Stoneridge, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Continuing operations comprise Control Devices, Electronics and PST. The Wiring business, sold in August 2014, is presented as discontinued operations.
Financial performance and position
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Net sales | $162.8 | $161.3; up 0.9% |
| Gross profit / margin | $43.6 / 26.8% | $48.1 / 29.8% |
| Operating income / margin | $3.1 / 1.9% | $6.4 / 4.0% |
| Income from continuing operations | $2.1 consolidated; about $2.5 attributable to Stoneridge | $(0.5) consolidated; about $0.5 attributable to Stoneridge |
| Net income attributable to Stoneridge | $2.3; diluted EPS $0.08 | $1.5; diluted EPS $0.05 |
| Cash from operating activities | $(4.3) | $(16.2) |
| Capital expenditures | $8.5 | $4.6 cash-flow statement amount |
| Cash and cash equivalents | $23.9 | $43.0 at Dec. 31, 2014 |
| Debt, including revolver | $123.4 | $130.3 at Dec. 31, 2014 |
- Interest expense fell to $1.3 million from $4.9 million following the 2014 redemption of $175 million of 9.5% senior secured notes and refinancing with the revolving facility.
- Cash declined $19.2 million during the quarter, reflecting working-capital needs, capital spending, debt repayment and foreign-exchange effects. Operating cash use improved year over year, while investing cash use increased to $8.5 million.
- The $300 million revolving credit facility had $100 million outstanding, matures in September 2019, and carried a reported 1.83% rate at March 31. The company reported covenant compliance. The filing does not state actual unused borrowing availability.
Material changes and drivers
- Sales growth in Control Devices and Electronics was largely offset by a sharp PST decline. Segment sales: Control Devices $79.9 million, up 3.3%; Electronics $56.4 million, up 12.7%; PST $26.5 million, down 21.8%.
- Gross margin fell three percentage points, principally because foreign-exchange movements increased material costs in Electronics and PST. Cost of goods sold rose 5.3%, faster than sales.
- Operating income fell 51.4%. Control Devices operating income increased to $9.6 million; Electronics declined to $3.4 million; PST remained loss-making at $(2.7) million. Corporate operating loss widened to $(7.3) million.
- Higher share-based compensation included $2.2 million from accelerated vesting associated with the former CEO’s retirement. This was partly offset by lower SG&A and design and development costs, including currency-related reductions.
- Other expense improved from $1.9 million to $0.2 million, largely because a prior-period foreign-exchange loss did not recur. Q1 2015 also included a $0.2 million after-tax discontinued-operations disposal loss; the 2014 comparative included $1.1 million of discontinued-operation income.
Outlook, risks and contingencies
- The filing gives no company-specific full-year revenue or earnings guidance. Management expected North American automotive production of 17.0–17.4 million units in 2015 and anticipated improving North American commercial-vehicle and modestly improving European commercial-vehicle markets to support relevant segments.
- Management described PST’s sales and operating performance as weak amid Brazil’s economic and automotive-market deterioration. It moderated PST growth expectations for the rest of 2015 and said PST would continue realigning costs. Foreign-exchange pressure and customer pricing pressure could also weigh on results.
- Foreign-exchange exposure is significant, particularly in Brazil, Argentina, Mexico, Sweden and Estonia; commodity-price changes, vehicle-production levels, customer demand, supplier performance, competition and debt covenants are additional risks. The company uses foreign-currency hedges.
- A Brazilian tax assessment seeks approximately $28.8 million, including tax, interest and penalties, concerning PST vehicle-tracking services. No liability was recorded; management assessed loss as not probable. An April 2015 administrative ruling favored PST, but a written opinion was pending and the state could appeal.
- Actia patent litigation seeks approximately €14 million (about $15 million) in injunctive relief and damages. Stoneridge disputes the claim, assesses loss as not probable, and recorded no liability.
- Other reasonably possible Brazilian civil, labor and tax contingencies totaled approximately $8.1 million at March 31; no provision was recorded. Environmental remediation accrual was $0.9 million, with groundwater remediation expected to begin in Q2 2015. Product warranty and recall liabilities totaled $7.2 million.
- The Wiring-sale working-capital and other purchase-price adjustments remained disputed and were referred to an independent accountant; resolution was expected in Q2 2015. The company also reported post-sale Q1 sales to the acquired Wiring business of $7.2 million.
Important facts for investors to verify
- Whether the lower gross margin and foreign-exchange-related material costs persist, and whether segment performance—especially PST—recovers.
- Cash conversion, working-capital requirements and capital spending, alongside actual availability under the revolving facility and continued covenant compliance.
- Developments, appeal status and potential financial exposure in the Brazilian tax matter and Actia patent case; neither had an accrual recorded.
- Final resolution of the Wiring-sale purchase-price adjustments and the effect of ongoing transition arrangements.
- Timing and amount of any U.S. deferred-tax valuation-allowance reversal; management said a reversal might become possible depending on sustained profitability, but timing and amount were uncertain.