Cooper-Standard Holdings Inc.: Form 10-Q for the period ended Sep 30, 2023

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 “Forward-Looking Statements” below 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (“2022 Annual Report”), including Item 1A. “Risk Factors.” The following should be read in conjunction with our 2022 Annual Report and the other information included herein. Our discussion of trends and conditions supplements and updates such discussion included in our 2022 Annual Report. References in this quarterly report on Form 10-Q (the “Report”) to “we,” “our,” or the “Company” refer to Cooper-Standard Holdings Inc., together with its consolidated subsidiaries.

Executive Overview

Our Business

We design, manufacture and sell sealing, fuel and brake delivery, and fluid transfer systems for use primarily in passenger vehicles and light trucks manufactured by global automotive original equipment manufacturers (“OEMs”). We are primarily a “Tier 1” supplier, with approximately 82% of our sales in 2022 made directly to major OEMs. We operate our automotive business along the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other.

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, relative to 2022, supply chain disruptions have improved and light vehicle production rates have largely stabilized. New vehicle inventory has increased in key markets but remains significantly below historic, pre-pandemic average levels. The relatively low light vehicle inventory levels are expected to support further increases in global light vehicle production through 2025. Global consumer demand for new vehicles has largely remained resilient despite the headwinds of rising interest rates, energy market volatility, persistent inflation and ongoing geopolitical tension.

In North America, U.S. consumer confidence in the third quarter 2023 reached its highest level in more than a year. Key drivers of the improvement in consumer sentiment are easing inflation, expectations for stabilizing interest rates, and the resolution of the government’s debt ceiling crisis. These changing dynamics have eased concerns over the likelihood of a major economic recession in the near term. A continuing strong labor market, resilience in the services sector and government spending related to infrastructure are expected to drive continued but more modest economic growth during the remainder of 2023. Economists at the International Monetary Fund (IMF) are expecting the economies of the United States, Canada and Mexico to grow by 2.1 percent, 1.3 percent and 3.2 percent, respectively, in 2023 with more modest growth expected in the United States and Mexico in 2024.

In Europe, current consumer and business indicators suggest an economic recovery is continuing. Key labor markets have remained strong, with the region recently experiencing record low unemployment levels. Concerns over a potential energy crisis are fading and consumer expenditures have stabilized. Increasing demand in the consumer services sector is now supportive of economic growth, and inflation appears to be moderating. However, industrial demand and output have leveled off as pandemic-related backlogs have been depleted, and the European Central Bank is expected to withdraw compensatory support related to energy and inflation in 2024. 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, improving to 1.2 percent in 2024.

In the Asia Pacific region, China’s economy experienced a sharp rebound during the first quarter of 2023 following the removal of COVID-related restrictions. Year-over-year growth continued in the second quarter, primarily due to the weak prior year comparable data which was adversely impacted by the pandemic. Underlying economic momentum slowed in the third quarter, however, due to subdued consumer sentiment and continued weakness in the property sector. In addition, demand for

Chinese exports has softened due to continuing geopolitical tensions among key trading partners. While considerable uncertainty remains in various, important economic sectors, 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 5.0 percent in 2023, but slowing to 4.2 percent in 2024.

In South America, the Brazilian economy has experienced better than expected economic growth in 2023, driven mainly by surging agricultural output to meet increasing demand from China, resilience of the service sector and increased consumption which has been bolstered by fiscal stimulus. Higher interest rates put in place in 2022 have been effective in controlling inflation, and the unemployment rate has fallen to levels not seen since 2015. In June, the Brazilian Senate approved a revised fiscal framework which looks to balance fiscal prudence while still providing flexibility for additional social spending. In view of this, economists at the IMF are now estimating the Brazilian economy will grow 3.1 percent in 2023, but slowing to 1.5 percent in 2024. 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 light vehicle production rates in North America, Europe, Asia Pacific and South America. Historically, production levels have been viewed as cyclical and largely dependent upon factors such as consumer demand, inventory levels, consumer confidence and other economic and competitive trends. In recent years, however, global light vehicle production, inventory and consumer demand all experienced extreme dislocations from historic norms due to the global COVID-19 pandemic and related restrictions on production and consumer activity. Post-pandemic, global light vehicle production continued to be negatively impacted by widespread supply chain disruptions, limiting the global automotive OEM’s ability to rebuild inventory and meet pent-up consumer demand. Since the second half of 2022, the supply chain disruptions have lessened, enabling modest increases in production and inventory levels, primarily in high demand, high margin market segments. The ramp-up of global light vehicle production continued in the third quarter of 2023 in North America and Europe. For the first nine months of 2023, all regions reported year-over-year increases in light vehicle production.

Light vehicle production in certain regions for the three and nine months ended September 30, 2023 and 2022 was as follows:

(in millions of units)

(1) Production data based on S&P Global (formerly IHS Markit), October 2023.

Despite the strong production in the third quarter and first nine months of 2023, vehicle production and inventory levels remain well below pre-pandemic historical averages. In addition, labor unions in North America initiated limited, targeted strikes against certain OEM production and distribution facilities beginning in mid-September 2023. While tentative agreements have been reached between these OEMs and labor unions, those agreements have not yet been ratified and the OEMs are slowly ramping up production. It is difficult to forecast the full extent to which these actions will impact light vehicle production for the remainder of 2023. Current industry forecasts suggest global light vehicle production will continue to increase modestly each year through at least 2025. Actual production may vary from forecasted levels due to a number of factors, however, including, but not limited to, the extent and duration of work stoppages related to union contract negotiations with the OEMs in North America.

Raw Materials

Our business is susceptible to inflationary pressures with respect to raw materials. Abrupt changes in the market prices or availability of certain key raw materials may result in operational and profitability challenges for the Company and the industry as a whole. Following the pandemic, market prices for key raw materials, such as steel, aluminum, and oil-derived commodities, experienced a period of extreme volatility, which led to significant cost increases for our business in 2021 and 2022. In response, we worked with our customers throughout 2022 to implement or expand index-based commercial agreements that have enabled us to partially recover incremental material costs incurred and significantly reduced our exposure and risk related to commodity price fluctuations going forward. Global commodity markets and pricing have stabilized to a large degree in 2023, and material cost impacts on our results for the nine months ended September 30, 2023 were relatively small.

General Inflation and Recovery Strategy

With continued inflationary pressures on wages, energy, transportation and other general costs, in order to remain competitive, we are working with our customers on an ongoing basis to offset the costs associated with this inflation. We are actively negotiating pricing adjustments on current business and considering the impact of inflationary and other costs in our quotes for new business. Most of the customer negotiations for inflation recovery and sustainable pricing were completed by the end of the third quarter, while the few remaining are expected to be concluded in the fourth quarter 2023.

Results of Operations

(dollar amounts in thousands)

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Sales

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

Sales for the three months ended September 30, 2023 increased 12.0%, compared to the three months ended September 30, 2022. The increase in sales was driven by volume and mix, mainly higher vehicle production volume due to the stabilization of the supply environment, net customer price adjustments including recovery of cost increases, and favorable foreign exchange. This increase was partially offset by the divestitures of our European technical rubber products business and a joint venture in the Asia Pacific region. See Note 2. “Divestitures and Deconsolidations” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for additional information.

Gross Profit

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

** Net of divestitures.

Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation and other direct operating expenses. The Company’s material portion of cost of products sold was approximately 51% and 52% of total cost of products sold for the three months ended September 30, 2023 and 2022, respectively. The change in cost of products sold was impacted by higher volume and mix, net of recovery of cost increases, higher inflation of labor and overhead, higher energy costs and unfavorable foreign exchange. These costs were partially offset by manufacturing and purchasing savings through lean initiatives, favorable commodity costs and the divestitures of our European technical rubber products business and a joint venture in the Asia Pacific region.

Gross profit for the three months ended September 30, 2023 increased $68.0 million compared to the three months ended September 30, 2022. The change was driven by volume and mix, net of customer price adjustments including recovery of cost increases, manufacturing and purchasing savings through lean initiatives and favorable commodity costs, partially offset by labor, overhead and energy inflation and unfavorable foreign exchange.

Selling, Administration and Engineering Expenses. Selling, administration and engineering expenses include administrative expenses as well as product engineering and design and development costs. Selling, administration and engineering expenses for both the three months ended September 30, 2023 and 2022 was 6.8% of sales.

Loss on Sale of Business, Net. Loss on sale of business, net for the three months ended September 30, 2023 was $0.3 million, due to the net effect of our 2023 divestitures, which included the sale of our European technical rubber products business and the sale of our entire controlling equity interest of a joint venture in the Asia Pacific region.

Amortization of Intangibles. Intangibles amortization for the three months ended September 30, 2023 was comparable to the three months ended September 30, 2022.

Restructuring Charges. Restructuring charges for the three months ended September 30, 2023 increased $0.3 million compared to the three months ended September 30, 2022. The increase was primarily driven by higher restructuring charges in Europe, partially offset by a reversal of restructuring charges in Asia Pacific that were recognized in prior periods.

Impairment Charges. Non-cash impairment charges for the three months ended September 30, 2023 decreased $0.4 million compared to the three months ended September 30, 2022, primarily due to impairments of certain assets in Asia Pacific in the prior year period.

Interest Expense, Net. Net interest expense for the three months ended September 30, 2023 increased $13.1 million compared to the three months ended September 30, 2022, primarily due to an increase in interest rates on the new debt subsequent to the Refinancing Transactions (as further described in Liquidity and Capital Resources).

Other (Expense) Income, Net. Other expense, net, for the three months ended September 30, 2023 increased $4.0 million compared to the three months ended September 30, 2022, primarily due to the unfavorable impact of foreign currency exchange and increased net periodic benefit cost other than service cost.

Income Tax Expense (Benefit). Income tax expense for the three months ended September 30, 2023 was $4.3 million on earnings before income taxes of $15.7 million compared to an income tax benefit of $0.8 million on losses before income taxes of $34.1 million for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2023 differed from the effective tax rate for the three months ended September 30, 2022 primarily due to the geographic mix of pre-tax losses, the inability to record a tax expense for pre-tax earnings and tax benefit for pre-tax losses in the U.S. and certain foreign jurisdictions due to valuation allowances, and other permanent items.

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Sales

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

Sales for the nine months ended September 30, 2023 increased 14.2%, compared to the nine months ended September 30, 2022. The increase in sales was driven by volume and mix, mainly higher vehicle production volume due to the stabilization of the supply environment, elimination of prior year COVID-19 related restrictions in China and net customer price adjustments including recovery of cost increases. This increase was partially offset by the negative impact of foreign exchange and the divestitures of our European technical rubber products business and a joint venture in the Asia Pacific region. See Note 2. “Divestitures and Deconsolidations” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for additional information.

Gross Profit

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

** Net of divestitures.

Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material portion of cost of products sold was approximately 52% and 51% of total cost of products sold for the nine months ended September 30, 2023 and 2022, respectively. The change in cost of products sold was impacted by higher volume and mix, net of recovery of cost increases, higher inflation of labor and overhead, higher energy costs and the negative impact of foreign exchange. These costs were partially offset by manufacturing and purchasing savings through lean initiatives, favorable commodity costs and the divestitures of our European technical rubber products business and a joint venture in the Asia Pacific region.

Gross profit for the nine months ended September 30, 2023 increased 199.5%, compared to the nine months ended September 30, 2022. The change was driven by volume and mix, net of customer price adjustments including recovery of cost increases, manufacturing and purchasing savings through lean initiatives and favorable commodity costs, partially offset by labor, overhead and energy inflation and unfavorable foreign exchange.

Selling, Administration and Engineering Expenses. Selling, administration and engineering expenses include administrative expenses as well as product engineering and design and development costs. Selling, administration and engineering expenses for the nine months ended September 30, 2023 was 7.3% of sales compared to 7.9% for the nine months ended September 30, 2022. The decrease was primarily due to salaried headcount initiative savings and foreign exchange, partially offset by higher compensation-related costs.

Loss on Sale of Business, Net. Loss on sale of business, net for the nine months ended September 30, 2023 was $0.3 million, due to the net effect of our 2023 divestitures, which included the sale of our European technical rubber products business and the sale of our entire controlling equity interest of a joint venture in the Asia Pacific region.

Gain on Sale of Fixed Assets, Net. The gain on sale of fixed assets for the nine months ended September 30, 2022 was attributable to the gain on the sale-leaseback of a European facility of $33.4 million.

Amortization of Intangibles. Intangibles amortization for the nine months ended September 30, 2023 was comparable to the nine months ended September 30, 2022.

Restructuring Charges. Restructuring charges for the nine months ended September 30, 2023 decreased $0.1 million compared to the nine months ended September 30, 2022. The decrease was primarily driven by lower restructuring charges in Europe and a reversal of restructuring charges in Asia Pacific that were recognized in prior periods, partially offset by higher restructuring charges in North America.

Impairment Charges. Impairment charges for the nine months ended September 30, 2023 decreased $0.2 million, compared to the nine months ended September 30, 2022. The decrease was driven by lower impairment charges in Europe and North America, partially offset by the impairment of certain assets in Asia Pacific in the current year period.

Interest Expense, Net. Net interest expense for the nine months ended September 30, 2023 increased $40.7 million compared to the nine months ended September 30, 2022, primarily due to an increase in interest rates on the new debt subsequent to the Refinancing Transactions (as further described in Liquidity and Capital Resources).

Loss on Refinancing and Extinguishment of Debt. Loss on refinancing and extinguishment of debt for the nine months ended September 30, 2023 was $81.9 million, which resulted from certain fees and the partial write off of new and unamortized debt issuance costs and unamortized original issue discount related to the Refinancing Transactions.

Other Expense, Net. Other expense, net for the nine months ended September 30, 2023 increased $7.8 million compared to the nine months ended September 30, 2022, primarily due to the unfavorable impact of foreign currency exchange and increased net periodic benefit cost other than service cost, partially offset by a loss on deconsolidation in the prior year period.

Income Tax Expense. Income tax expense for the nine months ended September 30, 2023 was $9.5 million on losses before income taxes of $138.7 million compared to income tax expense of $1.8 million on losses before income taxes of $127.3 million for the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 differed primarily from the effective tax rate for the nine months ended September 30, 2022 due to the geographic mix of pre-tax losses, the inability to record a tax benefit for pre-tax losses in the U.S. and certain foreign jurisdictions due to valuation allowances, and other permanent items which included discrete tax impacts of the gain on asset sale transaction in Europe and other tax reserve changes during the nine months ended September 30, 2022.

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. The Company uses 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 present sales and segment adjusted EBITDA for each of the reportable segments.

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Sales

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

• Volume and mix, net of customer price adjustments including recoveries, was mainly driven by vehicle production volume increases due to the stabilization of the supply environment.
• The net impact of foreign currency exchange was primarily related to the Euro and Chinese Renminbi.

Segment adjusted EBITDA

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

** Net of divestitures.

• Volume and mix, net of customer price adjustments including recoveries, was driven by vehicle production volume increases due to the stabilization of the supply environment.
• The net impact of foreign currency exchange was primarily related to the Mexican Peso, Polish Zloty and Euro.
• The Cost (Increases) / Decreases category above includes:
• Commodity cost and inflationary economics;
• Manufacturing and purchasing savings through lean initiatives; and
• Increased compensation-related expenses.

Nine Months Ended September 30, 2023 Compared with Nine Months Ended September 30, 2022

Sales

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

• Volume and mix, net of customer price adjustments including recoveries, was mainly driven by vehicle production volume increases due to the stabilization of the supply environment and elimination of prior year COVID-19 related restrictions in China.
• The net impact of foreign currency exchange was primarily related to the Chinese Renminbi, Euro and Canadian Dollar.

Segment adjusted EBITDA

(dollar amounts in thousands)

* Net of customer price adjustments, including recoveries.

** Net of divestitures.

• Volume and mix, net of customer price adjustments including recoveries, was mainly driven by vehicle production volume increases due to the stabilization of the supply environment and elimination of prior year COVID-19 related restrictions in China.
• The net impact of foreign currency exchange was primarily related to Mexican Peso.
• The Cost (Increases) / Decreases category above includes:
• Commodity cost and inflationary economics;
• Manufacturing and purchasing savings through lean initiatives; and
• Increased compensation-related expenses.

Liquidity and Capital Resources

Short and Long-Term Liquidity Considerations and Risks

The sources to fund our ongoing working capital, capital expenditures, debt service and other funding requirements are a combination of cash flows from operations, cash on hand, borrowings under our senior asset-based revolving credit facility (“ABL Facility”) and receivables factoring. The Company utilizes intercompany loans and equity contributions to fund its worldwide operations. There may be country-specific regulations which may restrict or result in increased costs in the repatriation of these funds. See Note 7. “Debt and Other Financing” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for additional information.

We continue to actively preserve cash and enhance liquidity, including decreasing our capital expenditures as a percent of sales. We continuously monitor and forecast our liquidity situation in light of automotive industry, customer and economic factors, and 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 work stoppages related to union contract negotiations with OEMs in North America and 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 facing the industry. Nonetheless, the Company opted to access the ABL Facility in the third quarter as a precautionary measure in view of market uncertainty related to then anticipated OEM labor negotiations and the potential for interruption of light vehicle production. In the fourth quarter, tentative agreements were reached in the OEM labor negotiations, leading the Company to repay the amounts outstanding under the ABL Facility.

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 principal 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 senior asset-based revolving credit facility (“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 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. The Company recognized a loss on the refinancing and extinguishment of debt of $81.9 million during the nine months ended September 30, 2023. Additionally, the Company incurred total fees of $91.8 million associated with the Refinancing Transactions, of which $87.6 million were paid during the nine months ended September 30, 2023 and $4.2 million were paid during 2022. The fees paid during the nine months ended September 30, 2023 are reflected as a financing outflow in the condensed consolidated statement of cash flows. Of the fees paid during the nine months ended September 30, 2023,

$73.4 million was included in the loss on the refinancing and extinguishment of debt referenced above, $13.2 million is presented as a direct deduction from the principal balance in the condensed consolidated balance sheet, and $1.0 million related to amending the ABL Facility is recorded in other long-term assets in the condensed consolidated balance sheet.

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 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. As of September 30, 2023, the aggregate principal amount of the First Lien Notes of $588.6 million recognized in the condensed consolidated balance sheet reflects the election that was made by the Company to pay 4.50% of the first interest payment as payment-in-kind. The Company has also elected to pay 4.50% of the second interest payment as payment-in-kind. Interest on the First Lien Notes is payable semi-annually in arrears on June 15 and December 15 of each year, and commenced on June 15, 2023.

As of September 30, 2023, the Company had $8.8 million of unamortized debt issuance costs and $0.4 million of unamortized original issue discount related to the First Lien Notes, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheet. Both the debt issuance costs and the original issue discount are amortized into interest expense over the term of the First Lien Notes.

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 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. As of September 30, 2023, the aggregate principal amount of the Third Lien Notes of $378.2 million recognized in the condensed consolidated balance sheet reflects the election that was made by the Company to fully pay the first interest payment on the Third Lien Notes as payment-in-kind. The Company has also elected to pay the second interest payment as payment-in-kind. Interest on the Third Lien Notes is payable semi-annually in arrears on June 15 and December 15 of each year, and commenced on June 15, 2023.

Debt issuance costs related to the Third Lien Notes are amortized into interest expense over the term of the Third Lien Notes. As of September 30, 2023, the Company had $5.5 million of unamortized debt issuance costs related to the Third Lien Notes, which are presented as a direct deduction from the principal balance in the condensed consolidated balance sheet.

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 “ABL Facility Collateral Agent”), 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.

For additional information regarding the guarantees, covenants and events of default with respect to the New Notes, see Note 7. “Debt and Other Financing” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

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.

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.

The Company paid approximately $7.1 million of debt issuance costs in connection with the issuance of the 2026 Senior Notes. The debt issuance costs are being amortized into interest expense over the term of the 2026 Senior Notes. As of September 30, 2023 and December 31, 2022, the Company had $0.2 million and $2.7 million of unamortized debt issuance costs related to the 2026 Senior Notes, which is presented as a direct deduction from the principal balance in the condensed consolidated balance sheets.

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. In the first quarter of 2023, 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.

The Company paid approximately $6.4 million of debt issuance costs in connection with the issuance of the 2024 Senior Secured Notes. Additionally, the 2024 Senior Secured Notes were issued at a discount of $5.0 million. As of December 31, 2022, the Company had $3.0 million of unamortized debt issuance costs and $2.5 million of unamortized original issue discount related to the 2024 Senior Secured Notes, which were presented as direct deductions from the principal balance in the condensed consolidated balance sheet. Both the debt issuance costs and the original issue discount were amortized into interest expense over the term of the 2024 Senior Secured Notes.

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 the ABL Facility. In March 2020, the Borrowers entered into Amendment No. 1 to 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 ABL Facility Collateral Agent 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.

The aggregate revolving loan availability includes a $100.0 million letter of credit sub-facility and a $25.0 million swing line sub-facility. The ABL Facility also provides for an uncommitted $100.0 million incremental loan facility, for a potential total ABL Facility of $280.0 million (if requested by the Borrowers and the lenders agree to fund such increase). No consent of any lender (other than those participating in the increase) is required to effect any such increase. The Company’s borrowing base as of September 30, 2023 was $180.0 million and the monthly fixed charge coverage ratio was at a level that provided the Company full access to the borrowing base. Net of $5.5 million of outstanding letters of credit, and $120.0 million of outstanding borrowings, the Company effectively had $54.5 million available for borrowing under its ABL Facility as of September 30, 2023.

As of September 30, 2023, there was $120.0 million outstanding under the ABL Facility which is recorded in short-term debt in the condensed consolidated balance sheet. The Company opted to access the ABL Facility in the third quarter as a precautionary measure in view of market uncertainty related to then anticipated OEM labor negotiations and the potential for interruption of light vehicle production. This amount was subsequently repaid on November 3, 2023.

Maturity. Any borrowings under our ABL Facility will mature, and the commitments of the lenders under our ABL Facility will terminate, on March 24, 2025.

Borrowing Base. As of the Settlement Date, the loan and letter of credit availability under the ABL Facility is subject to a borrowing base, which at any time is limited to the lesser of: (A) the maximum facility amount (subject to certain adjustments) and (B) (i) up to 85% of eligible accounts receivable; plus (ii) 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 ABL Facility Collateral Agent. The accounts receivable portion of the borrowing base is subject to certain formulaic limitations (including concentration limits). The inventory portion of the borrowing base is limited to eligible inventory, as determined by the ABL Facility Collateral Agent. The borrowing base is also subject to certain reserves, which are established by the ABL Facility Collateral Agent (which may include changes to the advance rates indicated above). Loan availability under the ABL Facility is apportioned as follows: $160.0 million to the U.S. Borrower and $20.0 million to the Canadian Borrower.

Interest. Borrowings under the ABL Facility bear interest at a rate equal to, at the Borrowers’ option:

• in the case of borrowings by the 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
• 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).

Fees. The Borrowers are required to pay a fee in respect of committed but unutilized commitments. The ABL Facility also requires the payment of customary agency and administrative fees.

Voluntary Prepayments. The Borrowers are able to voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans, in each case, in whole or in part, at any time without premium or penalty (other than customary breakage and related reemployment costs with respect to repayments of SOFR-based borrowings).

Debt Issuance Costs. As of September 30, 2023 and December 31, 2022, the Company had $1.0 million and $0.5 million, respectively, of unamortized debt issuance costs related to the ABL Facility recorded in other long-term assets in the condensed consolidated balance sheets.

For additional information regarding the guarantees, covenants and events of default with respect to the ABL Facility, see Note 7. “Debt and Other Financing” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

Term Loan Facility

On November 2, 2016, Cooper-Standard Automotive Inc., as borrower, entered into Amendment No. 1 to its senior term loan facility (the “Term Loan Facility”), which provided for loans in an aggregate principal amount of $340.0 million. 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.

As of December 31, 2022, the Company had $0.5 million of unamortized debt issuance costs and $0.3 million of unamortized original issue discount related to the Term Loan Facility. Both the debt issuance costs and the original issue discount were amortized into interest expense over the term of the Term Loan Facility.

For a further description of the Term Loan Facility, see Note 7. “Debt and Other Financing” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

Cash Flows

Operating Activities. Net cash provided by operations was $37.6 million for the nine months ended September 30, 2023, compared to net cash used in operations of $10.4 million for the nine months ended September 30, 2022. The net change was primarily due to improved operating performance offset by changes in working capital balances, including 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 during the nine months ended September 30, 2022.

Investing Activities. Net cash used in investing activities was $47.5 million for the nine months ended September 30, 2023, compared to net cash used in investing activities of $5.4 million for the nine months ended September 30, 2022. The net 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 nine months ended September 30, 2022, compared with net proceeds of $15.4 million related to our 2023 divestitures which were received in the nine months ended September 30, 2023. We expect to continue initiatives to reduce overall capital spending and anticipate that we will spend approximately $70 - $80 million on capital expenditures in 2023.

Financing Activities. Net cash provided by financing activities totaled $39.4 million for the nine months ended September 30, 2023, compared to net cash used in financing activities of $6.1 million for the nine months ended September 30, 2022. The net change was primarily due to $120.0 million of borrowings drawn on our revolving credit facility, partially offset by the impact of the Refinancing Transactions.

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 us 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. The specific timing and amount of any future repurchase will vary based on market and business conditions, changes in tax laws (including the Inflation Reduction Act) and other factors. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at our discretion. As of September 30, 2023, we had approximately $98.7 million of repurchase authorization remaining under the 2018 Program. We did not make any repurchases under the 2018 Program during the nine months ended September 30, 2023 or 2022.

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:

• 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, New Notes, 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.

The following table provides a reconciliation of EBITDA and Adjusted EBITDA from net income (loss), which is the most comparable financial measure in accordance with U.S. GAAP:

(dollar amounts in thousands)

(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 2023 related to certain assets in Asia Pacific and North America, and non-cash impairment charges in 2022 related to idle assets in Europe.

(3) Loss on sale of businesses related to divestitures in 2023.

(4) In the first quarter of 2022, the Company signed a sale-leaseback agreement on one of its European facilities, and a gain was recognized in the second quarter of 2022.

(5) Impact of indirect tax adjustments in 2022.

(6) Loss on refinancing and extinguishment of debt relating to the Refinancing Transactions.

Contingencies and Environmental Matters

The information concerning contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters, contained in Note 15. “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, is incorporated herein by reference.

Critical Accounting Estimates

There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2023.

Forward-Looking Statements

This quarterly report on Form 10-Q 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 Middle East; our ability to achieve commercial recoveries and to offset the adverse impact of higher commodity and other costs through pricing and other negotiations with our customers; work stoppages or other labor disruptions with our employees or our customers’ employees; 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; 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; 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 quarterly report on Form 10-Q, 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 quarterly report on Form 10-Q 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.

There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously disclosed in the Company’s 2022 Annual Report.

Evaluation of Disclosure Controls and Procedures

The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Based on that evaluation, the Company’s Chief Executive Officer along with the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.