Stoneridge, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Unless noted otherwise, financial amounts below are in U.S. dollars.
Business context
Stoneridge designs and manufactures electrical and electronic components and systems for commercial vehicles, automotive, agricultural, motorcycle and off-highway markets. Its four reportable segments are Electronics, Wiring, Control Devices and PST. PST, a Brazil-based business, was consolidated in 2012 following Stoneridge’s acquisition of a controlling interest on December 31, 2011; this makes year-over-year comparisons less directly comparable. In the fourth quarter of 2012, Wiring became a separate reportable segment, and prior-period segment data was revised accordingly.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $938.5 million | $765.4 million |
| Gross profit / gross margin | $224.6 million / 23.9% | $146.8 million / 19.2% |
| Operating income / operating margin | $28.7 million / 3.1% | $13.5 million / 1.8% |
| Income before income taxes | $4.6 million | $71.6 million |
| Net income attributable to Stoneridge | $5.4 million; $0.20 diluted EPS | $49.4 million; $2.00 diluted EPS |
| Cash provided by operating activities | $75.5 million | $0.9 million |
| Capital expenditures | $26.4 million | $26.3 million |
| Cash and cash equivalents at year-end | $44.6 million | $78.7 million |
| Working capital at year-end | $157.6 million | $131.5 million |
Sales increased 22.6%, primarily because 2012 included $180.4 million of PST revenue; underlying market and segment movements were mixed. Gross-margin improvement reflected PST’s higher gross margin and better productivity, overhead and certain foreign-exchange and commodity effects. The 2011 results included a one-time, non-cash $65.4 million pre-tax gain from remeasuring Stoneridge’s previously held PST interest; this materially boosted 2011 pretax income and earnings per share. The 2012 tax provision was $0.8 million, or 17.8% of pretax income, compared with $26.1 million, or 36.4%, in 2011.
Operating cash flow improved substantially, with management citing lower receivables and inventory balances and higher depreciation and amortization. Investing cash use was $45.6 million, including $19.8 million paid toward the PST acquisition and $26.4 million of capital expenditures. Financing cash use was $65.5 million, largely reflecting debt repayments. Cash declined by $34.2 million during the year.
Year-end total debt obligations were approximately $201.3 million, including $175.0 million principal of 9.5% senior secured notes due October 2017. The asset-based credit facility had no borrowings outstanding and $74.1 million of available capacity; a separate BCS revolver had $1.2 million outstanding. The company reported compliance with debt covenants. The filing reports a current portion of debt of $18.9 million and long-term debt, net, of $181.3 million.
Fourth-quarter 2012 sales were $222.7 million, operating income was $8.6 million, net income attributable to Stoneridge was $2.6 million and diluted EPS was $0.10. Fourth-quarter 2011 sales were $186.0 million, operating loss was $7.6 million, and attributable net income was $38.6 million, including the PST remeasurement gain.
Material changes versus the prior comparable period
- Consolidated revenue rose mainly because PST was included in 2012; PST reported a $5.0 million pretax loss, including purchase-accounting amortization and business realignment costs.
- Electronics sales fell 9.0% to $164.2 million, primarily due to weaker European automotive sales and unfavorable currency translation. Wiring sales were essentially flat at $326.0 million; Control Devices sales increased 3.3% to $267.9 million.
- Operating income more than doubled, but attributable net income declined sharply because 2011 included the non-recurring PST gain. Excluding that item, the reported year-over-year earnings comparison is not like-for-like.
- Receivables and inventory were lower at year-end; cash and cash equivalents also declined. PST consolidation increased reported assets, expenses and debt-related obligations.
Outlook, risks and unusual items
Management expected 2013 softness in North American commercial vehicles to be partly offset by anticipated increased sales to a significant customer. It expected North American automotive production to be 15.4–15.9 million units, European commercial-vehicle sales to improve, agricultural markets to continue improving, and PST revenue to be broadly consistent with 2012 with a modest Brazilian recovery. These are expectations, not earnings guidance; the filing provides no clear numerical forecast for 2013 revenue or profit.
- Key exposures include vehicle-market cyclicality, pricing pressure, customer awards and cancellations, and customer concentration: Navistar represented 18% and Deere 13% of 2012 sales; the top ten customers represented 57%.
- Commodity availability and prices, particularly copper, as well as foreign-exchange movements in Brazil, Mexico and Europe may affect costs and reported results. The company used commodity and currency hedges.
- Debt service, restrictive covenants and refinancing needs remain relevant risks. The $100 million asset-based facility expires in December 2016; the BCS revolver was extended to September 2013.
- PST incurred $1.6 million of business realignment charges, primarily severance. The company also recorded $0.3 million of 2012 restructuring charges related to the Mitcheldean lease.
- The company had a $1.3 million accrued environmental remediation liability for its former Sarasota site; groundwater remediation was expected to begin in the third quarter of 2013, subject to approval of a plan. PST had $11.9 million of reasonably possible civil, labor and tax contingencies for which no accrual was recorded.
- Management considered other ordinary-course litigation not material. The auditor gave an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- How much of 2012 sales and margin performance reflects PST consolidation versus underlying organic growth, and how PST’s losses and purchase-accounting costs evolve.
- Whether anticipated 2013 customer volumes and market recovery occurred, particularly in Wiring and PST, and the effect of any customer production shortfall.
- Debt maturities, interest costs, covenant headroom and accessible borrowing capacity, including the short-term BCS and PST obligations.
- Cash conversion and working-capital sustainability after the strong 2012 operating cash flow, as well as planned capital spending and acquisition-related payments.
- Developments in Sarasota groundwater remediation and PST’s unaccrued contingencies, plus customer concentration and foreign-exchange and commodity exposures.