Stoneridge, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless otherwise noted, figures are in millions of dollars; the filing presents financial statements in thousands. The company designs and manufactures electrical and electronic components and systems for vehicle markets. Continuing operations comprised Control Devices, Electronics and PST; the Wiring business was classified as discontinued operations.
Financial performance
- Q2 revenue: $162.1 million, down 4.6% from $169.8 million. Gross margin fell to 29.8% from 32.0%; cost of goods sold was 70.2% of sales versus 68.0%.
- Q2 results: Operating loss was $23.2 million, including a $29.3 million noncash goodwill impairment. Continuing-operations loss attributable to Stoneridge was approximately $21.3 million, or $0.79 per diluted share, versus income of $5.8 million, or $0.21 per diluted share. Including discontinued operations, net loss attributable to Stoneridge was $21.9 million.
- Six-month revenue and results: Revenue was $323.4 million, down 1.6%. Gross margin was 29.8%, versus 32.1%; operating loss was $16.8 million versus operating income of $20.2 million. Net loss attributable to Stoneridge was $20.4 million, versus net income of $9.9 million.
- Segment trends: Q2 Control Devices revenue increased 2.7% and Electronics increased 8.4%; PST revenue declined 29.5%. For the first half, those changes were +5.0%, +10.4% and −25.0%, respectively. The PST operating loss included the goodwill impairment; weaker Brazilian demand, product mix and currency effects also weighed on the segment.
- Cash flow and liquidity: Six-month operating cash flow was negative $7.1 million, compared with positive $3.2 million a year earlier; investing cash use was $13.6 million and financing provided $3.9 million. Cash declined $17.1 million to $45.8 million. The company had no borrowings on its asset-based revolver and $85.4 million of available capacity.
- Debt: Total debt was $205.1 million at June 30, including $22.2 million current and $182.9 million long-term. This included $175 million face value of 9.5% senior secured notes due October 2017 and PST borrowings. The company reported compliance with debt covenants.
- Other metrics: Q2 net interest expense was $5.1 million, up from $4.5 million; first-half expense was $10.0 million, up from $9.0 million. First-half capital expenditures were $11.8 million versus $9.2 million. The reported tax provision was $0.1 million for Q2 and $0.4 million for the first half; the impairment was not tax-deductible in Brazil.
Material changes, outlook and notable items
- The $29.3 million PST goodwill impairment followed weaker operating results and reduced growth expectations amid a weakening Brazilian economy and automotive market, as well as increased competition. The filing says the impairment was a best estimate pending completion of the second-step analysis, expected in Q3; it had no cash-flow or debt-covenant impact.
- On May 26, the company agreed to sell substantially all Wiring assets and liabilities. The sale closed August 1, after quarter-end, for $71.4 million cash, subject to final working-capital and customary adjustments. The company recorded a $1.2 million after-tax disposal loss in the first half. Transition services were to continue through December 2014, and Electronics expected ongoing sales to the divested business.
- Management expected modest North American automotive improvement in 2014, forecasting production of 16.5–17.0 million units versus 16.2 million in 2013. It expected continued improvement in North American and European commercial-vehicle markets. Because the Brazilian recovery remained uncertain, PST was realigning costs; management expressed longer-term optimism but gave no specific earnings or revenue guidance.
- Management cited customer pricing pressure, commodity-price exposure, foreign-exchange volatility, changing vehicle production, customer and supplier risks, and indebtedness and restrictive covenants as risks. PST demand and currency exposure, particularly the Brazilian real and Argentinian peso, were notable concerns. PST consumer-product demand is typically higher in the second half, especially Q4.
- Contingencies: The company disclosed a French patent-infringement claim seeking approximately $19 million and disputed the allegations; it recorded no liability, stating loss was not probable. PST also faced a Brazilian tax assessment of approximately $42 million, including interest and penalties, which management likewise considered not probable; no accrual was recorded. Other PST contingencies of $14.8 million were considered reasonably possible but not probable. Environmental remediation liability was $0.9 million, and the company retained responsibility for the former Sarasota site.
- On August 1, the company instructed the trustee to redeem $17.5 million of senior notes at 103% of principal, with redemption set for September 2. It expected an approximately $0.8 million loss from redemption and accelerated financing-cost and discount amortization in Q3.
- Management stated that disclosure controls were effective as of June 30, 2014, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Final PST goodwill impairment amount after the second-step analysis, and subsequent performance relative to the valuation assumptions.
- Final Wiring sale proceeds after working-capital adjustments, transaction-related costs, and the expected ongoing commercial relationship and transition-service obligations.
- PST sales, margins, cash generation and cost actions as Brazilian vehicle demand and currency conditions evolve.
- Resolution and potential financial exposure from the French patent litigation, Brazilian tax assessment and other PST contingencies.
- Debt maturities and cash needs, including the completed status and final cost of the announced senior-note redemption.