Cooper Standard(CPS) - 2022 Q4 - Annual Report

Part I Item 1. Business Cooper-Standard is a leading global automotive supplier of sealing, fuel, and fluid transfer systems, serving OEMs like Ford, GM, and Stellantis across four regional segments - The company operates 132 facilities in 21 countries with approximately 23,000 employees, holding market leadership positions in its product segments: 1 in sealing systems, 2 in fuel and brake delivery, and 3 in fluid transfer systems[136] - Recent strategic moves include the 2019 divestiture of the anti-vibration systems (AVS) business and the 2020 divestiture of European rubber fluid transfer, specialty sealing, and Indian operations to streamline focus[110] Sales by Product Line (2020-2022) | Product Line | 2022 (%) | 2021 (%) | 2020 (%) | | :--- | :--- | :--- | :--- | | Sealing systems | 51 | 51 | 50 | | Fuel and brake delivery systems | 25 | 25 | 25 | | Fluid transfer systems | 19 | 19 | 19 | | Other | 5 | 5 | 6 | Sales by Top Customers (2020-2022) | Customer | 2022 (%) | 2021 (%) | 2020 (%) | | :--- | :--- | :--- | :--- | | Ford | 25 | 24 | 24 | | General Motors | 19 | 17 | 19 | | Stellantis | 14 | 14 | 14 | | Volkswagen Group | 5 | 5 | 5 | | Daimler | 4 | 4 | 4 | | Other | 33 | 36 | 34 | - The company is focused on innovation, particularly for the growing electric vehicle (EV) market, with products like PlastiCool™ multilayer tubing and Ergo-Lock™ connectors for thermal management[120][142] Item 1A. Risk Factors The company faces significant operational, strategic, financial, and legal risks, including supply chain disruptions, customer concentration, substantial debt, and compliance challenges - Operational Risks: The company is vulnerable to public health crises (COVID-19), inflation increasing the cost structure, significant supply chain disruptions (e.g., semiconductors), and potential cybersecurity breaches[167][199][170] - Strategic Risks: High dependency on the automotive industry, significant customer concentration with Ford, GM, and Stellantis accounting for 58% of 2022 sales, and continuous pricing pressure from OEMs are major strategic challenges[175][206][176] - Financial Risks: The company has substantial debt ($1,056 million as of Dec 31, 2022) with restrictive covenants that limit operational flexibility. Liquidity is a concern, constrained by borrowing base limits on the ABL facility and a springing financial covenant that the company currently would not meet. Pension plans are also underfunded[243][210][249] - Legal and Compliance Risks: The company is exposed to product liability, warranty, and recall claims, which could be material. It also faces risks related to protecting its intellectual property and complying with a wide range of international laws, including environmental and anti-corruption regulations[234][222][253] Item 2. Properties As of December 31, 2022, the company operates 132 facilities across 21 countries, including 78 manufacturing sites, with its corporate headquarters in Northville, Michigan Facilities by Segment (as of Dec 31, 2022) | Segment | Type | Total Facilities | Owned Facilities | | :--- | :--- | :--- | :--- | | North America | Manufacturing | 35 | 21 | | | Other | 24 | 1 | | Asia Pacific | Manufacturing | 19 | 6 | | | Other | 12 | 0 | | Europe | Manufacturing | 21 | 14 | | | Other | 18 | 2 | | South America | Manufacturing | 3 | 1 | Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, has never paid dividends due to debt restrictions, and had $98.7 million remaining on its stock repurchase authorization as of December 31, 2022 - The company has never declared or paid a dividend on its common stock and does not plan to in the foreseeable future. Debt covenants also restrict the ability to pay dividends[256] - The company did not repurchase any shares under its 2018 common stock repurchase program during 2022, 2021, or 2020. As of December 31, 2022, approximately $98.7 million of repurchase authorization remained[284][52] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Sales increased to $2.53 billion in 2022, driven by higher volumes and pricing, while gross profit improved and net loss narrowed, supported by a significant debt refinancing in early 2023 Key Financial Results (2022 vs. 2021, in millions) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Sales | $2,525.4 | $2,330.2 | +8.4% | | Gross Profit | $129.8 | $87.2 | +48.8% | | Operating Loss | ($105.0) | ($209.1) | +49.8% | | Net Loss Attributable to CSHI | ($215.4) | ($322.8) | +33.3% | | Adjusted EBITDA | $37.9 | ($8.0) | +$45.9 | - The increase in sales was primarily driven by improved volume and mix from higher vehicle production and net customer price adjustments, partially offset by negative foreign currency exchange impacts of $96.4 million[298][297] - Gross profit margin improved from 3.7% to 5.1% year-over-year, benefiting from higher volume, manufacturing efficiencies, and purchasing savings, which were partially offset by significant commodity and wage inflation[273][298] - In January 2023, the company completed major refinancing transactions, including exchanging $357.4 million of 2026 Senior Notes for new Third Lien Notes and issuing $580.0 million of new First Lien Notes. This extended debt maturities and provides a payment-in-kind (PIK) interest option for the next two years to preserve cash[279][305] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency, interest rates, and commodity prices, managing them through hedging, but remains exposed to variable debt and raw material volatility - The company uses forward foreign exchange contracts to hedge currency risk. As of December 31, 2022, the notional amount of these contracts was $135.3 million[317][3] - As of December 31, 2022, 38.1% of the company's total debt was at variable interest rates. A 100 basis point (1%) increase in interest rates would increase annualized pre-tax interest expense by $3.7 million[319] - The company faces significant commodity price risk for raw materials. It attempts to mitigate this through material index agreements with customers and suppliers, but it is generally difficult to pass all increases to customers[160][319] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2020-2022, including the independent auditor's report, detailing the company's financial position, operations, and cash flows Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, highlighting property, plant, and equipment impairment as a critical audit matter - The auditor, Ernst & Young LLP, issued an unqualified opinion, concluding that the financial statements are fairly presented in accordance with U.S. GAAP[323] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[387] - The impairment of property, plant, and equipment was identified as a critical audit matter, requiring complex and subjective judgment regarding the estimation of the assets' fair value[354][384] Consolidated Financial Statements The consolidated financial statements show a $217.8 million net loss in 2022, total assets of $1.96 billion, and $36.2 million cash used in operations Consolidated Statement of Operations Highlights (in thousands) | Line Item | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Sales | $2,525,391 | $2,330,191 | $2,375,439 | | Gross Profit | $129,791 | $87,228 | $147,547 | | Operating Loss | ($105,002) | ($209,092) | ($268,686) | | Net Loss | ($217,791) | ($328,844) | ($269,374) | | Diluted Loss Per Share | ($12.53) | ($18.94) | ($15.82) | Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $945,649 | $994,897 | | Total Assets | $1,963,529 | $2,226,493 | | Total Current Liabilities | $631,618 | $597,615 | | Long-Term Debt | $982,054 | $980,604 | | Total Liabilities | $1,862,337 | $1,895,133 | | Total Equity | $101,192 | $331,360 | Consolidated Statement of Cash Flows Highlights (in thousands) | Line Item | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($36,150) | ($115,510) | ($15,934) | | Net cash used in investing activities | ($17,892) | ($91,262) | ($106,880) | | Net cash (used in) provided by financing activities | ($4,266) | $3,209 | $207,715 | Notes to Consolidated Financial Statements The notes detail accounting policies, segment performance, the 2023 debt refinancing, underfunded pension plans, contingent liabilities, and customer concentration - Subsequent to year-end, on January 27, 2023, the company completed a major refinancing, exchanging existing notes for new First and Third Lien Notes due 2027 and repaying its Term Loan Facility. This extended maturities and provides interest payment flexibility[490] - The company's U.S. pension plans were underfunded by $16.3 million and non-U.S. plans by $83.8 million as of Dec 31, 2022. The Board approved a plan to terminate the main U.S. pension plan, which is expected to be settled via lump sums and an annuity purchase[249][483] - The company has a contingent asset from a favorable Brazilian court ruling on indirect taxes, with $4.6 million of pre-tax recoveries remaining as of year-end 2022[570] - Environmental reserves for cleanup and compliance totaled $10.8 million as of Dec 31, 2022[34] Customer Concentration (% of Net Sales) | Customer | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Ford | 25 | 24 | 24 | | General Motors | 19 | 17 | 19 | | Stellantis | 14 | 14 | 14 | Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[577] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[609] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Required information for this item is incorporated by reference from the company's 2023 Proxy Statement[69][44] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the 2023 Proxy Statement - Required information for this item is incorporated by reference from the company's 2023 Proxy Statement[82] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - Required information for this item is incorporated by reference from the company's 2023 Proxy Statement[71] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement - Required information for this item is incorporated by reference from the company's 2023 Proxy Statement[44] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2023 Proxy Statement - Required information for this item is incorporated by reference from the company's 2023 Proxy Statement[581] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and material contracts - This section provides a comprehensive list of all financial statements, schedules, and exhibits filed with the Form 10-K[73][84] - The Index to Exhibits details numerous material agreements, including debt indentures, credit agreements, incentive plans, and amendments, many of which are incorporated by reference from previous filings[74][85][75] Signatures The Form 10-K was signed on February 17, 2023, by the principal executive, financial, and accounting officers, and a majority of the board of directors - The Form 10-K was signed on February 17, 2023, by Jeffrey S. Edwards, Chairman and Chief Executive Officer, along with other principal officers and directors[78][88][621]