Stoneridge, Inc. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; the filing also presents fourth-quarter results. Amounts are in U.S. dollars unless noted. Stoneridge designs and manufactures electronic and electrical vehicle components through Control Devices, Electronics and PST.
Key financial results
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $824.4 million | $696.0 million | +18.5% |
| Gross profit / margin | $248.1 million / 30.1% | $195.4 million / 28.1% | Margin +2.0 percentage points |
| Operating income / margin | $57.4 million / 7.0% | $44.1 million / 6.3% | +30.1% |
| Income before taxes | $52.6 million | $39.2 million | +34.2% |
| Income tax expense (benefit) | $7.5 million | $(36.4) million | Tax expense increased $43.9 million |
| Net income attributable to Stoneridge | $45.2 million; diluted EPS $1.57 | $77.5 million; diluted EPS $2.74 | Net income down $32.3 million |
| Cash from operations | $78.9 million | $65.3 million | +$13.6 million |
| Capital expenditures | $32.2 million | $24.5 million | +$7.7 million |
| Cash and cash equivalents | $66.0 million | $50.4 million | +$15.6 million |
| Working capital | $167.2 million | $128.2 million | +$39.1 million |
| Revolving credit facility borrowings | $121.0 million | $67.0 million | +$54.0 million |
Total debt was approximately $129.0 million, including $8.0 million of other debt. The $300 million revolving facility matures in September 2021; Stoneridge reported compliance with its covenants at year-end. Operating cash flow less capital expenditures was approximately $46.7 million, a simple derived measure.
Material changes and drivers
- Sales rose across all segments. Control Devices sales increased 9.7% to $447.5 million; Electronics rose 37.6% to $282.4 million; PST increased 14.5% to $94.5 million.
- Electronics growth included Orlaco, acquired January 31, 2017. Orlaco contributed $65.0 million of post-acquisition sales and $3.3 million of net income; the filing attributes much of the segment’s increase to the acquisition and off-highway demand.
- Control Devices operating income increased 17.4% to $72.6 million; Electronics increased 22.4% to $18.1 million; PST improved from a $3.5 million operating loss to $2.7 million of income. Unallocated corporate operating costs rose to $36.0 million from $29.1 million.
- Gross margin improved mainly with lower material and overhead costs as a share of sales, favorable foreign-exchange effects on certain purchases, and Orlaco sales mix. SG&A increased $30.7 million, including Orlaco-related costs and fair-value adjustments to earn-out consideration.
- Despite higher operating income, attributable net income and diluted EPS fell versus 2016, principally because 2016 included a $49.6 million benefit from releasing deferred-tax valuation allowances. FY2017 also included a net $9.1 million tax benefit from the Tax Cuts and Jobs Act, provisionally measured.
Cash, financing and capital allocation
- Investing cash outflow was $108.6 million, including $77.3 million paid for Orlaco and $32.2 million of capital expenditures. Financing provided $40.8 million, including increased facility borrowings; the company also made $41.0 million of voluntary facility repayments during the year.
- Orlaco’s acquisition-date consideration was $83.9 million, including contingent consideration and adjustments. Stoneridge also acquired the remaining 26% of PST in May 2017, making PST wholly owned; the transaction included uncapped performance-based earn-out consideration.
- No cash dividends had been declared since the 1997 IPO, and management did not expect dividends in the foreseeable future. The credit agreement restricts dividends and share repurchases.
Outlook, risks and unusual items
- Management expected North American automotive production to rise by 0.3 million units to 17.4 million in 2018, supporting Control Devices; it also anticipated China sensor growth. North American commercial vehicle production was expected to increase slightly, while Europe was expected to remain near 2017 levels.
- Management expected PST performance to benefit from stabilization in Brazil. It cited the IMF’s January 2018 forecast of Brazilian GDP growth of 1.9% in 2018 and 2.1% in 2019. These are expectations, not company revenue or earnings guidance.
- Key risks include vehicle-market cyclicality; dependence on major OEMs and vehicle programs; customer price reductions; launch execution; supplier and raw-material availability and costs; foreign-exchange exposure; competition; warranty, recall and product-liability claims; and debt covenants. The top five customers represented 38% of 2017 sales; the top ten represented 51%. The $3.5 billion awarded-program backlog is an estimate, not firm orders, and depends on production, pricing, currency and launch assumptions.
- Brazil assessed approximately $30 million, including interest and penalties, on PST vehicle-tracking services. No accrual was recorded because management considered loss not probable; the filing reports a favorable administrative ruling on February 27, 2018, while warning that an adverse outcome could be costly. Other PST civil, labor and non-income-tax contingencies totaled about $10.2 million and were considered reasonably possible, not probable.
- A class-action settlement concerning a control device required replacement parts for eligible claimants; the company accrued $0.525 million, with total cost dependent on claims. A separate putative class action was settled for $3,000. Environmental remediation liability for a former Florida site was $0.265 million.
- The reported FY2017 tax effects of the 2017 U.S. tax law were provisional and could be adjusted during the measurement period. The company recorded $7.5 million of income-tax expense overall; the fourth quarter included a $6.0 million tax benefit.
- At year-end, 97% of debt was floating-rate; management estimated a 1-percentage-point rate increase would add approximately $1.3 million to annual interest expense. The company also disclosed currency, commodity, cybersecurity, privacy, NAFTA/trade and international-operation risks.
Investor verification points
- Separate underlying growth from the acquired Orlaco contribution and verify its integration, profitability and contingent-payment assumptions.
- Normalize earnings for the unusually large 2016 valuation-allowance release and assess the provisional 2017 tax-law accounting and future cash-tax effects.
- Review debt repayment capacity, floating-rate exposure, facility covenants and the uncapped PST earn-out; confirm ongoing covenant headroom.
- Track the Brazilian tax dispute and other PST contingencies, warranty developments, and the ultimate cost of the control-device settlement.
- Test the $3.5 billion backlog against actual customer orders, vehicle production, program launches and price reductions; assess customer concentration and supplier constraints.
- Note that the financial statements received an unqualified audit opinion and management and the auditor reported effective internal control overall; Orlaco, representing 22.9% of year-end assets and 7.9% of annual sales, was excluded from the company’s 2017 internal-control assessment while integration continued.