Stoneridge, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise. The filing is unaudited.
Business context
Stoneridge designs and manufactures electrical and electronic components and systems for automotive, commercial, off-highway, motorcycle and agricultural vehicle markets. Its reportable segments are Control Devices, Electronics and PST.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $203.4 | $208.9 | $643.9 | $655.4 |
| Operating income | $9.3 | $18.3 | $70.2 | $54.3 |
| Net income | $6.7 | $13.3 | $56.1 | $41.8 |
| Diluted EPS | $0.24 | $0.46 | $1.97 | $1.44 |
| Gross margin | 25.5% | 30.3% | 26.3% | 30.3% |
Q3 sales fell 2.6%, while operating income declined 49.1%. Management cited restructuring expense, weaker gross margin, product mix, higher material and expediting costs, and lower PST sales. Nine-month operating income rose 29.2%, but included a $33.6 million gain on disposal of non-core products; excluding that gain, operating income was approximately $36.6 million, below the prior-year $54.3 million. Nine-month net income also benefited from the disposal gain and a Brazilian tax recovery.
- Segment sales, Q3: Control Devices $108.7 million (+0.3%); Electronics $78.2 million (-4.2%); PST $16.5 million (-12.3%).
- Segment operating income, Q3: Control Devices $9.8 million versus $16.3 million; Electronics $7.7 million versus $9.0 million; PST had a $0.5 million loss versus $0.7 million income.
- Cash flow, nine months: Operating cash flow was $20.5 million versus $47.6 million. Investing cash flow was positive $2.7 million versus negative $21.4 million, reflecting $34.4 million of proceeds from the non-core product disposal; capital expenditures, including intangibles, were $30.8 million versus $22.8 million.
- Liquidity and debt: Cash was $55.3 million at September 30, 2019, down from $81.1 million at year-end 2018; the filing says all cash was held outside the United States. Revolver borrowings were $108.5 million, up from $96.0 million. Total debt, including other borrowings, was $111.8 million. The company reported compliance with facility covenants.
- Balance sheet: Current assets were $331.2 million and current liabilities $160.6 million. Inventory increased to $103.6 million from $79.3 million. Shareholders’ equity was $276.6 million, down from $283.3 million.
Material changes and unusual items
- In April 2019, Stoneridge sold certain non-core switches and connector product lines and related assets for $40.0 million, subject to a post-closing inventory adjustment and assumption of certain liabilities. The transaction generated a reported $33.9 million gain. Transition and contract-manufacturing arrangements continue for a limited period.
- A favorable Brazilian court decision led to a $6.5 million pre-tax benefit recorded as a reduction in SG&A for the first nine months. Realization depends on administrative approvals and eligible tax liabilities; further legal clarification was scheduled for December 2019.
- The company recorded $9.3 million of Canton facility restructuring costs in the first nine months, including $3.6 million in Q3. Canton is expected to close by March 31, 2020; another $1.9 million to $3.0 million of costs was expected through 2020. Electronics restructuring was expected to incur approximately $0.6 million more through 2020.
- The $50.0 million accelerated share repurchase agreement delivered 1,349,528 shares initially. Final share settlement is based on the agreement’s pricing terms and may involve additional shares or, in certain circumstances, a cash payment; the agreement runs through May 8, 2020.
- The company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets of $20.9 million and lease liabilities of $21.2 million at September 30.
Outlook, commentary and risks
No specific earnings or revenue guidance was provided. Management expected North American automotive production to decline slightly in 2019 and anticipated lower commercial-vehicle volumes in Q4 in North America and Europe. It expected Control Devices sales volumes to be broadly consistent with the prior year, excluding the non-core product sale, and said PST performance depended in part on improvement in Brazil and the continued weakness of Argentina.
Key risks include customer production changes, program reductions or cancellations, pricing pressure, foreign-exchange exposure (particularly the Brazilian real and Argentine peso), tariffs and trade uncertainty, material costs and supply constraints, product launches, warranty and recall claims, and the company’s ability to achieve cost savings. The filing added that awarded-program sales estimates are not firm orders and can change with production volumes, customer pricing, currency movements, take rates and program cancellations.
- Brazilian civil, labor and other non-income-tax contingencies totaling about $7.5 million were considered reasonably possible but not probable; no provision was recorded.
- Product warranty and recall liabilities were $10.8 million at September 30, 2019. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting product liability, warranty and recall outcomes cannot be assured.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of nine-month earnings and operating income reflects the disposal gain and Brazilian tax recovery, and what the underlying recurring trend is.
- Whether gross margins recover as restructuring, product-mix, material-cost and expediting pressures change.
- Progress and final costs of the Canton closure and Electronics restructuring, including effects on production and working capital.
- Timing and realizability of the Brazilian tax credits, including the outcome of related legal or administrative challenges.
- Cash conversion, inventory growth, foreign-held cash availability, revolver usage and ongoing covenant compliance.
- Final settlement of the accelerated share repurchase and the future amount of PST earn-out consideration, which is uncapped and based on financial performance in 2020 or 2021.