UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-36127
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248 ) 596-5900
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Exchange on Which Registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting and non-voting common stock held by non-affiliates as of June 30, 2022 was $67,446,941 .
The number of the registrant’s shares of common stock, $0.001 par value per share, outstanding as of February 8, 2023 was 17,108,029 shares.
Documents Incorporated by Reference
Certain portions, as expressly described in this report, of the Registrant’s Proxy Statement for the 2023 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
| Page | ||||||||
| PART I | ||||||||
| Item 1. | Business | |||||||
| Item 1A. | Risk Factors | |||||||
| Item 1B. | Unresolved Staff Comments | |||||||
| Item 2. | Properties | |||||||
| Item 3. | Legal Proceedings | |||||||
| Item 4. | Mine Safety Disclosures | |||||||
| PART II | ||||||||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||||||
| Item 6. | [Reserved] | |||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||||||
| Item 8. | Financial Statements and Supplementary Data | |||||||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |||||||
| Item 9A. | Controls and Procedures | |||||||
| Item 9B. | Other Information | |||||||
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | |||||||
| PART III | ||||||||
| Item 10. | Directors, Executive Officers and Corporate Governance | |||||||
| Item 11. | Executive Compensation | |||||||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |||||||
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |||||||
| Item 14. | Principal Accounting Fees and Services | |||||||
| PART IV | ||||||||
| Item 15. | Exhibits and Financial Statement Schedules | |||||||
| Signatures | ||||||||
PART I
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, fuel and brake delivery, and fluid transfer systems. 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 listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “CPS.” The Company has approximately 23,000 employees, including 3,000 contingent workers, with 132 facilities in 21 countries. We are the largest global producer of sealing systems, the second largest global producer of the types of fuel and brake delivery products that we manufacture and the third largest global producer of the types of fluid transfer systems that we manufacture. 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 78 manufacturing locations and 54 design, engineering, administrative and logistics locations.
Our organizational structure consists of a global automotive business (“Automotive”) and the Advanced Technology Group (“ATG”). Our business is organized in the following reportable segments: North America, Europe, Asia Pacific and South America. ATG and all other business activities are reported in Corporate, eliminations and other. This operating structure allows us to offer our full portfolio of products and support our global and regional customers with complete engineering and manufacturing expertise in all major regions of the world. On an ongoing basis, we undertake restructuring, expansion and cost reduction initiatives to improve competitiveness.
Approximately 82% of our sales in 2022 were to OEMs, including Ford Motor Company (“Ford”), General Motors Company (“GM”), Stellantis, Volkswagen Group, Daimler, Renault-Nissan, BMW, Toyota, Volvo, Jaguar/Land Rover, Honda and various other OEMs based in China. The remaining 18% of our 2022 sales were primarily to Tier I and Tier II automotive suppliers, non-automotive customers, and replacement market distributors. The Company’s products can be found on over 440 nameplates globally.
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. 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 2018, we established ATG, which incorporated our Industrial and Specialty Group, to accelerate and maximize the value stream of Cooper Standard’s materials science and manufacturing expertise in industrial and specialty markets. We furthered the expansion of our Industrial and Specialty Group through the acquisition of Lauren Manufacturing and Lauren Plastics in 2018, and signed multiple joint development agreements for our Fortrex™ chemistry platform throughout 2018 to 2021. We have also licensed Fortrex™ technology into the footwear industry, with the first mass production programs expected to launch in 2023.
In 2019, we finalized the divestiture of our anti-vibration systems business (“AVS”) product line within our North America, Europe and Asia Pacific segments. In 2020, we completed the divestiture of our European rubber fluid transfer and specialty sealing businesses, as well as our Indian operations.
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Business Strategy
At the beginning of 2022, the Company introduced a new Purpose Statement - Creating Sustainable Solutions Together - which represents the importance of sustainability for the long-term health of the business as a whole and the sustained value that we work each day to deliver to our stakeholders (customers, investors, employees, suppliers and communities). Our key strategic imperatives are defined as:
| Financial Strength: | Execute our strategic initiatives, achieving and maintaining sustainable profit margins and cash flows. | ||||
| Growth – Building For The Future: | Leverage our materials science and manufacturing expertise. Pursue opportunities for both organic and inorganic growth. Continue to build an exceptional workforce. | ||||
| World-Class Functional Expertise and Execution: | Attain world-class results across all functions allowing the Company to be the first choice of our stakeholders. | ||||
| Sustainability: | Deliver value to all our stakeholders through Environmental, Social, and Governance (ESG) initiatives to ensure the long-term sustainability of the Company. | ||||
Cooper Standard’s global alignment around these imperatives continues to drive further value in many areas of the business, including:
Operational and Strategic Initiatives
As part of Cooper Standard’s world-class operations, the Company relies upon its CSOS (Cooper Standard Operating System) 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 standards everywhere across the world. As a result of these initiatives, the Company has leveraged CSOS to drive an average savings from improved operating efficiency of approximately $60 million each of the past five years.
In addition, as part of our continued focus on sustainability and corporate responsibility, in 2021, Cooper Standard formed a Global Sustainability Council to provide executive level oversight for the Company’s sustainability strategy and ensure alignment and integration with business goals and stakeholder priorities. The council maintains a holistic look at the Company’s ESG (environmental, social and governance) initiatives, tracks rapidly-evolving best practices and further develops long-term goals to drive world-class ESG performance.
Cooper Standard continues to progress its diversification strategy through its Advanced Technology Group, which is charged with accelerating and maximizing expertise in the Company’s core process types for applications in the industrial and specialty markets. This business also drives growth and diversification through the Company’s applied materials science offerings, which include the Fortrex™ chemistry platform that provides performance advantages over many other materials, as well as a significantly reduced carbon footprint.
The Company’s CS Open Innovation is an initiative that aims to position Cooper Standard as the partner of choice for start-ups, universities and other suppliers through a proactive outreach program. The initiative is focused in the areas of materials science, manufacturing and process technology, digital/artificial intelligence and advanced product technology.
Leveraging Technology and Materials Science for Innovative Solutions
We utilize our technical and materials science expertise to provide customers with innovative and sustainable product solutions. Our engineers use the results of advanced computational simulations and incorporate a broad understanding of materials science to design products which meet or exceed our customers’ stringent requirements. We believe our reputation for successful innovation in product design and materials is the reason our customers consult us early in the development and design process of their next generation vehicles or products.
Cooper Standard utilizes its i3 Innovation Process (Imagine, Initiate and Innovate) and CS Open Innovation as mechanisms to capture novel ideas while promoting a culture of innovation. Ideas are carefully evaluated by our global product
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line teams and Global Technology Council, and those that are selected are put on an accelerated development cycle. We are developing innovative technologies based on materials expertise, process know-how, and application vision, which may drive future product direction. An example is Fortrex™, the Company’s synthetic elastomer chemistry platform, offering reduced weight while delivering superior material performance and aesthetics. We have also developed several other significant technologies, especially related to advanced materials, processing and weight reduction. These include: FlushSeal™, an advanced integrated solution for frame under glass static sealing systems offering better appearance, improved aerodynamics, quieter ride and reduced weight; MagAlloy™, a processing technology for brake lines that increases long term durability through superior corrosion resistance; and Easy-Lock™, a small package coolant and fuel vapor quick connect. Given the trajectory and anticipated future growth of electric vehicles, Cooper Standard has developed innovations to provide lightweight plastic tubing with our PlastiCool® 2000 multilayer tubing, smooth and CVT mid-temperature multilayer tubing, and our next generation Ergo-Lock™ and Ergo-Lock™ + VDA quick connectors for glycol thermal management needs.
Among our newer technologies is Cooper Standard’s artificial intelligence (A.I.)-enhanced development cycle for polymer compounds that has shortened material development times while realizing rapid discovery of new compounds that offer superior performance properties, which yield superior products. We have also developed proprietary technology for A.I.-enhanced processes control improvements. This technology enables full automation of polymer extrusion and other complex continuous processes, reducing process variation (a top driver of scrap), increasing product quality, improving operational metrics and reducing our carbon footprint.
Our innovations are receiving industry recognition. Cooper Standard earned an Environment + Energy Leader Award in 2022 for our Fortrex™ chemistry platform, in addition to being named a General Motors Overdrive Award winner in the category of ‘Sustainability’ in 2021, and a 2018 Automotive News PACE Award winner and a 2018 and 2019 Society of Plastics Engineers Innovation Award finalist. Also, Cooper Standard’s artificial intelligence-enhanced development cycle for polymer compound development was named a finalist for the 2019 Automotive News PACE Awards.
Cooper Standard’s fluid handling products were selected as the Society of Plastics Engineers 2022 Automotive Innovation Award winner for the Material category for our innovative battery electric vehicle thermoplastic thermal management solution utilizing PlastiCool® 2000 multilayer tube and Ergo-Lock® connectors.
Leverage Acquisitions and Alliances to Enhance Capabilities and Accelerate Growth
We may, from time to time, consider and selectively pursue complementary acquisitions and joint ventures to enhance our customer base, geographic penetration, scale and technology. Consolidation is an industry trend, which has been encouraged by the OEMs’ desire for global automotive suppliers. 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.
Industry
The automotive industry is one of the world’s largest and most competitive markets. Consumer demand for new vehicles largely determines sales and production volumes of global OEMs. The business and commercial environment in each region also plays a role in vehicle demand as it relates to fleet vehicle sales and industrial use vehicles such as light and heavy trucks.
OEMs compete for market share in a variety of ways including pricing and incentives, the development of new, more attractive models, branding and advertising, and the ability to customize vehicle features and options to meet specific consumer needs or demands. They rely heavily on thousands of specialized suppliers to provide the many distinct components and systems that comprise the modern vehicle. They also rely on these automotive suppliers to develop technological innovations that will help them meet consumer demands as well as regulatory requirements.
The supplier industry is a highly competitive industry and 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 quality, price, service, performance, design and engineering capabilities, innovation, timely delivery, financial stability and global footprint. Over the last decade, suppliers that have been able to achieve manufacturing scale globally, reduce structural costs, diversify their customer base and provide innovative, value-added technologies have been the most successful.
The technology of today’s vehicles is evolving rapidly. This evolution is being driven by many factors including consumer preferences and social behaviors, a competitive drive for differentiation, regulatory requirements, environmental impact and safety. Cooper Standard supports these trends by providing innovations that reduce weight, increase life-cycle and durability, reduce interior noise, enhance exterior appearance, simplify the manufacturing and assembly process, and help reduce a vehicle’s environmental impact. These are innovations that can be applicable and valuable to virtually any vehicle (including internal combustion, hybrid or battery electric powertrains) or vehicle manufacturer and, in many cases, can also be transferred to non-automotive applications in adjacent markets. Cooper Standard remains closely aligned with our customers and is prepared to meet their evolving needs as they shift their fleets and offer more electric vehicle (“EV”) options. We are focused on growing
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our business in the EV segment by leveraging our technology and innovation to provide value-add solutions for increasingly specialized technical requirements.
Markets Served
Our automotive business is focused on the passenger car and light truck market, up to and including Class 3 full-size, full-frame trucks, better known as the global light vehicle market. This is our largest market and accounts for approximately 92% of our global sales.
Customers
We are a leading supplier to the following OEMs and are increasing our presence with major OEMs throughout the world. The following charts show the percentage of sales to our top customers for the years ended December 31, 2022, 2021 and 2020:
(1) 2020 percentages include FCA and Groupe PSA
Our other customers include OEMs such as Renault-Nissan, BMW, Toyota, Volvo, Jaguar/Land Rover, Honda and various other OEMs based in China. Our business with any given customer is typically split among several contracts for different parts on a number of platforms.
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Products
We currently have three distinct product lines: sealing systems; fuel and brake delivery systems; and fluid transfer systems. These products are produced and supplied globally to a broad range of customers in multiple markets. On July 1, 2020, we completed the divestiture of the European rubber fluid transfer and specialty sealing businesses, as well as our Indian operations.
In addition to these product lines, we also sell our core products into other adjacent markets. The percentage of sales by product line and other markets for the years ended December 31, 2022, 2021 and 2020 are as follows:
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| Product Lines | Market Position | ||||||||||||||||||||||
| SEALING 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: | – | Obstacle detection sensor system | |||||||||||||||||||||
| – | Fortrex® | – | FlushSeal™ systems | ||||||||||||||||||||
| – | Dynamic seals | – | Variable extrusion | ||||||||||||||||||||
| – | Static seals | – | Specialty sealing products | ||||||||||||||||||||
| – | Encapsulated glass | – | Stainless steel trim | ||||||||||||||||||||
| – | Tex-A-Fib (Textured Surface with Cloth Appearance) | – | Frameless Systems | ||||||||||||||||||||
| FUEL & BRAKE DELIVERY SYSTEMS | Sense, deliver and control fluid and fluid vapors for fuel and brake systems | Top 2 globally | |||||||||||||||||||||
| Products: | |||||||||||||||||||||||
| – | Chassis and tank fuel lines and bundles (fuel lines, vapor lines and bundles) | – | Direct injection & port fuel rails (fuel rails and fuel charging assemblies) | ||||||||||||||||||||
| – | Metallic brake lines and bundles | – | MagAlloy™ break tube coating | ||||||||||||||||||||
| – | Quick connects | – | ArmorTube™ brake tube coating | ||||||||||||||||||||
| – | Low oligomer multi-layer convoluted tube | – | Series 300 and S300LT (low temperature) quick connects | ||||||||||||||||||||
| – | Brake jounce lines | – | Gen III Posi-Lock® quick connects | ||||||||||||||||||||
| FLUID TRANSFER SYSTEMS | Sense, deliver, connect and control fluid delivery for optimal thermal management, powertrain & HVAC operation | Top 3 globally | |||||||||||||||||||||
| Products: | |||||||||||||||||||||||
| – | Heater/coolant hoses | – | Turbo charger hoses | ||||||||||||||||||||
| – | Quick connects (SAE and VDA) | – | Charged air cooler ducts/assemblies | ||||||||||||||||||||
| – | Diesel particulate filter (DPF) lines | – | Secondary air hoses | ||||||||||||||||||||
| – | Degas tanks and deaerators | – | Brake and clutch hoses | ||||||||||||||||||||
| – | Charged air cooling (air intake and discharge) | – | Easy-Lock™ quick connect | ||||||||||||||||||||
| – | Transmission Oil Cooling Hoses | – | Ergo-Lock™ VDA quick connect | ||||||||||||||||||||
| – | Multilayer tubing for glycol thermal management | – | Ergo-Lock™ + VDA quick connect | ||||||||||||||||||||
| – | PlastiCool® 5000 high temperature MLT | – | PlastiCool® 2000 multi-layer tubing for glycol thermal management | ||||||||||||||||||||
Competition
We believe that the principal competitive factors in our industry are quality, price, service, launch performance, design and engineering capabilities, innovation, timely delivery, financial stability and global footprint. 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 systems products compete with Toyoda Gosei, Henniges, Standard Profil, HSR&A, SaarGummi and JianXin, among others. Our fuel and brake delivery products compete with TI Automotive, Sanoh, Martinrea, Maruyasu and SeAH, among others. Our fluid transfer products compete with Conti-Tech, Hutchinson, Teklas, Tristone, Akwel and Fränkische, among others.
Joint Ventures and Strategic Alliances
Joint ventures represent an important part of our business, both operationally and strategically. We have utilized joint ventures to enter and expand in geographic markets such as China, India and Thailand, to acquire new customers and to develop new technologies. When 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.
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The following table shows our significant unconsolidated joint ventures as of December 31, 2022:
| Country | Name | Product Line | Ownership Percentage | |||||||||||
| Thailand | Nishikawa Tachaplalert Cooper Ltd. | Sealing systems | 20% | |||||||||||
| India | Polyrub Cooper Standard FTS Private Limited | Fluid transfer systems | 35% | |||||||||||
| United States | Nishikawa Cooper LLC | Sealing systems | 40% | |||||||||||
| China | Yantai Leading Solutions Auto Parts Co., Ltd. | Fuel and brake delivery systems | 50% | |||||||||||
| China | Shenya Sealing (Guangzhou) Company Limited | Sealing and fluid transfer systems | 51% | |||||||||||
Research and Development
We have a dedicated team of technical and engineering resources for each product line, some of which are located at our customers’ facilities. We utilize simulation, digital tools, best practices, standardization and track key process indicators to drive efficiency in execution with an emphasis on manufacturability and quality. Our development teams work closely with our customers to design and deliver innovative solutions, unique for their applications. Amounts spent on engineering, research and development, and program management were as follows:
| Year | Amount | Percentage of Sales | ||||||||||||
| (Dollar amounts in millions) | ||||||||||||||
| 2022 | $ | 80.5 | 3.2 | % | ||||||||||
| 2021 | $ | 90.0 | 3.9 | % | ||||||||||
| 2020 | $ | 101.6 | 4.3 | % | ||||||||||
Intellectual Property
We believe that one of our key competitive advantages is our ability to translate customer needs and our ideas into innovation through the development of intellectual property. We hold a significant number of patents and trademarks worldwide.
Our patents are grouped into two major categories: (1) specific product invention claims and (2) specific manufacturing processes that are used for producing products. The vast majority of our patents fall within the product invention 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 expiration of any one patent would materially affect our Company. We continue to seek patent protection for our new products and we develop significant technologies that we treat as trade secrets and choose not to disclose to the public through the patent process. These technologies nonetheless provide significant competitive advantages and contribute to our global leadership position in various markets. We believe that our trademarks, including FlushSeal™, Gen III Posi-Lock®, Easy-Lock®, MagAlloy®, Ergo-Lock®, Ergo-Lock® +, PlastiCool® and Fortrex™, help differentiate us and lead customers to seek our partnership.
We also have technology sharing and licensing agreements with various third parties, including Nishikawa Rubber Company, one of our joint venture partners in sealing products. We have mutual agreements with Nishikawa Rubber Company for sales, marketing and engineering services on certain sealing products. 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 also have licensing and joint development agreements for commercial applications of our Fortrex™ chemistry platform in non-automotive industries. A joint development agreement has also been put in place for the collaborative creation of novel dynamic fluid control products and systems.
Innovation, Materials, and Product Lifecycle
The international response to risks and opportunities of climate change is transforming our global economy. Our most significant opportunity to contribute to this low-carbon and circular economy is through reducing the environmental impact of our products and manufacturing processes. We purposefully apply sustainable principles in the design and production of our products, reducing the environmental impact from sourcing through end-of-life. These efforts also enable our customers to reduce their environmental impacts.
When obtaining or innovating materials for our products, we seek to sustainably source raw materials, increase the use of recycled content or recyclable material where feasible, decrease our use of hazardous chemicals where possible, and properly
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disclose restricted materials to customers and regulators. We believe our culture of innovation is a key differentiator, allowing us to compete and succeed within our dynamic global markets.
Supplies and Raw Materials
Cooper Standard is committed to building strong relationships with our supply partners. We recognize the importance of engaging with suppliers to create value for our customers.
The principal raw materials for our business include synthetic and natural rubber, carbon black, process oils, and plastic resins. Principal procured components are primarily made from plastic, carbon steel, aluminum and stainless steel. We manage the procurement of our direct and indirect materials to assure supply continuity and to obtain the most favorable total cost. 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 continue to manage, with our supplier partners, short-term disruptions in production and logistics throughout our supply chain caused by the COVID-19 pandemic.
Raw material prices are susceptible to fluctuations which may place operational and profitability burdens on the entire supply chain. Costs related to raw materials, such as steel, aluminum, and oil and oil-derived commodities, continue to be volatile, which led to extended and magnified increases in these costs in 2022. Current global events continue to add further price pressure and uncertainty to raw material costs for 2023. In addition, we continue to see significant inflationary pressure on wages, energy, transportation and other general costs. It is generally difficult to pass through such increases to our customers. As such, we have implemented strategies with both our suppliers and our customers to help manage these fluctuations. These actions include material index agreements that allow price changes as underlying material costs fluctuate and ongoing dialogue to address non-material inflationary impacts. 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.
Seasonality
Within the automotive industry, sales to OEMs are lowest during the months prior to model changeovers or during assembly plant shutdowns. Automotive production is traditionally reduced during July, August and year-end holidays, and our quarterly results may reflect these trends. However, economic conditions and consumer demand may change the traditional seasonality of the industry. In 2021, for example, while demand remained strong, production was more volatile due to supply chain disruptions, which resulted in late-notice shutdowns of certain customer facilities for an intermediate period of time. In 2022, disruptions stemming from the Russia-Ukraine crisis and lockdowns in key Chinese manufacturing and trading hubs such as Shenzhen and Shanghai further exacerbated supply chain disruptions and vehicle production levels.
Backlog
Our OEM sales are generally based upon purchase orders issued by the OEMs, with updated releases for volume adjustments. As such, we typically do not have a firm and definitive 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 five to eight 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, although there is no guarantee that this will occur.
Human Capital and Safety
As of December 31, 2022, we had approximately 23,000 employees, including 3,000 contingent workers. 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.
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Our people have always been the driving force of value at Cooper Standard. The emergence of new ways of working during the COVID-19 pandemic, a growing international movement for civil rights, and our unwavering dedication to keeping our employees healthy and safe has only made them more critical to our success. We accomplish this by developing the capabilities of our employees through continuous learning and performance management processes. Additionally, building an internal talent pipeline supports the achievement of this priority. In 2022, our internal fill rate was approximately 80%. This metric, which is based on salaried director level positions and above, helps us to understand where employees are advancing in their career and the effectiveness of our internal development programs. For 2022, our voluntary employee turnover rate was approximately 19%. While this metric has increased compared to prior years and despite the current competitive environment for talent, we believe that our culture and continued effort to provide our employees with growth opportunities contributes to retaining our strong talent.
In addition, we aim to diversify our workforce because we recognize the value of engaging different opinions and backgrounds in a global company. We are committed to recruiting, developing and retaining a high-performing and diverse workforce. A global measurement for our diversity is women in the company and women in leadership. In 2022, women made up approximately 38% of our workforce. Of our leadership positions, defined as vice president positions and above, women held approximately 22% of such roles.
Safety continues to be a top priority and primary focus of management. An emphasis on reducing workplace incidents helps Cooper Standard to maintain a safe workforce and continue to deliver world class results for product quality. In 2022, our total incident rate (“TIR”) was 0.33, which represents an Occupational Safety and Health Administration measurement of on-the-job injuries in relation to total hours worked. Based on our review of industry peer sustainability reports, we have a lower TIR relative to our peer group. Additionally, throughout the COVID-19 pandemic, we have remained focused on protecting the health and safety of our employees while meeting the needs of our customers. After the onset of COVID-19, we adopted enhanced safety measures and practices across our facilities to protect employee health and safety and ensure a reliable supply of products to our customers. We monitor and track the impact of the pandemic on our employees and within our operations and proactively modify or adopt new practices to promote their health and safety.
Community Involvement
Supported by the Cooper Standard Foundation, our employees are highly engaged in their local communities. The Foundation’s mission is to strengthen the communities where Cooper Standard employees work and live through the passionate support of children’s charities, education, health and wellness, and community revitalization. The Cooper Standard Foundation is a 501(c)(3) organization with oversight by its Board of Directors, Board of Trustees and Philanthropic Committee. For more information on the Company’s community involvement, please visit our Corporate Responsibility Report located on the Cooper Standard website.
Environmental, Social and Governance
In 2022, the Company was named to Newsweek’s list of America’s Most Responsible Companies for the fourth consecutive year and was recognized as one of the 2022 World’s Most Ethical Companies by Ethisphere for the third consecutive year. These awards are a further testament to Cooper Standard’s commitment to ESG (environmental, social and governance) topics, including our core value of integrity.
Cooper Standard considers itself a steward of the environment, and we monitor the environmental impact of our business and products. We prioritize our environmental management as a means of driving and sustaining excellence. 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 have not been material in the past and are not currently estimated to have a material adverse effect on our financial condition, such costs could be material to our financial statements in the future. Further details regarding our commitments and contingencies are provided in Note 21. “Contingent Liabilities” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K (the “Report”).
Market Data
Some market data and other statistical information used throughout this Annual Report on Form 10-K is based on data from independent firms such as S&P Global and PwC. Other data is based on good faith estimates, which are derived from our review of internal analyses, as well as third party sources. Although we believe these third party sources are reliable, we have not
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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 our 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”). Our reports filed with the SEC also may be found on the SEC’s website at www.sec.gov. Neither the information on our website nor the information on the SEC’s website is incorporated by reference into this Report unless expressly noted.
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. Our use of words “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “outlook,” “guidance,” “forecast,” or future or conditional verbs, such as “will,” “should,” “could,” “would,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs and projections will be achieved. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements. Among other items, such factors may include: volatility or decline of the Company’s stock price, or absence of stock price appreciation; impacts, including commodity cost increases and disruptions related to the war in Ukraine and the COVID-related lockdowns in China; our ability to offset the adverse impact of higher commodity and other costs through negotiations with our customers; the impact, and expected continued impact, of the COVID-19 outbreak on our financial condition and results of operations; significant risks to our liquidity presented by the COVID-19 pandemic risk; prolonged or material contractions in automotive sales and production volumes; our inability to realize sales represented by awarded business; escalating pricing pressures; loss of large customers or significant platforms; our ability to successfully compete in the automotive parts industry; availability and increasing volatility in costs of manufactured components and raw materials; disruption in our supply base; competitive threats and commercial risks associated with our diversification strategy through our Advanced Technology Group; possible variability of our working capital requirements; risks associated with our international operations, including changes in laws, regulations, and policies governing the terms of foreign trade such as increased trade restrictions and tariffs; foreign currency exchange rate fluctuations; our ability to control the operations of our joint ventures for our sole benefit; our substantial amount of indebtedness and variable rates of interest; our ability to obtain adequate financing sources in the future; operating and financial restrictions imposed on us under our debt instruments; the underfunding of our pension plans; significant changes in discount rates and the actual return on pension assets; effectiveness of continuous improvement programs and other cost savings plans; manufacturing facility closings or consolidation; our ability to execute new program launches; our ability to meet customers’ needs for new and improved products; the possibility that our acquisitions and divestitures may not be successful; product liability, warranty and recall claims brought against us; laws and regulations, including environmental, health and safety laws and regulations; legal and regulatory proceedings, claims or investigations against us; work stoppages or other labor disruptions; the ability of our intellectual property to withstand legal challenges; cyber-attacks, data privacy concerns, other disruptions in, or the inability to implement upgrades to, our information technology systems; the possible volatility of our annual effective tax rate; the possibility of a failure to maintain effective controls and procedures; the possibility of future impairment charges to our goodwill and long-lived assets; our ability to identify, attract, develop and retain a skilled, engaged and diverse workforce; our ability to procure insurance at reasonable rates; and our dependence on our subsidiaries for cash to satisfy our obligations.
You should not place undue reliance on these forward-looking statements. Our forward-looking statements speak only as of the date of this Annual Report on Form 10-K and we undertake no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except where we are expressly required to do so by law.
This Annual Report on Form 10-K also contains estimates and other information that is based on industry publications, surveys and forecasts. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of the information.
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Item 1A. Risk Factors
We have listed below (not necessarily in order of importance or probability of occurrence) the most significant risk factors that could cause our actual results to vary materially from recent or anticipated results and could materially and adversely affect our business, results of operations, financial condition and cash flows.
Operational Risks
Our financial condition and results of operations have been, and may continue to be, adversely affected by a public health issue, such as the COVID-19 pandemic.
We face risks related to public health issues, including epidemics and pandemics such as the global outbreak of COVID-19 and its related variants. The COVID-19 pandemic and preventative measures taken to contain or mitigate the COVID-19 pandemic have caused, and may continue to cause, business slowdowns or shutdowns and significant disruption in the financial markets both in the United States and globally. A resurgence of COVID-19 or a new public health crisis and efforts to contain it (including, but not limited to, vaccination, social distancing policies, restrictions on travel and reduced operations and extended closures of many businesses and institutions), may cause shutdowns of our and our customers’ facilities, increased operating and production costs, disruptions and financial distress in the supply chain, disruptions in our production cycle, lost or absent members of the workforce, a decline in demand due to an economic downturn, and inability to access capital due to disruptions in the global financial markets, materially impacting our financial condition and results of operations.
The full impact of the COVID-19 pandemic or another health crisis on our financial condition and results of operations will depend on various factors, such as the ultimate duration and scope of the health crisis, its impact on our customers, suppliers and logistics partners, how quickly normal operations can resume and the duration and magnitude of the economic downturn caused by the health crisis in our key markets. In particular, the emergence of new variants of COVID-19 could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Further, government-sponsored liquidity or stimulus programs in response to the COVID-19 pandemic may not be available to our customers, suppliers or us and, if available, may nevertheless be insufficient to address the impacts of COVID-19. Therefore, it remains difficult to predict the extent or nature of these impacts at this time. The COVID-19 pandemic or another health crisis may also exacerbate the other risks disclosed in this Item 1A. Risk Factors.
Our business, financial condition and results of operations may be adversely impacted by the effects of inflation.
Inflation has the potential to adversely affect our business, financial condition and results of operations by increasing our overall cost structure. Other inflationary pressures could affect wages, the cost and availability of components and raw materials and other inputs and our ability to meet customer demand. Inflation may further exacerbate other risk factors, including supply chain disruptions, risks related to international operations and the recruitment and retention of qualified employees. If we are unsuccessful in negotiating pricing adjustments with our customers to raise the prices of our products sufficiently to keep up with the rate of inflation, our profit margins and cash flows may be adversely affected.
Increases in the costs, or reduced availability, of raw materials and manufactured components may adversely affect our profitability.
Raw material costs can be volatile. The principal raw materials to produce our products include synthetic and natural rubber, carbon black, process oils, and plastic resins. Principal procured components are primarily made from plastic, carbon steel, aluminum and stainless steel. Material costs represented approximately 51% of our total cost of products sold in 2022. The costs and availability of raw materials and manufactured components can fluctuate due to factors beyond our control, including as a result of existing and potential changes to U.S. policies related to global trade and tariffs. Further, climate change may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters, which may adversely affect the availability or pricing for certain raw materials including natural rubber. A significant increase in the price of raw materials, or a restriction in their availability, could materially increase our operating costs and adversely affect our profitability because it is generally difficult to pass through these increased costs to our customers. While we entered into index pricing agreements with some of our customers which provide for a price adjustment based on quoted market prices to attempt to address some of these risks (notably with respect to steel and rubber), there can be no assurance that commodity price fluctuations will not adversely affect our results of operations and cash flows. In addition, while the use of index pricing adjustments may provide us with some protection from adverse fluctuations in commodity prices, by utilizing these instruments, we potentially forego the benefits that might result from favorable fluctuations in price. The recent disruptions to the global supply chain also have had an adverse impact on the cost and availability of raw materials, components, energy and other inputs used in our business, or in the businesses of our customers and suppliers, and has adversely affected and may continue to adversely affect our results of operations, financial condition and business.
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Disruptions in the supply chain could have an adverse effect on our business, financial condition, results of operations and cash flows.
We obtain components and other products and services from numerous suppliers and other vendors throughout the world. We are responsible for managing our supply chain, including suppliers that may be the sole sources of products that we require, that our customers direct us to use or that have unique capabilities that would make it difficult and/or expensive to re-source. In certain instances, entire industries may experience short-term capacity constraints. The global economy has experienced an increased risk of shortages and other disruptions to global supply chains due to strong demand, the potential effects of trade laws and tariffs, capacity constraints, financial instability, public health crises, such as pandemics and epidemics, or other circumstances. In particular, significant disruptions in supply have occurred, are occurring, and are expected to continue in the automotive industry due to these industry-wide parts shortages and global supply chain constraints which have adversely affected our operations and financial performance. The current uncertain economic or industry conditions could result in financial distress within our supply base, thereby further increasing the risk of supply disruption. As the uncertainty in the market conditions remain, any economic downturn or other unfavorable conditions in one or more of the regions in which we operate could cause further supply disruptions and thereby adversely affect our financial condition, operating results and cash flows.
Material supply shortages experienced by our customers either directly or as a result of a supply shortage at another supplier, such as the semiconductor shortage faced by the automotive industry, have caused customers to halt, delay or limit the purchase of our products, which have adversely affected and may continue to adversely affect our business, results of operations and financial condition.
Work stoppages or other disruptions to our operations could negatively affect our operations and financial performance.
We may experience work stoppages caused by labor disputes under existing collective bargaining agreements or in connection with the negotiation of new agreements given that we have a number of agreements that expire in any given year. Further, there is no certainty that we will be successful in negotiating new collective bargaining agreements that extend beyond the current expiration dates or that new agreements will be on terms as favorable to us as past labor agreements. In addition, it is possible that our workforce will become more unionized in the future. Unionization activities could increase our costs, which could negatively affect our results of operations.
Our operations may also be disrupted by other labor issues, including absenteeism, public health issues, and pandemic-related government restrictions; major equipment failure with prolonged downtime or a complete loss of critical equipment where either no other comparable equipment exists or the remaining equipment does not have enough capacity to pick up the demand; or natural disaster-related plant closures or disruptions. In particular, natural disasters and adverse weather conditions can be caused or exacerbated by climate change.
Regardless of the cause, any significant disruption to our production could negatively affect our operations, customer relationships and financial performance. Similar disruptions at one or more of our suppliers or our customers’ suppliers could adversely affect our operations if an alternative source of supply were not readily available. Additionally, similar disruptions at our customers’ facilities could result in reduced demand for our products causing us to delay or cancel production and could have an adverse effect on our business.
A disruption in, or the inability to successfully implement upgrades to, our information technology systems, including disruptions relating to cybersecurity as well as data privacy concerns, could adversely affect our business and financial performance.
We rely upon information technology networks, systems and processes, including the information technology networks of third parties such as suppliers and joint venture partners, to manage and support our business. We have implemented a number of procedures and practices designed to protect against breaches or failures of our systems. Despite the security measures that we have implemented, including those measures to prevent cyber-attacks, our systems could be breached or damaged by computer viruses or unauthorized physical or electronic access. Like other public companies, our computer systems and those of our third-party vendors, partners and service providers are regularly subject to, and will continue to be the target of, computer viruses, malware or other malicious codes (including ransomware), unauthorized access, cyber-attacks or other computer-related penetrations which may cause disruptions to our operations. While we have experienced threats to our data and systems, to date, we are not aware that we have experienced a material cyber-security breach. Over time, however, the sophistication of these threats continues to increase. The preventative actions we take to reduce the risk of cyber incidents and protect our information may be insufficient. A breach of our information technology systems, or those of the third parties on whom we rely, could result in theft of our intellectual property, disruption to business or unauthorized access to customer or personal information. Such a
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breach could adversely impact our operations and/or our reputation and may cause us to incur significant time and expense to cure or remediate the breach.
Further, we continually update and expand our information technology systems to enable us to more efficiently run our business. If these systems are not implemented successfully, our operations and business could be disrupted and our ability to report accurate and timely financial results could be adversely affected.
Our inability to effectively manage the timing, quality and costs of new program launches could adversely affect our financial performance.
In connection with the award of new business, we may obligate ourselves to deliver new products that are subject to our customers’ timing, performance and quality standards. Given the number and complexity of new program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp up of costs. Our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could adversely affect our financial condition, operating results and cash flows.
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 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 successfully or to keep pace with technological developments by our competitors and the industry in general. 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 the development of such technologies and capabilities. 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 adversely affected.
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. 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. Product liability, warranty and recall costs may adversely affect our business, results of operations and financial condition.
Our commitment to drive value through culture, innovation and results is dependent on our ability to identify, attract, develop and retain a skilled, engaged and diverse workforce.
Our people are the driving force behind our success at Cooper Standard. Our ability to pursue breakthrough technology innovations, implement cutting-edge manufacturing and business processes, and achieve our operating and strategic goals is dependent on the engagement, skills, experience and knowledge of our employees. Any failure or delay in attracting, retaining and developing such a workforce, including the loss of key technological and leadership personnel, could adversely impact our business, financial condition and operating results.
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Strategic Risks
We are highly dependent on the automotive industry. A prolonged or material contraction in automotive sales and production volumes could adversely affect our business, results of operations and financial condition.
Automotive sales and production are cyclical and depend on, among other things, 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). These factors could make it difficult for us, our suppliers and our customers to forecast accurately and plan future business activities. As the volume of automotive production and the mix of vehicles produced fluctuate, the demand for our products also fluctuates. Prolonged or material contraction in automotive sales and production volumes, or significant changes in the mix of vehicles produced, could cause our customers to reduce orders of our products, which could adversely affect our business, results of operations and financial condition and our ability to provide accurate forecasts and guidance.
We may not realize sales represented by awarded business, which could adversely affect our business, financial condition, results of operations and cash flows.
The realization of future sales from awarded business is subject to risks and uncertainties inherent in the cyclicality of vehicle production. In addition, our customers generally have the right to resource awarded business without penalty. Therefore, the ultimate amount of our sales is not guaranteed. If actual production orders from our customers are not consistent with the projections we use in calculating the amount of awarded business, we could realize substantially less sales and profit over the life of these awards than currently projected.
Pricing pressures may adversely affect our business.
Vehicle manufacturers often seek price reductions in both the initial bidding process and during the term of the contract. Price reductions historically have adversely impacted our sales and profit margins and may do so in the future. If we are not able to offset price reductions through improved operating efficiencies and reduced expenditures, those price reductions may have a negative impact on our financial condition.
Our business could be adversely affected if we lose any of our largest customers or significant platforms.
While we provide parts to virtually every major global OEM for use on a wide range of different platforms, sales to our three largest customers, Ford, GM, and Stellantis, on a worldwide basis represented approximately 58% of our sales for the year ended December 31, 2022. Our ability to reduce the risks inherent in certain concentrations of business will depend, in part, on our ability to continue to diversify our sales on a customer, product, platform and geographic basis. Although business with each customer is typically split among numerous contracts, the loss of a major customer, significant reduction in purchases of our products by such customer, or any discontinuance or resourcing of a significant platform could adversely affect our business, results of operations and financial condition.
We operate in a highly competitive industry and efforts by our competitors to gain market share could adversely affect our financial performance.
The automotive parts industry is highly competitive. We face numerous competitors in each of our product lines. In general, there are three or more significant competitors and numerous smaller competitors for most of the products we offer. We also face competition for certain of our products from suppliers producing in lower-cost regions such as Asia and Eastern Europe. Our competitors’ efforts to grow market share could exert downward pressure on the pricing of our products and our margins.
The benefits of our continuous improvement program and other cost savings plans may not be fully realized.
Our operations strategy includes continuous improvement programs and implementation of lean manufacturing tools across all facilities to achieve cost savings and increased performance. Further, we have and may continue to initiate restructuring actions designed to improve future profitability and competitiveness. The cost savings that we anticipate from these initiatives may not be achieved on schedule or at the level we anticipate. If we are unable to realize these anticipated savings, our operating results and financial condition may be adversely affected.
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We may continue to incur significant costs related to manufacturing facility closings or consolidation which could have an adverse effect on our financial condition.
If we must close or consolidate manufacturing locations, the exit costs associated with such closures or consolidation, including employee termination costs, may be significant. Such costs could negatively affect our cash flows, results of operations and financial condition.
We are subject to other risks associated with our international operations.
We have significant manufacturing operations outside the United States, including joint ventures and other alliances. Our operations are located in 21 countries, and we export to several other countries. In 2022, approximately 77% of our sales were attributable to products manufactured outside the United States. Risks inherent in our international operations include:
•currency exchange rate fluctuations, currency controls and restrictions, and the ability to hedge currencies;
•changes in local economic conditions;
•repatriation restrictions or requirements, including tax increases on remittances and other payments by our foreign subsidiaries;
•global sovereign fiscal uncertainty and hyperinflation in certain foreign countries;
•changes in laws and regulations, including laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs, or taxes or the imposition of embargoes on imports from countries where we manufacture products;
•operating in foreign jurisdictions where the ability to enforce rights over intellectual property is limited as a statutory or practical matter;
•exposure to possible expropriation or other government actions;
•disease, pandemics or other severe public health events; and
•exposure to local political or social unrest including resultant acts of war, terrorism, or similar events, including the war in Ukraine and the related sanctions imposed on Russia.
The occurrence of any of these risks may adversely affect the results of operations and financial condition of our international operations and our business as a whole.
Expanding our sales and manufacturing operations in the Asia Pacific region, particularly in China, is an integral part of our strategy, and, as a result, our exposure to the risks described above is substantial.
In addition, we are subject to the Foreign Corrupt Practices Act (the “FCPA”) and other laws which prohibit improper payments to foreign governments and their officials by U.S. and other business entities. Certain of the countries in which we operate present heightened corruption risks, which therefore increases the risks of our exposure under the FCPA and other applicable anti-bribery and corruption laws and regulations.
A portion of our operations are conducted by joint ventures which have unique risks.
Certain of our operations are carried out by joint ventures. In joint ventures, we share the management of the company with one or more partners who may not have the same goals, resources or priorities as we do. The operations of our joint ventures are subject to agreements with our partners, which typically include additional organizational formalities as well as requirements to share information and decision making and may also limit our ability to sell our interest. Additional risks include one or more partners failing to satisfy contractual obligations, a change in ownership of any of our partners and our limited ability to control our partners’ compliance with applicable laws, including the FCPA. Any such occurrences could adversely affect our financial condition, operating results, cash flow or reputation.
Any acquisitions or divestitures we make may be unsuccessful, may take longer than anticipated or may negatively impact our business, financial condition, results of operations and cash flows.
We may pursue acquisitions or divestitures in the future as part of our strategy. Acquisitions and divestitures involve numerous risks, including identifying attractive target acquisitions, undisclosed risks affecting the target, difficulties integrating acquired businesses, the assumption of unknown liabilities, potential adverse effects on existing customer or supplier relationships, and the diversion of management’s attention from day-to-day business. 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. Any acquisitions or divestitures we pursue may not be successful or prove to be beneficial to our operations and cash flow.
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Our diversification strategy through the Advanced Technology Group poses new competitive threats and commercial risks.
Our diversification strategy through the Advanced Technology Group is to leverage our core products in adjacent markets and license our innovation technology in non-automotive markets. We may be unsuccessful in leveraging our existing products and technology into new markets and thus in meeting the needs of these new customers and competing favorably in these new markets.
Financial Risks
The risks of the COVID-19 pandemic and global supply chain disruptions present significant risks to our liquidity.
Our continued access to sources of liquidity depends on multiple factors, including global economic conditions, the effects of the COVID-19 pandemic and global supply chain disruptions on our customers and their production rates, the costs of raw materials, the state of the overall automotive industry, the condition of global financial markets, the availability of sufficient amounts of financing, our operating performance and cash flows and our credit ratings. In particular, the global automotive industry is susceptible to uncertain economic conditions that could adversely impact new vehicle demand and production, and business conditions may vary significantly from period to period or region to region. In 2021, global automotive production was negatively impacted by lingering impacts of the COVID-19 pandemic and broad supply chain challenges stemming, in part, from a sharp rebound in overall industrial demand. In 2022, rising inflation, interest rates and continuing supply chain challenges are contributing to global economic uncertainty. In addition, recent pandemic-related restrictions imposed in certain large population centers in China, the threat of additional lockdowns, and continuing military actions in Eastern Europe are having broad negative impacts on key sectors of the global economy. Our business is also directly affected by the automotive vehicle production rates in North America, Europe, Asia Pacific and South America which have been adversely impacted by a series of events
in recent years.
Our ability to borrow against our senior asset-based revolving credit facility (the “ABL Facility”) is limited to our borrowing base, which consists primarily of our U.S. and Canadian accounts receivable and inventory. Production shutdowns or disruptions in both the United States and Canada could lead to significant reductions in these working capital balances and significantly decrease our ability to borrow under our ABL Facility.
In addition, if the Company has borrowing availability under its ABL Facility less than the greater of (i) $15.0 million and (ii) 10% of the Borrowing Base (as defined in the ABL Facility), it must be in compliance with a springing Fixed Charge Coverage Ratio maintenance covenant of 1.00:1.00. As of December 31, 2022, the Company would not have been able to satisfy such covenant, and accordingly, the Company has to manage any borrowings under its ABL Facility to avoid triggering this maintenance covenant, which further constrains its ability to utilize the ABL Facility. The effects of the COVID-19 pandemic and global supply chain disruptions on the Company’s business will adversely impact its ability to satisfy such covenant. As of December 31, 2022, there were no obligations outstanding under the ABL Facility and the Company’s borrowing base was $180.0 million. Net of the greater of 10% of the borrowing base or $15.0 million that cannot be borrowed without triggering the Fixed Charge Coverage Ratio maintenance covenant and $6.8 million of outstanding letters of credit, the Company effectively had $155.2 million available for borrowing under its ABL Facility.
Furthermore, production shutdowns or disruptions will result in working capital swings which could result in increased outflows. As a result of the impacts of the COVID-19 pandemic and global supply chain disruptions, we may be required to raise additional capital, and our access to and cost of financing will depend on, among other things, our performance, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, our prospects and our credit ratings. Such capital may not be available on favorable terms or at all.
The ongoing situation in Ukraine and Russia and related disruptions could adversely affect our liquidity, business, and results of operations.
In February 2022, Russia launched a large-scale invasion of Ukraine that has resulted in an ongoing military conflict between the two countries. As a result, the United States, the United Kingdom, the member states of the European Union and other public and private actors have levied severe sanctions on Russia that severely limit, and in some cases, reverse or cancel, business transactions in or involving certain individuals and/or business connected to or associated with Russia and/or Belarus. The Russia-Ukraine war and the resulting sanctions have caused, and are currently expected to continue to cause, significant disruptions to the global financial system, international trade, and the transportation and energy sectors, among others. The impacts of the conflict on the supply chain and commodity prices are expected to be profound and have resulted and may continue to result in substantial inflation in one or more countries (or globally). These and other issues resulting from the global economic slowdown and financial market turmoil have adversely affected and may continue to adversely affect the automotive industry, which may lead to a decline in the general demand for our products and erosion of their procurement or sale prices. We
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do not have operations in Ukraine or Russia, nor do we sell there. Nonetheless, if the global economic slowdown and the Russia-Ukraine war continue, our liquidity, business, and results of operations may continue to be adversely affected.
We have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to react to changes in our business.
We have a significant amount of indebtedness. As of December 31, 2022, after giving effect to the Refinancing Transactions, we had total indebtedness of $1,056 million. Our substantial amount of debt and our debt service obligations could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position. For example, it could:
•make it more difficult for us to satisfy our obligations;
•increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations, because a portion of our borrowings accrues interest at variable rates;
•require us to dedicate a substantial portion of our cash flows from operations to payments on our debt, which would reduce the availability of cash to fund working capital, capital expenditures, research and development efforts, acquisitions or other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we compete;
•place us at a disadvantage compared to competitors that may have less debt; and
•limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, research and development efforts, debt service requirements, acquisitions and general corporate purposes.
Our ability to make scheduled payments on our debt or to refinance these obligations depends on our financial condition, operating performance and our ability to generate cash in the future. 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, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, we may not be able to effect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the credit agreement governing the ABL Facility and the indentures governing the 13.50% Cash Pay / PIK Toggle Senior Secured First Lien Notes due 2027 (the “First Lien Notes”) and the 5.625% Cash Pay / 10.625% PIK Toggle Senior Secured Third Lien Notes due 2027 (the “Third Lien Notes”), may limit or prevent us from taking any of these actions. In addition, a reduction of our credit rating could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. An inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations in respect of the 5.625% Senior Notes due 2026 (the “2026 Senior Notes”), the First Lien Notes, the Third Lien Notes, or the ABL Facility.
In addition, we and our subsidiaries may be able to incur other substantial additional indebtedness in the future. Although the credit agreement governing the ABL Facility and the indentures governing the First Lien Notes and the Third Lien Notes contain certain limitations on our ability to incur additional indebtedness, such restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. To the extent that we incur additional indebtedness or incur such other obligations that may be permitted under our debt instruments, the risks associated with our substantial indebtedness described above, including our potential inability to service our debt, will increase.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
The borrowings under the ABL Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
SOFR and other interest rates that are indices deemed to be “benchmarks” are the subject of recent and ongoing national, international and other regulatory guidance and proposals for reform. Some of these reforms are already effective, while others are still to be implemented. These reforms may cause such benchmarks to perform differently than in the past, to be replaced or disappear entirely, or have other consequences that cannot be predicted. Any such consequence could have a material adverse
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effect on our existing facilities or our future debt linked to such a “benchmark” and our ability to service debt that bears interest at floating rates of interest.
Our debt instruments impose significant operating and financial restrictions on us and our subsidiaries.
The credit agreements governing the ABL Facility and the indentures governing the First Lien Notes and the Third Lien Notes impose significant operating and financial restrictions and limit our ability, among other things, to:
•incur, assume or permit to exist additional indebtedness (including guarantees thereof);
•pay dividends or certain other distributions on our capital stock or repurchase our capital stock
•prepay, redeem or repurchase indebtedness;
•incur liens on assets;
•make certain investments or other restricted payments;
•allow to exist certain restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;
•engage in transactions with affiliates; and
•sell certain assets or merge or consolidate with or into other companies.
Moreover, our ABL Facility provides the agent considerable discretion to impose reserves, which could materially reduce the amount of borrowings that would otherwise be available to us.
As a result of these covenants and restrictions (including borrowing base availability), 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 or acquisitions. The terms of any future indebtedness we may incur could include more restrictive covenants. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, we may not be able to obtain waivers from the lenders and/or amend the covenants in such agreements. Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or if we are unable to refinance such borrowings at all, our financial condition, results of operations and cash flows could be adversely affected.
If there were an event of default under any of the agreements relating to our outstanding indebtedness whether as a result of a payment default, covenant breach or otherwise, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. Our assets or cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon occurrence of an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could exercise remedies against the collateral securing that indebtedness with the holders of the First Lien Notes receiving full recovery on applicable collateral before the holders of the Third Lien Notes. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. As a result, any default by us on our indebtedness could have a material adverse effect on our business, financial condition and results of operation.
Our expected annual effective tax rate and cash tax liability 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 and cash tax liability 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 tax 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 and cash tax liability 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 and cash tax liability in future periods.
Our working capital requirements may negatively affect our liquidity and capital resources.
Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers’ worldwide vehicle production and the payment terms with our customers and suppliers. If our working capital needs exceed our cash provided by operating activities, we would look to our cash balances and availability under our borrowing arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.
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Foreign currency exchange rate fluctuations could materially impact our operating results.
Our sales and manufacturing operations outside the United States expose us to currency risks. For our consolidated financial statements, our sales and earnings denominated in foreign currencies are translated into U.S. dollars. This translation is calculated based on average exchange rates during the reporting period. Accordingly, our reported international sales and earnings could be adversely impacted in periods of a strengthening U.S. dollar.
Although we generally produce in the same geographic region as our products are sold, we also produce in countries that predominately sell in another currency. Further, some of our commodities are purchased in or tied to the U.S. dollar; therefore our earnings could be adversely impacted during the periods of a strengthening U.S. dollar relative to other foreign currencies. While we employ financial instruments to hedge certain portions of our foreign currency exposures, our efforts to manage these risks may not be successful and may not completely insulate us from the effects of currency fluctuation.
Impairment charges relating to our goodwill, long-lived assets or intangible assets could adversely affect our results.
We regularly monitor our goodwill, long-lived assets and intangible assets for impairment indicators. In conducting our goodwill impairment testing, we compare the fair value of our reporting units to their related net book value. In conducting our impairment analysis of long-lived and intangible assets, we compare the undiscounted cash flows expected to be generated from the long-lived or intangible assets to the related net book values if indicators of impairment are identified. Changes in economic or operating conditions impacting our estimates and assumptions could result in the impairment of our goodwill, long-lived assets or intangible assets. In the event that we determine that our goodwill, long-lived assets or intangible assets are impaired, we may be required to record a significant charge to earnings, which could adversely affect our results.
Certain of our pension plans are currently underfunded, and we may have to make cash contributions to the plans, reducing the cash available for our business.
We sponsor various pension plans worldwide that are underfunded and will require cash contributions. 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. As of December 31, 2022, our U.S. pension plans were underfunded by $16.3 million and our non-U.S. pension plans (which typically are pay-as-you-go plans) were underfunded by $83.8 million. If our cash flow from operations is insufficient to fund our worldwide pension liabilities, it could have an adverse effect on our financial condition and results of operations.
As further described in Note 13. “Pension” to the consolidated financial statements included under Item 8. “Financial Statements and Supplementary Data” of this Report, our Board of Directors approved a resolution to merge certain of the U.S. pension plans, and terminate the resulting merged plan effective December 31, 2022. As part of the termination process, we expect to settle benefit obligations under the terminated plan through a combination of lump sum payments to eligible plan participants and the purchase of a group annuity contract, under which future benefit obligations and administration will be transferred to a third-party insurance company. Such settlements will be funded primarily from plan assets, but may also require funding from the Company.
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 pension plans. Generally accepted accounting principles 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. Because these assumptions 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.
Failure to maintain effective controls and procedures could adversely impact our business, financial condition and results of operations.
Regulatory provisions governing the financial reporting of U.S. public companies require that we establish and maintain disclosure controls and internal controls over financial reporting across our operations in 21 countries. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives; as such, they can be susceptible to human error, circumvention or override, and fraud. Failure to maintain adequate, effective controls and procedures could result in potential financial misstatements or other forms of noncompliance that could have an adverse impact on our business, results of operations, financial condition or organizational reputation.
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We operate as a holding company and depend on our subsidiaries for cash to satisfy the obligations of the holding company.
Cooper-Standard Holdings Inc. is a holding company. Our subsidiaries conduct all of our operations and own substantially all of our assets. Our cash flow and our ability to meet our obligations depend on the cash flow of our subsidiaries. In addition, the payment of funds in the form of dividends, intercompany payments, tax sharing payments and otherwise may be subject to restrictions under the laws of the countries of incorporation of our subsidiaries or their governing documents.
We may not be able to procure insurance at reasonable rates to fully meet our needs.
Integral to our risk management strategy and due to requirements under certain of our contracts, we procure insurance coverage from third-party insurers. There can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at needed limits. Such circumstances will lead to an increase in both our overall risk exposure and our operational expenses, disrupt the management of our business, and could have a material adverse effect on our business, financial condition and results of our operations.
Legal and Compliance Risks
We are involved from time to time in legal and regulatory proceedings, claims or investigations which could have an adverse impact on our results of operations and financial condition.
We are involved in legal and regulatory proceedings, claims or investigations that, from time to time, may be significant. These matters typically arise in the normal course of business including, without limitation, commercial or contractual disputes, including warranty claims and other disputes with customers and suppliers; intellectual property matters; personal injury claims; environmental issues; tax matters; employment matters; antitrust matters; anti-corruption matters; or allegations relating to legal compliance by us or our employees.
For further information regarding our legal matters, see Item 3. “Legal Proceedings.” The industries in which we operate are also periodically reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims. It is not possible to predict with certainty the outcome of claims, investigations and lawsuits, and we could in the future incur judgments, fines or penalties or enter into settlements of lawsuits and claims that could have an adverse effect on our business, results of operations and financial condition in any particular period.
If we are unable to protect our intellectual property or if a third party challenges our intellectual property rights, our business could be adversely affected.
We own or have rights to proprietary technology that is important to our business. We rely on intellectual property laws, patents, trademarks and trade secrets to protect such technology. Such protections, however, vary among the countries in which we market and sell our products, and as a result, we may be unable to prevent third parties from using our intellectual property without authorization. Any infringement or misappropriation of our technology could have an adverse effect on our business and results of operations. We also face exposure to claims by others for infringement of intellectual property rights and could incur significant costs or losses related to such claims. In addition, many of our supply agreements require us to indemnify our customers from third-party infringement 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. If any such claim were to result in an adverse outcome, we could be required to take actions which may include: ceasing the manufacture, use or sale of the infringing products; paying 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 expending significant resources to develop or license non-infringing products, any of which could adversely affect our operations, business and financial condition.
We may be adversely affected by laws and regulations, including environmental, health and safety laws and regulations.
We are subject to various U.S. federal, state and local, and non-U.S. laws and regulations, including those related to environmental, health and safety, financial, tax, customs and other matters. We cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof. The introduction of new laws or regulations or changes in existing laws or regulations, or the interpretations thereof, could increase the costs of doing business for us or our customers or suppliers or restrict our actions and adversely affect our financial condition, results of operations and cash flows.
In particular, we are subject to a broad range of laws and 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 health and safety. We may incur substantial costs in complying with these laws and regulations. Many of our current and former facilities have been subject to certain environmental investigations and remediation activities, and we maintain environmental reserves for certain of these sites. Through various acquisitions, we
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have acquired a number of manufacturing facilities, and we cannot assure that we will not incur material costs or liabilities relating to activities that predate our ownership. Material future expenditures may be necessary if compliance standards change or material unknown conditions that require remediation are discovered. Environmental laws could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses. In addition, climate change poses regulatory risks that could harm our results of operations or affect the way we conduct our businesses. For example, new or modified regulations could require us to spend substantial funds to enhance our environmental compliance efforts. If we fail to comply with present and future environmental laws and regulations, we could be subject to future liabilities, which could adversely affect our financial condition, operating results and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2022, our operations were conducted through 132 wholly-owned, leased and consolidated joint venture facilities in 21 countries (North America: Canada, Costa Rica, Mexico, United States; Asia Pacific: China, India, Japan, South Korea, Thailand; Europe: Czech Republic, France, Germany, Italy, Netherlands, Poland, Romania, Serbia, Spain, Sweden, United Kingdom; South America: Brazil), of which 78 are predominantly manufacturing facilities and 54 have design, engineering, administrative or logistics designations. Our corporate headquarters are located in Northville, Michigan. Our manufacturing facilities are located in North America, Europe, Asia and South America. We believe that substantially all of our properties are in generally good condition and there is sufficient capacity to meet current and projected manufacturing, product development and logistics requirements. The following table summarizes our key property holdings:
| Segment | Type | Total Facilities* | Owned Facilities | |||||||||||||||||
| North America | Manufacturing (a) | 35 | 21 | |||||||||||||||||
Other (b) | 24 | 1 | ||||||||||||||||||
| Asia Pacific | Manufacturing (a) | 19 | 6 | |||||||||||||||||
Other (b) | 12 | — | ||||||||||||||||||
| Europe | Manufacturing (a) | 21 | 14 | |||||||||||||||||
Other (b) | 18 | 2 | ||||||||||||||||||
| South America | Manufacturing (a) | 3 | 1 | |||||||||||||||||
(a)Includes multi-activity sites which are predominantly manufacturing.
(b)Includes design, engineering, R&D, administrative and logistics locations.
(*) Excludes 3 unutilized facilities: 1 North America; 1 Europe; 1 South America
Item 3. Legal Proceedings
The litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. See Note 21. “Contingent Liabilities” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for discussion of loss contingencies.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock has been traded on the NYSE since October 17, 2013 under the symbol “CPS.”
Holders of Common Stock
As of February 8, 2023, there were approximately 6 holders of record of our common stock. This stockholder figure does not include a substantially greater number of holders whose shares are held of record by banks, brokers and other financial institutions.
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 agreements governing our ABL Facility and our indentures governing our New Notes, 2026 Senior Notes, and 2024 Senior Secured Notes contain covenants that, among other things, restrict our ability to pay certain dividends and distributions subject to certain qualifications and limitations. See “Liquidity and Capital Resources” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report. We do not anticipate paying any dividends on our common stock in the foreseeable future.
Securities Repurchase Program
In June 2018, our Board of Directors approved a common stock repurchase program (the “2018 Program”) authorizing us to repurchase, in the aggregate, up to $150.0 million of our outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by our management and in accordance with prevailing market conditions and federal securities laws and regulations. We expect to fund any future repurchases from cash on hand and future cash flows from operations. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at the Company’s discretion. The 2018 Program was effective beginning November 2018.
We did not repurchase any shares during the years ended December 31 2022, 2021, or 2020 under the 2018 Program. As of December 31, 2022, we had approximately $98.7 million of repurchase authorization remaining.
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Performance Graph
The following graph compares the cumulative total stockholder return for Cooper-Standard Holdings Inc. to 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 December 29, 2017 and reflects the cumulative total return on that investment, including the reinvestment of all dividends where applicable, through December 31, 2022.
Comparison of Cumulative Return
| Ticker | 12/29/2017* | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/30/2022* | ||||||||||||||||||||||||||||||||||||||
| Cooper-Standard Holdings Inc. | CPS | $ | 100.00 | $ | 50.71 | $ | 27.07 | $ | 28.30 | $ | 18.29 | $ | 7.40 | |||||||||||||||||||||||||||||||
| S&P 500 | SPX | $ | 100.00 | $ | 93.95 | $ | 123.37 | $ | 145.64 | $ | 186.72 | $ | 152.51 | |||||||||||||||||||||||||||||||
| S&P Supercomposite Auto Parts & Equipment Index | S15AUTP | $ | 100.00 | $ | 68.31 | $ | 90.75 | $ | 111.55 | $ | 136.22 | $ | 92.03 | |||||||||||||||||||||||||||||||
* Represents last trading day of the year
Item 6. [Reserved]
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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 in Item 1A. “Risk Factors.” Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those statements included in Item 8. “Financial Statements and Supplementary Data” of this Report.
Executive Overview
Our Business
We design, manufacture and sell sealing, fuel and brake delivery, and fluid transfer systems for use in passenger vehicles and light trucks manufactured by global OEMs. In 2022, approximately 82% of our sales consisted of original equipment sold directly to OEMs for installation on new vehicles. The remaining 18% 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. 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 quality, price, service, performance, design and engineering capabilities, innovation, timely delivery, financial stability 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.
In addition, to remain competitive and offset continued customer pricing pressure, 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 our employees, 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 continuous improvement initiatives.
Our OEM sales are generally based upon purchase orders issued by the OEMs, with updated releases for volume adjustments. As such, we typically do not have a defined 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 five to eight 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 2022, approximately 57% of our sales were generated in North America. Because of our significant international operations, we are subject to the risks associated with doing business in other countries, such as currency volatility, high interest and inflation rates, and the general political and economic risk that are associated with some of these markets.
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Recent Trends and Conditions
General Economic Conditions and Outlook
The global automotive industry is susceptible to uncertain economic conditions that could adversely impact new vehicle demand and production. Business conditions may vary significantly from period to period or region to region. In 2022, global automotive production continued to be negatively impacted by broad supply chain challenges, labor market disruptions and other lingering impacts of the COVID-19 pandemic. In 2023, while supply chain disruptions show signs of slightly improving, rising interest rates, persistent inflation and continuing military actions in Eastern Europe are contributing to global economic uncertainty and are having broad negative impacts on key sectors of the global economy.
In North America, U.S. consumer confidence has been trending positively since June of 2022 but remains well below historical averages. Key drivers of the improvement in consumer sentiment are modestly lower inflation rates and continued low levels of unemployment, offset by continuing concerns over rising interest rates. Consumer spending, fueled by improving confidence and further drawdown of excess accumulated pandemic savings, and government spending related to infrastructure are expected to drive modest economic growth in the coming year. Economists at the International Monetary Fund (IMF) are expecting the economies of the United States, Canada and Mexico to grow by 1.4 percent, 1.5 percent and 1.7 percent, respectively, in 2023.
In Europe, the war in Ukraine, related sanctions imposed on Russia, higher energy costs and infrastructure disruptions continue to impact the regional economy. This is translating into lower industrial output, higher inflation and lower average real household income for most Eurozone countries. While the European Central Bank has ended stimulative asset purchases and is continuing to raise policy interest rates to stem inflation, certain countries within the region continue to provide increased fiscal support at the household level to offset the impacts of higher energy costs. In this uncertain environment, economists at the IMF are currently expecting the economy in the Eurozone region to grow by approximately 0.7 percent in 2023.
In the Asia Pacific region, China has recently ended its strict zero-COVID strategy and has lifted all related restrictive policy measures previously employed to prevent spread of the disease. With mobility restored, pent up consumer demand for both goods and services is expected to boost economic activity in the first half of the 2023. At the same time, demand from external trading partners in Europe and the United States has been resilient and is likely to spur growth in exports. While considerable uncertainty remains in key economic sectors such as real estate, the nation’s leaders have pledged to provide additional monetary and fiscal support as necessary to ensure key economic targets are achieved. Economists at the IMF are expecting the Chinese economy to grow 5.2 percent in 2023.
In South America, the Brazilian economy will likely remain challenged by continued inflation and constraining interest rate policy. Following his election in October 2022, President Lula Da Silva has sought to address deep-rooted social problems and inequities with further expansive fiscal policy and social spending. The increased government spending is expected to spur inflation above 5 percent for the year and will likely force the central bank to maintain benchmark interest rates at high levels to dampen the inflationary pressure. Further, tax increases may be necessary to pay for the spending programs that already exceed strict budget levels. To the positive, the re-opening of the Chinese economy will drive incremental demand for Brazil’s agricultural exports. Economists at the IMF are now estimating the Brazilian economy will grow 1.2 percent in 2023. We remain cautious for the economic outlook in this market given the long history of political instability and economic volatility in the region.
Production Levels
Our business is directly affected by the automotive vehicle production rates in North America, Europe, Asia Pacific and South America which have been adversely affected by a series of significant events in recent years. Beginning in the first quarter of 2020, we experienced production shutdowns related to the COVID-19 pandemic. Beginning in the first quarter of 2021, OEM production volumes were disrupted by the global shortage of semiconductors, but have improved sequentially quarter over quarter. In 2022, disruptions stemming from the Russia-Ukraine crisis and lockdowns in key Chinese manufacturing and trading hubs such as Shenzhen and Shanghai further exacerbated supply chain disruptions and vehicle production levels. We continue to collaborate closely with our customers to minimize production inefficiencies while supporting their needs.
According to the forecasting firm S&P Global (formerly IHS Markit), global light vehicle production was approximately 82.0 million units in 2022. This reflects an increase of approximately 6.2% globally since 2021.
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Light vehicle production in certain regions for 2022 and 2021, as well as projections for 2023, are provided in the following table:
| (In millions of units) | 2023(1) | 2022(1) | 2021(1) | Projected % Change 2022-2023 | % Change 2021-2022 | ||||||||||||||||||||||||
| North America | 15.1 | 14.3 | 13.0 | 5.4 | % | 9.7 | % | ||||||||||||||||||||||
| Europe | 16.5 | 15.7 | 15.9 | 5.3 | % | (1.3) | % | ||||||||||||||||||||||
| Asia Pacific | 48.1 | 46.9 | 43.6 | 2.4 | % | 7.7 | % | ||||||||||||||||||||||
| Greater China | 26.6 | 26.3 | 24.8 | 1.0 | % | 6.1 | % | ||||||||||||||||||||||
| South America | 3.0 | 2.8 | 2.6 | 6.0 | % | 8.5 | % | ||||||||||||||||||||||
(1) Production data based on S&P Global, January 2023.
In all regions, production volumes were impacted by the global shortage of semiconductors which began in the first quarter of 2021 and deteriorated thereafter throughout the year. Production stoppages related to semiconductor and other supply chain shortages continued into 2022, but have improved sequentially quarter over quarter. In Europe, vehicle production in 2022 was negatively impacted by additional supply chain issues related to the Russia-Ukraine crisis.
Industry Overview
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. Because of a growing emphasis on global vehicle platforms, automotive suppliers with a global manufacturing footprint capable of fully servicing customers around the world will typically have a competitive advantage over smaller, regional competitors. This dynamic is likely to result in further consolidation of competing suppliers within our industry over time.
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.
Increased competitiveness in the industry, as well as customer focus on costs, has resulted in continued pressure on suppliers for price reductions, even in an inflationary environment, which reduces the overall profitability of the industry. Consolidations and market share shifts among vehicle manufacturers continue to put additional pressures on the supply chain. These pricing and market pressures will continue to drive our focus on reducing our overall cost structure through continuous improvement initiatives, capital redeployment, restructuring and other cost management processes. Nonetheless, we continue to negotiate with OEM customers to recover the costs associated with the significant commodity and other inflation that we have incurred during 2022 and anticipate to incur in 2023.
In addition to the above, other factors will present opportunities for automotive suppliers who are positioned for the changing environment, including autonomous and connected vehicles, evolving government regulation, and consumer preference for environmentally friendly products and technology, including hybrid and electric vehicle (“EV”) architectures.
Raw Materials
Our business is susceptible to inflationary pressures with respect to raw materials which may place operational and profitability burdens on the entire supply chain. Costs related to raw materials, such as steel, aluminum, and oil-derived commodities, continue to be volatile, which led to extended and magnified increases in these costs in 2021. Current global events continued to add further price pressure and uncertainty to raw material costs in 2022. In addition, we continue to see significant inflationary pressure on wages, energy, transportation and other general costs. As such, we will continue to work on an ongoing basis with our customers and suppliers to mitigate both inflationary pressures and our material-related cost exposures through a combination of expanded index-based agreements and other commercial enhancements.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in Note 2. “Basis of Presentation and Summary of Significant Accounting Policies” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. These policies require the most
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difficult, subjective or complex judgments that management makes in the preparation of the financial statements and accompanying notes. We consider an accounting estimate to be critical if (i) it requires us to make assumptions about matters that were uncertain at the time we were making the estimate, and (ii) changes in the estimate or different estimates that we could have selected could have had a material impact on our financial condition or results of operations. Such critical accounting estimates are discussed below. For these, materially different amounts could be reported under varied conditions and assumptions. While other items in our consolidated financial statements require estimation, however, in our judgment, they are not as critical as those discussed below.
Goodwill. Goodwill is tested for impairment by reporting unit as of October 1 of each year or more frequently if events or circumstances indicate that an impairment may exist. For our goodwill analysis, fair value is 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. Our long-range planning forecasts are based on our assessment of revenue growth rates generally based on industry specific data, external vehicle build assumptions published by widely used external sources, and customer market share data based on known and targeted awards over a three-year period. The projected profit margin assumptions included in the plans are based on the current cost structure and adjustments for anticipated cost reductions or increases. If different assumptions were used in these plans, the related cash flows used in measuring fair value could be different and impairment of goodwill might be recorded. The annual goodwill impairment analysis for 2022 resulted in no impairment for the North America and Industrial Specialty Group reporting units. Additionally, a hypothetical 10 percent decrease in the fair value of these reporting units would not impact our conclusion that goodwill was not impaired. See Note 9. “Goodwill and Intangible Assets” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
Long-Lived Assets. We monitor our long-lived assets for impairment indicators on an ongoing basis. If impairment indicators exist, we analyze the undiscounted cash flows expected to be generated from the long-lived assets compared 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 of machinery and equipment is based upon either estimated salvage value or estimated orderly liquidation value. Fair value of leased buildings is based on a discounted cash flow approach. Fair value of owned buildings is based on a sales comparison approach or cost approach. 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. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of long-lived assets. In 2022, 2021 and 2020, we recorded impairment charges related to buildings and machinery and equipment in North America, Europe, Asia Pacific, and Corporate and other segments. See Note 8. “Property, Plant and Equipment” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
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. 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 earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pretax operating income which considers forecasted revenue trends within the automotive industry, 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. We utilize 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 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. In the U.S. and certain foreign jurisdictions, we concluded that it is more likely than not that the net deferred tax assets may not be realized in the future. Accordingly, we continue to maintain and adjust as appropriate the valuation allowance related to those net deferred tax assets. However, since future financial results may differ from previous estimates, periodic adjustments to our valuation allowances may be necessary.
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
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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 16. “Income Taxes” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report 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 discount rates, mortality rates, expected returns on plan assets and health care cost trend rates. These assumptions are determined as of the current year measurement date. We 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. Experience gains and losses as well as the effects of changes in actuarial assumptions are recognized in other comprehensive income. Cumulative actuarial gains and losses in excess of 10% of the projected benefit obligation or the fair value of plan assets for a particular plan are amortized over the average future service period of the employees in that plan. Our net pension and postretirement benefit costs, which included non-cash net pension curtailment and settlement gains and losses of $2.7 million, were approximately $8.3 million and $0.1 million, respectively, for the year ended December 31, 2022. Note that the curtailment charge resulted from the approved merger and termination of certain U.S. pension plans. See Note. 13 “Pension” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
To develop the discount rate for each pension plan, the expected cash flows underlying the plan’s benefit obligations were discounted using a December 31, 2022 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 portfolio of plan assets, we considered the duration of the plan liabilities and gave more weight to fixed-income positions than to public and private equity investments.
Weighted average assumptions used to determine pension benefit obligations as of December 31, 2022 were as follows:
| U.S. | Non-U.S. | ||||||||||
| Discount rate | 4.55 | % | 4.45 | % | |||||||
| Rate of compensation increase | N/A (*) | 1.58 | % | ||||||||
| Cash balance interest credit rate | 2.41 | % | N/A | ||||||||
Weighted average assumptions used to determine net periodic benefit costs for the year ended December 31, 2022 were as follows:
| U.S. | Non-U.S. | ||||||||||
| Discount rate | 2.84 | % | 2.39 | % | |||||||
| Expected return on plan assets | 3.50 | % | 2.15 | % | |||||||
| Rate of compensation increase | N/A (*) | 2.39 | % | ||||||||
*As the U.S. plans are frozen, the rate of compensation increase was not applicable.
The sensitivity of our pension cost and obligations to changes in key assumptions, holding all other assumptions constant, is as follows:
| Change in assumption | Impact on 2023 net periodic benefit cost | Impact on PBO as of December 31, 2022 | |||||||||
| 1% increase in discount rate | +$0.5 million | -$22.7 million | |||||||||
| 1% decrease in discount rate | -$0.7 million | +$27.4 million | |||||||||
| 1% increase in expected return on plan assets | -$2.2 million | — | |||||||||
| 1% decrease in expected return on plan assets | +$2.2 million | — | |||||||||
Excluding the impact of any potential settlement charges associated with the approved termination of certain U.S. pension plans, aggregate pension net periodic benefit cost is forecasted to be approximately $10.0 million in 2023.
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Health care cost trend rates are assumed to reflect market trend, actual experience and future expectations. Health care cost trend rate assumptions used to determine the postretirement benefit obligation as of December 31, 2022 were as follows:
| U.S. | Non-U.S. | ||||||||||
| Health care cost trend rate | 6.17 | % | 5.00 | % | |||||||
| Ultimate health care cost trend rate | 4.50 | % | 5.00 | % | |||||||
| Year that the rate reaches the ultimate trend rate | 2028 | N/A | |||||||||
Aggregate other postretirement net periodic benefit cost is forecasted to be approximately $0.7 million in 2023.
The Company’s policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements and contribute amounts deductible for United States federal income tax purposes or amounts required by local statute. The Company estimates it will make funding cash contributions to its U.S. and non-U.S. pension plans of approximately $1.0 million and $4.4 million, respectively in 2023.
The Company does not prefund its postretirement benefit obligations. Rather, payments are made as costs are incurred by covered retirees. We expect net other postretirement benefit payments to be approximately $2.2 million in 2023.
Historical Periods
Refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended December 31, 2021 for discussion of the Results of Operations, Segment Results of Operations, and Liquidity and Capital Resources for the year ended December 31, 2021 compared to the year ended December 31, 2020, which is incorporated by reference herein.
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Results of Operations
| Year Ended December 31, | Change | |||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | ||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||
| Sales | $ | 2,525,391 | $ | 2,330,191 | $ | 195,200 | ||||||||||||||
| Cost of products sold | 2,395,600 | 2,242,963 | 152,637 | |||||||||||||||||
| Gross profit | 129,791 | 87,228 | 42,563 | |||||||||||||||||
| Selling, administration & engineering expenses | 199,455 | 227,110 | (27,655) | |||||||||||||||||
| Gain on sale of business, net | — | (696) | 696 | |||||||||||||||||
| Gain on sale of fixed assets, net | (33,391) | — | (33,391) | |||||||||||||||||
| Amortization of intangibles | 6,715 | 7,347 | (632) | |||||||||||||||||
| Impairment charges | 43,710 | 25,609 | 18,101 | |||||||||||||||||
| Restructuring charges | 18,304 | 36,950 | (18,646) | |||||||||||||||||
| Operating loss | (105,002) | (209,092) | 104,090 | |||||||||||||||||
| Interest expense, net of interest income | (78,514) | (72,511) | (6,003) | |||||||||||||||||
| Equity in losses of affiliates | (8,817) | (1,728) | (7,089) | |||||||||||||||||
| Pension settlement and curtailment charges | (2,682) | (1,279) | (1,403) | |||||||||||||||||
| Other expense, net | (5,485) | (4,842) | (643) | |||||||||||||||||
| Loss before income taxes | (200,500) | (289,452) | 88,952 | |||||||||||||||||
| Income tax expense | 17,291 | 39,392 | (22,101) | |||||||||||||||||
| Net loss | (217,791) | (328,844) | 111,053 | |||||||||||||||||
| Net loss attributable to noncontrolling interests | 2,407 | 6,009 | (3,602) | |||||||||||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | (215,384) | $ | (322,835) | $ | 107,451 | ||||||||||||||
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021.
Sales
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | Volume / Mix* | Foreign Exchange | Deconsolidation | |||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||
| Total sales | $ | 2,525,391 | $ | 2,330,191 | $ | 195,200 | $ | 322,259 | $ | (96,418) | $ | (30,641) | ||||||||||||||||||||||||||
* Net of customer price adjustments, including recoveries
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Sales for the year ended December 31, 2022 increased 8.4%, compared to the year ended December 31, 2021. The increase in sales was driven by volume and mix (higher net vehicle production volume due to the impact of lessening semiconductor supply issues in the current year, partially offset by the impact of COVID-19 related shut-downs in China and the Ukraine conflict in Europe) and net customer price adjustments including partial recovery of cost increases. This was partially offset by foreign exchange and the deconsolidation of a joint venture in the Asia Pacific region. See Note 4. “Deconsolidations and Divestitures” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
Gross Profit
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | Volume / Mix* | Foreign Exchange | Cost (Decreases) / Increases** | |||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||
| Cost of products sold | $ | 2,395,600 | $ | 2,242,963 | $ | 152,637 | $ | 155,243 | $ | (84,437) | $ | 81,831 | ||||||||||||||||||||||||||
| Gross profit | 129,791 | 87,228 | 42,563 | 167,016 | (11,981) | (112,472) | ||||||||||||||||||||||||||||||||
| Gross profit percentage of sales | 5.1 | % | 3.7 | % | ||||||||||||||||||||||||||||||||||
* Net of customer price adjustments, including recoveries
** Net of deconsolidation
Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. Cost of products sold for the year ended December 31, 2022 increased $152.6 million, or 6.8%, compared to the year ended December 31, 2021. Materials comprise the largest component of our cost of products sold and represented approximately 51% and 47% of total cost of products sold for the years ended December 31, 2022 and December 31, 2021, respectively. The change in the cost of products sold was impacted by higher volume and mix, commodity inflation, increased labor and overhead costs due to inconsistent volume production schedules, higher compensation related costs and higher energy and transportation costs. These costs were partially offset by foreign exchange, manufacturing efficiencies, purchasing lean savings, restructuring savings and the deconsolidation of a joint venture in the Asia Pacific region.
Gross profit for the year ended December 31, 2022 increased $42.6 million compared to the year ended December 31, 2021. As a percentage of sales, gross profit was 5.1% and 3.7% for the years ended December 31, 2022 and 2021, respectively. The change was driven by volume and mix net of customer price reductions including partial recovery of cost increases, manufacturing efficiencies, purchasing lean savings and restructuring savings. These items were partially offset by commodity and wage inflation, higher compensation related costs and the negative impact of foreign exchange.
Selling, Administration and Engineering. Selling, administration and engineering expense for the year ended December 31, 2022 was $199.5 million, or 7.9% of sales, compared to $227.1 million, or 9.7% of sales, for the year ended December 31, 2021. The decrease was primarily due to the non-recurrence of a prior year credit loss, salaried headcount initiative savings, customer recovery of engineering expense, and foreign exchange, partially offset by higher compensation related costs.
Gain on Sale of Business, net. The gain on sale of business of $0.7 million for the year ended December 31, 2021 related to the net effect of our 2020 divestitures.
Gain on Sale of Fixed Assets, net. The gain on sale of fixed assets for the year ended December 31, 2022 was attributable to the gain on the sale-leaseback of a European facility of $33.4 million.
Amortization of Intangibles. Intangible amortization for the year ended December 31, 2022 was relatively consistent compared to the year ended December 31, 2021.
Impairment Charges. Non-cash asset impairment charges of $43.7 million and $25.6 million for the years ended December 31, 2022 and 2021, respectively, related to property, plant and equipment impairment charges.
Restructuring. Restructuring charges for the year ended December 31, 2022 decreased $18.6 million compared to the year ended December 31, 2021. Our restructuring actions include plant and other facility closures and workforce reductions and are initiated to maintain our competitive footprint or in response to changes in global and regional automotive markets. The decrease was primarily attributable to Europe due to headcount initiatives and footprint rationalization actions that were completed in 2021.
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Interest Expense, net. Net interest expense for the year ended December 31, 2022 increased $6.0 million compared to the year ended December 31, 2021, primarily due to an increase in interest rates on variable rate debt.
Pension Settlement and Curtailment Charges. Non-cash pension settlement and curtailment charges of $2.7 million and $1.3 million for the years ended December 31, 2022 and 2021, respectively, related to a curtailment regarding the approved termination of a U.S. pension plan and settlements related to our non-U.S. pension plans. See Note 13. “Pension” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
Other Expense, net. Other expense, net for the year ended December 31, 2022 increased $0.6 million compared to the year ended December 31, 2021. The increase was primarily due to higher foreign currency losses in the year ended December 31, 2022, partially offset by benefit related income.
Income Tax Expense. Income tax expense for the year ended December 31, 2022 was $17.3 million on losses before taxes of $200.5 million. This compared to an income tax of $39.4 million on losses before taxes of $289.5 million for the year ended December 31, 2021. The tax expense in 2022 and 2021 differed from the statutory rate primarily due to incremental valuation allowances recorded on tax losses generated in the U.S. and certain foreign jurisdictions, the mix of income between the U.S. and foreign sources, tax credits and incentives, and other nonrecurring discrete items.
Segment Results of Operations
Our business is organized into the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other. We use Segment adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We have defined adjusted EBITDA as net income before interest, taxes, depreciation, amortization, restructuring expense, and special items.
The following tables presents sales and segment adjusted EBITDA for each of the reportable segments.
Year Ended December 31, 2022 Compared with Year Ended December 31, 2021
Sales
| Year Ended December 31, | Variance Due To: | |||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | Volume / Mix* | Foreign Exchange | Deconsolidation | |||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | ||||||||||||||||||||||||||||||||||||||
| Sales to external customers | ||||||||||||||||||||||||||||||||||||||
| North America | $ | 1,341,099 | $ | 1,148,257 | $ | 192,842 | $ | 195,844 | $ | (3,002) | $ | — | ||||||||||||||||||||||||||
| Europe | 503,672 | 518,245 | (14,573) | 47,557 | (62,130) | — | ||||||||||||||||||||||||||||||||
| Asia Pacific | 443,126 | 458,306 | (15,180) | 45,114 | (29,653) | (30,641) | ||||||||||||||||||||||||||||||||
| South America | 100,420 | 61,713 | 38,707 | 34,400 | 4,307 | — | ||||||||||||||||||||||||||||||||
| Total Automotive | 2,388,317 | 2,186,521 | 201,796 | 322,915 | (90,478) | (30,641) | ||||||||||||||||||||||||||||||||
| Corporate, eliminations and other | 137,074 | 143,670 | (6,596) | (656) | (5,940) | — | ||||||||||||||||||||||||||||||||
| Consolidated | $ | 2,525,391 | $ | 2,330,191 | $ | 195,200 | $ | 322,259 | $ | (96,418) | $ | (30,641) | ||||||||||||||||||||||||||
* Net of customer price adjustments, including recoveries
•Volume and mix, net of customer price adjustments including recoveries, was driven by vehicle production volume increases due to the lessening impact of semiconductor-related supply issues.
•The impact of foreign currency exchange was primarily related to the Euro, Chinese Renminbi and Korean Won.
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Segment adjusted EBITDA
| Year Ended December 31, | Variance Due To: | ||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | Volume / Mix* | Foreign Exchange | Cost Decreases / (Increases)** | ||||||||||||||||||||||||||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Segment adjusted EBITDA | |||||||||||||||||||||||||||||||||||||||||
| North America | $ | 70,819 | $ | 54,616 | $ | 16,203 | $ | 77,672 | $ | (3,395) | $ | (58,074) | |||||||||||||||||||||||||||||
| Europe | (37,137) | (49,599) | 12,462 | 41,972 | 1,394 | (30,904) | |||||||||||||||||||||||||||||||||||
| Asia Pacific | 1,556 | (16,756) | 18,312 | 25,609 | (6,042) | (1,255) | |||||||||||||||||||||||||||||||||||
| South America | 97 | (9,852) | 9,949 | 10,219 | 3,072 | (3,342) | |||||||||||||||||||||||||||||||||||
| Total Automotive | 35,335 | (21,591) | 56,926 | 155,472 | (4,971) | (93,575) | |||||||||||||||||||||||||||||||||||
| Corporate, eliminations and other | 2,533 | 13,557 | (11,024) | 11,544 | 371 | (22,939) | |||||||||||||||||||||||||||||||||||
| Consolidated adjusted EBITDA | $ | 37,868 | $ | (8,034) | $ | 45,902 | $ | 167,016 | $ | (4,600) | $ | (116,514) | |||||||||||||||||||||||||||||
* Net of customer price adjustments, including recoveries
**Net of deconsolidation
•Volume and mix, net of customer price adjustments including recoveries, was driven by vehicle production volume increases due to the lessening impact of semiconductor-related supply issues.
•Foreign currency exchange was impacted by the Chinese Renminbi, Korean Won, Mexican Peso, Canadian Dollar, Euro, Polish Zloty, Czech Koruna and the Brazilian Real.
•The Cost Decreases / (Increases) category above includes:
◦Commodity cost and inflationary economics;
◦Manufacturing efficiencies and purchasing savings through lean initiatives;
◦Increased compensation-related expenses; and
◦Decreased costs related to ongoing salaried headcount initiatives and restructuring savings.
Liquidity and Capital Resources
Short and Long-Term Liquidity Considerations and Risks
We intend to fund our ongoing working capital, capital expenditures, debt service and other funding requirements through a combination of cash flows from operations, cash on hand, borrowings under our senior asset-based revolving credit facility (“ABL Facility”) and receivables factoring. We utilize intercompany loans and equity contributions to fund our worldwide operations. There may be country-specific regulations which may restrict or result in increased costs in the repatriation of these funds.
We continue to actively preserve cash and enhance liquidity, including decreasing our capital expenditures. We continuously monitor and forecast our liquidity situation, take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. Our ability to fund our working capital needs, debt payments and other obligations, and to comply with the financial covenants, including borrowing base limitations, under our ABL Facility, depend on our future operating performance and cash flows and many factors outside of our control, including the costs of raw materials, the state of the overall automotive industry and financial and economic conditions, including the continued impact of COVID-19, and other factors. Based on those actions and current projections of light vehicle production and customer demand for our products, we believe that our cash flows from operations, cash on hand, borrowings under our ABL Facility and receivables factoring will enable us to meet our ongoing working capital requirements, capital expenditures debt service and other funding requirements for the foreseeable future, despite the challenges presented by the COVID-19 pandemic and supply chain issues facing the industry.
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Cash Flows
Operating Activities. Net cash used in operating activities was $36.2 million for the year ended December 31, 2022, compared to net cash used in operating activities of $115.5 million for the year ended December 31, 2021. The change was primarily due to increased cash earnings, working capital improvements and the receipt of $54.3 million in cash payments from the United States Internal Revenue Service for tax refunds related to net operating loss carrybacks.
Investing Activities. Net cash used in investing activities was $17.9 million for the year ended December 31, 2022, compared to net cash used in investing activities of $91.3 million for the year ended December 31, 2021. The change was primarily related to proceeds of $50.0 million related to the sale-leaseback of a certain European facility which were received in the year ended December 31, 2022 along with reduced capital spending in 2022. We expect reduced capital expenditures will continue in 2023, primarily as part of initiatives to consistently lower overall capital spending. We anticipate that we will spend approximately $70 million to $80 million on capital expenditures in 2023.
Financing Activities. Net cash used in financing activities totaled $4.3 million for the year ended December 31, 2022, compared to net cash provided by financing activities of $3.2 million for the year ended December 31, 2021. The net cash flows associated with financing activities were relatively consistent in 2022 as compared to 2021.
Refinancing Transactions
On January 27, 2023 (the “Settlement Date”), the Company, Cooper-Standard Automotive Inc. (the “Issuer”), a wholly-owned subsidiary of the Company, and certain other of the Company’s direct and indirect subsidiaries completed certain refinancing transactions (the “Refinancing Transactions”) consisting of: (i) the exchange (the “Exchange Offer”) of $357.4 million aggregate principal amount of the Issuer’s then existing 5.625% Senior Notes due 2026 (the “2026 Senior Notes”) (representing 89.36% of the aggregate principal amount outstanding of the 2026 Senior Notes) for $357.4 million aggregate principle amount of the Issuer’s newly issued 5.625% Cash Pay / 10.625% PIK Toggle Senior Secured Third Lien Notes due 2027 (the “Third Lien Notes”), (ii) the issuance by the Issuer (the “Concurrent Notes Offering”) of $580.0 million aggregate principal amount of 13.50% Cash Pay / PIK Toggle Senior Secured First Lien Notes due 2027 (the “First Lien Notes” and, together with the Third Lien Notes, the “New Notes”) to holders of 2026 Senior Notes or their designees who participated in the Exchange Offer, including to certain backstop commitment parties who committed to purchase the First Lien Notes not otherwise subscribed for, (iii) the related consent solicitation (the “Consent Solicitation”) to remove substantially all of the covenants, certain events of default and certain other provisions contained in the 2026 Senior Notes and the indenture governing the 2026 Senior Notes and to release and discharge the guarantee of the 2026 Senior Notes by the Company, (iv) the effectiveness of the Third Amendment (as defined below) to the ABL Facility and (v) the use of proceeds from the Concurrent Notes Offering, together with cash on hand, to prepay all amounts outstanding under the Term Loan Facility (as defined below) at par, plus any accrued and unpaid interest thereon, to redeem the Issuer’s existing 2024 Senior Secured Notes (as defined below), including the prepayment premium and any accrued and unpaid interest thereon, and to pay fees and expenses related to the Refinancing Transactions. As a result of the Refinancing Transactions, the Issuer extended the maturities of its indebtedness and reduced the amount of cash interest it is required to pay on such indebtedness for the next two years.
New Notes
On the Settlement Date, the Issuer issued $580.0 million aggregate principal amount of First Lien Notes pursuant to an indenture, dated as of the Settlement Date (the “First Lien Notes Indenture”), by and among the Issuer, the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee and collateral agent (the “First Lien Collateral Agent”).
The First Lien Notes are senior secured obligations of the Issuer and are guaranteed by CS Intermediate Holdco 1 LLC (“Holdings”), each of the Issuer’s wholly owned domestic subsidiaries that guarantee certain other indebtedness, subject to certain exceptions (the “Domestic Guarantors”), and certain of the Issuer’s wholly owned subsidiaries organized in Costa Rica, France, Mexico, the Netherlands and Romania (the “Foreign Guarantors”). The First Lien Notes are guaranteed by Holdings and the Domestic Guarantors on a senior secured basis and by the Foreign Guarantors on a senior unsecured basis. The guarantees of the subsidiaries organized in France are limited guarantees.
The First Lien Notes will mature on March 31, 2027. The First Lien Notes bear interest at the rate of 13.50% per annum, payable in cash; provided, however, that for the first four interest periods after the Settlement Date, the Issuer has the option, in its sole discretion, to pay up to 4.50% of such interest on the First Lien Notes, in such amount as specified by the Issuer, by increasing the principal amount of the outstanding First Lien Notes or, in limited circumstances as described in the First Lien Notes Indenture, by issuing additional First Lien Notes. Interest on the First Lien Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2023.
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The Issuer may, at its option, redeem all or part of the First Lien Notes prior to maturity at the prices set forth in the First Lien Notes Indenture. Upon the occurrence of certain events constituting a Change of Control (as defined in the First Lien Notes Indenture), the Issuer will be required to make an offer to repurchase all of the First Lien Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The First Lien Notes Indenture contains certain customary covenants that limit the Issuer’s and its restricted subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness or issue certain preferred stock; incur liens on assets; pay dividends or make other distributions in respect of, or repurchase or redeem, its capital stock or make other restricted payments; prepay, redeem or repurchase certain debt; make certain loans and investments; enter into agreements restricting certain subsidiaries’ ability to pay dividends; enter into transactions with affiliates; and sell certain assets or merge or consolidate with or into other companies. These covenants are subject to a number of important limitations and exceptions. The First Lien Notes Indenture also provides for customary events of default, which, if any occur, would permit or require the principal, premium, if any, interest and any other monetary obligations on all of the then outstanding First Lien Notes to be due and payable immediately.
On the Settlement Date, the Issuer issued $357.4 million aggregate principal amount of Third Lien Notes pursuant to an indenture, dated as of the Settlement Date (the “Third Lien Notes Indenture”), by and among the Issuer, the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee and collateral agent (the “Third Lien Collateral Agent”).
The Third Lien Notes are senior secured obligations of the Issuer and are guaranteed by Holdings, the Domestic Guarantors, and the Foreign Guarantors. The Third Lien Notes are guaranteed by Holdings and the Domestic Guarantors on a senior secured basis and by the Foreign Guarantors on a senior unsecured basis. The guarantees of the subsidiaries organized in France are limited guarantees.
The Third Lien Notes will mature on May 15, 2027. The Third Lien Notes bear interest at the rate of 5.625% per annum, payable in cash; provided, however, that for the first four interest periods after the Settlement Date, the Issuer has the option, in its sole discretion, to instead pay such interest at 10.625% per annum either by increasing the principal amount of the outstanding Third Lien Notes or, in limited circumstances as described the Third Lien Notes Indenture, by issuing additional Third Lien Notes. Interest on the Third Lien Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2023.
The Issuer may, at its option, redeem all or part of the Third Lien Notes prior to maturity at the prices set forth in the Third Lien Notes Indenture. Upon the occurrence of certain events constituting a Change of Control (as defined in the Third Lien Notes Indenture) occurs, the Issuer will be required to make an offer to repurchase all of the Third Lien Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The Third Lien Notes Indenture contains certain customary covenants that limit the Issuer’s and its restricted subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness or issue certain preferred stock; incur liens on assets; pay dividends or make other distributions in respect of, or repurchase or redeem, its capital stock or make other restricted payments; prepay, redeem or repurchase certain debt; make certain loans and investments; enter into agreements restricting certain subsidiaries’ ability to pay dividends; enter into transactions with affiliates; and sell certain assets or merge or consolidate with or into other companies. These covenants are subject to a number of important limitations and exceptions. The Third Lien Notes Indenture also provides for customary events of default, which, if any occur, would permit or require the principal, premium, if any, interest and any other monetary obligations on all of the then outstanding Third Lien Notes to be due and payable immediately.
In connection with the issuance of the New Notes, the First Lien Collateral Agent, the Third Lien Collateral Agent, the collateral agent under the ABL Facility, the Issuer, Holdings and the several other parties named therein entered into the First Lien and Third Lien Intercreditor Agreement, providing for the relative priorities of their respective security interests in the assets securing the First Lien Notes, the Third Lien Notes and the ABL Facility, and certain other matters relating to the administration of security interests.
2026 Senior Notes
On November 2, 2016, the Issuer issued $400.0 million aggregate principal amount of 2026 Senior Notes. On the Settlement Date, in connection with the Refinancing Transactions, the Issuer completed the Exchange Offer and delivered $357.4 million aggregate principal amount of the exchanged 2026 Senior Notes to the trustee for cancellation. Following the completion of the Exchange Offer, $42.6 million aggregate principal amount of the 2026 Senior Notes remain outstanding.
Following receipt of the requisite consents in the Consent Solicitation, on January 20, 2023, the Issuer, the guarantors named therein and U.S. Bank Trust Company, National Association (successor in interest to U.S. Bank National Association), as
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trustee, entered into a supplemental indenture to the indenture governing the 2026 Senior Notes, which became effective on the Settlement Date. The supplemental indenture provides for the elimination of substantially all of the covenants, certain events of default and certain other provisions contained in the 2026 Senior Notes and the indenture governing the 2026 Senior Notes and released and discharged the guarantee of the 2026 Senior Notes by the Company.
The 2026 Senior Notes are guaranteed by each of the Issuer’s wholly-owned existing or subsequently organized U.S. subsidiaries, subject to certain exceptions, to the extent such subsidiary guarantees the ABL Facility. The Issuer may, at its option, redeem all or part of the 2026 Senior Notes at various points in time prior to maturity, as described in the indenture governing the 2026 Senior Notes. The 2026 Senior Notes will mature on November 15, 2026. Interest on the 2026 Senior Notes is payable semi-annually in arrears in cash on May 15 and November 15 of each year.
2024 Senior Secured Notes
On May 29, 2020, the Issuer issued $250.0 million aggregate principal amount of its 13.000% Senior Secured Notes due 2024 (the “2024 Senior Secured Notes”), pursuant to an indenture, dated as of May 29, 2020, by and among the Issuer, the other guarantors party thereto and U.S. Bank National Association, as trustee. The 2024 Senior Secured Notes would have matured on June 1, 2024. Interest on the 2024 Senior Secured Notes was payable semi-annually in arrears in cash on June 1 and December 1 of each year. Subsequent to the year ended December 31, 2022, in connection with the Refinancing Transactions, the Issuer redeemed all of the outstanding 2024 Senior Secured Notes on the Settlement Date at the redemption price of 106.500% of the principal amount thereof, plus accrued and unpaid interest thereon.
ABL Facility
On November 2, 2016, Holdings, Cooper-Standard Automotive Inc. (the “U.S. Borrower”), Cooper-Standard Automotive Canada Limited (the “Canadian Borrower”), Cooper-Standard Automotive International Holdings B.V. (the “Dutch Borrower”, and, together with the U.S. Borrower and the Canadian Borrower, the “Borrowers”) and certain subsidiaries of the U.S. Borrower, entered into a third amendment and restatement of our ABL Facility. In March 2020, the Borrowers entered into Amendment No. 1 of the Third Amended and Restated Loan Agreement (the “First Amendment”). As a result of the First Amendment, the ABL Facility maturity was extended to March 2025 and the aggregate revolving loan commitment was reduced to $180.0 million. In May 2020, the Borrowers entered into Amendment No. 2 to the Third Amended and Restated Loan Agreement (the “Second Amendment”), which Second Amendment modified certain covenants under the ABL Facility. In December 2022, the Borrowers entered into Amendment No. 3 to the Third Amended and Restated Loan Agreement (the “Third Amendment”), which became effective on the Settlement Date. The Third Amendment provides for the ABL Facility to be amended to:
•permit the U.S. Borrower to issue the New Notes in the Concurrent Notes Offering and Exchange Offer, including the granting of liens, subject to the restrictions set forth in the ABL Facility;
•provide for certain of the U.S. Borrower’s wholly-owned subsidiaries organized in Costa Rica, France, Mexico, the Netherlands, Romania and certain other jurisdictions specified from time to time to become guarantors under the ABL Facility;
•authorize the collateral agent under the ABL Facility to enter into an intercreditor agreement with the collateral trustees for the New Notes; and
•remove the Dutch Borrower as a borrower under the ABL Facility.
In addition, the ABL Facility provides for an uncommitted $100.0 million incremental loan facility, for a potential total ABL Facility of $280.0 million.
The ABL Facility includes affirmative and negative covenants that impose substantial restrictions on our financial and business operations. The ABL Facility also contains various events of default that are customary for comparable facilities.
Loan and letter of credit availability under the agreement 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) the lesser of 70% of eligible inventory or 85% of the appraised net orderly liquidation value of eligible inventory; plus (iii) up to the lesser of $30.0 million and 85% of eligible tooling accounts receivable; minus reserves established by the agent. The obligations under the ABL Facility and the related guarantees are secured by various assets, as detailed in Note 10. “Debt” to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” of this Report.
Borrowings under the ABL Facility bear interest at a rate equal to, at the Borrowers’ option:
•in the case of borrowings by U.S. Borrower, the forward-looking secured overnight funding rate for the applicable interest period (“Term SOFR”) (including a credit spread adjustment of 0.11448% or 0.26161%, depending on the applicable interest period) or the base rate plus, in each case, an applicable margin; or
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•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 2.00% and 2.50% with respect to the Term SOFR or Canadian BA rate-based borrowings and between 1.00% and 1.50% with respect to U.S. base rate, Canadian prime rate and Canadian base rate borrowings. The applicable margin is subject, in each case, to quarterly pricing adjustments (based on average facility availability).
As of December 31, 2022, the Company had $155.2 million in availability under the ABL Facility. As of December 31, 2022 and 2021, the Company had $0.5 million and $0.8 million, respectively, in unamortized debt issuance costs related to the ABL Facility.
Term Loan Facility
On November 2, 2016, Cooper-Standard Automotive Inc., as borrower, entered into the first amendment to its senior term loan facility (the “Term Loan Facility”). The Term Loan Facility provided for loans in an aggregate principal amount of $340.0 million. Subject to certain conditions, the Term Loan Facility, without the consent of the then existing lenders (but subject to the receipt of commitments), could have been expanded (or a new term loan or revolving facility added) by an amount that would not cause the consolidated secured net debt ratio to exceed 2.25 to 1.00, plus $400.0 million, plus any voluntary prepayments (including revolving facility and ABL Facility to the extent commitments are reduced) not funded from proceeds of long-term indebtedness.
On May 2, 2017, CSA U.S. entered into Amendment No. 2 to the Term Loan Facility to modify the interest rate. Subsequently, on March 6, 2018, the Company entered into Amendment No. 3 to the Term Loan Facility to further modify the interest rate. In accordance with this amendment, borrowings under the Term Loan Facility bore interest, at the Company’s option, at either (1) with respect to Eurodollar rate loans, the greater of the applicable Eurodollar rate and 0.75% plus 2.0% per annum, or (2) with respect to base rate loans, the base rate, (which is the highest of the then current federal funds rate plus 0.5%, the prime rate most recently announced by the administrative agent under the term loan, and the one-month Eurodollar rate plus 1.0%) plus 1.0% per annum. The Term Loan Facility would have matured on November 2, 2023.
Subsequent to the year ended December 31, 2022, in connection with the Refinancing Transactions, Cooper-Standard Automotive Inc. repaid the Term Loan Facility in full on the Settlement Date and the term Loan Facility was terminated.
For additional information regarding our debt, see Note 10. “Debt” to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” of this Report.
Off-Balance Sheet Arrangements
As a part of our working capital management, we sell accounts receivable from certain European customers through a third-party financial institution in off-balance sheet arrangements. The amount sold varies each month based on the amount of underlying receivables and cash flow needs. As of December 31, 2022 and 2021, we had $52.5 million and $52.7 million, respectively, of receivables outstanding under receivable transfer agreements entered into by various locations. For the years ended December 31, 2022 and 2021, total accounts receivable factored were $355.3 million and $366.9 million, respectively. Costs incurred on the sale of receivables were $0.7 million, $0.5 million and $0.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. These amounts are recorded in other expense, net in the consolidated statements of operations. These are permitted transactions under the credit agreements governing the ABL Facility and the indentures governing the New Notes, the 2026 Senior Notes and the 2024 Senior Secured Notes.
Other Capital Transactions Impacting Liquidity
Share Repurchase Program
In June 2018, our Board of Directors approved a common stock repurchase program (the “2018 Program”) authorizing us to repurchase, in the aggregate, up to $150.0 million of our outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by management and in accordance with prevailing market conditions and federal securities laws and regulations. We expect to fund any future repurchases from cash on hand and future cash flows from operations. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at our discretion. The 2018 Program was effective beginning November 2018. As of December 31, 2022, we had approximately $98.7 million of repurchase authorization under the 2018 Program.
We did not make any repurchases under the 2018 Program during the years ended December 31, 2022, 2021 or 2020.
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Contractual Obligations
Our contractual 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 in future periods under all debt agreements at nominal value, undiscounted finance lease commitments and other contractual obligations, on a pro forma basis after giving effect to the Refinancing Transactions, which were completed on January 27, 2023:
| Payment due by period | |||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||
| (Dollar amounts in millions) | |||||||||||||||||||||||||||||
| Estimated debt obligations (a) | $ | 1,162.1 | $ | 51.9 | $ | — | $ | 1,110.2 | $ | — | |||||||||||||||||||
| Estimated interest on debt obligations (b) | 369.9 | 51.6 | 170.0 | 148.3 | — | ||||||||||||||||||||||||
| Operating lease obligations | 122.7 | 25.8 | 35.6 | 20.3 | 41.0 | ||||||||||||||||||||||||
| Finance lease obligations | 30.9 | 3.3 | 7.1 | 6.5 | 14.0 | ||||||||||||||||||||||||
| Total | $ | 1,685.6 | $ | 132.6 | $ | 212.7 | $ | 1,285.3 | $ | 55.0 | |||||||||||||||||||
(a) Debt obligations include (i) $580.0 million aggregate principal amount of First Lien Notes issued on the Settlement Date, (ii) $357.4 million aggregate principal amount of Third Lien Notes, (iii) $42.6 million aggregate principal amount of 2026 Senior Notes, which remain outstanding following the completion of the Refinancing Transactions and (iv) assumptions around interest paid in payment-in-kind as further described below. The above table gives effect to the full repayment of the Term Loan Facility and the full redemption of the 2024 Senior Secured Notes, each of which occurred on the Settlement Date.
(b) Assumes (i) interest on the Third Lien Notes is fully paid in payment-in-kind for the first four interest payments and (ii) 4.50% of the interest on the First Lien Notes is fully paid in payment-in-kind for the first four interest payments. Payment of interest on the Third Lien Notes and the First Lien Notes in payment-in-kind is at the Company’s discretion.
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 believed to be consistent with comparable companies. As of December 31, 2022, the Company had additional operating leases, primarily for real estate, that have not yet commenced with undiscounted lease payments of approximately $6.5 million.
We also have funding requirements with respect to our pension obligations. We expect to make cash contributions to our U.S. and foreign pension plans of approximately $1.0 million and $4.4 million, respectively, in 2023. Our minimum funding requirements after 2023 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 net other postretirement benefit payments to be approximately $2.2 million in 2023.
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 $5.9 million as of December 31, 2022 have been excluded from the contractual obligations table above. See Note 16. “Income Taxes” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
Excluded from the contractual obligations table above are open purchase orders as of December 31, 2022 for raw materials, supplies and capital expenditures in the normal course of business, supply contracts with customers, distribution agreements, joint venture agreements and other contracts without express funding requirements.
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Non-GAAP Financial Measures
In evaluating our business, management considers EBITDA and Adjusted EBITDA to be key indicators of our operating performance. Our management also uses EBITDA and Adjusted EBITDA:
•because similar measures are utilized in the calculation of the financial covenants and ratios contained in our financing arrangements;
•in developing our internal budgets and forecasts;
•as a significant factor in evaluating our management for compensation purposes;
•in evaluating potential acquisitions;
•in comparing our current operating results with corresponding historical periods and with the operational performance of other companies in our industry; and
•in presentations to the members of our board of directors to enable our board of directors to have the same measurement basis of operating performance as is used by management in their assessments of performance and in forecasting and budgeting for our company.
In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in evaluating our performance. We define Adjusted EBITDA as net income (loss) plus income tax expense (benefit), interest expense, net of interest income, depreciation and amortization (or “EBITDA”), as adjusted for items that management does not consider to be reflective of our core operating performance. These adjustments include, but are not limited to, restructuring costs, impairment charges, non-cash fair value adjustments and acquisition-related costs.
EBITDA and Adjusted EBITDA are not financial measurements recognized under U.S. GAAP, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA as a supplement to, and not as alternatives for, net income (loss), operating income, or any other performance measure derived in accordance with U.S. GAAP, nor as an alternative to cash flow from operating activities as a measure of our liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of our results of operations as reported under U.S. GAAP. These limitations include the following:
•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 ABL Facility, Term Loan Facility, 2026 Senior Notes, and 2024 Senior Secured Notes;
•they do not reflect certain tax payments that may represent a reduction in cash available to us;
•although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
•other companies, including companies in our industry, may calculate these measures differently and, as the number of differences in the way companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.
In addition, in evaluating Adjusted EBITDA, it should be noted that in the future, we may incur expenses similar to the adjustments in the below presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by special items.
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The following table provides a reconciliation of EBITDA and Adjusted EBITDA from net loss, which is the most comparable financial measure in accordance with U.S. GAAP:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | (215,384) | $ | (322,835) | $ | (267,605) | |||||||||||
| Income tax expense (benefit) | 17,291 | 39,392 | (60,847) | ||||||||||||||
| Interest expense, net of interest income | 78,514 | 72,511 | 59,167 | ||||||||||||||
| Depreciation and amortization | 122,476 | 139,008 | 154,229 | ||||||||||||||
| EBITDA | $ | 2,897 | $ | (71,924) | $ | (115,056) | |||||||||||
| Restructuring charges | 18,304 | 36,950 | 39,482 | ||||||||||||||
Deconsolidation of joint venture (1) | 2,257 | — | — | ||||||||||||||
Impairment charges (2) | 43,710 | 25,609 | 103,887 | ||||||||||||||
Gain on sale of business, net (3) | — | (696) | (2,834) | ||||||||||||||
Gain on sale of fixed assets, net (4) | (33,391) | — | — | ||||||||||||||
Lease termination costs (5) | — | 748 | 771 | ||||||||||||||
Indirect tax and customs adjustments (6) | 1,409 | — | — | ||||||||||||||
Pension settlement and curtailment charges (7) | 2,682 | 1,279 | 184 | ||||||||||||||
Project costs (8) | — | — | 5,648 | ||||||||||||||
| Divested noncontrolling interest debt extinguishment | — | — | 3,595 | ||||||||||||||
| Adjusted EBITDA | $ | 37,868 | $ | (8,034) | $ | 35,677 | |||||||||||
1.Loss attributable to deconsolidation of a joint venture in the Asia Pacific region, which required adjustment to fair value.
2.Non-cash impairment charges in 2022 related to recent operating performance and idle assets in certain locations in North America, Europe and Asia Pacific. Impairment charges in 2021 related to fixed assets and goodwill. Impairment charges in 2020 included impairment of assets held for sale and other impairment charges related to fixed assets and right-of-use operating lease assets, net of portion attributable to our noncontrolling interests.
3.During 2021, the Company recorded subsequent adjustments to the net gain on sale of business, which related to the 2020 divestiture of our European rubber fluid transfer and specialty sealing businesses, as well as its Indian operations. In 2020, the gain on sale of business primarily related to divestitures.
4.In 2022, the Company recognized a gain on a sale-leaseback agreement on one of its European facilities.
5.Lease termination costs no longer recorded as restructuring charges in accordance with ASC 842, Leases.
6.Impact of prior period indirect tax and customs adjustments.
7.Non-cash net pension settlement and curtailment charges and administrative fees incurred related to certain of our U.S. and non-U.S. pension plans.
8.Project costs recorded in selling, administration and engineering expense related to acquisitions and divestitures.
Recent Accounting Pronouncements
See Note 3. “New Accounting Pronouncements” to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” of this Report for additional information.
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 manage our exposure to risk from changes in foreign currency exchange rates through the use of derivative financial instruments in accordance with management’s guidelines. We do not enter into derivative instruments for trading or speculative purposes. See Item 8. “Financial Statements and Supplementary Data,” specifically Note 11. “Fair Value Measurements and Financial Instruments” to the consolidated financial statements.
Foreign Currency Exchange Rate Risk. We use forward foreign exchange contracts to reduce the effect of fluctuations in foreign exchange rates on a portion of forecasted sales, material purchases and operating expenses. As of December 31, 2022, the notional amount of these contracts was $135.3 million. As of December 31, 2022, the fair value of the Company’s forward foreign exchange contracts was an asset of $8.6 million. The potential fair value of the forward foreign exchange contracts from a hypothetical 10% adverse or favorable movement in the foreign currency exchange rates in relation to the U.S. Dollar is as
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follows:
| December 31, 2022 | December 31, 2021 | |||||||||||||
| 10% strengthening of U.S. Dollar | ($1.6) million | ($11.5) million | ||||||||||||
| 10% weakening of U.S. Dollar | + $21.4 million | + $12.2 million | ||||||||||||
These estimates assume a parallel shift in all currency exchange rates and, as a result, may overstate the potential impact to earnings because currency exchange rates do not typically move all in the same direction.
In addition to transactional exposures, our operating results are impacted by the translation of our foreign operating income into U.S. dollars. In 2022, net sales outside of the United States accounted for 77% of our consolidated net sales, although certain non-U.S. sales are U.S. dollar denominated. We do not enter into foreign exchange contracts to mitigate this exposure.
Interest Rates. The Company historically used interest rate swap contracts to create fixed interest payments on variable rate debt instruments in order to manage exposure to fluctuations in interest rates. We did not enter into any interest rate swap contracts in 2022. As of December 31, 2022 and 2021, approximately 38.1% and 38.4%, respectively, of our total debt was at variable interest rates. The pre-tax earnings and cash flow impact of a 100 basis points increase or decrease in the interest rates on our variable rate debt outstanding at December 31, 2022 would be a $3.7 million increase or decrease, respectively, on an annualized basis.
Commodity Prices. We have commodity price risk with respect to purchases of certain raw materials, including natural gas and carbon black. Raw material, energy and commodity costs have been extremely volatile over the past several years. We did not enter into any commodity derivative instruments in 2022. We will continue to evaluate, and may use, derivative financial instruments to manage our exposure to raw material, energy and commodity price fluctuations in the future.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Annual Financial Statements
| Page | |||||
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: | |||||
| Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, Internal Control over Financial Reporting | |||||
Consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020 | |||||
| Consolidated statements of comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020 | |||||
| Consolidated balance sheets as of December 31, 2022 and December 31, 2021 | |||||
| Consolidated statements of changes in equity for the years ended December 31, 2022, 2021 and 2020 | |||||
| Consolidated statements of cash flows for the years ended December 31, 2022, 2021 and 2020 | |||||
| Notes to consolidated financial statements | |||||
| Schedule II—Valuation and Qualifying Accounts | |||||
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Cooper-Standard Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cooper-Standard Holdings Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Impairment of property, plant and equipment
| Description of the Matter | As of December 31, 2022, the Company’s property, plant and equipment balance was $643 million. As discussed in Note 8 to the consolidated financial statements, during 2022 the Company recorded property, plant and equipment impairment charges at certain locations within its Europe and North America segments due to recent operating performance. The Company evaluated its property, plant and equipment in these locations for recoverability and concluded that certain assets were impaired. The Company recognized a $40.2 million impairment charge, which is the amount by which the carrying value exceeded the estimated fair value of these assets. Auditing the Company’s impairment measurement involved a high degree of judgment as estimates underlying the determination of fair value of the long-lived assets were based on assumptions affected by current market and economic conditions. The Company determined fair value using estimated orderly liquidation value. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to measure impairments of property, plant and equipment. Our audit procedures included among others, testing controls over the Company’s review of the significant assumptions and methodologies used in the calculation of the fair value of the related assets. Our testing of the Company’s impairment of property, plant and equipment included, among other procedures, evaluating the assumptions used to estimate the fair value of the property, plant and equipment. We reviewed the valuation methodology to assess whether the methodology is widely recognized and appropriate for use in the valuation of the property, plant and equipment, tested significant assumptions and the data used in the valuation, and recalculated the valuation estimate based on the applicable inputs. We also involved our valuation specialists to assist in our assessment of the valuation approach and assumptions used to estimate the fair value. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2005.
February 17, 2023
46
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Cooper-Standard Holdings Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Cooper-Standard Holdings Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Cooper-Standard Holdings Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 17, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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 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.
/s/ Ernst & Young LLP
Detroit, Michigan
February 17, 2023
47
COOPER-STANDARD HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands except per share amounts)
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Sales | $ | $ | $ | ||||||||||||||
| Cost of products sold | |||||||||||||||||
| Gross profit | |||||||||||||||||
| Selling, administration & engineering expenses | |||||||||||||||||
| Gain on sale of business, net | ( | ( | |||||||||||||||
| Gain on sale of fixed assets, net | ( | ||||||||||||||||
| Amortization of intangibles | |||||||||||||||||
| Impairment charges | |||||||||||||||||
| Restructuring charges | |||||||||||||||||
| Operating loss | ( | ( | ( | ||||||||||||||
| Interest expense, net of interest income | ( | ( | ( | ||||||||||||||
| Equity in (losses) earnings of affiliates | ( | ( | |||||||||||||||
| Pension settlement and curtailment charges | ( | ( | ( | ||||||||||||||
| Other expense, net | ( | ( | ( | ||||||||||||||
| Loss before income taxes | ( | ( | ( | ||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||
| Net loss | ( | ( | ( | ||||||||||||||
| Net loss attributable to noncontrolling interests | |||||||||||||||||
| Net loss attributable to Cooper-Standard Holdings Inc. | $ | ( | $ | ( | $ | ( | |||||||||||