Stoneridge, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results; amounts below are in U.S. dollars. Stoneridge designs and manufactures electrical and electronic products for automotive, commercial, off-highway, motorcycle and agricultural vehicle markets.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $220.6 million | $209.1 million | $446.5 million | $413.4 million |
| Operating income | $19.2 million | $15.7 million | $36.0 million | $30.8 million |
| Net income attributable to Stoneridge | $15.1 million | $9.0 million | $28.5 million | $18.2 million |
| Diluted EPS | $0.52 | $0.32 | $0.99 | $0.64 |
| Gross margin | 30.6% | 30.3% | 30.3% | 30.1% |
- Q2 sales grew 5.5% year over year; operating income rose 22.4%. For the first half, sales increased 8.0% and operating income increased 16.8%.
- Q2 operating margin was 8.7%, compared with 7.4% a year earlier; first-half operating margin was 8.1%, compared with 7.5%.
- First-half operating cash flow was $28.9 million, versus $27.0 million. Investing cash outflow was $15.4 million, including $16.8 million in capital expenditures; financing cash outflow was $17.4 million.
- Cash was $59.0 million at June 30, down from $66.0 million at year-end 2017. The filing says all cash was held outside the United States.
- Revolver borrowings were $110.0 million, down from $121.0 million at year-end. Total debt, including PST obligations, was $115.0 million. The $300 million revolving facility matures in September 2021; the company reported compliance with its covenants.
- Total assets were $560.6 million and shareholders’ equity was $258.0 million at June 30, 2018.
Material changes and drivers
- Electronics led growth: Q2 sales rose 26.1% to $90.3 million and segment operating income rose to $8.3 million from $2.8 million. Higher European and North American commercial-vehicle and off-highway sales, including Orlaco products, were key drivers.
- Control Devices weakened: Q2 sales fell 3.5% to $110.0 million and segment operating income fell 13.9% to $17.2 million, mainly due to lower North American automotive program volumes and higher support and development costs.
- PST declined: Q2 sales fell 13.5% to $20.3 million and operating income fell to $0.7 million from $1.1 million. Lower audio sales and unfavorable currency translation outweighed growth in monitoring and new products.
- Lower U.S. tax expense contributed to earnings growth: Q2 effective tax rate was 20.2%, versus 36.8%; first-half rate was 19.8%, versus 35.0%. Management attributed the decline primarily to the Tax Cuts and Jobs Act.
- Comparability is affected by the Orlaco acquisition: 2018 includes a full first half, while 2017 includes Orlaco only from its January 31 acquisition date. The filing does not present an organic-growth measure.
Outlook, risks and unusual items
- Management expected 2018 North American automotive production of 17.2 million units and anticipated Control Devices sales volumes to be consistent with the prior year. It expected North American and European commercial-vehicle markets to increase. No specific company-wide revenue or earnings guidance was provided.
- Management cited Electronics growth, operating-efficiency initiatives and products addressing industry trends as opportunities. It expected PST markets to remain broadly consistent, while noting lower audio-product demand and uncertainty in the Brazilian real and Argentine peso.
- Tariffs and potential retaliatory trade actions, foreign exchange movements, commodity costs, customer pricing pressure, vehicle production levels, customer acceptance and successful product launches were identified as risks. Management noted that stronger U.S. dollar movements against certain currencies had negatively affected material costs and reported results.
- Q2 comprehensive loss attributable to Stoneridge was $2.5 million despite net income of $15.1 million, primarily reflecting $17.4 million of foreign-currency translation loss in other comprehensive income.
- Fair-value earn-out liabilities totaled $20.0 million. PST’s earn-out is uncapped and depends on performance in 2020 or 2021. The Orlaco earn-out reached its capped amount in Q1 2018.
- PST civil, labor and tax contingencies totaling approximately $7.4 million were considered reasonably possible but not probable; no provision was recorded. The company also reported $10.9 million of product warranty and recall liabilities and a $157,000 remaining Sarasota environmental remediation liability.
- The company adopted ASC 606 in January 2018 with no material cumulative adjustment or expected ongoing material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of Electronics’ growth reflects underlying volume and how much reflects Orlaco, foreign exchange or other mix effects.
- Whether Control Devices’ North American automotive volume weakness and PST’s audio-product declines persist, and whether management’s market expectations are realized.
- Cash generation and working-capital requirements, given first-half increases in receivables and inventory, while the company continues debt repayment and capital investment.
- Exposure to foreign currencies, tariffs and commodity costs, including the effect on margins and cash held outside the United States.
- Potential payments and earnings effects from the PST and Orlaco earn-outs, PST contingencies, and warranty or recall claims.