Stoneridge, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Stoneridge designs and manufactures electronic and electrical vehicle components and systems. Its reportable segments are Control Devices, Electronics and PST; PST is 74%-owned. The Wiring business, sold in 2014, is presented as discontinued operations.
Financial performance and liquidity
- Revenue: $696.0 million, up 7.9% from $644.8 million in 2015. Control Devices sales rose 22.6% to $408.1 million; Electronics declined 5.2% to $205.3 million; PST declined 13.3% to $82.6 million.
- Profit and margins: Gross profit was $195.4 million and gross margin 28.1%, versus 27.4% in 2015. Operating income increased to $44.1 million from $27.8 million; operating margin was 6.3% versus 4.3%. Income before tax was $39.2 million. Income from continuing operations was $75.6 million, and net income attributable to Stoneridge was $77.5 million, or $2.74 diluted EPS.
- Tax-driven earnings item: The company recorded a $36.4 million income tax benefit, principally reflecting a $49.6 million release of valuation allowances on U.S. federal, certain state and foreign deferred tax assets. Excluding that release, management said continuing-operations income attributable to Stoneridge increased by $4.9 million, or $0.17 per diluted share, year over year.
- Cash flow and investment: Operating cash flow was $65.3 million, compared with $54.8 million in 2015. Capital expenditures were $24.5 million, down from $28.7 million. Cash and cash equivalents ended the year at $50.4 million, versus $54.4 million.
- Debt and liquidity: Revolver borrowings were $67.0 million, down from $100.0 million; other debt was $16.7 million, for total debt of $83.7 million. Working capital was $128.2 million. The $300 million revolving facility matures in September 2021; the company reported compliance with its covenants at year-end.
- Fourth quarter: Revenue was $172.6 million versus $154.6 million a year earlier; operating income was $10.2 million versus $8.3 million. Diluted EPS was $1.70 versus $0.22, materially affected by the fourth-quarter tax benefit.
Material changes versus 2015
- Revenue growth was led by North American automotive demand and new Control Devices products. Higher Control Devices volume lifted segment operating income to $61.8 million from $44.7 million.
- Electronics operating income increased to $14.8 million from $13.8 million despite lower sales. PST remained loss-making, but its operating loss narrowed to $3.5 million from $7.5 million, with Brazilian weakness and currency translation weighing on sales.
- Corporate operating costs increased by $6.0 million, including $1.8 million of headquarters relocation costs and higher compensation and M&A-related professional fees.
- Gross margin improved 0.7 percentage points, supported by lower labor and overhead as a proportion of sales and favorable currency-related material costs in Electronics and PST; Control Devices faced higher warranty costs and an unfavorable product mix.
- The 2016 result includes a substantial deferred-tax benefit; 2015 included a $0.2 million loss related to the prior Wiring-business sale. The $51.5 million PST goodwill impairment was recorded in 2014, not 2015 or 2016.
Outlook, risks and unusual items
- Management expected North American automotive sales growth in 2017 from recent Control Devices launches, despite forecasting lower North American vehicle production. It expected North American commercial vehicle markets to decline slightly and European commercial vehicle markets to remain approximately flat.
- Management moderated PST growth expectations for 2017 because of continued Brazilian economic and automotive-market weakness, and said it would assess further cost realignment. It expected the effective tax rate to rise in 2017 after the valuation-allowance release, while cash taxes as a percentage of income were expected to be consistent with 2016.
- On January 31, 2017, the company agreed to acquire Orlaco for approximately €74.9 million ($79.7 million), plus potential earnout consideration of up to €7.5 million. It borrowed $81.0 million under the Credit Facility to fund the acquisition. This post-year-end transaction materially changes the debt picture relative to December 31, 2016.
- Principal risks include vehicle-production cyclicality, customer concentration and pricing pressure, foreign exchange and commodity costs, supply interruptions, warranty and product-liability exposure, and debt covenants. Ford represented 17% of 2016 sales; the top five customers represented 42%.
- Legal matters include a Brazilian tax assessment of approximately $28.4 million, for which management said loss was not probable and recorded no accrual; other PST civil, labor and non-income tax contingencies of approximately $9.8 million were considered reasonably possible, not probable. Two U.S. putative class actions concerning a control device had no recorded liability. The company also reported a $0.446 million environmental remediation accrual.
- The company reported $3.0 billion of awarded-business backlog, but stated it is an estimate of projected program volume, not firm orders, and customers may change or cancel schedules.
Important facts for investors to verify
- How much of 2016 earnings and EPS reflects the $49.6 million valuation-allowance release, and what recurring tax rate and cash-tax burden should be expected?
- How the Orlaco acquisition, its potential earnout and the $81.0 million acquisition borrowing affect leverage, interest costs and covenant headroom.
- Whether Brazilian demand and PST profitability recover, and the status and potential exposure of the Brazilian tax assessment and other PST contingencies.
- Whether Control Devices growth and margin gains persist, particularly given customer concentration, pricing demands and higher warranty costs.
- How much of the $3.0 billion backlog converts to actual production and revenue, given that it is not firm orders and can be revised or canceled.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2016.