Stoneridge, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Stoneridge designs and manufactures electrical and electronic products for vehicle markets through Control Devices, Electronics and PST. Orlaco, acquired in January 2017, is included in Electronics. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $225.9 | $204.3 |
| Gross margin | 30.1% | 29.9% |
| Operating income | $16.8; 7.5% margin | $15.2; 7.4% margin |
| Net income attributable to Stoneridge | $13.4 | $9.2 |
| Diluted EPS | $0.46 | $0.32 |
| Operating cash flow | $9.7 | $9.8 |
| Capital expenditures | $10.5 | $7.3 |
- Sales rose 10.6%; attributable net income increased about 45%. Gross margin improved 0.2 percentage points.
- Cash and cash equivalents were $57.4 at March 31, down from $66.0 at year-end; the filing says all cash was held in foreign locations. Operating cash flow was slightly below the prior-year quarter, while capital expenditures exceeded operating cash flow by approximately $0.8.
- Credit-facility borrowings were $116.0, down from $121.0 at year-end. Total debt, including PST and other borrowings, was $122.9. The revolving facility has a $300.0 stated capacity and matures in September 2021. Stoneridge reported compliance with its covenants; PST debt carried comparatively high rates, approximately 9%–11.84%.
Changes versus prior comparable period
- Electronics sales increased 41.1% to $90.0, reflecting Orlaco and stronger commercial-vehicle and off-highway sales, with favorable currency effects. Electronics operating income increased to $7.9 from $5.6.
- Control Devices sales declined 3.0% to $115.4, mainly from planned North American automotive program volume reductions; operating income fell to $17.9 from $19.1.
- PST sales declined 5.0% to $20.5, while operating income fell to $0.2 from $0.6, in part due to lower mass-retailer sales and earn-out expense.
- SG&A rose $3.0 and design and development expense rose $2.1, primarily reflecting the full-quarter contribution of Orlaco and higher Electronics spending. The lower tax provision—$3.2 versus $4.6—was principally attributed to U.S. tax legislation; the effective tax rate declined to 19.5% from 33.3%.
- Q1 2017 included $77.5 of acquisition cash outflow for Orlaco; there was no acquisition outflow in Q1 2018. Q1 2018 investing cash use was $9.1, compared with $84.8 a year earlier.
Outlook, commentary and risks
- No quantified company-wide revenue or earnings guidance is provided. Management expects North American automotive production to increase by 0.2 million units to 17.2 million in 2018, continued China automotive sensor growth, and growth in the North American commercial-vehicle market; European commercial-vehicle production is expected to remain approximately level with 2017.
- Management said PST’s performance reflected stabilization in Brazil and expects improving Brazilian markets to support performance. The company expects a lower effective tax rate in 2018 than in 2017, while noting its estimate could change as it analyzes tax-law provisions.
- Management cited product growth, including emission sensors, front-axle disconnect actuators and Orlaco products, and operating-efficiency initiatives. Customer pricing pressure remains; the company said cost actions had so far mitigated its effect.
- Key exposures include vehicle-production changes, customer and supplier concentration or disruption, pricing and cost pressures, product launches and acceptance, foreign exchange, commodity prices, and debt covenants. Currency movements had mixed effects in Q1; the company uses forward contracts to hedge certain exposures.
- Brazilian PST civil, labor and other tax contingencies were assessed as reasonably possible but not probable; no provision was recorded for stated exposure of approximately $11.5. The company reported a $93 accrual for potential claims under a settled product class action and a $132 environmental remediation liability. It said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes remain uncertain.
- Fair-value remeasurement of earn-out consideration increased expense by $0.9 in Q1; total earn-out liabilities were $21.9. The Orlaco earn-out reached its €7.5 cap. Adoption of ASC 606 had no material reported impact.
Important facts for investors to verify
- Whether Electronics growth and profitability continue as Orlaco becomes a larger contributor, and whether Control Devices and PST recover.
- Cash conversion, working-capital needs and capital spending relative to operating cash flow.
- Credit-facility availability, covenant headroom, debt repayments and the cost and maturity profile of PST borrowings.
- Effects of foreign exchange, customer pricing, vehicle-production trends and U.S. tax-law implementation on future margins and the effective tax rate.
- Potential changes in warranty and recall claims, PST contingencies, environmental remediation costs and earn-out liabilities.