Stoneridge, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Its reportable segments are Control Devices, Electronics and PST.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $218.3 million | $225.9 million | Down 3.4% |
| Gross margin | 27.9% | 30.1% | Down 2.2 percentage points |
| Operating income | $11.7 million | $16.8 million | Down 30.6% |
| Net income | $9.7 million | $13.4 million | Down 27.8% |
| Diluted EPS | $0.33 | $0.46 | Down $0.13 |
| Operating cash flow | $(5.6) million | $9.7 million | Decrease of $15.3 million |
| Capital expenditures | $8.7 million | $10.5 million | Down $1.8 million |
Cash and cash equivalents were $53.1 million at quarter-end, down from $81.1 million at December 31, 2018. Operating cash flow was pressured by working-capital use, including higher receivables and inventory, lower earnings and the Orlaco earn-out payment. Investing cash outflow was $9.1 million; financing cash outflow was $12.0 million.
Total debt was approximately $92.9 million, including $91.0 million drawn on the $300 million revolving credit facility and $1.9 million of PST debt. Revolver borrowings declined from $96.0 million at year-end after voluntary repayments. The company reported compliance with debt covenants. Cash was mostly held outside the United States ($51.4 million of $53.1 million).
Total assets were $582.3 million and shareholders’ equity was $287.8 million at March 31, 2019. Adoption of lease accounting added operating lease right-of-use assets of $19.2 million and lease liabilities of $19.3 million at quarter-end.
Material changes and segment results
- Control Devices: Sales fell 4.5% to $110.1 million; operating income declined 33.2% to $11.9 million. Lower North American automotive program volumes, restructuring costs and higher warranty costs weighed on results.
- Electronics: Sales rose 0.9% to $90.8 million; operating income increased 14.6% to $9.0 million, primarily on lower SG&A and design and development costs. Unfavorable product mix and currency effects offset sales growth.
- PST: Sales decreased 15.6% to $17.3 million, mainly from unfavorable currency translation and weaker Argentina aftermarket volumes. Operating income improved to $0.7 million from $0.2 million, primarily on lower SG&A and overhead.
Consolidated operating margin declined to approximately 5.4% from 7.5%. The effective tax rate was 16.0%, compared with 19.5%, reflecting tax-deductible stock compensation and a state valuation allowance release; lower taxable income also reduced tax expense.
Outlook, risks and unusual items
- Management expected North American automotive production to decline slightly in 2019, forecasting 16.8 million units, and expected Control Devices sales volumes to be consistent with 2018. It anticipated modest growth in the North American commercial vehicle market and broadly stable European commercial vehicle demand.
- Management expected North American MirrorEye camera-monitor retrofit sales to benefit 2019 results. It also noted that PST performance depends on economic conditions in Brazil and Argentina and movements in the Brazilian real and Argentine peso. No consolidated numerical revenue or earnings guidance was provided.
- A Canton, Massachusetts facility closure and manufacturing consolidation began in January 2019. The company recorded $2.2 million of costs in Q1 and estimated a further $6.3–$7.3 million through 2020. The filing gives differing expected closure dates: March 31, 2020 in the notes and the end of 2019 in MD&A.
- Electronics restructuring actions generated $0.2 million of Q1 expense, with approximately $0.7–$0.9 million of additional costs expected through 2020; the filing’s notes and MD&A state slightly different estimates.
- On April 1, 2019, Stoneridge sold certain non-core switches and connectors product lines and related assets to Standard Motor Products for $40.0 million, subject to an inventory adjustment and assumption of certain liabilities. The divested products generated Q1 sales of $11.2 million and operating income of $3.1 million.
- The PST acquisition earn-out liability was $10.4 million at quarter-end, based on forecast performance and payable in 2020 or 2021; the obligation is uncapped. Stoneridge paid $8.5 million for the Orlaco earn-out in March.
- Potential risks include customer program reductions, vehicle production changes, pricing pressure, foreign exchange and tariff impacts, material costs, supplier disruptions, warranty and recall claims, and debt covenants. PST had Brazilian civil, labor and other non-income-tax contingencies of approximately $8.0 million assessed as reasonably possible but not probable; no provision was recorded. Product warranty and recall liabilities totaled $10.3 million.
- Management considered disclosure controls effective at March 31, 2019. Implementation of a new lease accounting system materially changed a component of internal control over financial reporting; its operating effectiveness was to be evaluated during 2019.
Most important facts for investors to verify
- Whether working-capital needs, restructuring and customer volume reductions continue to pressure operating cash flow and margins.
- The Canton facility closure timing and total restructuring costs, given inconsistent dates and differing disclosure of expected additional costs.
- Realization and timing of proceeds from the April 1 asset sale, including inventory adjustments, assumed liabilities and transition-service arrangements.
- Currency, economic and demand exposure in Brazil and Argentina, and the assumptions underlying PST’s uncapped earn-out liability.
- Progress on warranty claims, Brazilian contingencies, covenant compliance and availability under the revolving credit facility.