Stoneridge, Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. The quarter includes PST’s results for the first time on a consolidated basis following Stoneridge’s acquisition of a controlling interest on December 31, 2011; PST was previously accounted for using the equity method. Consequently, reported year-over-year growth is not directly comparable.
Key financial results
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $262.3 | $193.0 |
| Gross margin | 24.8% | 20.4% |
| Operating income | $11.8 | $6.7 |
| Income before taxes | $7.0 | $3.4 |
| Net income attributable to Stoneridge | $5.9 | $2.9 |
| Diluted earnings per share | $0.22 | $0.12 |
| Cash provided by (used in) operations | $5.9 | $(15.5) |
| Capital expenditures | $6.8 | $4.3 |
- Sales increased 35.9%; the newly consolidated PST contributed $53.7 million. Electronics sales rose 10.7% and Control Devices sales rose 3.2%.
- Operating margin improved to 4.5% from 3.5%. SG&A increased to $53.3 million from $32.6 million, primarily reflecting PST’s $20.4 million of SG&A.
- Cash and equivalents were $42.9 million at March 31, down from $78.7 million at year-end. Net cash used was $26.5 million in investing activities, including $19.8 million paid for the PST interest, and $17.4 million in financing activities.
- Balance-sheet debt was approximately $253.2 million, including current maturities and short-term debt, versus approximately $267.1 million at December 31, 2011. The company had $63.4 million of undrawn availability under its asset-based credit facility.
Changes, outlook and risks
- Management attributed higher sales to stronger North American commercial-vehicle, automotive and agricultural production, as well as PST consolidation. Currency movements reduced sales by about $1.4 million.
- Gross-margin improvement reflected better labor productivity, lower premium freight and favorable commodity and currency movements, partly offset by higher precious-metal, rare-earth-magnet and resin costs in Control Devices. PST recorded a $0.3 million pretax loss; acquisition-related depreciation and amortization and fair-value adjustments reduced its results by approximately $3.2 million.
- Management forecast 2012 PST revenue of $240 million to $270 million. It expected North American commercial-vehicle and agricultural markets to improve and cited a 2012 North American automotive-production forecast of 14.3 million to 14.7 million units, versus 13.1 million in 2011. The European commercial-vehicle market was expected to decline. These are expectations, not guarantees.
- Risks include vehicle-production changes, commodity prices, foreign exchange, customer and supplier disruptions, customer price reductions, acquisition integration, indebtedness and debt covenants. Copper hedges and customer surcharge billings were intended to mitigate some copper exposure; currency forwards addressed certain exposures.
- PST had $15.1 million of civil, labor and tax contingencies considered possible but not probable, with no accrual recorded. The company also reported a $1.9 million accrued environmental remediation liability and a $2.0 million letter of credit related to its former Sarasota site. A possible BCS earnout of up to $3.2 million in 2013 was contingent on 2012 performance; no liability was recorded because payment was not deemed probable.
- The company reported compliance with debt covenants, except that it obtained a waiver for delayed delivery of certain PST-acquisition documents. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification points
- Separate underlying business growth from the PST consolidation effect when assessing the 35.9% reported sales increase and comparing earnings.
- Monitor PST’s revenue, profitability, acquisition integration and the finalization of its preliminary purchase-price allocation.
- Track cash conversion, working-capital needs, upcoming debt maturities—including PST borrowings due within twelve months—and available borrowing capacity.
- Assess sensitivity to commodity prices, foreign exchange and vehicle-production forecasts, as well as the outstanding legal, environmental, warranty and contingent-payment exposures.