Stoneridge, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; filed November 9, 2012. Amounts below are in millions of dollars unless noted. Financial statements are unaudited.
Business context and reporting period
Stoneridge designs and manufactures electrical and electronic components and systems for commercial, automotive, agricultural, motorcycle and off-highway vehicles. Its three reportable segments are Electronics, Control Devices and PST.
Comparability is affected by the December 31, 2011 acquisition of a controlling interest in PST: Stoneridge consolidated PST’s results from January 1, 2012, while 2011 results included its share of PST earnings under the equity method. Stoneridge owns 74% of PST.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $219.3 | $195.9 | $715.8 | $579.3 |
| Gross margin | 23.4% | 19.1% | 23.8% | 19.8% |
| Operating income | $6.6 | $7.0 | $20.1 | $21.1 |
| Income before tax | $1.0 | $5.8 | $1.8 | $13.5 |
| Net income attributable to Stoneridge | $0.4 | $4.5 | $2.7 | $10.8 |
| Diluted earnings per share | $0.02 | $0.18 | $0.10 | $0.44 |
Operating margin was 3.0% in Q3 2012 versus 3.6% a year earlier, and 2.9% for the first nine months versus 3.7%. SG&A was $44.6 million in Q3 and $150.0 million year to date, up from $30.5 million and $93.3 million, respectively; the increase chiefly reflects PST consolidation.
Cash flow: For the first nine months, operating activities provided $40.0 million, compared with $17.4 million used in 2011. Investing activities used $39.5 million, including $19.8 million paid for the additional PST interest; capital expenditures were $20.2 million. Financing activities used $44.9 million, primarily reflecting debt repayments. Cash declined $43.2 million to $35.6 million.
Liquidity and debt: At September 30, cash was $35.6 million, including $12.1 million held domestically and $23.5 million abroad. Undrawn capacity on the asset-based credit facility was $71.1 million. Total reported debt, including revolving facilities, was approximately $210.1 million, compared with $267.1 million at December 31, 2011. This included $28.2 million of current debt and $181.9 million of long-term debt. The $175 million senior secured notes bear 9.5% interest and mature in October 2017; PST had $34.1 million of term loans, including $26.4 million due in 2012. The company reported covenant compliance at September 30.
Material changes versus the prior comparable period
- Q3 sales rose 11.9%, but Stoneridge-attributable net income fell to $0.4 million from $4.5 million. The sales increase reflects PST consolidation; the quarter’s reported PST revenue was $43.8 million.
- Q3 Electronics sales declined 16.7% to $110.7 million, principally due to lower North American commercial-vehicle volume, including reduced sales to a significant customer. Control Devices sales increased 2.8% to $64.8 million; PST contributed $43.8 million.
- For the first nine months, sales increased 23.6%, while attributable net income declined to $2.7 million from $10.8 million. Consolidated PST reported a $7.3 million pretax loss for the period; 2011 included $4.1 million of equity earnings from PST rather than its consolidated operations.
- Gross margin improved year over year, mainly because PST’s gross margin was higher and Electronics benefited from productivity and lower overhead. The improvement did not translate into higher operating income, as SG&A and other expenses rose.
- Interest expense increased to $15.4 million for the first nine months from $12.8 million, partly due to PST debt and higher average credit-facility borrowings. Other expense was $3.4 million versus $0.2 million of income, with currency volatility—particularly losses associated with PST’s U.S.-dollar debt—a significant factor.
- Cash and cash equivalents fell from $78.7 million at year-end 2011 to $35.6 million. The company also reduced revolving-facility borrowings from $39.2 million to $12.2 million.
Outlook, management commentary and risks
- Management expected North American and European commercial-vehicle weakness, including lower sales to a significant customer, to continue through the remainder of 2012, creating risk for Electronics.
- Management forecast North American automotive production of 14.8–15.0 million units for 2012, versus 13.1 million in 2011, and expected agricultural-vehicle markets to continue improving.
- PST 2012 revenue was revised down to $185–$197 million because of a weaker Brazilian economy and unfavorable Brazilian-real translation. PST sales also faced foreign-exchange and product-mix pressure.
- Management identified customer pricing pressure, commodity costs—especially copper—and foreign exchange exposure, including the Brazilian real, Mexican peso and euro, as risks. Hedges cover portions of currency and copper exposures; they do not eliminate the risks.
- Environmental remediation at a former Florida site remains the company’s responsibility. A $1.9 million liability was accrued; groundwater remediation was expected to begin in 2013, subject to approval, and a $2.0 million letter of credit is maintained for the property buyer.
- PST had $13.9 million of civil, labor and tax-related contingencies assessed as reasonably possible but not probable; no accrual was recorded. The company said ordinary-course legal matters were not expected to have a material adverse effect, while noting possible product warranty and recall exposure. Warranty and recall liabilities were $5.8 million at September 30, up from $3.1 million at the start of the year.
- A potential BCS earn-out payment of up to $3.2 million in 2013 depends on 2012 performance targets; no liability was recorded because payment was not deemed probable. Management reported no material changes to previously disclosed risk factors and no material changes in internal control during the quarter.
Important facts for investors to verify
- How PST performs against the revised 2012 revenue range, and whether Brazil’s economy and currency continue to weigh on sales and earnings.
- Whether commercial-vehicle weakness and lower volume from the significant customer persist, and the resulting effect on Electronics profitability.
- The drivers of the sharp decline in attributable earnings despite higher reported sales and gross margin, including segment performance, SG&A, interest and currency effects.
- PST’s near-term debt maturities and the company’s liquidity after year-end payments, including availability under the asset-based facility.
- Developments in PST’s unaccrued contingencies, product warranty and recall claims, and the timing and cost of Florida groundwater remediation.