Stoneridge, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The condensed consolidated financial statements are unaudited. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Business context and reporting period
Stoneridge designs and manufactures electrical and electronic components, modules and systems for automotive, commercial, motorcycle, off-highway and agricultural vehicle markets. Its reportable segments are Control Devices, Electronics and PST. Results include Orlaco from its acquisition on January 31, 2017.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $204.3 | $162.6 |
| Gross margin | 29.9% | 27.8% |
| Operating income | $15.2 | $8.5 |
| Operating margin | 7.4% | 5.2% |
| Net income attributable to Stoneridge | $9.2 | $7.2 |
| Diluted EPS | $0.32 | $0.26 |
| Operating cash flow | $9.8 | $1.1 |
| Capital expenditures | $7.3 | $6.8 |
Gross profit rose to approximately $61.2 million from $45.2 million. The company reported net income of $9.2 million, including a $30,000 loss attributable to noncontrolling interests. Income tax expense was $4.6 million, versus $0.8 million, and the effective tax rate increased to 33.3% from 12.2%. Management attributed the tax-rate change mainly to valuation allowances released in late 2016.
Cash and cash equivalents were $44.9 million at March 31, 2017, down from $50.4 million at year-end. Current assets were $283.1 million and current liabilities $133.2 million. The cash decrease reflected working-capital needs and capital spending, partly offset by earnings. Operating cash flow improved year over year, while investing cash use rose to $84.8 million, chiefly due to Orlaco. Financing provided $68.9 million, principally from increased revolver borrowings.
At quarter-end, the company had $141.0 million outstanding on its $300 million revolving facility and $14.2 million of other debt, for total debt of approximately $155.2 million. Revolver borrowings increased from $67.0 million to fund the acquisition. Stoneridge reported compliance with facility covenants. Cash included $9.8 million in the U.S. and $35.1 million overseas.
Material changes versus the prior-year quarter
- Sales increased $41.7 million, or 25.6%, with growth in each segment. Control Devices sales rose 28.7%, Electronics 21.2%, and PST 22.8%.
- Control Devices growth was driven largely by North American automotive product launches. Electronics benefited from Orlaco and European commercial-vehicle sales; PST’s reported growth was substantially aided by favorable currency translation.
- Gross margin improved 2.1 percentage points, reflecting lower material costs, operating improvements and mix, partly offset by higher warranty costs and Orlaco inventory fair-value step-up expense.
- Operating income increased 78.3%. Segment operating income improved in Control Devices, Electronics and PST; unallocated corporate operating loss widened to $10.1 million from $5.7 million.
- SG&A increased $8.5 million, including higher corporate compensation, share-based compensation and $1.2 million of Orlaco transaction costs. Design and development expense also increased.
- Net income attributable to Stoneridge rose $2.0 million, but the higher tax expense offset part of the operating improvement.
Acquisition, outlook, risks and unusual items
Stoneridge acquired Orlaco for total purchase consideration of $85.1 million, including $79.7 million cash consideration and the fair value of earn-out and other adjustments. The purchase-price allocation was preliminary; acquired goodwill was $34.7 million and was not tax deductible. Orlaco contributed $11.1 million of post-acquisition sales and $0.6 million of net income. The filing reports $1.0 million of inventory step-up expense and $1.2 million of acquisition-related costs. An additional earn-out of up to €7.5 million may be payable if targets are achieved.
Management expected North American automotive growth in 2017 from recent launches, despite forecast production declines; it expected North American commercial-vehicle markets to decline slightly and European commercial-vehicle markets to be roughly flat. PST’s Brazilian-market outlook remained moderated, and the company continued to assess further cost realignment. Management expected a higher 2017 effective tax rate than in 2016, while cash taxes as a percentage of income were expected to be consistent with 2016. These are outlook statements, not quantified company-wide sales or earnings guidance.
Key risks include customer and vehicle-production changes, pricing pressure, supplier and labor disruption, foreign-exchange and commodity movements, and the company’s indebtedness and covenant restrictions. PST’s Brazilian operations faced weak demand, slower customer payments and liquidity challenges; factoring and short-term bank loans remained available funding sources. Management said the U.S. dollar’s weakening against certain currencies had favorably affected material costs and reported results.
Contingencies include a Brazilian tax assessment of approximately $29.6 million related to vehicle-tracking services; management considered loss not probable and recorded no accrual. Other Brazilian civil, labor and tax contingencies totaled $7.7 million and were considered reasonably possible, not probable. The company also disclosed product-liability and class-action matters, with no accrual for the cited vehicle-control-device claims because loss was not considered probable or reasonably estimable. Warranty and recall liabilities were $11.7 million, up from $9.3 million at year-end. Environmental remediation liability was $0.3 million.
Management stated disclosure controls were effective at March 31, 2017. Orlaco was being integrated into internal controls and was expected to be excluded from the company’s 2017 internal-control assessment under the acquisition-year allowance.
Important facts for investors to verify
- Confirm the final Orlaco purchase-price allocation, acquisition performance, and potential earn-out; reported allocation was preliminary.
- Track revolver borrowings, available borrowing capacity, covenant compliance and debt repayment needs after the acquisition.
- Assess PST’s Brazilian demand, collections and liquidity, and developments in the $29.6 million tax assessment and other contingencies.
- Monitor warranty and recall claims, including the increase in the recorded reserve and potential exposure beyond accrued amounts.
- Evaluate whether sales and margin growth persist excluding Orlaco, currency effects, acquisition costs and inventory step-up expense.
- The filing text’s cover-page checkbox appears to mark “No” for having filed all required reports during the preceding 12 months; verify the original filing checkbox and the company’s reporting status.