Stoneridge, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Stoneridge designs and manufactures electrical and electronic components and systems for commercial, automotive, agricultural and off-highway vehicles. Unless noted, amounts below are in millions of dollars; comparative 2010 figures are adjusted for the inventory accounting change.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $190.4 | $166.3 | $383.5 | $314.3 |
| Gross margin | 19.8% | 23.6% | 20.1% | 23.3% |
| Operating income | $7.4 | $7.8 | $14.1 | $12.2 |
| Net income | $3.2 | $3.8 | $5.9 | $5.7 |
| Net income attributable to Stoneridge | $3.4 | $3.8 | $6.3 | $5.7 |
| Diluted earnings per share | $0.14 | $0.16 | $0.25 | $0.24 |
- Q2 sales rose 14.5%; six-month sales rose 22.0%. Growth reflected higher vehicle production, new business and favorable currency translation. Electronics sales grew 18.3% in Q2 and 26.6% for the half; Control Devices grew 8.1% and 14.3%, respectively.
- Q2 operating income and net income declined despite higher sales, principally as cost of goods sold rose faster than revenue. Six-month net income attributable to Stoneridge improved modestly; 2010 comparisons include unusual SPL administration-related gains and a tax benefit.
- Six-month net cash used in operating activities was $23.1 million, versus $7.4 million used in 2010. Capital expenditures were $14.1 million, versus $7.1 million. Cash fell to $36.4 million from $72.0 million at year-end, mainly reflecting working-capital needs and higher capital spending.
- At June 30, current assets were $259.7 million and current liabilities $120.3 million. The balance sheet reported $169.2 million of long-term debt. The $175 million senior secured notes bear 9.5% interest and mature in October 2017. The asset-based facility had no borrowings and $78.5 million of available capacity; the company reported covenant compliance. Cash was held in foreign locations and was unrestricted.
Changes, management commentary and outlook
- Q2 gross margin contracted 3.8 percentage points. Management cited higher copper and other input prices, Mexican peso movements, and North American wiring-operation inefficiencies. Q2 impacts included approximately $1.1 million from commodities, $2.0 million from currency exposure, and $1.4 million from labor inefficiencies; premium freight was also higher.
- Management said it was reducing direct labor and improving manufacturing processes to address inefficiencies, and expected these costs to decline through the rest of 2011. It also cited higher scrap rates in Control Devices and expected improvement.
- Management expected North American automotive production of 12.8–13.0 million units in 2011, compared with 11.9 million in 2010; it expected commercial-vehicle production and agricultural markets to improve through the second half. These were market expectations, not company earnings guidance.
- Risks include commodity-price and foreign-exchange volatility, customer or supplier disruptions, vehicle-production changes, customer pricing pressure, debt restrictions and execution of facility start-ups. Copper hedges covered only a portion of expected purchases. The company reported no Japan-related supply shortages to date, but continued to monitor potential disruption.
- Accounting change: effective January 1, 2011, the company retrospectively changed certain U.S. inventory costing from LIFO to FIFO. The change increased six-month 2011 net income by $1.7 million versus LIFO; prior periods were restated. The company said FIFO better reflects current acquisition costs and improves comparability.
- Other matters: BCS had previously breached certain revolver covenants, received waivers, and those covenants were eliminated through the facility’s expiration. Potential BCS acquisition-related payments depend on future performance. The company accrued $1.3 million for Sarasota environmental remediation and $3.4 million for product warranty and recall claims. Management did not expect ordinary-course litigation to have a material adverse effect, but noted product-liability and recall exposure.
- The company was evaluating whether a 2010 secondary offering triggered an ownership change that could limit use of tax-loss and research-credit carryforwards. No financial-statement impact was recorded; the company maintained a valuation allowance against relevant deferred tax assets.
Key facts for investors to verify
- Whether gross margins and Electronics-segment profitability recover as manufacturing inefficiencies, premium freight and scrap costs ease.
- Cash conversion and working-capital requirements, particularly inventory levels at North American wiring operations and the Mexico facility start-up.
- Actual vehicle-market volumes, commodity prices, foreign-exchange effects and effectiveness of the company’s partial hedges and copper surcharges.
- Available borrowing capacity and compliance with debt covenants; the BCS revolver was scheduled to mature September 29, 2011, and the Suzhou term loan August 5, 2011.
- Potential BCS contingent payments, environmental remediation costs, warranty or recall claims, and any effect of the ownership-change review on tax attributes.