Stoneridge, Inc. — Q3 2016 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Stoneridge designs and manufactures electrical and electronic products for automotive, commercial, motorcycle, off-highway and agricultural vehicle markets. Its reportable segments are Control Devices, Electronics and PST. Financial statement amounts below are in U.S. dollars; amounts are shown in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $173.8 | $162.1 | $523.4 | $490.2 |
| Gross margin | 28.6% | 27.9% | 28.2% | 27.5% |
| Operating income | $11.8 | $8.9 | $33.9 | $19.5 |
| Income attributable to Stoneridge | $10.3 | $7.4 | $29.1 | $16.7 |
| Diluted EPS attributable to Stoneridge | $0.36 | $0.26 | $1.03 | $0.60 |
- Q3 sales grew 7.3%; nine-month sales grew 6.8%. Operating margin was 6.8% in Q3 and 6.5% for nine months, versus 5.6% and 4.0%, respectively, a year earlier.
- Q3 sales growth was led by Control Devices, up 19.2% to $103.7 million. Electronics fell 5.7% to $47.8 million and PST fell 8.2% to $22.3 million. For nine months, Control Devices rose 21.4%, while Electronics declined 4.1% and PST declined 18.5%.
- Management attributed improved gross margin mainly to lower material costs in Electronics and PST, including favorable currency movements. Control Devices growth was driven principally by North American automotive new-product sales, including shift-by-wire products.
- Nine-month net cash from operating activities was $37.0 million, compared with $17.1 million. Investing used $17.8 million, including $18.5 million of capital expenditures; financing used $22.7 million. Cash declined $3.8 million during the period.
- At September 30, cash was $50.6 million, current assets were $269.7 million and current liabilities were $126.5 million. Total current assets divided by current liabilities was approximately 2.1x.
- Revolving-credit borrowings were $87.0 million, down from $100.0 million at year-end 2015. Other debt was $18.2 million, making reported borrowings approximately $105.2 million in total. The $300 million credit facility was extended to September 2021; the company reported compliance with its covenants.
Changes, outlook and management commentary
- Profitability improved substantially year over year, reflecting higher Control Devices sales, lower material costs, and lower SG&A for the first nine months. Q3 SG&A nevertheless increased $1.5 million, including $0.7 million of headquarters-relocation costs.
- Management expected Q4 2016 financial performance to improve versus Q4 2015, citing new product launches and savings from prior realignment actions. It expected continued North American automotive growth and forecast 2016 North American automotive production of approximately 17.9 million units, versus 17.5 million in 2015. No numerical company-wide earnings guidance is provided in the filing text.
- Management expected North American commercial vehicle markets to decline for the rest of 2016 and European commercial vehicle markets to increase modestly. PST remained pressured by Brazil’s weak economy, vehicle market and currency; management continued cost realignment there and said the timing and scale of recovery were uncertain.
- The company was relocating its headquarters from Warren, Ohio, to Novi, Michigan, primarily during Q4 2016. Expected relocation costs were $2.8–$3.4 million; $1.0 million had been incurred in the first nine months. The company could qualify for a Michigan grant of up to $1.4 million, subject to job creation.
Risks, contingencies and unusual items
- Foreign-exchange movements, Brazilian demand and customer or vehicle-production changes can affect sales, costs and earnings. Management also cited pricing pressure, supplier reliability, commodity costs, customer acceptance of new products, and debt covenants as risks.
- A Brazilian tax assessment concerning PST vehicle tracking services was approximately $28.5 million, including tax, interest and penalties. Management considered loss not probable and recorded no accrual; an unfavorable outcome could materially affect PST. Other Brazilian civil, labor and tax contingencies considered reasonably possible, but not probable, totaled approximately $10.7 million and were also unaccrued.
- Product warranty and recall liabilities were $7.8 million at September 30, 2016. Environmental remediation liabilities for a former Florida facility were $0.5 million; groundwater remediation was expected to begin in November 2016. A $2.0 million letter of credit supports obligations related to the property sale.
- Two putative class actions allege defects in control devices used in certain vehicles; no liability was recorded. One plaintiff estimated damages of no more than $1 per person; damages in the other action were unspecified. The Actia patent dispute was settled in July 2016 without a recorded liability.
- The company maintained a full valuation allowance on U.S. deferred tax assets. Management said a future reversal could produce an income tax benefit, but timing and amount depend on sustained profitability. Q3 relocation costs and ongoing business realignment charges affected reported expenses.
Important facts for investors to verify
- Whether new Control Devices programs sustain growth and whether customer pricing, product mix and warranty costs constrain margins.
- Whether PST’s Brazilian operating performance, cash generation and customer collections improve, and the status of its tax assessment and other contingencies.
- Cash conversion and working-capital trends: receivables increased during the period, while operating cash flow improved substantially year over year.
- Debt repayment capacity, covenant headroom and PST’s relatively high-cost local borrowings; the filing gives no specific covenant headroom figures.
- Actual total headquarters-relocation costs, any grant qualification, and progress toward the stated Q4 performance outlook.