Stoneridge, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statements are unaudited. Unless otherwise stated, amounts below are in millions of U.S. dollars. The company designs and manufactures electrical and electronic components and systems for vehicle markets through Control Devices, Electronics and PST. Its Wiring business was sold in August 2014 and is reported as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $162.1 | $170.3 | $490.2 | $493.8 |
| Operating income (loss) | $8.9 | $13.8 | $19.5 | $(3.0) |
| Income (loss) from continuing operations | $7.4 | $9.1 | $15.8 | $(19.9) |
| Net income (loss) attributable to Stoneridge | $7.4 | $(0.1) | $16.7 | $(20.6) |
| Diluted EPS attributable to Stoneridge | $0.26 | $0.00 | $0.60 | $(0.76) |
| Gross margin | 27.9% | 29.1% | 27.5% | 29.6% |
- Q3 sales declined 4.9%. Control Devices sales rose 11.1%, while Electronics fell 7.8% and PST fell 34.3%. Management attributed much of PST and Electronics weakness to unfavorable currency translation; Control Devices benefited from North American automotive demand and new products.
- Q3 operating income declined 35.0%. The prior-year quarter included a $5.8 million goodwill impairment reversal benefit; excluding that comparison effect and the prior-year $0.9 million debt-extinguishment loss, management said continuing-operations income increased by $3.1 million, primarily from lower interest expense.
- Gross margin contracted as material costs rose to 51.0% of sales from 49.8%, notably due to currency effects in Electronics. Lower SG&A partly offset the pressure: Q3 SG&A was down $4.9 million, mainly reflecting currency translation in PST and Electronics.
- Nine-month sales were down 0.7%. Control Devices grew 8.3% and Electronics grew 4.6%, while PST declined 28.9%. Nine-month operating results improved substantially versus 2014, when the company recorded a $23.5 million PST goodwill impairment; interest expense also declined $10.4 million following the 2014 refinancing.
Cash flow, balance sheet and debt
- For the nine months, operating cash flow was $17.1 million, compared with cash use of $0.8 million in 2014. Investing used $25.2 million, including $23.5 million of capital expenditures, primarily supporting new product launches. Financing used $3.8 million. Cash decreased $13.7 million to $29.3 million.
- At September 30, cash was $29.3 million, total assets $365.9 million, and shareholders’ equity $99.9 million. Cash was $43.0 million at December 31, 2014. Management cited working-capital needs, capital expenditures, debt repayment and employee tax-withholding share repurchases as factors in the decline.
- Total debt was $122.9 million: $100.0 million outstanding on the revolving facility and $22.9 million of other debt. The facility has a $300 million stated commitment, matures in September 2019 and had an approximately 2.12% rate at quarter-end. The company reported covenant compliance; borrowing availability is not specified in the filing text provided.
- PST debt includes short- and long-term obligations with high borrowing costs; its short-term obligations carried rates of 5.5%–24.0%, and management reported $17.5 million of PST principal due from October 2015 through September 2016.
Outlook, risks and unusual items
- No formal company-wide earnings or revenue guidance is provided. Management expected 2015 North American automotive production of 17.0–17.5 million units and anticipated improving North American commercial-vehicle and modestly improving European commercial-vehicle markets to support relevant segments.
- Management cautioned that Brazilian economic and automotive-market weakness, together with adverse currency translation, continued to pressure PST. The IMF’s October 2015 forecast cited in the filing projected Brazilian GDP declines of 3.0% in 2015 and 1.0% in 2016. PST was realigning costs to address potentially continued weak demand and currency pressure.
- Foreign exchange exposure, customer pricing pressure, commodity costs, vehicle-production levels, major-customer risks, suppliers and debt covenants are identified risks. Currency movements also affect material costs; the company uses forward contracts to hedge selected exposures.
- Contingencies include putative vehicle-control-device class actions, a French patent dispute, and a Brazilian tax assessment of approximately $23.3 million. Management said losses on the class actions and tax assessment were not considered probable or reasonably estimable and recorded no related liability. A French court ruled for Stoneridge on one patent claim, subject to appeal; another claim remained unresolved. The company also had a $0.7 million accrued environmental remediation liability and a $2.0 million letter of credit associated with its former Sarasota site.
- Q3 2015 discontinued-operations loss was $0.1 million, versus $8.1 million in Q3 2014, which included the Wiring disposal loss. Nine-month discontinued-operations loss was $0.2 million versus $7.7 million. Share-based compensation for the first nine months included $2.2 million associated with accelerated vesting upon the former CEO’s retirement.
- The company maintained a full valuation allowance on U.S. deferred tax assets but stated that a reversal could become possible if sufficient positive evidence develops. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor verification points
- Assess how much of the earnings and margin trend reflects underlying operations versus the prior-year goodwill adjustment, debt refinancing, foreign exchange and discontinued-operation comparisons.
- Track PST’s demand, profitability, Brazilian currency exposure and cost-realignment progress, along with the concentration of near-term PST debt maturities.
- Verify actual revolver availability and covenant headroom, rather than relying on the facility’s stated commitment alone.
- Monitor material-cost inflation, warranty claims, product-liability litigation and the status and potential exposure of the Brazilian tax and patent matters.
- Evaluate whether operating cash generation can support planned capital spending and working-capital requirements while maintaining liquidity.