Stoneridge, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets through Control Devices, Electronics and PST.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $186.9 | $165.3 | $349.5 | $328.1 |
| Gross margin | 28.2% | 27.8% | 28.0% | 27.3% |
| Operating income | $13.6 | $7.4 | $22.1 | $10.5 |
| Net income attributable to Stoneridge | $11.6 | $7.0 | $18.8 | $9.3 |
| Diluted EPS | $0.41 | $0.25 | $0.67 | $0.34 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $17.8 | $1.6 |
For Q2, sales increased 13.1%, operating income rose 83.8%, and diluted EPS increased $0.16 year over year. For the first half, sales rose 6.5% and operating income more than doubled. Six-month capital expenditures were $12.0 million, leaving approximately $5.8 million of operating cash flow after capital expenditures. Cash was $55.3 million at June 30, up from $54.4 million at December 31, 2015.
At June 30, total debt was approximately $120.8 million, including $100.0 million drawn on the $300.0 million revolving facility and approximately $20.8 million of other debt. The facility matures in September 2019; the company reported covenant compliance. PST debt carries comparatively high rates: its disclosed weighted-average rates were 14.1% for short-term and 10.7% for long-term debt. Current assets were $275.8 million and current liabilities $130.7 million.
Material changes and operating drivers
- Control Devices: Q2 sales grew 29.0%, primarily on new North American automotive programs; operating income rose to $18.3 million from $12.0 million. First-half sales rose 22.5%.
- Electronics: Q2 sales were nearly flat, while operating income improved to $4.5 million from $3.2 million, helped by lower material costs tied to currency movements. First-half sales declined 3.4%.
- PST: Q2 sales fell 11.9% and first-half sales fell 23.5%, reflecting Brazilian market weakness and adverse currency translation. Operating losses narrowed year over year, but PST remained loss-making.
- Gross margin improved in both comparison periods. Management cited lower labor and overhead as a percentage of sales and favorable currency-related material costs in Electronics, partly offset by product mix and higher material costs in Control Devices and PST.
- SG&A declined $4.2 million in the first half year over year, partly because 2015 included $2.2 million of accelerated share-based compensation tied to the former CEO’s retirement. 2016 included $0.5 million of expense from award modifications and $2.2 million of business realignment charges.
Outlook, risks and unusual items
- Management expected improved financial performance for full-year 2016 versus 2015, citing product launches and savings from prior realignment actions. No specific revenue or earnings guidance was provided.
- Management expected North American automotive production to reach approximately 18.0 million units in 2016, versus 17.5 million in 2015, supporting Control Devices. It anticipated a weaker North American commercial vehicle market in the second half and modestly higher European commercial vehicle activity.
- PST outlook remained constrained by Brazilian economic and automotive weakness, currency movements, slower customer collections and financing needs. PST used receivables factoring and short-term bank loans; scheduled PST principal repayments were $13.6 million from July 2016 through June 2017.
- The company planned to relocate its headquarters from Warren, Ohio, to Novi, Michigan, primarily in Q4 2016. Estimated relocation costs were $3.0–$3.4 million; a Michigan grant of up to $1.4 million was conditional on job creation.
- Key exposures include foreign exchange, commodity costs, customer pricing pressure, vehicle production changes, supplier disruptions, customer concentration, debt covenants and product warranty or recall claims. Open currency forwards were used for hedging.
- Contingencies include a Brazilian tax assessment of approximately $28.8 million, for which management considered loss not probable and recorded no accrual; patent and vehicle-control-device class-action litigation, also without recorded accruals based on management’s assessments; and a $7.2 million product warranty and recall liability. The company also carried a $0.5 million environmental remediation liability.
- The company maintained a full valuation allowance on U.S. deferred tax assets and said a future reversal could produce a tax benefit, depending on sustained profitability. The effective tax rate was 10.9% in Q2 2016 versus negative 6.4% in Q2 2015.
Important facts for investors to verify
- Whether Control Devices’ new-product growth and margin gains continue, and whether customer or vehicle-production changes affect that growth.
- Whether PST’s sales, cash generation and collections stabilize amid Brazil’s economic weakness, currency exposure and near-term debt repayments.
- Actual cash available under the revolving facility, covenant headroom and the cost and refinancing implications of PST borrowings.
- Realized headquarters relocation costs and eligibility for the conditional Michigan grant.
- Developments in the Brazilian tax assessment, patent and product litigation, warranty claims, and any resulting changes to recorded liabilities.
- Whether U.S. profitability supports a deferred-tax-asset valuation-allowance release; timing and amount were not assured.