Stoneridge, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context and reporting period
Stoneridge designs and manufactures electrical and electronic products for vehicle markets. Its reportable segments are Electronics, Control Devices and PST. Since acquiring a controlling interest in PST at the end of 2011, Stoneridge has consolidated PST’s results; 2011 comparative results included PST only as equity earnings. This acquisition makes year-over-year revenue comparisons less directly comparable.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | 2012: $234.3; 2011: $190.4 | 2012: $496.5; 2011: $383.5 |
| Gross margin | 2012: 22.9%; 2011: 19.8% | 2012: 23.9%; 2011: 20.1% |
| Operating income | 2012: $1.6; 2011: $7.4 | 2012: $13.5; 2011: $14.1 |
| Net income (loss) attributable to Stoneridge | 2012: $(3.6); 2011: $3.4 | 2012: $2.3; 2011: $6.3 |
| Basic and diluted EPS | 2012: $(0.13); 2011: $0.14 | 2012: $0.09 basic; $0.09 diluted; 2011: $0.26 basic; $0.25 diluted |
| Operating cash flow | Six months 2012: $15.3 provided; 2011: $23.1 used |
Q2 operating margin was 0.7%, down from 3.9%; first-half operating margin was 2.7%, down from 3.7%. Q2 sales rose 23.0% and first-half sales rose 29.5%, substantially reflecting PST consolidation. In Q2, Electronics sales increased 2.5% and Control Devices sales increased 3.4%; PST contributed $38.5. First-half Electronics and Control Devices sales rose 6.6% and 3.3%, respectively, while PST contributed $92.2.
Cash and cash equivalents fell to $39.2 at June 30 from $78.7 at year-end 2011. First-half investing cash use was $33.8, including $19.8 paid for the additional PST interest; capital expenditures were $14.4. Financing cash use was $21.6. Total debt reported on the balance sheet was approximately $244.9, including $37.1 current debt, $26.1 revolving borrowings and $181.8 long-term debt. The $175.0 senior secured notes bear 9.5% interest and mature in October 2017. The asset-based facility had $63.3 of undrawn capacity; management reported covenant compliance at June 30.
Material changes versus the prior comparable period
- Despite higher sales and gross margin, Q2 shifted to a $3.6 attributable loss from $3.4 income; first-half attributable income declined to $2.3 from $6.3.
- Q2 SG&A rose $21.7 to $52.0, largely from PST consolidation, including $18.6 of PST SG&A. First-half SG&A rose $42.4 to $105.3.
- PST recorded a pretax loss of $8.1 in Q2 and $8.5 for the first half, compared with prior-year equity earnings from the unconsolidated venture. Stoneridge attributed PST’s losses to weaker Brazilian demand, unfavorable product mix and currency, acquisition-related depreciation and amortization, and realignment charges.
- Electronics pretax income improved to $2.4 in Q2 and $9.0 in the first half. Control Devices pretax income declined to $3.8 and $7.9, respectively, primarily due to product mix and lower customer reimbursement of development costs.
- First-half operating cash flow improved from use of $23.1 to provision of $15.3, mainly because working capital was more stable than in 2011.
Outlook, commentary and risks
- Management forecast 2012 PST revenue of $195–$214, reduced because of the weakening Brazilian economy and depreciation of the Brazilian real against the U.S. dollar.
- Management expected North American automotive and agricultural vehicle production to support results, while continued commercial-vehicle weakness and lower European automotive volumes could weigh on segments. These expectations are forward-looking and subject to market conditions.
- Commodity prices, especially copper, and foreign-exchange movements are significant exposures. Stoneridge uses hedges for some copper purchases and currency exposures; it also has exposure involving Mexico, Sweden and Brazil.
- Q2 included PST business realignment charges of $1.3 and purchase-accounting-related costs, including $2.8 of PST depreciation and amortization cited in MD&A. The company also reported foreign-exchange losses associated in part with PST’s U.S.-dollar debt. PST realignment charges were $1.6 for the first half.
- Contingencies include $14.3 of PST civil, labor and tax matters assessed as reasonably possible but not probable, with no accrual recorded; a $1.9 environmental remediation accrual, with groundwater work expected to begin in Q3 2013 subject to approval; and warranty/recall liabilities of $4.8. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Other risks identified include customer or supplier disruption, vehicle-production changes, cost-reduction execution, acquisition integration, debt and covenant restrictions, and product liability or recall claims. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported sales growth reflects PST consolidation versus underlying volume, pricing and currency effects.
- Whether PST can meet the revised $195–$214 revenue outlook and improve profitability amid Brazilian economic and currency weakness.
- Cash conversion, liquidity and near-term repayment needs, particularly PST notes due in 2012 and other short-term debt, alongside the facility’s available borrowing capacity.
- Whether gross-margin gains and Electronics productivity improvements can offset SG&A, development costs, Control Devices mix pressure and commodity or foreign-exchange volatility.
- Potential outcomes and cash costs from PST contingencies, environmental remediation, product warranty/recall claims and the remaining purchase-accounting estimates.