Stoneridge, Inc. — Q2 2019 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and six months ended June 30, 2019, compared with the same 2018 periods. Stoneridge designs and manufactures electrical and electronic vehicle components and systems. Its reportable segments are Control Devices, Electronics and PST.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $222.2 million, up 0.7% from $220.6 million | $440.5 million, down 1.3% from $446.5 million |
| Operating income | $49.2 million, versus $19.2 million | $60.9 million, versus $36.0 million |
| Net income | $39.8 million, versus $15.1 million | $49.4 million, versus $28.5 million |
| Diluted EPS | $1.41, versus $0.52 | $1.72, versus $0.99 |
| Gross margin | 25.6%, versus 30.6% | 26.7%, versus 30.3% |
| Operating cash flow | Not separately presented | $6.7 million, versus $28.9 million |
| Capital expenditures | Not separately presented | $17.5 million, versus $16.8 million |
Reported earnings included a $33.9 million gain on the sale of non-core products and a $6.5 million Brazilian indirect-tax recovery. The filing does not provide a single adjusted earnings figure excluding these items.
Cash and cash equivalents were $51.5 million at June 30, 2019, down from $81.1 million at year-end 2018. Current assets were $336.1 million and current liabilities $163.5 million. Revolver borrowings were $103.5 million; other debt was $1.6 million. The company had a new $400 million revolving facility maturing in June 2024 and reported compliance with its covenants. All reported cash was held outside the United States.
Material changes and operating drivers
- Control Devices: Q2 sales rose 3.7%, while segment operating income benefited substantially from the non-core product disposal gain. Excluding that gain, management said segment operating income declined 39.1% year over year. North American automotive program-volume reductions, material and warranty costs, and Canton restructuring costs weighed on performance.
- Electronics: Q2 sales rose 1.4%, but operating income fell 8.7%, with unfavorable product mix and higher electronic-component costs cited.
- PST: Q2 sales fell 18.3%, reflecting weaker Argentina aftermarket, alarm/audio and monitoring activity. Segment operating income improved, primarily due to the Brazilian tax recovery and lower SG&A.
- Q2 SG&A declined $7.7 million, mainly due to the tax recovery and reimbursement for transition services related to the disposal. Consolidated gross margin fell as cost of goods sold rose faster than sales.
- First-half operating cash flow was lower amid working-capital investment, including higher inventory, and the cash payment of the Orlaco earn-out. Investing cash flow was positive $15.8 million, including proceeds from the disposal; financing cash outflow was $50.9 million, including the $50 million share repurchase.
Outlook, risks and unusual items
- Management expected North American automotive production to decrease slightly in 2019 and Control Devices sales volumes to be consistent with the prior year; it expected North American commercial-vehicle markets to increase slightly and European commercial-vehicle markets to remain approximately level. No company-wide revenue or EPS guidance was provided.
- Management cited continued weakness in Argentina and uncertainty in Brazil, foreign-exchange exposure, tariffs and trade policy, commodity and material costs, customer pricing pressure, and the ability to launch awarded programs as risks.
- The Canton, Massachusetts facility closure and consolidation were expected to cost an additional $2.7 million to $3.9 million through 2020. The filing gives differing expected closure timing: the note says by March 31, 2020, while MD&A says by the end of 2019. Electronics restructuring was expected to add about $0.8 million through 2020.
- The Brazilian tax benefit represents recovery through offsets against future federal tax liabilities; realization depends on administrative approvals and eligible tax liabilities. PST also had $5.0 million of Brazilian civil, labor and non-income-tax contingencies assessed as reasonably possible, with no provision recorded.
- Product warranty and recall liabilities totaled $11.1 million. The filing also describes ongoing environmental remediation, ordinary-course legal matters and product-liability/recall risks; management did not expect currently known legal matters collectively to have a material adverse effect.
- Adoption of lease accounting in 2019 added right-of-use assets and lease liabilities; management said adoption had no material impact on results or cash flows.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the $33.9 million disposal gain and $6.5 million tax recovery, rather than recurring operations.
- The timing and remaining costs of the Canton closure, given the inconsistent timing descriptions in the filing.
- Whether weaker PST sales, especially in Argentina, and gross-margin pressure continue, and whether the Brazilian tax credits are realized as expected.
- Working-capital needs, cash generation relative to capital spending, and liquidity given lower cash balances and increased revolver borrowing.
- Final settlement of the $50 million accelerated share repurchase and the amount of the uncapped PST earn-out, which is tied to future performance.