Stoneridge, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Unless stated otherwise, financial amounts below are in U.S. dollars; figures are in millions.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $236.4 | $235.7 |
| Gross margin | 23.2% | 24.9% |
| Operating income | $7.6 | $10.3 |
| Income before taxes | $0.9 | $5.3 |
| Net income attributable to Stoneridge | $1.5 | $4.1 |
| Diluted earnings per share | $0.05 | $0.15 |
| Cash used for operating activities | $16.2 | $0.6 |
| Capital expenditures | $4.6 | $5.8 |
Sales were nearly flat, up 0.3%. Gross margin fell as a share of sales because of product mix and higher material and labor costs; material costs rose to 52.0% of sales from 50.5%. Operating margin declined to 3.2% from 4.4%. Other expense increased to $1.9 million from $0.6 million, substantially reflecting foreign-exchange losses associated with the Argentine peso and PST. The effective tax rate was 46.7%, versus 19.2% in the financial statements for Q1 2013.
Operating cash outflow worsened to $16.2 million, primarily reflecting increased working capital, including higher inventory and receivables, and lower earnings. Cash declined to $48.4 million from $62.8 million at year-end. Total debt was $205.6 million, including $21.6 million current debt, compared with $197.2 million at December 31, 2013. The company had no borrowings on its $100 million asset-based facility and reported $87.0 million of available capacity; it was in compliance with debt covenants.
Material changes and segment performance
- PST: Sales fell 20.1% to $33.9 million; pretax results moved from $0.5 million income to a $5.6 million loss. Management cited adverse product mix, currency effects, weaker Brazilian demand and lower sales volume.
- Control Devices: Sales increased 7.5% to $77.3 million and pretax income rose to $6.8 million.
- Electronics: Sales increased 12.5% to $50.1 million, supported by European commercial-vehicle sales and new products, but pretax income eased to $3.6 million.
- Wiring: Sales decreased 2.3% to $75.1 million; the pretax loss widened to $0.6 million, with lower agricultural volume and labor inefficiencies contributing.
North American sales rose 1.5%, South American sales declined 20.1%, and Europe and Other sales rose 17.3%. Management attributed some reported sales movements to foreign-currency translation.
Outlook, risks and contingencies
Management expected modest improvement in the North American automotive market in 2014, forecasting production of 16.2–16.8 million units, compared with 16.2 million in 2013. It expected continued weakness in North American commercial vehicles and agricultural production, while European commercial-vehicle conditions were expected to improve. Given uncertainty in Brazil, PST was realigning its cost structure. The filing provides no company-wide earnings or revenue guidance.
- Key operating exposures include customer pricing pressure, commodity costs—especially copper—and foreign exchange, particularly in Brazil, Argentina, Mexico and Sweden. Hedging contracts cover portions of anticipated currency and copper exposures.
- A French patent case brought by Actia seeks injunctive relief and approximately $19 million in damages; Stoneridge disputes the claims and is defending itself.
- A Brazilian tax assessment against PST totals approximately $40.9 million, including tax, interest and penalties. Management considered a loss not probable and recorded no accrual; an adverse decision could have a significant impact.
- PST had other reasonably possible, unaccrued civil, labor and tax contingencies of $13.6 million. A $0.9 million environmental remediation liability was accrued; groundwater remediation was expected to begin in Q2 2014. Product warranty and recall liabilities totaled $7.4 million.
- Senior secured notes have a 9.5% stated rate and mature in October 2017; PST debt maturities include $19.1 million in 2014. The company’s $45 million interest-rate swap makes that portion of the notes variable-rate exposure.
Important facts for investors to verify
- Whether working-capital investment and negative operating cash flow reverse in subsequent quarters, and how inventory levels develop.
- Whether PST stabilizes as Brazil’s economy, product mix, sales volume and currency effects evolve.
- Whether gross-margin pressure from labor, materials, pricing and product mix improves or persists.
- Developments in the Actia litigation, Brazilian tax assessment and other contingencies, including any change in management’s loss assessments.
- Debt maturities, borrowing availability and covenant headroom, alongside the company’s ability to maintain liquidity.