Stoneridge, Inc. — 2018 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a quarterly filing, although unaudited fourth-quarter results are included. Stoneridge designs and manufactures electrical and electronic products for vehicle markets through Control Devices, Electronics and PST. The company reported that smart products made up almost 75% of sales in 2018, up from just over 50% in 2014.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $866.2 million | $824.4 million | +5.1% |
| Gross profit / margin | $256.6 million / 29.7% | $248.1 million / 30.1% | Margin down 0.4 percentage points |
| Operating income / margin | $67.0 million / 7.7% | $57.4 million / 7.0% | +16.8% |
| Net income attributable to Stoneridge | $53.8 million | $45.2 million | +19.2% |
| Diluted EPS | $1.85 | $1.57 | +$0.28 |
| Operating cash flow | $80.8 million | $78.9 million | +$1.9 million |
| Capital expenditures | $29.0 million | $32.2 million | Down $3.1 million |
Net sales increased $41.8 million. Electronics sales rose 22.1% to $344.7 million, while Control Devices sales declined 1.4% to $441.3 million and PST sales declined 15.2% to $80.2 million. Electronics operating income rose 55.8% to $28.2 million; Control Devices operating income fell 11.5% to $64.2 million; PST operating income increased to $5.0 million from $2.7 million.
Cost of goods sold rose 5.8%; direct material costs increased as a share of sales, with tariffs affecting Control Devices and U.S.-dollar-denominated purchases weighing on non-U.S. operations. Lower SG&A, including a $7.3 million year-over-year reduction in expense related to Orlaco and PST earn-out fair-value changes, supported operating income. 2018 included $3.5 million of Electronics restructuring charges.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $81.1 million at year-end, versus $66.0 million a year earlier; $67.2 million was held outside the United States.
- Net cash from operations was $80.8 million; investing activities used $28.0 million and financing activities used $33.9 million. Cash increased $15.1 million overall.
- Borrowings under the $300 million revolving credit facility were $96.0 million, down from $121.0 million, following voluntary principal repayments. Other debt was $2.5 million; total debt was approximately $98.5 million.
- Working capital was $172.9 million, compared with $167.2 million. Total assets were $559.5 million and shareholders’ equity was $283.3 million.
- The company reported compliance with its credit covenants at year-end. The facility matures in September 2021 and includes maximum leverage and minimum interest-coverage requirements. Approximately 97.8% of outstanding debt was floating-rate.
Outlook, risks and unusual items
- Management expects continued growth from Electronics and efficiency improvements, and anticipates North American MirrorEye retrofit sales will benefit 2019. It expects North American automotive production to remain near 2018 levels, Control Devices sales volumes to be consistent with 2018, and modest growth in North American commercial vehicles; European commercial vehicle production is expected to be roughly flat. These are expectations, not formal earnings guidance.
- Management described uncertainty in PST from weaker Argentina conditions and currency movements, while expecting Brazilian economic improvement to support served markets. Foreign exchange, tariffs and trade policy, material availability and pricing, customer price pressure, vehicle-market cyclicality, customer concentration and program launches are significant risks.
- In January 2019, the company committed to close its Canton, Massachusetts facility by year-end 2019 and consolidate production. Estimated costs are $8.5–$9.5 million through 2020, affecting Control Devices.
- The company authorized up to $50 million of share repurchases over 18 months; the authorization is discretionary and does not require purchases. 2018 repurchases were limited to shares withheld for employee taxes.
- Stoneridge committed to invest $10 million in an Autotech Ventures fund over its expected ten-year life; $0.4 million had been contributed by year-end.
- Brazilian PST civil, labor and other non-income-tax contingencies totaled approximately $7.6 million and were assessed as reasonably possible, not probable; no provision was recorded. The PST earn-out is uncapped and based on performance in 2020 or 2021. Routine legal matters were not expected by management to materially affect results, though outcomes could differ from estimates.
- Fourth-quarter 2018 sales were $210.8 million and operating income was $12.7 million, compared with $207.4 million and $13.2 million, respectively, in fourth-quarter 2017. The 2018 annual report states that ASC 606 adoption had no material effect. The company expects adoption of lease accounting in 2019 to add estimated right-of-use assets and lease liabilities of $15.6–$21.2 million.
Important facts for investors to verify
- Whether Electronics growth, including MirrorEye, translates into sustained sales and margins, and whether the Canton closure achieves planned savings without disrupting supply.
- How tariffs, foreign exchange and input costs affect margins, especially in Control Devices and non-U.S. operations.
- Whether awarded-program backlog of $3.4 billion converts into sales; the company notes that customer agreements may be terminated and backlog is not firm orders.
- Customer exposure: the top ten customers represented 54% of 2018 sales; Ford alone represented 12%.
- Liquidity and covenant headroom, floating-rate exposure, and the timing of debt repayments; management estimated a 1 percentage-point increase in floating rates would add about $1.0 million to annual interest expense.
- The outcome and payment timing of PST’s uncapped earn-out and the reasonably possible Brazilian contingencies.
- The filing reports unqualified auditor opinions on the financial statements and internal control over financial reporting; verify any subsequent developments not covered by this 2018 report.