Stoneridge, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 10, 2014. Unaudited results. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context
Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Continuing operations comprised Control Devices, Electronics and PST. The company completed the sale of substantially all of its Wiring business to Motherson on August 1, 2014; Wiring is reported as discontinued operations for all periods presented.
Financial performance and liquidity
- Revenue: Q3 sales were $170.3 million, up 5.4% from $161.6 million. Nine-month sales were $493.8 million, up 0.7% from $490.3 million.
- Profitability: Q3 operating income was $13.8 million versus $12.6 million; gross margin declined to 29.1% from 30.8%. Continuing-operations income attributable to Stoneridge was about $8.0 million, or $0.29 diluted EPS. After an $8.1 million discontinued-operations loss, including a $6.5 million after-tax disposal loss, Stoneridge reported a $0.1 million net loss attributable to the company (approximately break-even per diluted share). For the first nine months, operating loss was $3.0 million, continuing-operations loss attributable to Stoneridge was $12.9 million, and net loss attributable to Stoneridge was $20.6 million, or $0.76 per share.
- Cash flow: Nine-month operating cash flow was negative $0.8 million, compared with positive $22.4 million in 2013. Capital expenditures were $19.8 million. Cash and cash equivalents were $41.0 million at quarter-end; restricted cash of $52.7 million brought total cash balances including restricted cash to $93.7 million. Operating cash flow was pressured by lower earnings and higher working capital.
- Debt and liquidity: Total debt was $183.2 million at September 30, including $73.9 million classified as current; no revolving-credit borrowings were outstanding at that date. The company amended its revolver to a $300 million facility maturing in 2019, with a possible $80 million accordion, and reported covenant compliance. In October, it redeemed the remaining $157.5 million of 9.5% senior notes using $100 million borrowed under the revolver and restricted cash. It expected to record an approximately $9.7 million debt-extinguishment loss in Q4. PST had $26.5 million of term loans, including $15.5 million maturing in 2014.
Material changes and drivers
- Q3 Control Devices sales rose 7.3% and Electronics sales rose 22.5%; PST sales fell 15.1%. Nine-month PST sales declined 21.8%, primarily due to weaker Brazilian demand and unfavorable currency translation.
- Q3 gross margin fell as material costs rose to 49.8% of sales from 47.3%, reflecting product mix, material costs and currency effects. Nine-month gross margin declined to 29.6% from 31.7%.
- Stoneridge recorded a $23.5 million non-cash goodwill impairment for PST in the first nine months, reflecting weaker Brazilian economic and automotive-market expectations. Completion of the impairment analysis generated a $5.8 million Q3 adjustment that reduced the previously estimated charge.
- Wiring’s sale generated $71.4 million cash proceeds, subject to post-closing working-capital and other adjustments. The company recorded a $7.8 million nine-month after-tax disposal loss; the final purchase-price adjustments could affect that loss.
Outlook, risks and contingencies
- Management anticipated modest improvement in North American vehicle production and continued improvement in North American and European commercial-vehicle markets through late 2014 and into 2015. It gave no specific company revenue or earnings guidance.
- Management expected Brazilian weakness to weigh on PST and said it would continue realigning costs to address potentially lower demand through the remainder of 2014 and the first half of 2015. Competitive pricing, customer price reductions, material costs and foreign exchange were cited as risks.
- The Brazilian tax assessment against PST was approximately $37.7 million, including tax, interest and penalties. Management considered loss not probable and recorded no accrual. Other PST civil, labor and tax contingencies considered reasonably possible totaled $14.4 million, with no provision recorded.
- Actia sought injunctive relief and approximately $19 million in damages in a French patent-infringement case. Stoneridge denied infringement, was defending the matter and recorded no liability because management considered loss not probable.
- Environmental remediation liability was $0.9 million; groundwater remediation at a former Florida site was expected to begin in Q1 2015. Product warranty and recall liability was $7.5 million at September 30.
Important facts for investors to verify
- Post-closing adjustments to the Wiring sale proceeds and the final disposal loss.
- Actual post-October debt balances, revolver availability, covenant headroom and the Q4 debt-extinguishment charge.
- Whether Brazil’s economy and automotive market recover, and whether PST cost actions offset lower demand and any further goodwill impairment risk.
- Developments in the Brazilian tax assessment, Actia litigation and other PST contingencies, including any change in management’s loss assessments.
- Cash generation and working-capital trends, given negative nine-month operating cash flow and lower reported cash excluding restricted proceeds.