Stoneridge, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Stoneridge designs and manufactures electrical and electronic products for automotive, commercial and off-highway vehicles, motorcycles and agricultural vehicles. This unaudited report covers the quarter and nine months ended September 30, 2018, compared with the same 2017 periods. Its segments are Control Devices, Electronics (including Orlaco) and PST.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $208.9 | $203.6 | $655.4 | $617.0 |
| Operating income | $18.3 | $13.3 | $54.3 | $44.1 |
| Net income attributable to Stoneridge | $13.3 | $8.0 | $41.8 | $26.3 |
| Diluted EPS | $0.46 | $0.28 | $1.44 | $0.92 |
| Gross margin | 30.3% | 30.7% | 30.3% | 30.3% |
| Operating margin | 8.8% | 6.5% | 8.3% | 7.1% |
- Revenue mix: Q3 Electronics sales rose 14.3% to $81.6 million and Control Devices rose 1.5% to $108.4 million; PST fell 25.7% to $18.9 million. For nine months, Electronics grew 26.7% to $261.9 million, while Control Devices declined 1.8% to $333.7 million and PST declined 15.3% to $59.7 million.
- Profitability drivers: Q3 operating income increased 37.7%, mainly on stronger Electronics results and lower SG&A, including no Orlaco earn-out fair-value expense in the quarter versus $1.8 million in Q3 2017. Nine-month operating income increased 23.1%. Higher design and development spending and material costs weighed on margins; Q3 gross margin declined 0.4 percentage points.
- Taxes: Effective tax rates were 20.7% for Q3 and 20.1% for the first nine months of 2018, versus 32.1% and 34.2%, respectively, in 2017. The company attributed the decrease primarily to the Tax Cuts and Jobs Act; its analysis of certain provisions remained ongoing.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $47.6 million, down from $51.1 million, despite higher net income; management cited greater working-capital use. Capital expenditures were $22.8 million, compared with $24.9 million.
- Cash and cash equivalents were $60.7 million at September 30, 2018, down from $66.0 million at year-end 2017. The company said all cash was held outside the United States.
- Cash used in investing was $21.4 million, versus $102.1 million in 2017, which included the Orlaco acquisition. Cash used in financing was $28.2 million, versus $47.1 million provided in 2017; 2018 included voluntary debt repayments.
- Revolving-credit borrowings were $101.0 million, down from $121.0 million at year-end. Total debt, including PST obligations, was $104.0 million. The $300 million revolving facility matures in September 2021; the company reported covenant compliance. PST debt was $3.0 million, with relatively high stated interest rates of 8.0%–11.26%.
- Current assets were $319.9 million and current liabilities $145.7 million. The filing reports $2.0 million of outstanding letters of credit under the credit facility.
Outlook, risks and notable items
- Management expected North American automotive conditions to remain consistent with 2017 and commercial-vehicle markets in North America and Europe to increase in 2018. No specific financial guidance or quantified full-year forecast is provided in the filing.
- Management cited continued Electronics growth, operating-efficiency initiatives and investment in products addressing industry trends. PST performance remained weak amid lower alarm and audio demand and economic and currency pressures in Argentina.
- Risks highlighted include tariffs and trade disruption, foreign-exchange movements (including the Brazilian real and Argentine peso), raw-material cost increases, customer pricing pressure, vehicle-production changes, product launches, customer and supplier concentration, warranty/recall exposure and debt covenants.
- Brazilian PST civil, labor and tax contingencies totaling approximately $7.4 million were considered reasonably possible but not probable; no provision was recorded. The company stated that an unfavorable outcome could be significant. It also reported a $9.9 million product warranty and recall liability and a $155,000 remaining Sarasota environmental-remediation liability.
- Earn-out liabilities totaled $20.0 million at quarter-end, including $11.3 million for PST; the PST earn-out is uncapped and based on future performance. Q3 results also reflect the lower tax rate from U.S. tax reform. Foreign-currency translation reduced nine-month other comprehensive income by $16.9 million.
- After quarter-end, on October 26, 2018, the company amended its credit agreement to permit repurchases of up to $50 million of common shares. It reported no share repurchases during Q3. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
Key investor verification points
- Assess whether Electronics growth and margin gains can offset continued weakness in PST and lower Control Devices automotive volumes.
- Track working-capital requirements, cash generation, capital spending and the pace of revolving-credit repayments.
- Review the effect of tariffs, foreign exchange and U.S.-dollar-denominated materials on costs and reported results.
- Monitor the resolution and potential cash impact of PST contingencies, warranty claims and the uncapped PST earn-out.
- Verify subsequent use of the $50 million share-repurchase authorization, its funding source and any related effects on liquidity and debt covenants.
- Follow completion of the company’s tax-reform analysis and its adoption of lease accounting in 2019, which management expected to materially increase balance-sheet assets and liabilities.