Stoneridge, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Its reportable segments are Electronics, Wiring, Control Devices and PST.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $233.5 | $219.3 | $712.0 | $715.8 |
| Gross margin | 22.9% | 23.4% | 24.2% | 23.8% |
| Operating income | $10.7 | $6.6 | $32.8 | $20.1 |
| Income before taxes | $6.5 | $1.0 | $19.3 | $1.8 |
| Net income attributable to Stoneridge | $5.0 | $0.4 | $14.9 | $2.7 |
| Diluted EPS | $0.19 | $0.02 | $0.55 | $0.10 |
| Operating cash flow | Not separately presented for the quarter | $22.4 | $40.0 |
Q3 sales grew 6.5%, while nine-month sales declined 0.5%. Q3 earnings improved substantially, supported by higher sales in automotive and European commercial vehicle markets, improved product mix, lower SG&A and interest expense, and less adverse foreign-exchange transaction effects. Gross margin narrowed in Q3 due to labor costs incurred against customer forecasts that did not convert into sales and higher premium freight; the nine-month margin improved, helped by lower material costs and nonrecurrence of prior-year PST charges.
For the first nine months, cash from operations fell $17.6 million year over year, primarily because of higher working capital at PST and Wiring in preparation for planned Q4 production. Inventory rose to $119.0 million from $96.0 million at year-end 2012. Capital expenditures were $18.5 million, compared with $20.2 million. Cash increased to $46.1 million from $44.6 million.
Balance sheet, debt and liquidity
At September 30, 2013, total assets were $603.6 million, current assets $345.7 million, current liabilities $161.4 million, and shareholders’ equity $195.2 million. Total debt was $196.7 million, including $9.2 million current and $187.5 million long-term; there were no borrowings on the asset-based revolver. The company reported $83.6 million of undrawn availability under that facility and stated it was in compliance with its covenants.
The principal debt is $175 million of 9.5% senior secured notes due October 2017. A $45 million interest-rate swap converts a portion of the fixed-rate exposure to variable interest. PST term loans and other subsidiary borrowings account for additional debt; $9.2 million of total debt is classified as current.
Changes and segment performance
- Q3 Electronics sales increased 18.7% and Control Devices sales increased 12.7%; Wiring sales declined 1.3%, and PST sales were nearly flat in reported dollars.
- For the first nine months, Electronics sales rose 12.5% and Control Devices rose 7.7%, while Wiring fell 12.5% and PST fell 2.3%. Wiring reported a $5.6 million pretax loss for the period, compared with $1.4 million pretax income a year earlier.
- Nine-month pretax income improved to $19.3 million from $1.8 million, with significant contributions from Control Devices, Electronics and PST. Prior-year PST results included a $3.2 million inventory purchase accounting adjustment and business realignment costs that did not recur.
- Accumulated other comprehensive loss increased to $24.6 million from $10.3 million at year-end, largely reflecting foreign-currency translation losses and derivative movements.
Outlook, risks and unusual items
- No numerical company-wide earnings or revenue guidance is provided. Management expected North American commercial vehicle weakness to continue into Q4 2013; it expected improvement in European commercial vehicles and continued PST revenue growth in local Brazilian currency. North American automotive production was forecast by the company at 15.5–16.2 million units for 2013, versus 15.4 million in 2012.
- Management cited risks from vehicle production and customer demand, customer pricing pressure, the ability to control costs, commodity prices (especially copper), foreign exchange—particularly the Brazilian real—and economic conditions in Brazil. It also noted that lower-than-forecast production could hurt Wiring and Electronics.
- PST is contesting a São Paulo tax assessment of approximately $41.5 million, including tax, interest and penalties, concerning whether vehicle tracking services are subject to state ICMS tax. Management said loss was not probable and recorded no accrual; an adverse outcome could materially affect PST.
- PST had other civil, labor and tax contingencies of $11.6 million deemed reasonably possible, but not probable; no accrual was recorded. The company also carried a $1.34 million environmental remediation liability for a former Florida site, with groundwater remediation subject to regulatory approval.
- Product warranty and recall liability was $6.48 million at September 30, 2013, up from $6.11 million at year-end 2012. Ordinary-course legal matters were not considered likely to have a material adverse effect by management.
Important facts for investors to verify
- Whether planned Q4 production materializes and converts the elevated receivables and inventory into sales and cash; operating cash flow was materially lower year over year.
- Whether Wiring’s customer-related volume decline, forecast-related labor costs and premium freight improve, and whether its losses persist.
- Developments in PST’s $41.5 million tax dispute, including potential exposure for periods after those assessed.
- Debt service and refinancing capacity, including the 9.5% notes, upcoming subsidiary loan maturities, revolver availability and covenant headroom.
- Whether foreign-exchange movements, customer pricing pressure and copper or other input costs affect margins and reported sales.