Cooper-Standard puts brakes on cash burn concerns as margins, industry outlook heal
Cooper-Standard Automotive is expected to slow its cash burn this year as a series of strategic initiatives lead to margin improvement and the auto market continues to recover from the early effects of the pandemic, said two buysiders and a sellsider.
For 2021, the auto products supplier is expected to report a cash drain of USD 75m-USD 130m, based on estimates calling for USD 180m-USD 200m of adjusted EBITDA, less USD 100m-USD 125m of capex, USD 50m of working capital charges, USD 65m of interest expense, USD 50m-USD 55m of restructuring costs and USD 10m-USD 15m of cash taxes, the sources noted.
If the adjusted EBITDA falls closer to the company’s forecast of USD 250m this year, then cash burn would recover to around USD 25m-USD 60m, they added. And giving credit for the restructuring costs would push free cash flow to range from negative USD 5m to positive USD 25m, the sources said.
Meanwhile, giving the company full credit for its LTM adjusted EBITDA of USD 66m through 31 March, Cooper-Standard’s cash outflow amounted to USD 139m-USD 144m through USD 80m of capex, USD 65m of interest expense, USD 50m of working capital and USD 10m-USD 15m of cash taxes, the sources noted.
Sources looked at the company’s restructuring costs as recurring costs rather than one-time charges to add back to EBITDA and further subtracted a portion of those costs from free cash flow, leading to an LTM adjusted EBITDA of USD 43m and cash burn of USD 162m-USD 167m.
The improved outlook comes on the back of the sealing, fuel and brake delivery, and fluid transfer system manufacturer’s ongoing focus on executing on a number of cost-saving moves, including headcount initiatives, footprint rationalization and closure or consolidation of facilities and the reorganization of its operating structure.
Among the initiatives, in July 2020, Cooper-Standard completed a divestiture of its European rubber fluid transfer and specialty sealing businesses, as well as its Indian operations, to Mutares SE & Co KGaA for EUR 9m with EUR 6.5m in cash and EUR 2.5m in deferred payments due December 2021.
The company and sources alike expect that as these plants close, revenue may take a hit but margins will improve.
Cooper-Standard received a boost from the sale, as it led to a 9.4% EBITDA margin in 3Q20, compared to negative 27.5% in 2Q20 and positive 1.3% in 1Q20. However, margins have fallen consecutively to 8.2% in 4Q20 and 5.8% in 1Q21, according to company documents.
While a year-over-year improvement, historically margins have hovered around 6%-7% and to fully reverse the cash burn and start generating cash, the company will have to cut down on its restructuring costs or find a way to translate them to consistently higher margins, the sources said.
As of 31 March, liquidity totaled USD 543m, including USD 399m of cash and USD 144m of ABL availability, according to company documents.
At the time, total leverage shook out at 15x through USD 66m of LTM adjusted EBITDA and USD 1.025bn of total debt. Factoring in cash, net leverage came down to 9.5x.
If the company books USD 250m of adjusted EBITDA in 2021, leverage would decrease meaningfully to the 4.1x area. Meanwhile, if the company’s EBITDA falls closer to source expectations of USD 180m-USD 200m, then leverage would dip to the 5.1x-5.7x range.
No chips, no whips
Also leading to expectations that Cooper-Standard will narrow its cash burn this year is the ongoing recovery in the auto market following a drop-off in consumer demand and factory closures last year, the sources said.
In the near-term, the issuer still faces challenges with direct exposure to the semiconductor shortage plaguing the auto industry, the sources said. The company’s free cash flow will stay at lower levels until OEM production recovers entirely and the chip shortage resolves, the sources continued. But OEMs are directing production to their higher-end and more profitable models, cushioning Cooper-Standard from a larger blow to free cash flow, they noted.
The company has significant exposure to the OEM market with roughly 83% of its 2020 sales coming from OEMs and 54% of 2020 total sales coming from its three largest customers: Ford Motor Company, General Motors Company and Fiat Chrysler Automobiles. The remainder of its 2020 sales were to Tier I and Tier II automotive suppliers, non-automotive customers, and replacement market distributors.
In response to the chip shortage, both GM and Ford have shut down factories, laid off workers and slashed vehicle production. Each company expects up to a USD 2bn hit in sales for 2021, according to company documents.
Cooper-Standard’s USD 400m 5.625% senior unsecured notes due 2026 traded yesterday (23 June) at 93.666 to yield 7.056%, compared to 88.77 in early June, according to MarketAxess. Its USD 240m 13% senior secured notes due 2024 last traded on 11 June at 113.5 to yield 5.106%, in line with recent levels.
The borrower’s USD 323m Libor+ 200bps term loan due 2023 is quoted in the 97.4/98.4 context, also in line with recent levels, according to a trader.
The company’s equity closed for trading yesterday at USD 28.50 and USD 482.9m market cap, down from a recent high of USD 47.12 hit in March.
Cooper-Standard did not return requests seeking comment.
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