Stoneridge, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Stoneridge designs and manufactures electrical and electronic vehicle components and systems. Its three reportable segments are Control Devices, Electronics and PST. In 2014, the company sold substantially all of its Wiring business, which is reported as discontinued operations.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $644.8 million | $660.6 million |
| Gross profit / gross margin | $177.0 million / 27.4% | $190.9 million / 28.9% |
| Operating income (loss) / margin | $27.8 million / 4.3% | ($25.8) million / (3.9)% |
| Net income (loss) attributable to Stoneridge | $22.8 million | ($47.1) million |
| Diluted earnings (loss) per share | $0.81 | ($1.75) |
| Cash from operating activities | $54.8 million | $19.8 million |
| Cash and cash equivalents at year-end | $54.4 million | $43.0 million |
| Working capital at year-end | $123.9 million | $125.2 million |
| Total debt at year-end | $118.4 million | $130.0 million |
Capital expenditures were $28.7 million, compared with $23.5 million in 2014; design and development costs were $38.8 million, or 6.0% of sales. The company had $100.0 million drawn on its $300.0 million revolving credit facility, which matures in September 2019. It reported compliance with all debt covenants at year-end. Of total debt, $13.9 million was due in 2016; PST short-term borrowings carried rates as high as 19.31%.
Q4 2015: Sales were $154.6 million, operating income was $8.3 million, and net income attributable to Stoneridge was $6.1 million, or $0.22 diluted EPS. Q4 2014 sales were $166.8 million and operating loss was $22.8 million, including PST goodwill impairment.
Material changes versus 2014
- Annual sales declined 2.4%. Control Devices sales rose 8.6% to $333.0 million, Electronics sales increased 1.1% to $216.5 million, and PST sales fell 31.9% to $95.3 million.
- Control Devices operating income increased to $44.7 million from $35.4 million. Electronics operating income fell to $13.8 million from $17.4 million. PST posted a $7.5 million operating loss, versus a $59.6 million loss in 2014, which included a $51.5 million goodwill impairment.
- Gross margin contracted 1.5 percentage points, principally reflecting higher material costs tied to currency movements, particularly in Electronics and PST. SG&A declined $13.3 million, partly due to foreign currency translation.
- Reported earnings improved substantially, in part because 2014 included the PST impairment and a $10.6 million loss on extinguishment of debt. Excluding those 2014 items, management said 2015 continuing-operations income increased $9.9 million, primarily due to $10.5 million lower net interest expense after refinancing.
- Operating cash flow increased to $54.8 million, aided by working-capital needs and earnings. Cash rose by $11.3 million during the year. The comparison is affected by the 2014 Wiring sale, which generated $71.4 million of cash proceeds.
Outlook, risks and unusual items
- Management expected improved 2016 financial performance from new product launches and functional cost improvements, including North American automotive growth and the Control Devices shift-by-wire launch. It anticipated North American automotive production of 18.2 million units, versus 17.5 million in 2015.
- Management expected North American commercial vehicle markets to decline in 2016 and European commercial vehicle markets to remain approximately flat. PST growth expectations were moderated because of Brazilian economic and automotive weakness; PST continued cost realignment to address demand and currency risks.
- Foreign exchange remains a material exposure: a stronger U.S. dollar reduced reported sales and increased some input costs in 2015. The company used currency forwards; it estimated a 10% currency move would change 2015 pretax income by approximately $2.3 million. A 1% change in floating-rate borrowing costs was estimated to affect annual interest expense by about $1.0 million.
- Other key risks include vehicle-market cyclicality, customer pricing pressure, dependence on major customers (top ten represented 54% of 2015 sales), supplier and commodity availability, product warranty/recall claims, and debt covenants. Ford represented 14% of sales.
- Contingencies include putative vehicle-control-device class actions, Actia patent litigation, and a Brazilian tax assessment of approximately $23.7 million concerning tracking and monitoring services. The company recorded no liability for these matters, stating loss was not probable or reasonably estimable. Sarasota groundwater remediation was underway; the recorded liability was $0.5 million and a $2.0 million letter of credit was required.
- The company recorded a full valuation allowance against PST deferred tax assets in 2015. A $2.2 million share-based compensation charge related to accelerated vesting upon the former CEO’s retirement was included in 2015 SG&A.
Important facts for investors to verify
- Whether 2016 product launches and cost actions deliver the forecast improvement, particularly in North American automotive.
- Whether PST can stabilize performance amid Brazilian market weakness, foreign-exchange pressure and high-cost short-term borrowing.
- How much of the margin decline reflects persistent material-cost and currency pressures, and the effectiveness and coverage of hedges.
- Debt repayment capacity and covenant headroom, including the $100.0 million revolving-facility balance and upcoming PST maturities.
- Developments and potential exposure in the product class actions, Actia litigation, Brazilian tax dispute and environmental remediation.
- Potential realization of deferred tax assets and any future valuation-allowance changes.