Owned
Schelklingen
Fluid Handling
Owned
Italy
Battipaglia
Body Sealing
Owned
Ciriè
Body Sealing
Owned
Netherlands
Amsterdam
Administration
Leased
Poland
Bielsko-Biala
Body Sealing
Owned
Bielsko-Biala
Administration
Leased
Czestochowa(a)
Anti-Vibration and Body Sealing
Owned
Dzierzoniow(2)
Body Sealing
Owned
Myslenice
Body Sealing
Leased
Piotrkow
Body Sealing
Owned
Romania
Craiova
Body Sealing and Fluid Handling
Leased
Serbia
Sremska Mitrovica
Body Sealing
Owned
United Kingdom
Coventry
Design, engineering and administration
Leased
Asia Pacific
Australia
Adelaide
Industrial Products
Owned
China
Chongqing
Fluid Handling
Owned
Huai-an(a)
Body Sealing
Leased
Jingzhou(a)
Fluid Handling
Owned
Kunshan
Anti-Vibration, Body Sealing and Fluid Handling
Owned
Panyu(a)
Body Sealing
Leased
Shanghai(a)(2)
Body Sealing
Owned/Leased
Wuhu
Body Sealing
Owned
India
Bawal
Body Sealing
Leased
Chennai
Body Sealing and Fluid Handling
Owned
Dharuhera(a)
Body Sealing
Leased
Mumbai(a)
Anti-Vibration
Leased
Sahibabad(a)
Body Sealing
Leased
Manesar(a)
Body Sealing
Leased
Pune
Fluid Handling
Leased
Japan
Hiroshima
Design, engineering and administration
Leased
Nagoya
Design, engineering and administration
Leased
South Korea
CheongJu(b)
Body Sealing
Owned
Gimhae
Body Sealing
Leased
Gunsan
Body Sealing and Fluid Handling
Leased
SeoCheon Gun
Body Sealing
Owned
Thailand
Nakon Ratchasma(a)
Body Sealing
Owned
(a) Denotes a joint venture facility.
(b) Under contract of sale.
Item 3.
Item 3. Legal Proceedings
We are periodically involved in claims, litigation and various legal matters that arise in the ordinary course of business. In addition, we conduct and monitor environmental investigations and remedial actions at certain locations. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably for us. If appropriate we establish a reserve estimate for each matter and update our estimate as additional information becomes available. We do not believe that the ultimate resolution of any of these matters will have a material adverse effect on our business, financial condition or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the NYSE since October 17, 2013, under the symbol “CPS” and our warrants are quoted on the OTC Bulletin Board since June 4, 2010, under the symbol “COSHW.” Prior to the NYSE listing, our common stock was traded on the OTC Bulletin Board under the symbol “COSH.”
The following chart lists the high and low sale prices for shares of our common stock and warrants for the calendar quarters indicated through December 31, 2012 and 2013. These prices are between dealers and do not include retail markups, markdowns or other fees and commissions and may not represent actual transactions:
Holders of Common Stock
As of January 28, 2014 we had approximately 1,533 holders of record of our common stock, based on information provided by our transfer agent.
Dividends
Cooper-Standard Holdings Inc. has never paid or declared a dividend on its common stock. The declaration of any prospective dividends is at the discretion of the Board of Directors and would be dependent upon sufficient earnings, capital requirements, financial position, general economic conditions, state law requirements, and other relevant factors. Additionally, our credit agreement governing our Senior ABL Facility and the indenture governing our Senior Notes and Senior PIK Toggle Notes contain covenants that among other things restrict our ability to pay certain dividends and distributions subject to certain qualifications and limitations. We do not anticipate paying any dividends on our common stock in the foreseeable future.
Securities Repurchase
On May 24, 2013, the Company announced that its Board of Directors approved a securities repurchase program (the “Program”) authorizing the Company to repurchase, in the aggregate, up to $50 million of its outstanding common stock or warrants to purchase common stock. Under the Program, repurchases may be made on the open market or through private transactions, as determined by the Company’s management and in accordance with prevailing market conditions and federal securities laws and regulations. The Company expects to fund all 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 program may be discontinued at any time at the Company’s discretion. This program was not affected by our May 2013 tender offer pursuant to which we purchased approximately $200 million of our common stock.
The following table presents repurchases of common stock during the quarterly period ended December 31, 2013:
Converted Securities
On October 18, 2013, the Company gave notice to the holders of its 7% preferred stock that the Company had elected to cause the mandatory conversion of all 810,382 shares of issued and outstanding 7% preferred stock on November 15, 2013. The 7% preferred stock was converted at the rate of 4.34164 shares of the Company’s common stock for each share of 7% preferred stock, or into an aggregate of 3,518,366 shares of common stock. On the conversion date, the Company’s common shares were issued and the shares of 7% preferred stock were cancelled and all rights of holders of 7% preferred stock were terminated. Shares of 7% preferred stock that were converted and cancelled were restored to the status of authorized but unissued preferred stock of the Company.
Performance Graph
The following graph compares the cumulative total stockholder return from May 27, 2010, the date of our emergence from Chapter 11 bankruptcy proceedings, through December 31, 2013, for Cooper-Standard Holdings Inc. existing common stock, the Standard & Poor’s 500 Index and the Standard & Poor’s Supercomposite Auto Parts & Equipment Index based on currently available data. The graph assumes an initial investment of $100 on May 27, 2010 and reflects the cumulative total return on that investment, including the reinvestment of all dividends where applicable, through December 31, 2013.
Comparison of Cumulative Return
(1) Represents last trading day of the year
Item 6.
Item 6. Selected Financial Data
The selected financial data for the year ended December 31, 2009, the five months ended May 31, 2010, the seven months ended December 31, 2010 and the years ended December 31, 2011, 2012 and 2013 have been derived from our consolidated financial statements, which have been audited by Ernst & Young LLP, our Independent Registered Public Accounting Firm.
The audited consolidated statements of net income, statements of comprehensive income, statements of changes in equity and statements of cash flows for the years ended December 31, 2011, 2012 and 2013 are included elsewhere in this Annual Report on Form 10-K. The audited consolidated balance sheets as of December 31, 2012 and 2013 are included elsewhere in this Annual Report on Form 10-K. See Item 8. “Financial Statements and Supplementary Data.”
In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations,” we adopted fresh-start accounting upon our emergence from Chapter 11 bankruptcy proceedings and became a new entity for financial reporting purposes as of June 1, 2010. Accordingly, the consolidated financial statements for the reporting entity subsequent to emergence from Chapter 11 bankruptcy proceedings (the “Successor”) are not comparable to the consolidated financial statements
for the reporting entity prior to emergence from Chapter 11 bankruptcy proceedings (the “Predecessor”). The “Company,” when used in reference to the period subsequent to emergence from Chapter 11 bankruptcy proceedings, refers to the Successor, and when used in reference to periods prior to emergence from Chapter 11 bankruptcy proceedings, refers to the Predecessor.
You should read the following data in conjunction with Item 7.
Item 7. 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 Item 1. “Business-Forward-Looking Statements” 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 elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.” Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with Item 6.” Selected Financial Data” and our consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K.
Company Overview
We design, manufacture and sell sealing and trim, fuel and brake delivery, fluid transfer, thermal and emissions and anti-vibration systems, subsystems and modules for use in passenger vehicles and light trucks manufactured by global OEMs. In 2013, approximately 77% of our sales consisted of original equipment sold directly to OEMs for installation on new vehicles. The remaining 23% of our sales were primarily to Tier I and Tier II suppliers and non-automotive manufacturers. Accordingly, sales of our products are directly affected by the annual vehicle production of OEMs and, in particular, the production levels of the vehicles for which we provide specific parts. Most of our products are custom designed and engineered for a specific vehicle platform which are increasingly larger and more global. Our sales and product development personnel frequently work directly with the OEMs engineering departments in the design and development of our various products.
Although each OEM may emphasize different requirements as the primary criteria for judging its suppliers, we believe success as an automotive supplier generally requires outstanding performance with respect to price, quality, service, performance, design and engineering capabilities, innovation, timely delivery and an extensive global footprint. Also, we believe our continued commitment to invest in global common processes is an important factor in servicing global customers with the same quality and consistency of product wherever we produce in the world. This is especially important when supplying products for global platforms.
We believe in our continued commitment to investment in global common process solutions. In addition, in order to remain competitive we must also consistently achieve and sustain cost savings. In an ongoing effort to reduce our cost structure, we run a global continuous improvement program which includes training for Kaizen project teams, as well as implementation of lean tools, structured problem solving, best business practices, standardized processes and change management. We also evaluate opportunities to consolidate facilities and to relocate certain operations to lower cost countries. We believe we will continue to be successful in our efforts to improve our design and engineering capability and manufacturing processes while achieving cost savings, including through our lean initiatives.
Our OEM sales are principally generated from purchase orders issued by OEMs and as a result we have no order backlog. Once selected by an OEM to supply products for a particular platform, we typically supply those products for the life of the platform, which is normally three to five years; although there is no guarantee that this will occur. In addition, when we are the incumbent supplier to a given platform, we believe we have a competitive advantage in winning the redesign or replacement platform.
In the year ended December 31, 2013, approximately 52% of our sales were generated in North America and approximately 48% of our sales were generated outside of North America. Because of our significant international operations, we are subject to the risks associated with doing business in other countries. Historically, our operations in Canada and Western Europe have not presented materially different risks or problems from those we have encountered in the United States, although the cost and complexity of streamlining operations in certain European countries is greater than would be the case in the United States. This is due
primarily to labor laws in those countries that can make reducing employment levels more time-consuming and expensive than in the United States. We believe the risks of conducting business in less developed markets, including Brazil, Mexico, Poland, Czech Republic, China, Korea and India are sometimes greater than in the United States, Canadian and Western European markets. This is due to the potential for currency volatility, high interest and inflation rates, and the general political and economic instability that are associated with some of these markets.
Business Environment and Outlook
According to the fourth quarter 2013 outlook from the forecasting firm IHS, global light vehicle sales will hit a new record of nearly 82 million vehicles this year, despite economic challenges in several key markets, and will grow steadily through 2020 to approximately 105 million vehicles.
Much of this growth will be driven by emerging markets in China, India, Russia, Brazil and Eastern Europe, as well as Indonesia, Thailand and Turkey.
Other important changes include:
•
North American vehicle sales are expected to remain strong over the next few years with strong growth in compact and mid-size vehicles;
•
a slow recovery is beginning in Western Europe with vehicle sales expected to return to the 15 million vehicles level by 2018;
•
the biggest growth area between 2015 and 2020 will be China, followed by India;
•
China will account for nearly 30% of global light vehicle sales by 2020 and will become the world’s #1 light vehicle market, followed by the United States and India;
•
more than $70 billion of capital investments will be made in the BRIC countries (Brazil, Russia, India and China) in the next couple of years to expand auto production capacity, with more than half of that being spent by the OEMs in China alone; and
•
the share of global light vehicles sales for the mature markets (North America, Western Europe and Japan/Korea) will fall from approximately 43% in 2012 to 36 % in 2020, while the share for emerging markets will grow to approximately 64% by 2020.
Several factors will present significant opportunities for automotive suppliers who are positioned for the changing environment such as:
•
continued shift to global platforms (same vehicle that is built around the world);
•
consolidation of suppliers;
•
increased government regulation; and
•
intensified consumer demand for high technology features in vehicles.
Our business is directly affected by the automotive build rates in North America and Europe. It is also becoming increasingly impacted by build rates in Brazil 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 and government and tax incentives.
Details on light vehicle production in certain regions for 2012 and 2013 are provided in the following table:
(1) Production data based on IHS Automotive, December 2013.
(2) Production data for 2012 has been updated to reflect actual production levels.
The expected annualized vehicle production volumes for 2014 are provided in the following table:
(1) Production data based on IHS Automotive, December 2013.
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. Globalization and the importance to service 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 the reduced production volumes, will 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
Year ended December 31, 2013 Compared to Year ended December 31, 2012.
Sales. Sales were $3,090.5 million for the year ended December 31, 2013, compared to $2,880.9 million for the year ended December 31, 2012, an increase of $209.6 million, or 7.3%. Sales were favorably impacted by an increase in volumes in all segments, and favorable foreign exchange of $7.6 million. In addition, the Jyco acquisition provided $32.7 million of incremental sales. These items were partially offset by 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 $2,617.8 million for the year ended December 31, 2013, compared to $2,442 million for the year ended December 31, 2012, an increase of $175.8 million or 7.2%. Raw materials comprise the largest component of our cost of products sold and represented 49% and 51% of total cost of products sold for the years ended December 31, 2013 and 2012, respectively. The period was impacted by increased volumes in all segments, higher staffing costs and other operating expenses. In addition, cost of products sold for the year ended December 31, 2013 was impacted by the Jyco acquisition, which was completed July 31, 2013. These items were partially offset by lean savings.
Gross Profit. Gross profit for the year ended December 31, 2013 was $472.7 million compared to $438.9 million for the year ended December 31, 2012. As a percentage of sales, gross profit was 15.3% and 15.2% of sales for the years ended December 31, 2013 and 2012, respectively. The increase was driven by the favorable impact of lean savings and increased volumes in all segments, partially offset by customer price concessions, higher staffing costs and other operating expenses.
Selling, Administration and Engineering. Selling, administration and engineering expense for the year ended December 31, 2013 was $293.4 million or 9.5% of sales compared to $281.3 million or 9.8% of sales for the year ended December 31, 2012. Selling, administration and engineering expense for the year ended December 31, 2013 was impacted by increased staffing and compensation expenses as we increase our research and development and engineering resources to support our growth initiatives around the world. In addition, the year ended December 31, 2013 was impacted by the Jyco acquisition, which was completed July 31, 2013.
Restructuring. Restructuring charges of $21.7 million for the year ended December 31, 2013 consisted primarily of $5.3 million of costs associated with initiatives announced prior to 2013 and $16.4 million of costs associated with initiatives announced in 2013, primarily relating to an initiative in Europe to change our manufacturing footprint. Restructuring charges of $28.8 million for the year ended December 31, 2012 consisted primarily of costs associated with European initiatives announced during 2012 and additional costs associated with the reorganization of our French body sealing operations in relation to the joint venture with FMEA.
Interest Expense, Net. Net interest expense of $54.9 million for the year ended December 31, 2013 resulted primarily from interest and debt issuance amortization recorded on the Senior Notes and Senior PIK Toggle Notes. Net interest expense of $44.8 million for the year ended December 31, 2012 resulted primarily from interest and debt issuance amortization recorded on the Senior Notes.
Other Income (Expense), Net. Other expense for the year ended December 31, 2013 was $7.4 million, which consisted of $9.4 million of foreign currency losses and $1.7 million of loss on sale of receivables, which were partially offset by $3.7 million of other miscellaneous income. Other expense for the year ended December 31, 2012 was $0.1 million, which consisted of $6.8 million of foreign currency losses and $1.0 million of loss on sale of receivables, which were partially offset by $4.4 million of gains related to forward contracts and $3.3 million of other miscellaneous income.
Income Tax Expense (Benefit). Income taxes for the year ended December 31, 2013 included an expense of $45.6 million on earnings before taxes of $90.9 million. This compares to a benefit of $31.5 million on $67.3 million of earnings before taxes for the year ended December 31, 2012. Tax expense in 2013 differs from the statutory rate due to the incremental valuation allowance recorded on tax losses and credits generated in certain foreign jurisdictions, the distribution of income between the United States and foreign sources, tax credits and incentives, and other non-recurring discrete items.
Year ended December 31, 2012 Compared to Year ended December 31, 2011.
Sales. Sales were $2,880.9 million for the year ended December 31, 2012, compared to $2,853.5 million for the year ended December 31, 2011, an increase of $27.4 million, or 1%. Sales were favorably impacted by an increase in volumes in North America as well as the USi acquisition and the joint venture with FMEA which were completed March, 2011 and May, 2011, respectively. These favorable items were partially offset by unfavorable foreign exchange of $129.4 million and decreased volumes in the Europe segment.
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 $2,442 million for the year ended December 31, 2012, compared to $2,402.9 million for the year ended December 31, 2011, an increase of $39.1 million or 1.6%. Raw materials comprise the largest component of our cost of products sold and represented 51% of total cost of products sold for the years ended December 31, 2012 and 2011. The period was impacted by higher material costs, increases in other fixed and variable costs as a result of improved North American production volumes, and higher labor costs due to the additional hires to support the increased volumes. In addition, the period was impacted by the USi acquisition and the joint venture with FMEA, which were completed March, 2011 and May, 2011, respectively. These items were partially offset by lean savings and favorable foreign exchange.
Gross Profit. Gross profit for the year ended December 31, 2012 was $438.9 million compared to $450.6 million for the year ended December 31, 2011. As a percentage of sales, gross profit was 15.2% and 15.8% of sales for the years ended December 31, 2012 and 2011, respectively. The decrease was driven primarily by higher material costs, increases in other expenses associated with launch and expansion activities and unfavorable foreign exchange. In addition, the gross profit margins associated with our 2011 acquisitions are lagging behind our base business. These items were partially offset by the favorable impact of increased volumes in North America and lean savings.
Selling, Administration and Engineering. Selling, administration and engineering expense for the year ended December 31, 2012 was $281.3 million or 9.8% of sales compared to $257.6 million or 9% of sales for the year ended December 31, 2011. Selling, administration and engineering expense for the year ended December 31, 2012 was impacted by increased staffing and compensation expenses as we increase our research and development and engineering resources to support our growth initiatives around the world. In addition, the year ended December 31, 2012 was impacted by the USi acquisition and the joint venture with FMEA, which were completed March, 2011 and May, 2011, respectively.
Impairment Charges. Due to launch activities and operational inefficiencies incurred in 2012 and that were expected to continue into the future as additional time would be needed to improve operational performance, a goodwill impairment charge of $2.8 million was recorded during the fourth quarter of 2012. In 2012, as a result of projected declines in vehicle production volumes and increased costs, the undiscounted cash flows at one of our European facilities did not exceed its book value resulting in an asset impairment charge of $7.3 million being recorded in the fourth quarter of 2012.
Restructuring. Restructuring charges of $28.8 million for the year ended December 31, 2012 consisted primarily of costs associated with European initiatives announced during 2012 and additional costs associated with the reorganization of our French body sealing operations in relation to the joint venture with FMEA. Restructuring charges of $52.2 million for the year ended December 31, 2011 consisted primarily of costs associated with the reorganization of our French body sealing operations in relation to the joint venture with FMEA, the closure of a facility in North America and the establishment of a centralized shared services function in Europe.
Interest Expense, net. Net interest expense of $44.8 million for the year ended December 31, 2012 resulted primarily from interest and debt issuance amortization recorded on the Senior Notes. Net interest expense of $40.6 million for the year ended December 31, 2011 consisted primarily of interest and debt issuance amortization recorded on the Senior Notes, which was partially offset by interest income of $4.9 million.
Other Income (Expense), net. Other expense for the year ended December 31, 2012 was $0.1 million, which consisted of $6.8 million of foreign currency losses and $1.0 million of loss on sale of receivables, which were largely offset by $4.4 million of gains related to forward contracts and $3.3 million of other miscellaneous income. Other income for the year ended December 31, 2011 was $7.2 million, which consisted of a gain on the partial sale of ownership in our NISCO joint venture of $11.4 million and foreign currency gains of $2.8 million, which were partially offset by unrealized losses related to forward contracts of $5.3 million and loss on factoring of receivables and miscellaneous expense of $1.7 million.
Income Tax Expense (Benefit). Income taxes for the year ended December 31, 2012 included a benefit of $31.5 million on earnings before taxes of $67.3 million. This compares to an expense of $20.8 million and $97.3 million on earnings before taxes for the year ended December 31, 2011. Tax expense in 2012 differs from the statutory rate due to the benefit resulting from the reversal of the valuation allowance on net deferred tax assets in the United States, income in jurisdictions with valuation allowances offset by incremental valuation allowance recorded on tax losses and credits generated in certain foreign jurisdictions, the distribution of income between the United States and foreign sources, tax credits and incentives, and other non-recurring discrete items.
Segment Results of Operations
The following table presents sales and segment profit (loss) for each of the reportable segments for the years ended December 31, 2011, 2012 and 2013:
Year ended December 31, 2013 Compared to the Year Ended December 31, 2012.
North America. Sales for the year ended December 31, 2013 increased $114.2 million or 7.6%, compared to the year ended December 31, 2012, primarily due to an increase in sales volume, which was partially offset by customer price concessions and unfavorable foreign exchange of $5 million. In addition, sales were favorably impacted by the Jyco acquisition, which was completed July 31, 2013. Segment profit for the year ended December 31, 2013 decreased $1.7 million, primarily due to customer price concessions, higher staffing costs and other operating expenses, which were partially offset by the favorable impact of lean savings, increased sales volume and the Jyco acquisition.
Europe. Sales for the year ended December 31, 2013 increased $59.5 million, or 5.9%, compared to the year ended December 31, 2012, primarily due to an increase in sales volume and favorable foreign exchange of $33.2 million, which were partially offset by customer price concessions. Segment loss improved by $16.6 million, primarily due to the favorable impact of lean and restructuring savings and favorable material prices, which were partially offset by customer price concessions, higher staffing and other operating expenses. In addition, an asset impairment charge of $7.3 million was recorded in 2012.
South America. Sales for the year ended December 31, 2013 increased $29.1 million, or 19.8%, compared to the year ended December 31, 2012, primarily due to an increase in sales volumes, which was partially offset by unfavorable foreign exchange of $18.1 million. Segment loss improved by $6.9 million, primarily due to increased volumes and lean savings, which were partially offset by other operating expenses. In addition, a goodwill impairment charge of $2.8 million was recorded in 2012.
Asia Pacific. Sales for the year ended December 31, 2013 increased $6.7 million, or 3.2%, compared to the year ended December 31, 2012, primarily due to an increase in sales volume, which was partially offset by unfavorable foreign exchange of $2.5 million. In addition, sales were favorably impacted by the Jyco acquisition, which was completed July 31, 2013. Segment profit increased by $1.8 million, primarily due to increased volumes and lean savings, which were partially offset by higher staffing costs.
Year ended December 31, 2012 Compared to the Year Ended December 31, 2011.
North America. Sales for the year ended December 31, 2012 increased $86.5 million or 6.1%, compared to the year ended December 31, 2011, primarily due to an increase in sales volume, offset by unfavorable foreign exchange of $12.5 million. Segment profit for the year ended December 31, 2012 decreased $21.7 million, primarily due to higher raw material costs, increased staffing and a gain of $11.4 million recognized in 2011 for the partial sale of ownership in our NISCO joint venture, which were partially offset by the favorable impact of lean savings and increased sales volume.
Europe. Sales for the year ended December 31, 2012 decreased $61.6 million, or 5.7%, compared to the year ended December 31, 2011, primarily due to unfavorable foreign exchange of $86.1 million and decreased production volumes, which were partially offset by sales from our joint venture with FMEA. Segment loss decreased by $13.4 million, primarily due to restructuring costs that were recorded in 2011 for the joint venture agreement with FMEA and the favorable impact of lean savings, which were partially offset by impairment charges of fixed assets of $7.3 million, higher raw material costs, unfavorable foreign exchange and decreased volumes.
South America. Sales for the year ended December 31, 2012 increased $7.9 million, or 5.7%, compared to the year ended December 31, 2011, primarily due to increased production volumes, which was partially offset by unfavorable foreign exchange of $22 million. Segment profit decreased by $24.5 million, primarily due to new plant start-up costs, impairment charges of goodwill of $2.8 million, higher raw material costs and unfavorable foreign exchange, which were partially offset by the favorable impact of increased sales volume and lean savings.
Asia Pacific. Sales for the year ended December 31, 2012 decreased $5.4 million, or 2.5%, compared to the year ended December 31, 2011, primarily due to unfavorable foreign exchange of $8.7 million. Segment profit increased by $2.8 million, primarily due to the favorable impact of lean savings, which was partially offset by higher material costs.
Off-Balance Sheet Arrangements
As a part of our working capital management, we sell certain receivables through third party financial institutions without recourse. The amount sold varies each month based on the amount of underlying receivables and cash flow needs. At December 31, 2012 and 2013, we had $73.7 million and $94.5 million, respectively, of receivables outstanding under receivable transfer agreements entered into by various locations. For the years ended December 31, 2012 and 2013, total accounts receivables factored were $332 million, and $474.2 million, respectively. Costs incurred on the sale of receivables were $2 million, $2.2 million and $2.9 million for the years ended December 31, 2011, 2012 and 2013, respectively. These amounts are recorded in other income (expense), net and interest expense, net of interest income in the consolidated statements of net income. These are permitted transactions under our credit agreement governing our Senior ABL Facility and the indentures governing the Senior Notes and the Senior PIK Toggle Notes.
As of December 31, 2013, we had no other material off-balance sheet arrangements.
Liquidity and Capital Resources
Short and Long-Term Liquidity Considerations and Risks
We intend to fund our ongoing capital and working capital requirements through a combination of cash flows from operations, cash on hand and borrowings under our Senior ABL Facility, in addition to certain receivable factoring. We anticipate that funds generated by operations, cash on hand and funds available under our Senior ABL Facility will be sufficient to meet working capital requirements for the next 12 months. 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 7. “Debt” to the consolidated financial statements for additional information.
Based on our current and anticipated levels of operations and the condition in our markets and industry, we believe that our cash on hand, cash flow from operations and availability under our Senior ABL Facility will enable us to meet our working capital, capital expenditures, debt service and other funding requirements for the next 12 months. However, 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 Senior ABL Facility, depends on our future operating performance and cash flow 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 and other factors. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.
Cash Flows
Operating activities. Net cash provided by operations was $133.3 million for the year ended December 31, 2013, which included $59.3 million of cash used that related to changes in operating assets and liabilities. The use of cash related to operating assets and liabilities was primarily a result of increased accounts and tooling receivables and inventories of $81.6 million, partially offset by increased accounts payable of $58.4 million, due primarily to increased demand for our products. In addition, pension contributions of $20.8 million were made during the year ended December 31, 2013. Net cash provided by operations was $84.4 million for the year ended December 31, 2012, which included $114.5 million of cash used that related to changes in operating assets and liabilities. The use of cash related to operating assets and liabilities was primarily a result of increased accounts and tooling receivables of $61.7 million and pension contributions of $33.5 million.
Investing activities. Net cash used in investing activities was $191.1 million for the year ended December 31, 2013, which consisted primarily of $183.3 million of capital spending and $13.5 million for the Jyco acquisition, offset by a $2.1 million return on equity investments and proceeds of $3.6 million for the sale of fixed assets and other. Net cash used in investing activities was $117.6 million for the year ended December 31, 2012, which consisted primarily of $131.1 million of capital spending, offset by proceeds of $14.6 million for the sale of fixed assets and other. We anticipate that we will spend approximately $195 million to $205 million on capital expenditures in 2014.
Financing activities. Net cash used in financing activities totaled $23 million for the year ended December 31, 2013, which consisted primarily of repurchase of common stock of $217.5 million, payment of cash dividends on our 7% preferred stock of $4.7 million and payments on long-term debt of $3.9 million, which were partially offset by proceeds of $194.4 million from the issuance of Senior PIK Toggle Notes, $11.3 million related to the exercise of stock warrants and an increase in long-term debt of $7.1 million. Net cash used in financing activities totaled $58.1 million for the year ended December 31, 2012, which consisted primarily of repurchases of 7% preferred stock of $6.8 million, repurchase of common stock of $36.9 million, a decrease in short-term debt and payments on long-term debt aggregating $5.5 million, and payment of cash dividends on our 7% preferred stock of $6.8 million.
On October 18, 2013, the Company gave notice to the holders of its 7% preferred stock that the Company had elected to cause the mandatory conversion of all 810,382 shares of issued and outstanding shares of 7% preferred stock on November 15, 2013. The 7% preferred stock was converted at the rate of 4.34164 shares of the
Company’s common stock for each share of 7% preferred stock, or into an aggregate of 3,518,366 shares of common stock. On the conversion date, the shares of 7% preferred stock were cancelled and all rights of holders of 7% preferred stock were terminated (other than the right to receive shares of common stock issuable upon conversion). Shares of 7% preferred stock that were converted and cancelled were restored to the status of authorized but unissued preferred stock of the Company.
Financing Arrangements
As part of our Plan of Reorganization, we issued $450 million of our Senior Notes and entered into our Senior ABL Facility. On April 3, 2013, the Company issued its Senior PIK Toggle Notes as part of the financing for the purchase of shares of our common stock pursuant to the Equity Tender Offer. We intend to fund our ongoing capital and working capital requirements through a combination of cash flows from operations and borrowings under our Senior ABL Facility. We anticipate that funds generated by operations and funds available under our Senior ABL Facility will be sufficient to meet working capital requirements for the next 12 months. Our Senior Notes, Senior ABL Facility and Senior PIK Toggle Notes are described below. See Note 7. “Debt” to the consolidated financial statements for additional information.
Senior ABL Facility
On April 8, 2013, Cooper-Standard Holdings Inc. (“Parent”), CSA U.S. (the “Issuer” or the “US Borrower”), CSA Canada (the “Canadian Borrower”), Cooper-Standard Automotive International Holdings BV (the “European Borrower” and, together with the US Borrower and Canadian Borrower, the “Borrowers”), and certain subsidiaries of the US Borrower entered into an Amended and Restated Loan and Security Agreement in connection with its Senior ABL Facility, with certain lenders, Bank of America, N.A., as agent (the “Agent”) for such lenders, Deutsche Bank Trust Company Americas, as syndication agent, and Banc of America Securities LLC, Deutsche Bank Securities Inc., and J.P. Morgan Securities LLC, as joint lead arrangers and bookrunners. A summary of our Senior ABL Facility is set forth below. This description is qualified in its entirety by reference to the credit agreement governing our Senior ABL Facility.
General. Our Senior ABL Facility provides for an aggregate revolving loan availability of up to $150 million, subject to borrowing base availability, including a $50 million letter of credit sub-facility and a $25 million swing line sub-facility. Our Senior ABL Facility also provides for an uncommitted $75 million incremental loan facility, for a potential total Senior ABL Facility of $225 million (if requested by the Borrowers and the lenders agree to fund such increase). No consent of any lender (other than those participating in the increase) is required to effect any such increase. On December 31, 2013, subject to borrowing base availability, the Company had $150 million in availability less outstanding letters of credit of $36.7 million.
Maturity. Any borrowings under our Senior ABL Facility will mature, and the commitments of the lenders under our Senior ABL Facility will terminate, on March 1, 2018.
Borrowing base. Loan (and letter of credit) availability under our Senior ABL Facility is subject to a borrowing base, which at any time is limited to the lesser of: (A) the maximum facility amount (subject to certain adjustments) and (B) (i) up to 85% of eligible accounts receivable; plus (ii) up to the lesser of 70% of eligible inventory or 85% of the appraised net orderly liquidation value of eligible inventory; minus reserves established by the Agent. The accounts receivable portion of the borrowing base is subject to certain formulaic limitations (including concentration limits). The inventory portion of the borrowing base is limited to eligible inventory, as determined by an independent appraisal. The borrowing base is also subject to certain reserves, which are established by the Agent (which may include changes to the advance rates indicated above). Loan availability under our Senior ABL Facility is apportioned as follows: $130 million to CSA U.S., which includes a $50 million sublimit to Cooper-Standard Automotive International Holdings B.V. and a $20 million sublimit to CSA Canada.
Guarantees; security. Obligations under our Senior ABL Facility and cash management arrangements and interest rate and foreign currency swaps, in each case with the lenders and their affiliates (collectively “Additional ABL Secured Obligations”) entered into by CSA U.S. are guaranteed on a senior secured basis by
the Company and all of our U.S. subsidiaries (other than CS Automotive LLC). Obligations of CSA Canada under our Senior ABL Facility and Additional ABL Secured Obligations of CSA Canada and its Canadian subsidiaries are guaranteed on a senior secured basis by the Company, its U.S. subsidiaries and CSA Canada and Canadian subsidiaries. The obligations under our Senior ABL Facility and related guarantees are secured by a first priority lien on all of each Borrower’s and each guarantor’s existing and future personal property consisting of accounts receivable, payment intangibles, inventory, documents, instruments, chattel paper and investment property, certain money, deposit accounts, securities accounts, letters of credit, commercial tort claims and certain related assets and proceeds of the foregoing.
Interest. Borrowings under our Senior ABL Facility bear interest at a rate equal to, at the Borrowers’ option:
•
in the case of borrowings by the U.S. Borrower or European Borrower, LIBOR or the base rate plus, in each case, an applicable margin; or
•
in the case of borrowings by the Canadian Borrower, bankers’ acceptance (“BA”) rate, Canadian prime rate or Canadian base rate plus, in each case, an applicable margin.
The applicable margin may vary between 1.50% and 2.00% with respect to the LIBOR or BA-based borrowings and between 0.50% and 1.00% with respect to base rate, Canadian prime rate and Canadian base rate borrowings. The applicable margin is subject, in each case, to quarterly pricing adjustments based on usage over the immediately preceding quarter.
In addition to paying interest on outstanding principal under our Senior ABL Facility, the Borrowers are required to pay a fee in respect of committed but unused commitments. The Borrowers are also required to pay a fee on outstanding letters of credit under our Senior ABL Facility together with customary issuance and other letter of credit fees. Our Senior ABL Facility also required the payment of customary agency and administrative fees.
The Borrowers are able to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans, in each case, in whole or in part, at any time without premium or penalty (other than customary breakage and related reemployment costs with respect to repayments of any outstanding borrowings).
Covenants; Events of Default. Our Senior ABL Facility includes affirmative and negative covenants that impose substantial restrictions on our financial and business operations, including our ability to incur and secure debt, make investments, sell assets, pay dividends or make acquisitions. Our Senior ABL Facility also includes a requirement to maintain a monthly fixed charge coverage ratio of no less than 1.0 to 1.0 when availability under our Senior ABL Facility is less than specified levels. Our Senior ABL Facility also contains various events of default that are customary for comparable facilities.
Our current revenue forecast for 2014 is determined from specific platform volume projections consistent with a North American and European light vehicle production estimate of 16.8 million units and 19.6 million units, respectively. Adverse changes to the vehicle production levels could have a negative impact on our future sales, liquidity, results of operations and ability to comply with our debt covenants under our Senior ABL Facility or any future financing arrangements we enter into. In addition to the potential impact of changes on our sales, our current operating performance and future compliance with the covenants under our Senior ABL Facility or any future financing arrangements we enter into are dependent upon a number of other external and internal factors, such as changes in raw material costs, changes in foreign currency rates, our ability to execute our cost savings initiatives, our ability to implement and achieve the savings expected by the changes in our operating structure and other factors beyond our control.
8 1/2% Senior Notes due 2018
On May 11, 2010 as part of the Plan of Reorganization, CSA Escrow Corporation (the “escrow issuer”), an indirect wholly-owned non-Debtor subsidiary of the Issuer closed an offering of $450 million aggregate principal amount of its Senior Notes. Proceeds from the Senior Notes were used to pay certain claims in the Plan of
Reorganization. The Senior Notes were initially issued in a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). In February 2011, we consummated a registered exchange offer pursuant to which we exchanged all of the outstanding privately placed Senior Notes, or “old notes,” for new 8 1/2% Senior Notes due 2018, or “exchange notes.” The exchange notes were issued under the same indenture as the old notes and are identical to the old notes, except that the new notes have been registered under the Securities Act. References herein to the “Senior Notes” refer to the old notes prior to the consummation of the exchange offer and to the exchange notes thereafter.
A summary description of the Senior Notes is set forth below. This description is qualified in its entirety by reference to the Senior Notes indenture.
General. The Senior Notes were issued pursuant to an indenture dated May 11, 2010 by and between the escrow issuer and the trustee thereunder. On the effective date of our Plan of Reorganization, the escrow issuer was merged with and into the Issuer, with the Issuer as the surviving entity, and upon the consummation of the merger, the Issuer assumed the obligations under the Senior Notes and the Senior Notes indenture and the guarantees by the guarantors described below became effective.
Guarantees. The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by Parent and all of the Issuer’s wholly-owned domestic restricted subsidiaries (collectively, the “guarantors” and, together with the Issuer, the “obligors”). If the Issuer or any of its domestic restricted subsidiaries acquires or creates another wholly-owned domestic restricted subsidiary that guarantees certain debt of the Issuer or a guarantor, such newly acquired or created subsidiary is also required to guarantee the Senior Notes.
Ranking. The Senior Notes and each guarantee constitute senior debt of the Issuer and each guarantor, respectively. The Senior Notes and each guarantee (1) rank equally in right of payment with all of the applicable obligor’s existing and future senior debt, (2) rank senior in right of payment to all of the applicable obligor’s existing and future subordinated debt, (3) are effectively subordinated in right of payment to all of the applicable obligor’s existing and future secured indebtedness and secured obligations to the extent of the value of the collateral securing such indebtedness and obligations and (4) are structurally subordinated to all existing and future indebtedness and other liabilities of the Issuer’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to the Issuer or one of the guarantors).
Optional redemption. The Issuer has the right to redeem the Senior Notes at the redemption prices set forth below:
•
on and after May 1, 2014, all or a portion of the Senior Notes may be redeemed at a redemption price of 104.250% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2014, 102.125% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2015, and 100% of the principal amount thereof if redeemed on or after May 1, 2016, in each case plus any accrued and unpaid interest to the redemption date;
•
prior to May 1, 2014, all or a portion of the Senior Notes may be redeemed at a price equal to 100% of the principal amount thereof plus a make-whole premium, and any accrued and unpaid interest to the redemption date.
Change of control. If a change of control occurs with respect to Parent or the Issuer, unless the Issuer has exercised its right to redeem all of the outstanding Senior Notes, each noteholder shall have the right to require that the Issuer repurchase such noteholder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase, subject to the right of the noteholders of record on the relevant record date to receive interest due on the relevant interest payment date.
Covenants. The Senior Notes indenture limits, among other things, the ability of the Issuer and its restricted subsidiaries, (currently, all majority owned subsidiaries) to pay dividends or make distributions, repurchase equity, prepay subordinated debt or make certain investments, incur additional debt or issue certain disqualified stock or preferred stock, sell assets, incur liens, enter into transactions with affiliates and allow to
exist certain restrictions on the ability of a restricted subsidiary to pay dividends or to make other payments or loans to or transfer assets to the Issuer; in each case, subject to certain exclusions and other customary exceptions. The Senior Notes indenture also limits the ability of the Issuer, Parent and a subsidiary guarantor to merge or consolidate with another entity or sell all or substantially all of its assets. In addition, certain of these covenants will not be applicable during any period of time when the Senior Notes have an investment grade rating. The Senior Notes indenture contains customary events of default.
Senior PIK Toggle Notes
On April 3, 2013, the Company issued the Senior PIK Toggle Notes. The Senior PIK Toggle Notes bear an interest rate of 7.375% and mature on April 1, 2018. The Senior PIK Toggle Notes were issued pursuant to an indenture dated April 3, 2013. The Senior PIK Toggle Notes were issued at a discount of $3.9 million. On May 20, 2013, the Company issued an additional $25 million Senior PIK Toggle Notes pursuant to the indenture dated April 3, 2013. The additional Senior PIK Toggle Notes were issued at a discount of $0.2 million. The Company used the proceeds from the issuance of the Senior PIK Toggle Notes, together with cash on hand, to finance the purchase of shares of our common stock pursuant to the Equity Tender Offer.
The Company paid the first interest payment on the Senior PIK Toggle Notes in cash (“Cash Interest”). For each interest period thereafter (other than for the final interest period ending at stated maturity, which will be made in cash), the Company will be required to pay Cash Interest, unless the conditions described in the indenture are satisfied, in which case the Company will be entitled to pay, to the extent described in the indenture, interest by increasing the principal amount of the outstanding Senior PIK Toggle Notes or issuing new Senior PIK Toggle Notes (such increase or issuance, “PIK Interest”). Cash Interest will accrue on the Senior PIK Toggle Notes at a rate equal to 7.375% per annum. PIK Interest will accrue on the Senior PIK Toggle Notes at a rate equal to 8.125% per annum.
The Senior PIK Toggle Notes were not guaranteed as of the date of issuance. If any of the Company’s wholly-owned domestic restricted subsidiaries guarantees certain debt of the Company, such subsidiary will also be required to guarantee the Senior PIK Toggle Notes.
The Senior PIK Toggle Notes constitute senior debt of the Company and (1) rank equally in right of payment with all of the Company’s existing and future senior debt, (2) rank senior in right of payment to any future subordinated debt of the Company, (3) are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and secured obligations to the extent of the value of the collateral securing such indebtedness and obligations and (4) are structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries (other than indebtedness and liabilities owed to the Company).
The Company has the right to redeem the Senior PIK Toggle Notes at the redemption prices set forth below:
•
on and after April 1, 2014, all or a portion of the Senior PIK Toggle Notes may be redeemed at a redemption price of 102.000% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2014, 101.000% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2015, and 100.000% of the principal amount thereof if redeemed on or after April 1, 2016, in each case plus any accrued and unpaid interest to the redemption date;
•
prior to April 1, 2014, all or a portion of the Senior PIK Toggle Notes may be redeemed with the proceeds from certain equity offerings at a redemption price of 102.000% of the principal amount thereof, plus any accrued and unpaid interest to the redemption date; and
•
prior to April 1, 2014, all or a portion of the Senior PIK Toggle Notes may be redeemed at a price equal to 100.000% of the principal amount thereof plus a make-whole premium, plus any accrued and unpaid interest to the redemption date.
If a change of control occurs with respect to the Company, unless the Company has exercised its right to redeem all of the outstanding Senior PIK Toggle Notes, each noteholder shall have the right to require the Company to repurchase such noteholder’s Senior PIK Toggle Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase.
The Senior PIK Toggle Notes indenture contains covenants and events of default customary for an issuer of non-investment grade debt and substantially similar to the covenants and events of default in the indenture governing the Senior Notes.
Non-GAAP Financial Measures
In evaluating our business, management considers EBITDA and Adjusted EBITDA as 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 restructuring costs, impairment charges, non-cash fair value adjustments, acquisition related costs, non-cash stock based compensation and non-cash gains and losses from certain foreign currency transactions and translation.
We calculate EBITDA and Adjusted EBITDA by adjusting net income (loss) to eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. 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 in addition 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;
•
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 Senior Notes, Senior PIK Toggle Notes and Senior ABL Facility;
•
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 unusual or non-recurring items.
The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income, which is the most comparable financial measure in accordance with U.S. GAAP:
(1) Includes non-cash restructuring.
(2) Proportionate share of restructuring costs related to FMEA joint venture.
(3) Write-up of inventory to fair value for the USi, Inc. acquisition, the FMEA joint venture, net of noncontrolling interest and the Jyco acquisition.
(4) Net gain on partial sale of ownership percentage in joint venture.
(5) Costs incurred in relation to the FMEA joint venture agreement and the Jyco acquisition.
(6) Non-cash stock amortization expense and non-cash stock option expense for grants issued at emergence from bankruptcy.
(7) Impairment charges related to goodwill of $2.8 million and fixed assets of $7.3 million.
(8) Executive compensation for retired CEO and recruiting costs related to search for new CEO.
(9) Noncontrolling interest deferred tax valuation reversal related to FMEA joint venture.
(10) Costs related to corporate development activities.
Working capital
Historically, we have not generally experienced difficulties in collecting our accounts receivable, but the dynamics associated with the global economic downturn have impacted both the amount of our receivables and somewhat the stressed ability for our customers to pay within normal terms. We believe that we currently have a strong working capital position. As of December 31, 2013, we had net cash of $184.4 million.
Contractual Obligations
Our contractual cash obligations consist of legal commitments requiring us to make fixed or determinable cash payments, regardless of the contractual requirements of the vendor to provide future goods or services. Except as otherwise disclosed, this table does not include information on our recurring purchase of materials for use in production because our raw materials purchase contracts typically do not require fixed or minimum quantities.
The following table summarizes the total amounts due as of December 31, 2013 under all debt agreements, commitments and other contractual obligations.
(1) Noncancellable purchase order commitments for capital expenditures, other borrowings and capital lease obligations.
In addition to our contractual obligations and commitments set forth in the table above, we have employment arrangements with certain key executives that provide for continuity of management. These arrangements include payments of multiples of annual salary, certain incentives, and continuation of benefits upon the occurrence of specified events in a manner that is believed to be consistent with comparable companies.
We also have minimum funding requirements with respect to our pension obligations. We expect to make minimum cash contributions of approximately $13.2 million and discretionary cash contributions of approximately $1.3 million to our domestic and foreign pension plan asset portfolios in 2014. Our minimum funding requirements after 2014 will depend on several factors, including the investment performance of our retirement plans and prevailing interest rates. Our funding obligations may also be affected by changes in applicable legal requirements. We also have payments due with respect to our postretirement benefit obligations. We do not prefund our postretirement benefit obligations. Rather, payments are made as costs are incurred by covered retirees. We expect other postretirement benefit net payments to be approximately $3.1 million in 2014.
We may be required to make significant cash outlays due to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $7.0 million as of December 31, 2013 have been excluded from the contractual obligations table above. See Note 10. “Income Taxes” to the consolidated financial statements for additional information.
In addition, excluded from the contractual obligation table are open purchase orders at December 31, 2013 for raw materials and supplies used in the normal course of business, supply contracts with customers, distribution agreements, joint venture agreements and other contracts without express funding requirements.
Raw Materials and Manufactured Components
The principal raw materials for our business include synthetic rubber, components manufactured from carbon steel, plastic resins and components, carbon black, process oils, components manufactured from aluminum and natural rubber. We manage the procurement of our raw materials to assure supply and to obtain
the most favorable total cost of ownership. Procurement arrangements include short-term and long-term supply agreements that may contain formula-based pricing based on commodity indices. These arrangements provide quantities needed to satisfy normal manufacturing demands.
We believe we have adequate sources for the supply of raw materials and components for our products with suppliers located around the world. We often use offshore suppliers for machined components, die castings and other labor-intensive, economically freighted products in our North American and European facilities.
Extreme fluctuations in material pricing have occurred in recent years adding challenges in forecasting supply costs. Our inability generally to recover higher than anticipated material costs from our customers could impact our profitability.
Seasonal Trends
Historically, sales to automotive customers are lowest during the months prior to model changeovers and during assembly plant shutdowns. However, economic conditions and consumer demand may change the traditional seasonality of the industry and lower production may prevail without the impact of seasonality. Historically, model changeover periods have typically resulted in lower sales volumes during July, August and December. During these periods of lower sales volumes, profit performance is reduced but working capital often improves due to the continued collection of accounts receivable.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 2. “Significant Accounting Policies,” to the consolidated financial statements. Application of these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or estimation than other accounting policies.
Pre-Production Costs Related to Long Term Supply Arrangements. Costs for molds, dies, and other tools owned by us to produce products under long-term supply arrangements are recorded at cost in property, plant, and equipment and amortized over the lesser of three years or the term of the related supply agreement. We expense all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer.
Goodwill. As of December 31, 2012 and 2013, we had recorded goodwill of approximately $133.7 million and $139.7 million, respectively. Goodwill is not amortized but is tested for impairment, either annually or when events or circumstances indicate that impairment may exist. We evaluate each reporting unit’s fair value versus its carrying value annually or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value of the reporting unit. Estimated fair values are based on the cash flows projected in the reporting units’ strategic plans and long-range planning forecasts discounted at a risk-adjusted rate of return. We assess the reasonableness of these estimated fair values using market based multiples of comparable companies. If the carrying value exceeds the fair value, an impairment loss is measured and recognized. Goodwill fair value measurements are classified within Level 3 of the fair value hierarchy, which are generally determined using unobservable inputs. We conduct our annual goodwill impairment as of October 1st of each year.
Our 2012 annual goodwill impairment analysis, completed as of the first day of the fourth quarter, resulted in an impairment charge of $2.8 million in our South America reporting unit. This charge was due to changes in the forecast for this reporting unit resulting from launch activities and operational inefficiencies incurred in 2012 that were expected to continue into the future as additional time would be required to improve operational performance.
Our 2013 annual goodwill impairment analysis, completed as of the first day of the fourth quarter, resulted in no impairment. The fair value of our Europe reporting unit did not substantially exceed its corresponding carrying amount and if future growth assumptions are not achieved, the Company could incur a future goodwill impairment charge.
Long-Lived Assets. We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with ASC 360, “Property, Plant, and Equipment.” If impairment indicators exist, we perform the required analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Change in economic or operating conditions impacting these estimates and assumptions could result in the impairment of long-lived assets. During 2012, we impaired property, plant and equipment at one of our European facilities with a carrying value of $16.7 million to its fair value of $9.4 million, resulting in an impairment charge of $7.3 million. Fair value was determined using discounted cash flows, revenue growth of 2% and a discount rate of 15%.
Restructuring-Related Reserves. Specific accruals have been recorded in connection with restructuring initiatives, as well as the integration of acquired businesses. These accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities, contractual obligations, and the valuation of certain assets. Actual amounts recognized could differ from the original estimates. Restructuring-related reserves are reviewed on a quarterly basis and changes to plans are appropriately recognized when identified. Changes to plans associated with the restructuring of existing businesses are generally recognized as employee separation and plant phase-out costs in the period the change occurs. See Note 4. “Restructuring” to the consolidated financial statements for additional information.
Revenue Recognition and Sales Commitments. We generally enter into agreements with our customers to produce products at the beginning of a vehicle’s life. Although such agreements do not generally provide for minimum quantities, once we enter into such agreements, fulfillment of our customers’ purchasing requirements can be our obligation for an extended period or the entire production life of the vehicle. These agreements generally may be terminated by our customer at any time. Historically, terminations of these agreements have been minimal. In certain limited instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses as they are incurred.
We receive blanket purchase orders from many of our customers on an annual basis. Generally, such purchase orders and related documents set forth the annual terms, including pricing, related to a particular vehicle model. Such purchase orders generally do not specify quantities. We recognize revenue based on the pricing terms included in our annual purchase orders as our products are shipped to our customers. As part of certain agreements, we are asked to provide our customers with annual cost reductions. We accrue for such amounts as a reduction of revenue as our products are shipped to our customers. In addition, we generally have ongoing adjustments to our pricing arrangements with our customers based on the related content and cost of our products. Such pricing accruals are adjusted as they are settled with our customers.
Amounts billed to customers related to shipping and handling are included in sales in our consolidated statements of net income. Shipping and handling costs are included in cost of sales in our consolidated statements of net income.
Income Taxes. In determining the provision for income taxes for financial statement purposes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. In accordance with ASC Topic 740, Accounting for Income Taxes, we evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we
consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative losses in the most recent fiscal years, expectations for future pretax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Deferred tax assets are reduced by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods.
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. The Company utilizes three years cumulative pre-tax book results adjusted for significant permanent book to tax differences as a measure of cumulative results in recent years. In certain foreign jurisdictions, our analysis indicates that we have cumulative three-year historical losses on this basis. This is considered significant negative evidence which is difficult to overcome. However, the three year loss position is not solely determinative and, accordingly, management considers all other available positive and negative evidence in its analysis. Based upon this analysis, management concluded that it is more likely than not that the net deferred tax assets in certain foreign jurisdictions may not be realized in the future. Accordingly, the Company continues to maintain a valuation allowance related to those net deferred tax assets.
We continue to maintain a valuation allowance related to our net deferred tax assets in several foreign jurisdictions. As of December 31, 2013, we had valuation allowances of $122.8 million related to tax loss and credit carryforwards and other deferred tax assets in several foreign jurisdictions. Our valuation allowance increased in 2013 primarily as a result of recording a valuation allowance against our net deferred tax asset in Brazil and current year losses with no benefit in certain foreign jurisdictions. Our current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances in certain countries. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Our future provision for income taxes will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.
In addition, the calculation of our tax benefits and liabilities includes uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which additional taxes will be due. We adjust these liabilities based on changing facts and circumstances; however, due to the complexity of some of these uncertainties and the impact of any tax audits, the ultimate resolutions may be materially different from our estimated liabilities. See Note 10. “Income Taxes” to the consolidated financial statements for additional information.
Pensions and Postretirement Benefits Other Than Pensions. Included in our results of operations are significant pension and postretirement benefit costs, which are measured using actuarial valuations. Inherent in these valuations are key assumptions, including assumptions about discount rates and expected returns on plan assets. These assumptions are updated at the beginning of each fiscal year. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in pension and postretirement benefit costs may occur in the future due to changes in these assumptions. Our net pension and postretirement benefit costs were approximately $7.3 million and $2.4 million, respectively, for the year ended December 31, 2013.
To develop the discount rate for each plan, the expected cash flows underlying the plan’s benefit obligations were discounted using a December 31, 2013 pension index to determine a single equivalent rate. To develop our expected return on plan assets, we considered historical long-term asset return experience, the expected investment portfolio mix of plan assets and an estimate of long-term investment returns. To develop our expected portfolio mix of plan assets, we considered the duration of the plan liabilities and gave more weight to equity positions, including both public and private equity investments, than to fixed-income securities. Holding all other assumptions constant, a 1% increase or decrease in the discount rate would have increased the fiscal 2014 net periodic benefit cost expense by approximately $0.4 million or $1.6 million, respectively. Likewise, a
1% increase or decrease in the expected return on plan assets would have decreased or increased the fiscal 2014 net periodic benefit cost by approximately $3.4 million. Decreasing or increasing the discount rate by 1% would have increased or decreased the projected benefit obligations by approximately $70.6 million or $57.9 million, respectively. Aggregate pension net periodic benefit cost is forecasted to be approximately $3.1 million in 2014.
The expected annual rate of increase in health care costs is approximately 7% for 2013 (6.92% for the United States, 8% for Canada) grading down to 5% in 2018, and was held constant at 5% for years past 2018. These trend rates were assumed to reflect market trend, actual experience and future expectations. The health care cost trend rate assumption has a significant effect on the amounts reported. Only certain employees hired are eligible to participate in our subsidized postretirement plan. A 1% change in the assumed health care cost trend rate would have increased or decreased the fiscal 2014 service and interest cost components by $0.3 million or $0.2 million, respectively and the projected benefit obligations would have increased or decreased by $3.0 million or $2.4 million, respectively. Aggregate other postretirement net periodic benefit cost is forecasted to be approximately $1.2 million in 2014.
The general funding policy is to contribute amounts deductible for United States federal income tax purposes or amounts required by local statute.
Recent Accounting Pronouncements
See Note 2. “Significant Accounting Policies,” to the consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to fluctuations in interest rates, currency exchange rates and commodity prices. We actively monitor our exposure to risk from changes in foreign currency exchange rates and interest rates through the use of derivative financial instruments in accordance with management’s guidelines. We do not enter into derivative instruments for trading purposes. See Item 8.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Annual Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Cooper-Standard Holdings Inc.
We have audited the accompanying consolidated balance sheets of Cooper-Standard Holdings Inc. (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of net income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the index at Item 15(a) 2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cooper-Standard Holdings Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cooper-Standard Holdings Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 28, 2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 28, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Cooper-Standard Holdings Inc.
We have audited Cooper-Standard Holdings Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). Cooper-Standard Holdings Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cooper-Standard Holdings Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cooper-Standard Holdings Inc. as of December 31, 2013 and 2012, and the related consolidated statements of net income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013, and our report dated February 28, 2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 28, 2014
COOPER-STANDARD HOLDINGS INC.
CONSOLIDATED STATEMENTS OF NET INCOME
(Dollar amounts in thousands except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
COOPER-STANDARD HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(1) Other comprehensive income (loss) related to the benefit plan liability is net of a tax effect of $2,303, $10,055 and ($17,224) for the years ended December 31, 2011, 2012 and 2013, respectively.
(2) Other comprehensive income (loss) related to the fair value change of derivatives is net of a tax effect of ($34), ($29) and $99 for the years ended December 31, 2011, 2012 and 2013, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
COOPER-STANDARD HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2012 and 2013
(Dollar amounts in thousands except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
COOPER-STANDARD HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollar amounts in thousands except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
COOPER-STANDARD HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except note 22, per share and share amounts)
1. Description of Business
Description of business
Cooper-Standard Holdings Inc. (together with its consolidated subsidiaries, the “Company,” “Cooper Standard,” “we,” “our” or “us”), through its wholly-owned subsidiary CSA U.S., is a leading manufacturer of sealing and trim, fuel and brake delivery, fluid transfer, thermal and emissions, and anti-vibration systems (“AVS”) components, systems, 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 Company believes that they are the largest global producer of body sealing systems, the second largest global producer of the types of fuel and brake delivery products that they manufacture and one of the largest North American producers of fluid transfer systems. They design and manufacture their products in each major region of the world through a disciplined and sustained approach to engineering and operational excellence. The Company operates in 74 manufacturing locations and 10 design, engineering, and administrative locations in 19 countries around the world.
2. Significant Accounting Policies
Principles of combination and consolidation - The consolidated financial statements include the accounts of the Company and the wholly-owned and less than wholly-owned subsidiaries controlled by the Company. All material intercompany accounts and transactions have been eliminated. Acquired businesses are included in the consolidated financial statements from the dates of acquisition.
The equity method of accounting is followed for investments in which the Company does not have control, but does have the ability to exercise significant influence over operating and financial policies. Generally this occurs when ownership is between 20% to 50%. The cost method is followed in those situations where the Company’s ownership is less than 20% and the Company does not have the ability to exercise significant influence.
The Company’s investment in Nishikawa Standard Company (“NISCO”), a 40% owned joint venture in the United States, is accounted for under the equity method. This investment is in the Company’s North America segment. This investment totaled $17,424 and $17,162 at December 31, 2012 and 2013, respectively, and is included in other assets in the accompanying consolidated balance sheets. In 2012, the Company received from NISCO a dividend of $800, all of which was related to earnings. In 2013, the Company received from NISCO a dividend of $4,000, consisting of $1,880 related to earnings and a $2,120 return of capital.
The Company’s investment in Guyoung, a 17% owned joint venture in Korea, is accounted for under the cost method. This investment is in the Company’s Asia Pacific segment. This investment totaled $2,014 and $1,886 at December 31, 2012 and 2013, respectively, and is included in other assets in the accompanying consolidated balance sheets. During 2013, the Company sold shares of its investment in Guyoung which decreased the ownership percentage from 20% to 17%.
The Company’s investment in Huayu-Cooper Standard Sealing Systems Co. Ltd. (“Huayu”), a 47.5% owned joint venture in China, is accounted for under the equity method. This investment is in the Company’s Asia Pacific segment. This investment totaled $26,815 and $29,270 at December 31, 2012 and 2013, respectively, and is included in other assets in the accompanying consolidated balance sheets. In 2012, the Company received from Huayu a dividend of $2,519 all of which was related to earnings. In 2013, the Company received from Huayu a dividend of $2,094, all of which was related to earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The Company’s investment in NISCO Thailand, a 20% owned joint venture in Thailand, is accounted for under the equity method. This investment is in the Company’s Asia Pacific segment. This investment totaled $13,056 and $14,839 at December 31, 2012 and 2013, respectively, and is included in other assets in the accompanying consolidated balance sheets. In 2012, the Company received from NISCO Thailand a dividend of $82, all of which was related to earnings. In 2013, the Company received from NISCO Thailand a dividend of $1,374, all of which was related to earnings.
The Company’s investment in Sujan Barre Thomas AVS Private Limited, a 50% owned joint venture in India, is accounted for under the equity method. This investment is in the Company’s Europe segment. This investment totaled $2,944 and $3,329 at December 31, 2012 and 2013, respectively, and is included in other assets in the accompanying consolidated balance sheets.
Foreign currency - The financial statements of foreign subsidiaries are translated to U.S. dollars at the end-of-period exchange rates for assets and liabilities and at a weighted average exchange rate for each period for revenues and expenses. Translation adjustments for those subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Transaction related gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those intercompany balances which are designated as long-term.
Cash and cash equivalents - The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts receivable - The Company records trade accounts receivable when revenue is recorded in accordance with its revenue recognition policy and relieves accounts receivable when payments are received from customers. Generally the Company does not require collateral for its accounts receivable.
Allowance for doubtful accounts - The allowance for doubtful accounts is established through charges to the provision for bad debts when it is probable that the outstanding receivable will not be collected. The Company evaluates the adequacy of the allowance for doubtful accounts on a periodic basis. The evaluation includes historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk. This evaluation is inherently subjective, as it requires estimates that are susceptible to revision as more information becomes available. The allowance for doubtful accounts was $3,727 and $6,317 at December 31, 2012 and 2013, respectively.
Advertising expense - Expenses incurred for advertising are generally expensed when incurred. Advertising expense was $1,463 for 2011, $1,839 for 2012 and $3,059 for 2013.
Inventories - Inventories are valued at lower of cost or market. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. The Company records inventory reserves for inventory in excess of production and/or forecasted requirements and for obsolete inventory in production. As of December 31, 2012 and 2013, inventories are reflected net of reserves of $20,987 and $19,954, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Derivative financial instruments - Derivative financial instruments are utilized by the Company to reduce foreign currency exchange and interest rate risks. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities. On the date the derivative is established, the Company designates the derivative as either a fair value hedge, a cash flow hedge, or a net investment hedge in accordance with its established policy. The Company does not enter into financial instruments for trading or speculative purposes.
Income taxes - Income tax expense in the consolidated statements of net income is calculated in accordance with ASC Topic 740, Accounting for Income Taxes, which requires the recognition of deferred income taxes using the liability method.
Deferred tax assets or liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax laws and rates. A valuation allowance is provided on deferred tax assets if the Company determines that it is more likely than not that the asset will not be realized.
Long-lived assets - Property, plant, and equipment are recorded at cost and depreciated using primarily the straight-line method over their estimated useful lives. Leasehold improvements are amortized over the expected life of the asset or term of the lease, whichever is shorter. Intangibles with finite lives, which include technology and customer relationships, are amortized over their estimated useful lives. The Company evaluates the recoverability of long-lived assets when events and circumstances indicate that the assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying value. If the net carrying value exceeds the fair value, an impairment loss exists and is calculated based on a discounted cash flow analysis or estimated salvage value. Discounted cash flows are estimated using internal budgets and assumptions regarding discount rates and other factors.
Pre-Production Costs Related to Long Term Supply Arrangements - Costs for molds, dies, and other tools owned by the Company to produce products under long-term supply arrangements are recorded at cost in property, plant, and equipment and amortized over the lesser of three years or the term of the related supply agreement. The amounts capitalized were $2,593 and $2,026 at December 31, 2012 and 2013, respectively. The Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer. Reimbursable tooling costs included in other assets in the accompanying consolidated balance sheets were $3,877 and $13,786 at December 31, 2012 and 2013, respectively. Reimbursable tooling costs are recorded in tooling receivable in the accompanying consolidated balance sheets if considered a receivable in the next twelve months. Tooling receivable for customer-owned tooling for the years ended December 31, 2012 and 2013 was $116,947 and $156,205, respectively, of which $78,403 and $99,687, respectively, was not yet invoiced to the customer.
Goodwill - Goodwill is not amortized but is tested for impairment, either annually or when events or circumstances indicate that impairment may exist, by reporting unit which is determined in accordance with ASC 350 “Intangibles-Goodwill and Other.” The Company utilizes an income approach to estimate the fair value of each of its reporting units. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally-developed forecasts, as well as commercial, wage and benefit, inflation and discount rate assumptions. Other significant assumptions include the weighted average cost of capital, terminal value growth rate, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, the Company believes that the income approach provides a reasonable estimate of the fair value of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
its reporting units. The guideline public company method, a form of the market approach, was used to corroborate the results of the Company’s income approach conclusions. The Company conducts its annual goodwill impairment analysis as of October 1st of each year.
The Company may first assess qualitative factors to determine if it is necessary to perform the two-step goodwill impairment test. The Company also has the option to bypass the qualitative assessment and proceed directly to the first step of the goodwill test. For 2013, the Company decided to bypass the qualitative assessment and proceed directly to the first step of the goodwill impairment test. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value exceeds the carrying value, then the Company concludes that no goodwill impairment has occurred. If the carrying value of the reporting unit exceeds its fair value, a second step is required to measure possible goodwill impairment loss. The second step includes hypothetically valuing the tangible and intangible assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying value of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, the Company would recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value. The 2013 annual goodwill impairment analysis resulted in no impairment.
Revenue Recognition and Sales Commitments - Revenue is recognized when there is evidence of a sales agreement, the delivery of the goods has occurred, the sales price is fixed and deliverable and collectability is reasonably assured. The Company generally enters into agreements with their customers to produce products at the beginning of a vehicle’s life. Although such agreements do not generally provide for minimum quantities, once they enter into such agreements, fulfillment of their customers’ purchasing requirements can be their obligation for an extended period or the entire production life of the vehicle. These agreements generally may be terminated by their customer at any time. Historically, terminations of these agreements have been minimal. In certain limited instances, the Company may be committed under existing agreements to supply products to their customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, they recognize losses as they are incurred.
The Company receives blanket purchase orders from many of its customers on an annual basis. Generally, such purchase orders and related documents set forth the annual terms, including pricing, related to a particular vehicle model. Such purchase orders generally do not specify quantities. The Company recognizes revenue based on the pricing terms included in the annual purchase orders as products are shipped to the customers. As part of certain agreements, the Company is asked to provide its customers with annual cost reductions. The Company accrues for such amounts as a reduction of revenue as products are shipped to the customers. In addition, the Company generally has ongoing adjustments to pricing arrangements with its customers based on the related content and cost of the products. Such pricing accruals are adjusted as they are settled with the customers.
Amounts billed to customers related to shipping and handling are included in sales in the Company’s consolidated statements of net income. Shipping and handling costs are included in cost of sales in the Company’s consolidated statements of net income.
Research and development - Costs are charged to selling, administration and engineering expenses as incurred and totaled $83,906 for 2011, $94,171 for 2012 and $103,475 for 2013.
Stock-based compensation - The Company measures stock-based compensation expense at fair value in accordance with U.S. GAAP and recognizes such expenses over the vesting period of the stock-based employee awards. See Note 18. “Stock-Based Compensation” for additional information.
Use of estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of (1) revenues and expenses
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
during the reporting period and (2) assets and liabilities, as well as disclosure of contingent assets and liabilities, at the date of the financial statements. Actual results could differ from those estimates.
Reclassifications - Certain amounts in prior periods’ financial statements have been reclassified to conform to the current year presentation. In the Company’s balance sheet as of December 31, 2012, $32,616 was reclassified from accounts receivable, net to other current assets to conform to the current period presentation.
Recent accounting pronouncements
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU requires that a liability related to an unrecognized tax benefit be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if certain criteria are met. The guidance is effective for fiscal years beginning after December 15, 2013. The adoption of this ASU is not expected to have a material impact on the consolidated financial statements.
In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits use of the Fed Funds Effective Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes and removes the restriction on using different benchmark rates for similar hedges. The guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this ASU had no impact on the consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires companies to present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012. The Company adopted this guidance effective January 1, 2013. The effects of adoption were not significant and the additional required disclosures are included in Note 12. “Accumulated Other Comprehensive Income (Loss).”
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-lived Intangible Assets for Impairment. This ASU permits companies to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired before performing the quantitative impairment test. This ASU is effective for fiscal years beginning after September 15, 2012. The Company adopted this guidance effective January 1, 2013. The impact of the adoption of this ASU did not have a material impact on the consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which requires additional disclosures regarding offsetting and related arrangements. The issuance of ASU 2013-01, Balance Sheet (Topic 210): Clarifying the scope of Disclosures about Offsetting Assets and Liabilities, limited the scope of ASU 2011-11 to derivatives, repurchase agreements and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting or similar agreement. The provisions of these updates were effective as of January 1, 2013. The adoption of this ASU had no impact on the consolidated financial statements.
3. Acquisitions
On July 31, 2013, the Company completed the acquisition of Jyco Sealing Technologies (“Jyco”) for cash consideration of $14,382. The business acquired in the transaction is operated from Jyco’s manufacturing
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
locations in Canada, Mexico and China. Jyco provides Thermoplastic Vulcanizate (“TPV”) sealing technology and primarily supplies sealing systems and components to the automotive industry. This directly aligns with the Company’s growth strategy by strengthening important customer relationships in the automotive sealing systems. This acquisition was accounted for under ASC 805, “Business Combinations,” and the results of operations of Jyco are included in the Company’s consolidated financial statements from the date of acquisition.
The following table summarizes the estimated fair value of Jyco assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents, accounts receivable, 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. Management has estimated the fair value of property, plant and equipment, intangibles and other long-lived assets based upon financial estimates and projections prepared in conjunction with the transaction. The value assigned to all assets and liabilities did not exceed the acquisition price, therefore goodwill and intangibles were recorded related to this transaction as of December 31, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
4. Restructuring
The following table summarizes the activity for all restructuring initiatives for the years ended December 31, 2012 and 2013:
Restructuring activities initiated prior to 2012
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. The Company commenced these initiatives prior to January 1, 2012 and continued to execute these initiatives during 2013. The majority of the costs associated with these initiatives were incurred shortly after the original implementation. However, the Company continues to incur costs on some of the initiatives related principally to the disposal of the respective facilities.
The following table summarizes the restructuring expense for these initiatives for the years ended December 31, 2011, 2012 and 2013:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following table summarizes the activity in the restructuring liability for these initiatives for the years ended December 31, 2012 and 2013:
Restructuring activities initiated in 2012
During 2012, the Company initiated the restructuring of certain facilities in Europe to change the Company’s European footprint to improve operating performance. The majority of the costs have been recognized. The Company has recognized $23,410 of costs related to these initiatives.
The following table summarizes the restructuring expense for these initiatives for the years ended December 31, 2012 and 2013:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following table summarizes the activity in the restructuring liability for these initiatives for the years ended December 31, 2012 and 2013:
In the first quarter of 2012, the Company initiated the closure of a facility in North America and a restructuring liability of $4,886 was recorded. During the second quarter of 2012, the Company was able to negotiate a new contract with the union, therefore enabling the facility to remain open. As a result, $4,725 of restructuring expense was reversed in the year ended December 31, 2012.
Restructuring activities initiated in 2013
In the first quarter of 2013, the Company eliminated certain positions within the organization that resulted in restructuring expense of $1,621, all of which is paid. No additional expense is expected to be incurred related to this initiative.
In the third quarter of 2013, the Company initiated the closure of a facility in Korea and the transfer of equipment to another facility in Korea. The estimated cost of this initiative is $1,000 and is expected to be completed in 2014. For the year ended December 31, 2013, the Company recorded $622 of employee separation costs and other exit costs related to this initiative. As of December 31, 2013, the liability associated with this initiative is $390.
In the fourth quarter of 2013, the Company initiated the restructure of a facility in Europe. The estimated cost of this initiative is $21,100 and is expected to be completed in 2016. The following table summarizes the activity in the restructuring liability for this initiative for the year ended December 31, 2013:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
5. Property, Plant and Equipment
Property, plant and equipment is comprised of the following:
During 2012, the Company impaired property, plant and equipment at one of its European facilities with a carrying value of approximately $16,700 to the fair value of approximately $9,400, resulting in an impairment charge of approximately $7,300. Fair value was determined using discounted cash flows, revenue growth of 2% and a discount rate of 15%.
Depreciation expense totaled $108,473, $107,275 and $95,597 for the years ended December 31, 2011, 2012 and 2013, respectively.
6. Goodwill and Intangibles
Goodwill
Effective April 1, 2013, the Company changed its basis of presentation from two to four reportable segments. See Note 19. “Business Segments” for additional information. The changes in the carrying amount of goodwill by reportable operating segment for the years ended December 31, 2012 and 2013 are summarized as follows:
Goodwill is not amortized but is tested for impairment, either annually or when events or circumstances indicate that impairment may exist, by reporting units determined in accordance with ASC 350, “Goodwill and Other Intangible Assets.” During the fourth quarter of 2012, the Company recorded a goodwill impairment charge of $2,787 in its South America reporting segment. This charge was due to changes in the forecast for this reporting unit resulting from launch activities and operating inefficiencies incurred in 2012 that were expected to continue into the future as additional time would be required to improve operational performance. The 2013 annual goodwill impairment analysis, completed as of the first day of the fourth quarter, resulted in no impairment. The fair value of the Europe reporting unit did not substantially exceed its corresponding carrying amount and if future growth assumptions are not achieved, the Company could incur a future goodwill impairment charge.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Other Intangible Assets
The following table presents intangible assets and accumulated amortization balances of the Company as of December 31, 2012 and 2013, respectively:
Amortization expense totaled $15,601, $15,456 and $15,431 for the years ended December 31, 2011, 2012 and 2013, respectively.
Estimated amortization expense for the next five years is shown in the table below:
7. Debt
Outstanding debt consisted of the following at December 31, 2012 and 2013:
8 1/2% Senior Notes due 2018 (“Senior Notes”)
On May 11, 2010, the Company sold $450,000 aggregate principal amount of the Senior Notes. The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by Cooper-Standard Holdings Inc. and all of CSA U.S.’s wholly-owned domestic restricted subsidiaries (collectively, the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
“guarantors” and together with CSA U.S., the “obligors”). If CSA U.S. or any of its domestic restricted subsidiaries acquires or creates another wholly-owned domestic restricted subsidiary that guarantees certain debt of CSA U.S. or a guarantor, such newly acquired or created subsidiary is also required to guarantee the Senior Notes. The Senior Notes bear an interest rate of 8 1/2% and mature on May 1, 2018. Interest is payable semi-annually on May 1 and November 1.
The Senior Notes and each guarantee constitute senior debt of CSA U.S. and each guarantor, respectively. The Senior Notes and each guarantee (1) rank equally in right of payment with all of the applicable obligor’s existing and future senior debt, (2) rank senior in right of payment to all of the applicable obligor’s existing and future subordinated debt, (3) are effectively subordinated in right of payment to all of the applicable obligor’s existing and future secured indebtedness and secured obligations to the extent of the value of the collateral securing such indebtedness and obligations and (4) are structurally subordinated to all existing and future indebtedness and other liabilities of CSA U.S.’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to CSA U.S. or one of the guarantors).
CSA U.S. has the right to redeem the Senior Notes at the redemption prices set forth below:
•
on and after May 1, 2014, all or a portion of the Senior Notes may be redeemed at a redemption price of 104.250% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2014, 102.125% of the principal amount thereof if redeemed during the twelve-month period beginning on May 1, 2015, and 100% of the principal amount thereof if redeemed on or after May 1, 2016, in each case plus any accrued and unpaid interest to the redemption date;
•
prior to May 1, 2014, all or a portion of the Senior Notes may be redeemed at a price equal to 100% of the principal amount thereof, plus a make-whole premium, and any accrued and unpaid interest to the redemption date.
If a change of control occurs with respect to Cooper-Standard Holdings Inc. or CSA U.S., unless CSA U.S. has exercised its right to redeem all of the outstanding Senior Notes, each noteholder shall have the right to require that CSA U.S. repurchase such noteholder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase, subject to the right of the noteholders of record on the relevant record date to receive interest due on the relevant interest payment date.
The Senior Notes indenture limits, among other things, the ability of CSA U.S. and its restricted subsidiaries (currently, all majority owned subsidiaries) to pay dividends or make distributions, repurchase equity, prepay subordinated debt or make certain investments, incur additional debt or issue certain disqualified stock or preferred stock, sell assets, incur liens, enter into transactions with affiliates and allow to exist certain restrictions on the ability of a restricted subsidiary to pay dividends or to make other payments or loans to or transfer assets to CSA U.S. in each case, subject to certain exclusions and other customary exceptions. The Senior Notes indenture also limits the ability of CSA U.S., Cooper-Standard Holdings Inc. and a subsidiary guarantor to merge or consolidate with another entity or sell all or substantially all of its assets. In addition, certain of these covenants will not be applicable during any period of time when the Senior Notes have an investment grade rating. The Senior Notes indenture contains customary events of default.
Senior PIK Toggle Notes
On April 3, 2013, the Company issued $175,000 aggregate principal amount of its 7 3/8% Senior PIK Toggle Notes due 2018 (the “Senior PIK Toggle Notes”). The Senior PIK Toggle Notes bear an interest rate of 7.375%, mature on April 1, 2018 and were issued at an aggregate discount of $3,938. On May 20, 2013, the Company issued an additional $25,000 Senior PIK Toggle Notes. These additional Senior PIK Toggle Notes were issued at an aggregate discount of $188. All of the Senior PIK Toggle Notes were issued pursuant to an indenture dated April 3, 2013. The Company used the proceeds from the issuance of the Senior PIK Toggle
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Notes, together with cash on hand, to finance the purchase of shares pursuant to the Company’s cash tender offer (“Equity Tender Offer”) to purchase up to 4,651,162 shares of its common stock at a price of $43.00 per share, which settled on May 2, 2013. See Note 17. “Equity and 7% Preferred Stock” for additional information.
The Company paid the first interest payment on the Senior PIK Toggle Notes in cash (“Cash Interest”). For each interest period thereafter (other than for the final interest period ending at stated maturity, which will be made in cash), the Company will be required to pay Cash Interest, unless the conditions described in the indenture are satisfied, in which case the Company will be entitled to pay, to the extent described in the indenture, interest by increasing the principal amount of the outstanding Senior PIK Toggle Notes or issuing new Senior PIK Toggle Notes (such increase or issuance, “PIK Interest”). Cash Interest will accrue on the Senior PIK Toggle Notes at a rate equal to 7.375% per annum. PIK Interest will accrue on the Senior PIK Toggle Notes at a rate equal to 8.125% per annum. Interest is payable semi-annually on April 1 and October 1.
The Senior PIK Toggle Notes were not guaranteed as of the date of issuance. If any of the Company’s wholly-owned domestic restricted subsidiaries guarantees certain debt of the Company, such subsidiary will also be required to guarantee the Senior PIK Toggle Notes.
The Senior PIK Toggle Notes constitute senior debt of the Company and (1) rank equally in right of payment with all of the Company’s existing and future senior debt, (2) rank senior in right of payment to any future subordinated debt of the Company, (3) are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and secured obligations to the extent of the value of the collateral securing such indebtedness and obligations and (4) are structurally subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries (other than indebtedness and liabilities owed to the Company).
The Company has the right to redeem the Senior PIK Toggle Notes at the redemption prices set forth below:
•
on and after April 1, 2014, all or a portion of the Senior PIK Toggle Notes may be redeemed at a redemption price of 102.000% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2014, 101.000% of the principal amount thereof if redeemed during the twelve-month period beginning on April 1, 2015, and 100.000% of the principal amount thereof if redeemed on or after April 1, 2016, in each case plus any accrued and unpaid interest to the redemption date;
•
prior to April 1, 2014, all or a portion of the Senior PIK Toggle Notes may be redeemed with the proceeds from certain equity offerings at a redemption price of 102.000% of the principal amount thereof, plus any accrued and unpaid interest to the redemption date; and
•
prior to April 1, 2014, all or a portion of the Senior PIK Toggle Notes may be redeemed at a price equal to 100% of the principal amount thereof plus a make-whole premium, plus any accrued and unpaid interest to the redemption date.
If a change of control occurs with respect to the Company, unless the Company has exercised its right to redeem all of the outstanding Senior PIK Toggle Notes, each noteholder shall have the right to require the Company to repurchase such noteholder’s Senior PIK Toggle Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase.
The Senior PIK Toggle Notes indenture contains covenants and events of default customary for an issuer of non-investment grade debt and substantially similar to the covenants and events of default in the indenture governing the Senior Notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Senior ABL Facility
On April 8, 2013, the Company and certain of its subsidiaries entered into the Amended and Restated Loan and Security Agreement, in connection with its Senior ABL Facility, with certain lenders, which amended and restated the then-existing credit facility. The Senior ABL Facility provides for an aggregate revolving loan availability of up to $150,000, subject to borrowing base availability, including a $50,000 letter of credit sub-facility and a $25,000 swing line sub-facility. The Senior ABL Facility also provides for an uncommitted $75,000 incremental loan facility, for a potential total Senior ABL Facility of $225,000 (if requested by the Borrowers and the lenders agree 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 December 31, 2013, subject to borrowing base availability, the Company had $150,000 in availability less outstanding letters of credit of $36,739.
Any borrowings under the Senior ABL Facility will mature, and the commitments of the lenders under the Senior ABL Facility will terminate, on March 1, 2018. Proceeds of the Senior ABL Facility may be used to issue commercial and standby letters of credit, to finance ongoing working capital needs and for general corporate purposes. Loan (and letter of credit) availability under the Senior ABL Facility is subject to a borrowing base, which at any time is limited to the lesser of: (A) the maximum facility amount (subject to certain adjustments) and (B) (i) up to 85% of eligible accounts receivable; plus (ii) up to the lesser of 70% of eligible inventory or 85% of the appraised net orderly liquidation value of eligible inventory; minus reserves established by the Agent. The accounts receivable portion of the borrowing base is subject to certain formulaic limitations (including concentration limits). The inventory portion of the borrowing base is limited to eligible inventory, as determined by an independent appraisal. The borrowing base is also subject to certain reserves, which are established by the Agent (which may include changes to the advance rates indicated above). Loan availability under the Senior ABL Facility is apportioned to the Borrowers as follows: $130,000 to CSA U.S. which includes a $50,000 sublimit to Cooper-Standard Automotive International Holdings B.V. and a $20,000 sublimit to CSA Canada.
Obligations under the Senior ABL Facility and cash management arrangements and interest rate and foreign currency swaps, in each case with the lenders and their affiliates (collectively “Additional ABL Secured Obligations”) entered into by CSA U.S. are guaranteed on a senior secured basis by the Company and all of our U.S. subsidiaries (other than CS Automotive LLC). Obligations of CSA Canada under the Senior ABL Facility and Additional ABL Secured Obligations of CSA Canada and its Canadian subsidiaries are guaranteed on a senior secured basis by the Company, its U.S. subsidiaries and CSA Canada and Canadian subsidiaries. Obligations of Cooper-Standard International Holdings BV under the Senior ABL Facility are guaranteed on a secured basis by the Company and all of our US subsidiaries (other than CS Automotive LLC). The obligations under the Senior ABL Facility and related guarantees are secured by a first priority lien on all of each Borrower’s (other than Cooper-Standard International Holdings BV and each guarantor’s existing and future personal property consisting of accounts receivable, payment intangibles, inventory, documents, instruments, chattel paper and investment property, certain money, deposit accounts and securities accounts and certain related assets and proceeds of the foregoing.
Borrowings under the Senior ABL Facility bear interest at a rate equal to, at the Borrowers’ option:
•
in the case of borrowings by the U.S. Borrower or European Borrower, LIBOR or the base rate plus, in each case, an applicable margin; or
•
in the case of borrowings by the Canadian Borrower, BA rate, Canadian prime rate or Canadian base rate plus, in each case, an applicable margin.
The applicable margin may vary between 1.50% and 2.00% with respect to the LIBOR or BA-based borrowings and between 0.50% and 1.00% with respect to base rate, Canadian prime rate and Canadian base rate borrowings. The applicable margin is subject, in each case, to quarterly pricing adjustments based on usage over the immediately preceding quarter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
In addition to paying interest on outstanding principal under the Senior ABL Facility, the Borrowers are required to pay a fee in respect of committed but unutilized commitments. The Borrowers are also required to pay a fee on outstanding letters of credit under the Senior ABL Facility, together with customary issuance and other letter of credit fees. The Senior ABL Facility also requires the payment of customary agency and administrative fees.
The Borrowers are able to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans, in each case, in whole or in part, at any time without premium or penalty (other than customary breakage and related reemployment costs with respect to repayments of outstanding borrowings).
The Senior ABL Facility includes affirmative and negative covenants that impose substantial restrictions on the Company’s financial and business operations, including their ability to incur and secure debt, make investments, sell assets, pay dividends or make acquisitions. The Senior ABL Facility also includes a requirement to maintain a monthly fixed charge coverage ratio of no less than 1.0 to 1.0 when availability under the Senior ABL Facility is less than specified levels. The Senior ABL Facility also contains various events of default that are customary for comparable facilities.
The Company was in compliance with all covenants as of December 31, 2013.
Other borrowings at December 31, 2012 and 2013 reflect borrowings under capital leases, local bank lines and accounts receivable factoring sold with recourse classified in debt payable within one year on the consolidated balance sheet.
The maturities of debt at December 31, 2013 are as follows:
Interest paid on third party debt was $44,038, $45,752 and $52,925 for the years ended December 31, 2011, 2012 and 2013, respectively.
8. Pensions
The Company maintains defined benefit pension plans covering employees located in the United States. The majority of these plans are frozen and all are closed to new employees. Benefits generally are based on compensation, length of service and age for salaried employees and on length of service for hourly employees. The Company’s policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements. The Company also sponsors defined benefit pension plans for employees in some of its international locations.
The Company also sponsors defined contribution pension plans for certain salaried and hourly U.S. employees of the Company. Participation is voluntary. The Company matches contributions of participants, up to various limits based on its profitability, in substantially all plans. The Company also sponsors a retirement plan that includes Company non-elective contributions. Non-elective and matching contributions under these plans totaled $12,565, $12,851 and $13,609 for the years ended December 31, 2011, 2012 and 2013, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following tables disclose information related to the Company’s defined benefit pension plans:
Included in cumulative other comprehensive loss at December 31, 2013 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service costs of $2,706 ($2,546 net of tax) and unrecognized actuarial losses of $47,020 ($51,579 net of tax). The amounts included in cumulative other comprehensive loss and expected to be recognized in net periodic benefit cost during the fiscal year-ended December 31, 2014 are $295 and $699, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The accumulated benefit obligation for all domestic and international defined benefit pension plans was $325,755 and $187,065 at December 31, 2012 and $293,488 and $186,798 at December 31, 2013, respectively. As of December 31, 2012, the fair value of plan assets for one of the Company’s defined benefit plans exceeded the projected benefit obligation of $13,171 by $2,509. As of December 31, 2013, the fair value of plan assets for two of the Company’s defined benefit plans exceeded the projected benefit obligation of $63,719 by $7,113.
Weighted average assumptions used to determine benefit obligations at December 31, 2012 and 2013:
The following table provides the components of net periodic benefit cost for the plans:
The following table provides weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2011, 2012 and 2013:
Plan Assets
To develop the expected return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The weighted average asset allocations for the Company’s pension plans at December 31, 2012 and 2013 by asset category are approximately as follows:
(1) Invested primarily in equity, fixed income and cash instruments.
Equity security investments are structured to achieve an equal balance between growth and value stocks. The Company determines the annual rate of return on pension assets by first analyzing the composition of its asset portfolio. Historical rates of return are applied to the portfolio. This computed rate of return is reviewed by the Company’s investment advisors and actuaries. Industry comparables and other outside guidance is also considered in the annual selection of the expected rates of return on pension assets.
Investments in equity securities and debt securities are valued at fair value using a market approach and observable inputs, such as quoted market prices in active markets (Level 1 input based on the U.S. GAAP fair value hierarchy). Investments in equity securities and balanced funds in which the Company holds participation units in a fund, the Net Asset Value of which is based on the underlying assets and liabilities of the respective fund, are considered an unobservable input (Level 3 input based on the U.S. GAAP fair value hierarchy). Investments in Balanced Funds are valued at fair value using a market approach and inputs that are primarily directly or indirectly observable (Level 2 input based on the U.S. GAAP fair value hierarchy). Investments in Real Estate funds are primarily valued at Net Asset Value depending on the investment. See Note 20. “Fair Value of Financial Instruments” for additional information on the U.S. GAAP fair value hierarchy.
The following table sets forth by level, within the fair value hierarchy established by FASB ASC 820, the Company’s pension plan assets at fair value as of December 31, 2012:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following table sets forth by level, within the fair value hierarchy established by FASB ASC 820, the Company’s pension plan assets at fair value as of December 31, 2013:
The following is a reconciliation for which Level 3 inputs were used in determining fair value:
Transfers from Level 3 to Level 2 were accounts mainly in commercial real estate and includes mortgage loans which are backed by the associated properties. It has been determined that the Company has the ability to redeem these investments at Net Asset Value as of the measurement date, therefore the investment is categorized as a Level 2 fair value measurement.
The Company estimates its benefit payments for its domestic and foreign pension plans during the next ten years to be as follows:
The Company estimates it will make minimum funding cash contributions of approximately $13,200 and discretionary cash contributions of approximately $1,300 to its pension plans in 2014.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
9. Postretirement Benefits Other Than Pensions
The Company provides certain retiree health care and life insurance benefits covering substantially all U.S. salaried and certain hourly employees and employees in Canada. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Independent actuaries determine postretirement benefit costs for each applicable subsidiary of the Company. The Company’s policy is to fund the cost of these postretirement benefits as these benefits become payable.
The following table discloses information related to the Company’s postretirement benefit plans:
Included in cumulative other comprehensive loss at December 31, 2013 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service credits of $4,072 ($3,441 net of tax) and unrecognized actuarial gains of $17,603 ($17,277 net of tax). The amounts included in cumulative other comprehensive loss and expected to be recognized in net periodic benefit cost during the fiscal year ended December 31, 2014 is ($2,223).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following table provides the components of net periodic benefit costs for the plans:
The curtailment gain for the years ended December 31, 2011 and 2012 in the table above were recorded as a reduction to restructuring expense.
The following table provides weighted average assumptions used to determine benefit obligations at December 31, 2012 and 2013:
The following table provides weighted average assumptions used to determine net periodic benefit costs for the years ended December 31, 2011, 2012 and 2013:
At December 31, 2013, the weighted average assumed annual rate of increase in the cost of health care benefits (health care cost trend rate) for 2014 was 6.92% for the U.S. and 8.00% for Non-U.S. with both grading down over time to 5.00% in 2018. A one-percentage point change in the assumed health care cost trend rate would have had the following effects:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The Company estimates its benefit payments for its postretirement benefit plans during the next ten years to be as follows:
Other post retirement benefits recorded in the Company’s consolidated balance sheets include $7,767 and $7,526 as of December 31, 2012 and 2013, respectively, for termination indemnity plans for two of the Company’s European locations.
10. Income Taxes
Components of the Company’s income (loss) before income taxes and adjustment for noncontrolling interests are as follows:
The Company’s income tax expense (benefit) consists of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following schedule reconciles the United States statutory federal rate to the income tax provision:
Payments, net of refunds, for income taxes for the years ended December 31, 2011, 2012 and 2013 were $20,643, $17,555 and $7,110, respectively. These amounts do not include any payments or refunds of income taxes related to the US-Canada Advanced Pricing Agreement settlement.
Deferred tax assets and liabilities reflect the estimated tax effect of accumulated temporary differences between the basis of assets and liabilities for tax and financial reporting purposes, as well as net operating losses, tax credit and other carryforwards. Significant components of the Company’s deferred tax assets and liabilities at December 31 are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Net deferred taxes in the consolidated balance sheets at December 31 are as follows:
At December 31, 2013, certain of the Company’s foreign subsidiaries, primarily in France, Brazil, and Germany, have operating loss carryforwards aggregating $207,000 with indefinite expiration periods. Other foreign subsidiaries in China, Mexico, Italy, Netherlands, Poland, Spain, India and Korea have operating losses aggregating $107,000, with expiration dates beginning in 2014. The Company has tax credit carryforwards totaling $35,600 in Poland and the United States with expiration dates beginning in 2017. The deferred tax asset related to foreign tax credit carryforwards is lower than the actual amount reported on the Company’s domestic tax returns by approximately $3,100. This difference is the result of tax deductions in excess of financial statement amounts for stock-based compensation. When these amounts are realized, the Company will record the tax benefit as an increase to additional paid-in capital. The Company and its domestic subsidiaries have anticipated tax benefits of state net operating losses and credit carryforwards of $17,500 with expiration dates beginning in 2014.
The Company continues to maintain a valuation allowance related to their net deferred tax assets in several foreign jurisdictions. As of December 31, 2013, the Company had valuation allowances of $122,771 related to tax loss and credit carryforwards and other deferred tax assets in several foreign jurisdictions. The Company’s valuation allowance increased in 2013 primarily as a result of recording a valuation allowance against their net deferred tax asset in Brazil and current year losses with no benefit in certain foreign jurisdictions. The Company’s current and future provision for income taxes is significantly impacted by the initial recognition of and changes in 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. The Company’s future provision for income taxes will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.
Deferred income taxes have not been provided on approximately $450,000 of undistributed earnings of foreign subsidiaries as such amounts are considered permanently reinvested. It is not practical to estimate any additional income taxes and applicable withholding taxes that would be payable on remittance of such undistributed earnings.
At December 31, 2013, the Company has $7,012 ($7,073 including interest and penalties) of total unrecognized tax benefits. Of this total, $6,797 represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate. The total unrecognized tax benefits differ from the amount which would affect the effective tax rate due primarily to the impact of the valuation allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The Company, or one of its subsidiaries, files income tax returns in the United States and other foreign jurisdictions. The Internal Revenue Service completed an examination of the Company’s U.S. income tax returns through 2008. The Company is nearly complete with the examination for tax years ended December 31, 2010 and 2011. U.S. state and local jurisdictions tax claims for any taxable year prior to 2009 are generally limited to the amount of any claims they filed in the Bankruptcy Court by February 3, 2010. The Company’s major foreign jurisdictions are Brazil, Canada, France, Germany, Italy, Mexico, and Poland. The Company is no longer subject to income tax examinations in major foreign jurisdictions for years prior to 2007.
During the next twelve months, it is reasonably possible that, as a result of audit settlements, the conclusion of current examinations and the expiration of the statute of limitations in certain jurisdictions, the Company may decrease the amount of its gross unrecognized tax benefits by approximately $1,955, of which an immaterial amount, if recognized, could impact the effective tax rate.
The Company classifies all tax related interest and penalties as income tax expense. The Company has recorded in liabilities for the years ended December 31, 2012 and 2013, $46 and $61 respectively, for tax related interest and penalties on its consolidated balance sheets.
11. Lease Commitments
The Company leases certain manufacturing facilities and equipment under long-term leases expiring at various dates. Rental expense for operating leases was $24,064, $24,340 and $26,853 for the years ended December 31, 2011, 2012 and 2013, respectively.
Future minimum payments for all non-cancelable operating leases are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
12. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of related tax, are as follows:
Amounts in parentheses indicate debits.
(1) Other comprehensive income (loss) related to the benefit plan liability is net of a tax effect of $2,303, $10,055, and ($17,224) for the years ended December 31, 2011, 2012 and 2013. Other comprehensive income (loss) related to the fair value change of derivatives is net of a tax effect of ($34), ($29) and $99 for the years ended December 31, 2011, 2012 and 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2013 are as follows:
(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. (See Note 8. “Pensions” and Note 9. “Postretirement Benefits other than Pensions” for additional details.)
13. Contingent Liabilities
Employment Contracts
The Company has employment arrangements with certain key executives that provide for continuity of management. These arrangements include payments of multiples of annual salary, certain incentives, and continuation of benefits upon the occurrence of specified events in a manner that is believed to be consistent with comparable companies.
Unconditional Purchase Orders
Noncancellable purchase order commitments for capital expenditures made in the ordinary course of business were $36,119 and $65,459 at December 31, 2012 and 2013, respectively.
Legal and Other Claims
The Company is periodically involved in claims, litigation, and various legal matters that arise in the ordinary course of business. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably with respect to the Company. If appropriate, the Company establishes a reserve estimate for each matter and updates such estimate as additional information becomes available. Based on the information currently known to the Company, they do not believe that the ultimate resolution of any of these matters will have a material adverse effect on their financial condition, results of operations, or cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Environmental
The Company is subject to a broad range of federal, state, and local environmental and occupational safety and health laws and regulations in the United States and other countries, including those governing: emissions to air, discharges to water, noise and odor emissions; the generation, handling, storage, transportation, treatment, reclamation and disposal of chemicals and waste materials; the cleanup of contaminated properties; and human health and safety. The Company may incur substantial costs associated with hazardous substance contamination or exposure, including cleanup costs, fines, and civil or criminal sanctions, third party property or natural resource damage, personal injury claims or costs to upgrade or replace existing equipment as a result of violations of or liabilities under environmental laws or the failure to maintain or comply with environmental permits required at their locations. In addition, many of the Company’s current and former facilities are located on properties with long histories of industrial or commercial operations and some of these properties have been subject to certain environmental investigations and remediation activities. The Company maintains environmental reserves for certain of these sites. As of December 31, 2013, the Company has $7,656 reserved in accrued liabilities and other liabilities on the consolidated balance sheet on an undiscounted basis, which they believe are adequate. Because some environmental laws (such as the Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws) can impose liability retroactively and regardless of fault on potentially responsible parties for the entire cost of cleanup at currently or formerly owned or operated facilities, as well as sites at which such parties disposed or arranged for disposal of hazardous waste, the Company could become liable for investigating or remediating contamination at their current or former properties or other properties (including offsite waste disposal locations). The Company may not always be in complete compliance with all applicable requirements of environmental laws or regulation, and the Company may receive notices of violation or become subject to enforcement actions or incur material costs or liabilities in connection with such requirements. In addition, new environmental requirements or changes to interpretations of existing requirements, or in their enforcement, could have a material adverse effect on the Company’s business, results of operations, and financial condition. The Company has made and will continue to make expenditures to comply with environmental requirements. 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 be material, such costs may be material in the future.
14. Other Income (Expense), net
The components of other income (expense), net consists of:
15. Related Party Transactions
Sales to NISCO, a 40% owned joint venture, totaled $28,933, $44,620 and $47,175 for the years ended December 31, 2011, 2012 and 2013, respectively. In March 2011 and 2012, the Company received from NISCO a dividend of $4,750 and $800, respectively, all of which was related to earnings. In March 2013, the Company received from NISCO a dividend of $4,000, consisting of $1,880 related to earnings and a $2,120 return of capital.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Purchases of materials from Guyoung Technology Co. Ltd., a Korean Corporation of which the Company owns approximately 17% of the common stock, totaled $2,984, $3,133 and $2,493 for the years ended December 31, 2011, 2012 and 2013, respectively. During 2013, the Company sold shares of Guyoung which decreased the ownership percentage from 20% to 17%.
16. Net Income Per Share Attributable to Cooper-Standard Holdings Inc.
Basic net income per share attributable to Cooper-Standard Holdings Inc. was computed using the two-class method by dividing net income attributable to Cooper-Standard Holdings Inc., after deducting dividends on the Company’s 7% cumulative participating convertible preferred stock (“7% preferred stock”), premium paid for redemption of 7% preferred stock and undistributed earnings allocated to participating securities, by the weighted average number of shares of common stock outstanding during the period excluding unvested restricted shares. The Company’s shares of 7% preferred stock outstanding are considered participating securities. 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. Diluted net income per share attributable to Cooper-Standard Holdings Inc. computed using the two-class method was antidilutive. A summary of information used to compute basic and diluted net income per share attributable to Cooper-Standard Holdings Inc. is shown below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The effect of certain common stock equivalents, including the 7% preferred stock and options, were excluded from the computation of weighted average diluted shares outstanding for years ended December 31, 2011, 2012 and 2013, as inclusion would have resulted in antidilution. A summary of these 7% preferred shares (as if converted) and options are shown below:
17. Equity and 7% Preferred Stock
Common Stock
The Company is authorized to issue up to 190,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2013, an aggregate of 18,226,223 shares of its common stock were issued and 16,676,539 were outstanding.
Holders of shares of common stock are entitled to one vote for each share on each matter on which holders of common stock are entitled to vote. Holders of common stock are entitled to receive ratably dividends and other distributions when, as and if declared by the Company’s board of directors out of assets or funds legally available therefore. The Senior Notes, the Senior PIK Toggle Notes and the Senior ABL Facility each contain covenants that restrict the Company’s ability to pay dividends or make distributions on the common stock, subject to certain exceptions.
In the event of the liquidation, dissolution or winding up of the Company, holders of common stock are entitled to share ratably in the Company assets, if any, remaining after the payment of all the Company’s debts and liabilities.
Warrants
An aggregate of 2,419,753 warrants have been issued and 2,419,753 shares of common stock are issuable upon exercise of the warrants. The warrants are exercisable into shares of common stock at an exercise price of $27.33 per share or on a cashless (net share settlement) basis and are subject to certain customary anti-dilution protections. The warrants may be exercised at any time prior to the close of business on November 27, 2017. The warrants are not redeemable. Warrant holders do not have any rights or privileges of holders of common stock until they exercise their warrants and receive shares of common stock. As of December 31, 2013, 419,124 warrants had been exercised.
7% Preferred Stock
On October 18, 2013, the Company gave notice to the holders of its 7% preferred stock that the Company had elected to cause the mandatory conversion of all 810,382 shares of issued and outstanding shares of 7% preferred stock on November 15, 2013. The 7% preferred stock was converted at the rate of 4.34164 shares of the Company’s common stock for each share of 7% preferred stock, or into an aggregate of 3,518,366 shares of common stock. On the conversion date, the shares of common stock were issued and the shares of 7% preferred
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
stock were cancelled and all rights of holders of 7% preferred stock were terminated. Shares of 7% preferred stock that were converted and cancelled were restored to the status of authorized but unissued preferred stock of the Company.
The following table summarizes the Company’s 7% preferred stock activity for the years ended December 31, 2012 and 2013:
Equity Tender Offer
On May 2, 2013, the Company purchased 4,651,162 shares of its common stock pursuant to the Equity Tender Offer at a purchase price of $43.00 per share for an aggregate purchase price of approximately $200,000. The Company used the proceeds from the issuance of the Senior PIK Toggle Notes (see Note 7. “Debt”), together with cash on hand, to finance the purchase of shares of common stock pursuant to the Equity Tender Offer.
18. Stock-Based Compensation
The Company measures stock-based compensation expense at fair value in accordance with the provisions of U.S. GAAP and recognizes such expense over the vesting period of the stock-based employee awards.
In 2010, the Company adopted the 2010 Cooper-Standard Holdings Inc. Management Incentive Plan (the “Management Incentive Plan”). In 2011, the Company’s Board of Directors approved adoption of the 2011 Cooper-Standard Holdings Inc. Omnibus Incentive Plan (the “Omnibus Plan”). The Omnibus Plan replaces the Management Incentive Plan and provides for the grant of stock options, stock appreciation rights, shares of common stock, restricted stock, restricted stock units, restricted preferred stock, incentive awards and certain other types of awards to key employees and directors of the Company and its affiliates.
In accordance with the Management Incentive Plan and the Omnibus Plan, stock based compensation awards that settle in shares of Company stock may be delivered on a gross settlement basis or a net settlement basis, as determined by the recipient.
The compensation expense related to stock options and restricted stock granted to key employees and directors of the Company, which is quantified below, does not represent payments actually made to these employees. Rather, the amounts represent the non-cash compensation expense recognized by the Company in connection with these awards for financial reporting purposes. The actual value of these awards to the recipients will depend on the trading price of the Company’s stock when the awards vest.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Stock Options. Stock option awards are granted at the fair market value of the Company’s stock price at the date of the grant and have a 7 or 10 year term. The stock option grants vest over three, four or five years from the date of grant.
A summary of stock option transactions and related information for the year ended December 31, 2013 is presented below:
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2011, 2012 and 2013 was $20.53, $19.45 and $13.95, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2011, 2012 and 2013 was $599, $1,326 and $2,588, respectively.
The aggregate intrinsic value in the table above represents the total excess of the $49.11 closing price of Cooper-Standard Holdings Inc. common stock on the last trading day of 2013 over the price of the stock option, multiplied by the related number of options exercised, outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in fair market value of the Company’s common stock.
Total compensation expense recognized for stock options amounted to $3,198, $4,097 and $3,815 for the years ended December 31, 2011, 2012 and 2013, respectively. As of December 31, 2013, unrecognized compensation expense for stock options amounted to $6,577. Such cost is expected to be recognized over a weighted average period of approximately 2.5 years.
For the years 2011 and 2012, the Company used expected volatility of similar entities to develop the expected volatility. For 2013, expected volatility was based on the historical volatility of the Company’s stock. The expected option life was calculated using the simplified method. The risk-free rate is based on the U.S. Treasury zero-coupon issues with a term equal to the expected option life on the date the stock options were granted. Fair value of the shares that are accounted for under ASC 718 was estimated at the date of the grant using the Black-Scholes option pricing model and the following assumptions were used for the 2011, 2012 and 2013 grants:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Restricted Shares of Common Stock and Units. The fair value of the restricted shares of common stock and units is determined based on the closing price of the common stock on the date of grant. The restricted shares of common stock and units vest over three or four years.
A summary of restricted common stock and units transactions and related information for the year ended December 31, 2013 is presented below:
The weighted-average grant date fair value of restricted shares of common stock and units granted during the years ended December 31, 2011, 2012 and 2013 was $44.20, $41.93 and $43.46, respectively. The total fair value of restricted shares of common stock and units vested during the years ended December 31, 2011, 2012 and 2013 was $5,960, $5,734 and $7,343, respectively.
Total compensation expense recognized for restricted shares of common stock and units amounted to $7,062, $8,245 and $6,967 for the years ended December 31, 2011, 2012 and 2013, respectively. As of December 31, 2013, unrecognized compensation expense for restricted shares of common stock and units amounted to $8,533. Such cost is expected to be recognized over a weighted-average period of approximately 1.6 years.
Restricted Preferred Stock. Restricted preferred stock vest over three or four years from the date of grant. The fair value of the restricted preferred stock is determined based on the fair market value of the 7% preferred stock on the date of grant. In the fourth quarter of 2013, all non-vested restricted shares of preferred stock were converted to non-vested restricted shares of common stock.
A summary of restricted preferred stock transactions and related information for the year ended December 31, 2013 is presented below:
There were no restricted shares of preferred stock granted during the years ended December 31, 2011, 2012 and 2013. The total fair value of restricted preferred stock vested during the years ended December 31, 2011, 2012 and 2013 was $1,576, $1,463 and $1,462, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Total compensation expense recognized for restricted preferred stock totaled $1,573, $1,471 and $794 for the years ended December 31, 2011, 2012 and 2013, respectively. As of December 31, 2013, there was no unrecognized compensation expense for restricted preferred stock.
19. Business Segments
ASC 280, “Segment Reporting,” establishes the standards for reporting information about operating segments in financial statements. The Company organized, managed and reported its global business operations through two geographic segments in the first quarter of 2013. In April 2013, the Company implemented organizational and management changes of its global business operations resulting in four reportable segments associated with geographic regions. In applying the criteria set forth in ASC 280, the Company revised its segment disclosures beginning with the second quarter of 2013 from the two reportable segments, North America and International, to four reportable segments, North America, Europe, South America and Asia Pacific. The Company’s principal products within each of these segments are sealing and trim systems, fuel and brake delivery systems, fluid transfer systems, thermal and emissions 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. Prior periods have been revised to conform to the current period presentation. Due to this segment revision, the Company has also revised the previously reported amounts in Note 6. “Goodwill and Intangibles” to conform to the new segment presentation. The accounting policies of the Company’s business segments are consistent with those described in Note 2. “Significant Accounting Policies.”
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The following table details information on the Company’s business segments:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
Geographic information for revenues, based on country of origin, and long-lived assets is as follows:
Sales to customers of the Company which contributed 10% or more of its total consolidated sales and the related percentage of consolidated Company sales for 2011, 2012 and 2013 are as follows:
20. Fair Value of Financial Instruments
Fair values of the Senior Notes approximated $480,938 and $477,000 at December 31, 2012 and 2013, respectively, based on quoted market prices, compared to the recorded value of $450,000. This fair value measurement is classified within Level 1 of the fair value hierarchy.
Fair values of the Senior PIK Toggle Notes approximated $197,466 at December 31, 2013 based on quoted market prices, compared to the recorded value of $196,484. This fair value measurement is classified within Level 1 of the fair value hierarchy.
Fair values of the 7% preferred stock approximated $169,193 at December 31, 2012, compared to the recorded values of $121,649 at December 31, 2012. The fair values were determined based on the contingent claims valuation methodology utilizing the principles of option pricing theory. This fair value measurement is classified within Level 3 of the fair value hierarchy. All outstanding 7% preferred stock was converted to common stock in November 2013, see Note 17. “Equity and 7% Preferred Stock” for additional information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
The Company completed an agreement with Fonds de Modernisation des Equipementiers Automobiles (“FMEA”) on May 2, 2011, to establish a joint venture that combined the Company’s French body sealing operations and the operations of Société des Polymères Barre-Thomas (“SPBT”). SPBT was a French supplier of anti-vibration systems and low pressure hoses, as well as body sealing products, which FMEA acquired as a preliminary step to the joint venture transaction. SPBT changed its name to Cooper Standard France SAS (“CS France”) subsequent to the transaction. The Company has 51% ownership and FMEA has 49% ownership in CS France. In connection with the investment in CS France, the noncontrolling shareholders have the option, which is embedded in the noncontrolling interest, to require the Company to purchase the remaining 49% noncontrolling share at a formula price designed to approximate fair value based on operating results of the entity.
The noncontrolling interest is redeemable at other than fair value as the put value is determined based on a formula. The Company records the noncontrolling interests in CS France at the greater of 1) the initial carrying amount, increased or decreased for the noncontrolling shareholders’ share of net income or loss and its share of other comprehensive income or loss and dividends (“carrying amount”) or 2) the cumulative amount required to accrete the initial carrying amount to the redemption value. According to authoritative accounting guidance, the redeemable noncontrolling interest was classified outside of permanent equity, in mezzanine equity, on the Company’s consolidated balance sheets.
Prior to December 31, 2013, the Company was accreting the carrying amount of the redeemable noncontrolling interest in CS France to redemption value. At December 31, 2013, the estimated redemption value of the put option relating to the noncontrolling interest in CS France is $0. As such, the prior period accretion amounts were reversed resulting in the balance in redeemable noncontrolling interest being recorded at zero related to CS France. The initial carrying amount of FMEA’s interest in CS France, decreased for their interest in CS France’s net loss since inception, at December 31, 2013 is $2,420. This balance is recorded in noncontrolling interest in equity which decreases total equity. This reclassification reflects the fact that the redemption value of the put is $0. The redemption amount, if any, related to the put option is guaranteed by the Company and secured with the CS France shares held by a subsidiary of the Company. The Company has determined that the non-recurring fair value measurement related to this calculation relies primarily on Company-specific inputs and the Company’s assumptions, as observable inputs are not available. As such, the Company has determined that this fair value measurement resides within Level 3 of the fair value hierarchy. To determine the fair value of the put option, the Company utilizes the projected cash flows expected to be generated by the joint venture, then discounts the future cash flows by using a risk-adjusted rate for the Company.
According to authoritative accounting guidance for redeemable noncontrolling shareholders’ interests, to the extent the noncontrolling shareholders have a contractual right to receive an amount upon exercise of a put option that is other than fair value, and such amount is greater than carrying value, then the noncontrolling shareholder has, in substance, received a dividend distribution that is different than other common stockholders. Therefore the redemption amount in excess of fair value should be reflected in the computation of earnings per share available to the Company’s common stockholders. At December 31, 2013 there was no difference between redemption value and fair value.
Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments, including forwards 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 consolidated statements of net 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 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
transaction is no longer probable, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in the consolidated statements of net 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, accrued liabilities and other long-term liabilities.
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, the Romanian Leu against the Euro and the Euro against 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. The gains or losses on the forward contracts are reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The amount reclassified from accumulated other comprehensive loss into cost of products sold was ($204) for the year ended December 31, 2013. At December 31, 2013 all forward foreign exchange contracts were settled.
Interest rate swaps - The Company had an interest rate swap contract to manage cash flow fluctuations of variable rate debt due to changes in market interest rates. This contract, which fixed the interest payment of a certain variable rate debt instrument, was accounted for as a cash flow hedge. The amount reclassified from accumulated other comprehensive loss into interest expense for this swap was $103 and ($209) for the years ended December 31, 2012 and 2013, respectively. The interest rate swap contract was settled as of September 30, 2013.
Undesignated Derivatives
As part of the FMEA joint venture, SPBT had undesignated derivative forward contracts to hedge currency risk of the Euro against the Polish Zloty which are included in the Company’s consolidated financial statements. The forward contracts are used to mitigate the potential volatility of cash flows arising from changes in currency exchange rates that impact the Company’s foreign currency transactions. These foreign currency derivative contracts relate to hedge transactions through April 2014. As of December 31, 2013, the notional amount of these contracts was $6,203. At December 31, 2013, the fair value of the Company’s undesignated derivative forward contracts was a net asset of $35 and is recorded in other current assets and accrued liabilities in the Company’s consolidated balance sheet. The unrealized gain or loss on the forward contracts is reported as a component of other income (expense), net. The unrealized gain for the years ended December 31, 2012 and 2013 was $4,392 and $80, respectively.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
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, 2012 and 2013, are shown below:
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. “Significant Accounting Policies,” Note 3. “Acquisitions,” Note 4. “Restructuring,” Note 5. “Property, Plant and Equipment,” and Note 6. “Goodwill and Intangibles.”
21. Selected Quarterly Information (Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
22. Guarantor and Non-Guarantor Subsidiaries
On May 27, 2010, Cooper-Standard Automotive Inc. (the “Issuer”), a wholly-owned subsidiary of Cooper-Standard Holdings Inc., issued 8 1/2% senior notes due 2018 (the “Senior Notes”) with a total principal amount of $450,000. Cooper-Standard Holdings Inc. and all wholly-owned domestic subsidiaries of Cooper-Standard Automotive Inc. (the “Guarantors”) unconditionally guarantee the Senior Notes. The following condensed consolidated financial data provides information regarding the financial position, results of operations, and cash flows of the Guarantors. The Guarantors account for their investments in the non-guarantor subsidiaries on the equity method. The principal elimination entries are to eliminate the investments in subsidiaries and intercompany balances and transactions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Year Ended December 31, 2011
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Year Ended December 31, 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the Year Ended December 31, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2011
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollar amounts in thousands except note 22, per share and share amounts)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2013
23. 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 Senior ABL Facility and the indentures governing the Senior Notes and the Senior PIK Toggle Notes.
At December 31, 2012 and 2013, the Company had $73,686 and $94,546, respectively, outstanding under receivable transfer agreements without recourse entered into by various locations. The total amount of accounts receivable factored were $332,004 and $474,233 for the years ended December 31, 2012 and 2013. Costs incurred on the sale of receivables were $2,047, $2,216 and $2,876 for the years ended December 31, 2011, 2012 and 2013, respectively. These amounts are recorded in other income (expense), net and interest expense, net of interest income in the consolidated statements of net income.
At December 31, 2012 and 2013, the Company had $13,708 and $9,159, 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 $81,596 and $89,642 for the years ended December 31, 2012 and 2013, respectively. Costs incurred on the sale of receivables were $363, $340 and $432 for the years ended December 31, 2011, 2012 and 2013, respectively. These amounts are recorded in other income (expense), net and interest expense, net of interest income in the consolidated statements of net income.
SCHEDULE II
Valuation and Qualifying Accounts
(dollars in millions)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. 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, as amended (the “Exchange Act”)) as of December 31, 2013. 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. However, 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 as of December 31, 2013.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on the evaluation under the framework in Internal Control-Integrated Framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
The attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting is set forth in item 8. “Consolidated Financial Statements and Supplementary Data,” under the caption “Report of Independent Registered Public Accounting Firm on Internal control over Financial Reporting” and incorporated herein by reference.
There was no change in the Company’s internal control over financial reporting that occurred during the fourth quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning the Company’s directors, corporate governance guidelines, Compensation Committee and Governance Committee appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the headings “The Board’s Committees and Their Functions” and “Corporate Governance” and is incorporated herein by reference. Information concerning the Company’s executive officers is contained at the end of Part I of this Annual Report on Form 10-K under the heading “Executive Officers.”
Audit Committee
Information regarding the Audit Committee, including the identification of the Audit Committee members and the “audit committee financial expert,” appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the headings “The Board’s Committees and Their Functions” and “Corporate Governance” and is incorporated herein by reference.
Compliance with Section 16(a) of The Exchange Act
Information regarding compliance with Section 16(a) of the Exchange Act appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the headings “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.
Code of Ethics
The Company’s Code of Business Ethics and Conduct applies to all of the Company’s officers, directors and employees and is available on the Company’s website at www.cooperstandard.com. To access this information, first click on “Investors” and then click on “Code of Conduct” of the Company’s website.
Item 11.
Item 11. Executive Compensation
Information regarding executive and director compensation, Compensation Committee Interlocks and Insider Participation, and the Compensation Committee Report appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the headings “Compensation Discussion & Analysis,” “Executive Compensation” and “Director Compensation” and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning the security ownership of certain beneficial owners and management of the Company’s voting securities and equity securities appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders, under the heading “Stock Ownership” and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding transactions with related persons appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the heading “The Board’s Committee and Their Functions” and is incorporated herein by reference.
Information regarding the independence of the Company’s directors appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the heading “Corporate Governance” and is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
Information regarding the Company’s independent auditor appears in the Company’s definitive Proxy Statement for its 2014 Annual Meeting of Stockholders under the heading “Certain Relationships and Related Transactions” and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents Filed as Part of this Annual Report on Form 10-K:
Index to Exhibits
* Previously filed.
** Filed herewith.
*** Submitted electronically with the Report.
 Management contracts and compensation plans or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on February 28, 2014 by the following persons on behalf of the Registrant in the capacities indicated.
Signature
Title
/s/ Jeffrey S. Edwards
Jeffrey S. Edwards
Chairman and Chief Executive Officer
/s/ Allen J. Campbell
Allen J. Campbell
Chief Financial Officer (Principal Financial Officer)
/s/ Helen T. Yantz
Helen T. Yantz
Chief Accounting Officer (Principal Accounting Officer)
/s/ Larry J. Jutte
Larry J. Jutte
Director
/s/ Jeffrey E. Kirt
Jeffrey E. Kirt
Director
/s/ David J. Mastrocola
David J. Mastrocola
Director
/s/ Thomas W. Sidlik
Thomas W. Sidlik
Director
/s/ Stephen A. Van Oss
Stephen A. Van Oss
Director
/s/ Kenneth L. Way
Kenneth L. Way
Director