Stoneridge, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Stoneridge designs and manufactures vehicle electronics, instrumentation, sensors, switches, actuators, and related systems. Its legacy operations primarily served commercial, agricultural, and off-highway vehicle markets.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $765.4 million | $635.2 million |
| Gross profit / gross margin | $146.8 million / 19.2% | $145.6 million / 22.9% |
| Operating income / operating margin | $13.5 million / 1.8% | $23.5 million / 3.7% |
| Net income | $45.5 million | $11.3 million |
| Net income attributable to Stoneridge | $49.4 million | $11.5 million |
| Diluted EPS | $2.00 | $0.47 |
| Cash from operating activities | $0.9 million | $13.9 million |
| Capital expenditures | $26.3 million | $18.6 million |
Sales increased 20.5%, driven mainly by stronger commercial-vehicle and agricultural production, new business, and favorable currency effects. Electronics sales rose 27.3%; Control Devices sales rose 9.1%. North America represented 78.6% of sales and Europe and other regions 21.4%.
Margins declined despite higher sales. Management cited Mexican peso and commodity headwinds, including approximately $6.2 million of adverse currency impact and $4.4 million from commodities, as well as North American wiring labor inefficiencies and premium freight. Operating income also included a $4.9 million goodwill impairment charge.
Liquidity, debt, and balance sheet
- At year-end, cash and cash equivalents were $78.7 million, working capital was $131.4 million, and total assets were $697.7 million.
- Debt and short-term borrowings totaled approximately $267.1 million on the balance sheet. This included $175 million face amount of 9.5% senior secured notes due October 2017 and $38 million drawn on the asset-based facility. The filing reports $29.5 million of undrawn capacity under that facility.
- The asset-based facility was extended to December 1, 2016. Management expected operating cash flow in 2012 to be sufficient to repay its year-end facility borrowing.
- Operating cash flow fell sharply to $0.9 million, primarily as higher receivables and inventory absorbed cash. Cash increased by $6.8 million overall, supported by financing inflows.
- The company reported compliance with its principal credit-facility covenants at year-end, subject to a waiver relating to acquisition-document delivery. BCS had earlier covenant violations that were waived; the relevant covenants were subsequently removed through the facility’s expiration.
Material changes and unusual items
- On December 31, 2011, Stoneridge increased its PST ownership from 50% to 74%, making PST a consolidated subsidiary. PST’s balance sheet was consolidated at year-end, but its operating results were not included in 2011 consolidated sales or operating results because the acquisition occurred on the final day of the year.
- Remeasurement of the previously held PST interest generated a one-time, non-cash pre-tax gain of $65.4 million and after-tax gain of approximately $42.5 million. Management said the gain contributed $1.72 to 2011 diluted EPS. Accordingly, reported earnings substantially reflect this transaction rather than recurring operating performance.
- PST reported standalone 2011 sales of $234.2 million and pre-tax income of $21.0 million. The filing’s unaudited pro forma results, assuming acquisition from January 1, 2010, show 2011 sales of $999.6 million and net income attributable to Stoneridge of $10.6 million; these are not reported consolidated results.
- Stoneridge issued approximately 1.94 million shares and agreed to pay approximately $29.7 million cash for the additional PST interest; part of the consideration was paid in January 2012. The PST purchase-price allocation was preliminary.
- In 2011 the company changed certain U.S. inventories from LIFO to FIFO, retrospectively adjusting prior periods. Management cited consistency and comparability as reasons for the change.
Outlook, commentary, and risks
- For 2012, management forecast North American automotive production of 13.5–13.9 million units and expected North American commercial-vehicle production and agricultural markets to improve. It expected the European commercial-vehicle market to decline.
- Management forecast PST revenue of $240–$270 million in 2012. PST results were to be included in consolidated results beginning January 1, 2012.
- Management identified copper prices and foreign exchange as potential headwinds. It had fixed-price contracts for part of 2012 copper needs, customer copper surcharges on some sales, and currency forwards intended to reduce certain exposures. Plans to address wiring inefficiencies included labor reductions and process improvements.
- Key risks include cyclical vehicle demand, customer concentration and customer-directed price reductions, supply and commodity availability, manufacturing execution, foreign-currency movements, acquisition integration, and leverage. Navistar accounted for 24% and Deere for 15% of 2011 sales; the top ten customers represented 71%.
- The company disclosed possible PST civil, labor, and tax contingencies of $13.3 million that were not accrued because counsel considered loss possible, not probable. It also retained a $1.9 million accrual for remediation at its former Sarasota site and provided a $2.0 million letter of credit to the property buyer.
- Management and the auditor reported effective internal control over financial reporting, but PST was excluded from the year-end control assessment following its acquisition. The financial-statement audit opinion was unqualified.
- No cash dividends were expected in the foreseeable future, and debt agreements restrict dividends. The company did not repurchase shares in 2011 or 2010.
Important facts for investors to verify
- How much of 2012 earnings and cash generation comes from ongoing operations versus the nonrecurring PST remeasurement gain in 2011.
- Whether operating cash flow recovers after the 2011 working-capital build and whether year-end facility borrowings are repaid as management expected.
- Actual post-acquisition PST revenue, profitability, cash flows, debt service, and integration progress compared with management’s outlook.
- Whether the purchase-price allocation, including acquired intangibles, goodwill, and deferred taxes, changes from its preliminary estimates.
- Progress in restoring Electronics margins and reducing labor, freight, copper, and currency pressures; also monitor BCS goodwill and the Sarasota remediation exposure.
- Customer concentration, the $13.3 million of unaccrued PST contingencies, debt covenant headroom, and the maturity profile of PST borrowings.