Stoneridge, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited; amounts below are in U.S. dollars. The company designs and manufactures vehicle electrical and electronic products through Control Devices, Electronics and PST. Its Wiring business was sold in August 2014 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $165.3 million | $162.1 million | $328.1 million | $323.4 million |
| Operating income (loss) | $7.4 million | $(23.2) million | $10.5 million | $(16.8) million |
| Income (loss) attributable to Stoneridge | $7.0 million | $(21.9) million | $9.3 million | $(20.4) million |
| Diluted EPS attributable to Stoneridge | $0.25 | $(0.81) | $0.34 | $(0.76) |
| Gross margin | 27.8% | 29.8% | 27.3% | 29.8% |
- Q2 sales increased 2.0% year over year; first-half sales increased 1.4%. Control Devices and Electronics grew, while PST declined.
- Q2 Control Devices sales rose 10.4% to $84.4 million and segment operating income increased to $12.0 million. Electronics sales rose 9.7% to $57.9 million, but segment operating income fell 34.1% to $3.2 million. PST sales fell 30.1% to $23.0 million; its operating loss was $2.6 million.
- Lower gross margin reflected higher material costs, including adverse currency effects in Electronics. Material costs were 51.2% of sales in Q2 versus 48.3% a year earlier.
- The sharp improvement in reported operating results primarily reflects the absence of the $29.3 million PST goodwill impairment recorded in Q2 2014. Q2 2015 results also benefited from $3.4 million lower net interest expense following the 2014 debt refinancing.
- First-half SG&A fell $3.2 million, but included $2.2 million of accelerated share-based compensation tied to the former CEO’s retirement. First-half income also benefited from lower other expense and the absence of a discrete foreign tax expense recorded in 2014.
Cash flow, debt and liquidity
- First-half operating cash flow was $1.6 million, compared with a $7.1 million use in 2014. Investing cash outflow was $16.9 million, including $15.2 million of capital expenditures; financing cash outflow was $3.3 million. Cash declined $20.2 million to $22.9 million from year-end 2014.
- Capital expenditures exceeded operating cash flow by approximately $13.6 million. Management attributed cash decline primarily to working capital, product-launch investment, debt repayment and employee tax-withholding share repurchases.
- At June 30, cash was $22.9 million and total debt was $127.6 million, including $100.0 million drawn on the revolving facility. The facility allows borrowings up to $300 million, matures in September 2019 and had approximately 1.84% interest; the company reported covenant compliance.
- Current assets were $246.4 million and current liabilities $127.1 million. PST debt carried high rates: short-term obligations were 14.4%–19.2%, and its weighted-average short-term borrowing rate was 16.9%. Approximately $20.1 million of PST principal was scheduled from July 2015 through June 2016.
Outlook, risks and contingencies
- No company-specific revenue or earnings guidance was provided. Management expected continued benefit from North American automotive production and improvement in North American commercial vehicles, with modest improvement in European commercial vehicles.
- Management described PST’s outlook as weak amid Brazil’s economic and automotive-market deterioration. It planned to realign PST’s cost structure; the timing and extent of a Brazilian recovery remained uncertain.
- Foreign exchange exposure, especially in Brazil and other international operations, raw-material costs, customer pricing pressure, vehicle production levels, customer demand and supplier performance could affect results. Management noted that cost reductions had so far mitigated pricing pressure, but future success was not assured.
- A Brazilian tax assessment related to PST tracking services was approximately $29.8 million, including tax, interest and penalties. A state tax tribunal ruled in PST’s favor in April 2015, but the state could appeal; management assessed loss as not probable and recorded no accrual. Other PST civil, labor and tax contingencies were approximately $7.2 million and considered reasonably possible, not probable; no provision was recorded.
- Actia sought approximately $15.6 million in a French patent-infringement proceeding. Stoneridge disputed the claim, was defending itself, and recorded no liability because management considered loss not probable.
- Environmental remediation liability was $715,000 at June 30, 2015; a $2.0 million letter of credit remained in place for the former Sarasota facility. Groundwater remediation was expected to begin in Q3 2015, subject to property access approvals.
- Disclosure controls were considered effective as of June 30, 2015. The filing reported no material changes to internal controls or risk factors.
Important facts for investors to verify
- Whether sales and margins in Control Devices and Electronics offset continued PST weakness, currency effects and higher input costs.
- Whether cash generation can support capital spending and PST’s substantial near-term debt maturities while maintaining revolver covenant compliance.
- Developments in the Brazilian tax assessment and other PST contingencies, and the status and cost of Sarasota remediation.
- Whether management’s market assumptions and PST cost-realignment plans materialize; the filing provides no quantified company earnings guidance.