Stoneridge, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Its reportable segments are Control Devices, Electronics and PST.
Financial results
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $162.6 million | $162.8 million |
| Gross margin | 27.8% | 26.8% |
| Operating income | $8.5 million | $3.1 million |
| Income from continuing operations | $6.1 million | $2.1 million |
| Net income attributable to Stoneridge | $7.2 million | $2.3 million |
| Diluted earnings per share | $0.26 | $0.08 total; $0.09 from continuing operations |
| Cash provided by (used in) operating activities | $1.1 million | $(4.3) million |
| Capital expenditures | $6.8 million | $8.5 million |
Improved earnings reflected higher Control Devices sales, lower Electronics material costs and lower SG&A, partly offset by $1.9 million of business realignment charges and higher income taxes. Q1 2015 SG&A included $2.2 million of accelerated share-based compensation tied to the former CEO’s retirement. The effective tax rate was 12.2%, versus 6.5%.
Segments and material changes
- Control Devices: Sales rose 15.6% to $92.4 million; operating income increased 40.7% to $13.5 million, primarily on new products and North American automotive growth.
- Electronics: Sales fell 6.7% to $52.6 million; operating income increased 11.6% to $3.8 million, aided by lower material costs from currency movements.
- PST: Sales fell 33.6% to $17.6 million and operating loss widened to $3.1 million from $2.7 million. Weak Brazilian demand and unfavorable currency translation weighed on results.
- Consolidated sales were nearly flat as Control Devices growth was offset by declines in Electronics and PST. Gross margin improved by one percentage point.
Cash, debt and liquidity
- Cash was $48.4 million at March 31, down from $54.4 million at year-end; $22.0 million was held in the U.S. and $26.4 million abroad. Management attributed the decline mainly to higher working capital, product-launch capital spending, debt repayments and employee tax withholding share repurchases.
- Operating cash flow was positive $1.1 million, compared with negative $4.3 million a year earlier. Working-capital movements included higher receivables and inventory, partly offset by increased payables.
- Debt included $100.0 million drawn on the $300.0 million revolving facility and approximately $21.0 million of other debt, for total debt of about $121.0 million. The revolver matures in September 2019; its March 31 rate was 1.69%. PST debt carried materially higher rates, including a 16.0% weighted-average rate on short-term debt.
- Current assets were $255.3 million and current liabilities $124.9 million. The company reported compliance with credit-facility and debt covenants.
Outlook, risks and unusual items
- Management expected improved 2016 performance versus 2015, citing new product launches and savings from prior realignment actions. It anticipated North American automotive growth and production of 18.2 million units in 2016, versus 17.5 million in 2015; this is management’s market expectation, not quantified company earnings guidance.
- Management expected North American commercial vehicle markets to decline for the remainder of 2016 and European commercial vehicle markets to remain near 2015 levels. Brazilian weakness and currency exposure continued to pressure PST; management was adjusting PST’s cost base and using factoring and short-term bank loans to support liquidity.
- The planned corporate headquarters move from Warren, Ohio, to Novi, Michigan, was expected mainly in Q3 and Q4 2016, with estimated costs of $2.0–$2.5 million. Potential Michigan support included a grant of up to $1.4 million, conditional on job creation, plus other local incentives.
- Contingencies include a Brazilian tax assessment of approximately $26 million and other PST civil, labor and tax contingencies of approximately $7.5 million deemed reasonably possible. No accrual was recorded for these matters; management considered loss on the tax assessment not probable. The company also disclosed product-related class actions and a French patent dispute, with no accrual recorded for the cited claims.
- Environmental remediation liability was $0.5 million; a $2.0 million letter of credit supports obligations relating to the former Sarasota site. Product warranty and recall liability was $7.1 million.
- Principal risks include vehicle-market demand, customer pricing pressure, currency and commodity movements, supplier and labor disruptions, customer concentration, debt covenants, product claims and the uncertain Brazilian economy. Management reported effective disclosure controls and no material change in internal controls.
Key facts for investors to verify
- Whether North American new-product launches and vehicle production translate into sustained sales and margin gains.
- PST’s Brazilian demand, receivable collections, funding needs and ability to reduce operating losses.
- Cash conversion and working-capital trends, including whether operating cash flow can support capital spending and debt service.
- Debt structure, covenant headroom and the cost and repayment schedule of PST’s short-term borrowings.
- Developments in the Brazilian tax assessment, vehicle-device litigation, patent claims and warranty or recall exposure.
- Actual headquarters relocation costs and whether conditional state and local incentives are realized.