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SRI > SEC Filings for SRI > Form 10-Q on 9-Aug-2012All Recent SEC Filings

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Form 10-Q for STONERIDGE INC


9-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of Stoneridge, Inc. (the "Company"). This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements.

Background

We are a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the commercial, automotive, agricultural, motorcycle and off-highway vehicle markets.

As of December 31, 2011, we completed the acquisition of an additional 24% controlling interest in PST. As a result, we now own 74% of the outstanding equity of PST, which is a Brazil-based electronics system provider focused on security, convenience and infotainment devices and services, primarily for the automotive and motorcycle markets. In exchange for the controlling interest in PST, we paid the sellers $29.7 million in cash and issued 1.9 million Common Shares of the Company. Prior to the acquisition of the additional interest, see Note 3 to the condensed consolidated financial statements, PST was an unconsolidated joint venture accounted for under the equity method of accounting. Subsequent to the acquisition, PST is a consolidated subsidiary of the Company. Because PST controlling interest was not acquired until December 31, 2011, PST's results of operations were not consolidated in the Company's statement of operations for the year ended December 31, 2011 but instead were included within equity in earnings of investees.

We are primarily organized by markets served and products produced. Under this structure, our operations have been aggregated into the following reportable segments:

Electronics

This segment includes results of operations that design and manufacture electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution.

Control Devices

This segment includes results of operations that design and manufacture sensors, switches, valves and actuators.

PST Eletrônica Ltda. ("PST")

This segment specializes in the design, manufacture and sale of electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices in South America. PST's results of operations are consolidated and included in the consolidated results of operations of the Company beginning on January 1, 2012 due to the acquisition of controlling interest as of December 31, 2011.

Second Quarter Overview

We had a net loss attributable to Stoneridge, Inc. and subsidiaries of $3.6 million for the second quarter of 2012 compared to net income attributable to Stoneridge, Inc. and subsidiaries of $3.4 million for the second quarter of 2011.

The decrease in second quarter 2012 earnings compared to the second quarter of 2011 was primarily due to loss at our PST segment and a decrease in profitability of our Control Devices segment, which more than offset the increased profitability of our Electronics segment.

The loss at our PST segment for the second quarter of 2012, which had been a 50% equity method investment in 2011, was due to a combination of lower sales volume resulting from a weakened Brazilian economy, an unfavorable change in mix of products sold, purchase accounting depreciation and amortization expense of $2.8 million, business realignment charges of $1.6 million and an unfavorable foreign currency translation.

The lower profitability of our Control Devices segment was primarily due to a change in mix of products sold, which more than offset the increase in sales volume.

The increased profitability of our Electronics segment was due to an increase in sales volume, improvements in labor productivity, premium freight, operating efficiencies and a fluctuation in foreign currency exchange rates, primarily the Mexican peso. These improvements in labor productivity and lower premium freight positively affected gross margin by $1.3 million. The net change in foreign currency exchange rates positively impacted our operating results by approximately $1.3 million during the current quarter. We continue to execute plans including reducing direct labor headcount and overtime and developing more efficient manufacturing processes to improve our operating efficiencies. These actions have reduced these types of costs which we expect will continue going forward.

Our second quarter 2012 net sales were positively affected by improvements in the North American automotive and agricultural vehicle markets. Production volumes in the North American automotive vehicle market increased during the second quarter of 2012 when compared to the second quarter of 2011. This automotive vehicle market production volume increase had a positive effect on our North American automotive vehicle market net sales of approximately $2.8 million, primarily within our Control Devices segment. Our 2012 second quarter net sales were further favorably affected by approximately $5.7 million, primarily within the Electronics segment, due to production volume increases within the agricultural vehicle market. The commercial vehicle market production volumes in North America improved during the second quarter of 2012 when compared to the prior year second quarter. These increases in net sales were unfavorably affected by foreign currency translation at our European Electronics operation of approximately $3.6 million during the second quarter of 2012 when compared to the second quarter of 2011.

Our selling, general and administrative expenses ("SG&A") increased $21.7 million, or 71.7%, from $30.3 million for the second quarter of 2011 to $52.0 million for the second quarter of 2012 primarily due to the acquisition of the additional controlling interest in PST, which had SG&A expenses of $18.6 million for the second quarter of 2012 including approximately $1.1 million of purchase accounting depreciation and amortization, $0.7 million of business realignment charges. In addition, we had a reduction in customer reimbursement for product development activities.

At June 30, 2012 and December 31, 2011, we maintained a cash and cash equivalents balance of $39.2 million and $78.7 million, respectively. Our cash balance at December 31, 2011 included $19.8 million which was used to pay for a portion of the acquisition of the additional interest in PST on January 5, 2012. As discussed in Note 6 to the condensed consolidated financial statements, at June 30, 2012 and December 31, 2011, we had $25.0 million and $38.0 million, respectively, in borrowings outstanding on our asset-based credit facility (the "credit facility"). At June 30, 2012 and December 31, 2011, we had undrawn borrowing capacity of $63.3 million and $29.5 million, respectively.

Outlook

The improvement in the North American automotive vehicle market had a favorable effect on our Control Devices segment's results. North American automotive vehicle production was 13.1 million units for 2011. For 2012, this production volume is forecasted to be in the range of 14.5 million to 15.0 million units. If this forecasted increase in production volume occurs, it will favorably affect our Control Devices segment.

The North American commercial vehicle market has experienced a slight improvement, but is expected to have continued weakness through 2012. The forecasted continued weakness in the commercial vehicle market combined with a continuation of lower expected sales to a significant customer in that market may negatively affect our Electronics segment. If actual production is lower than forecasted, it will negatively affect our Electronics segment.

Our North American automotive vehicle market has also experienced improvement in 2012. If the increase in forecasted production volume occurs, it will favorably affect our Electronics and Control Devices segments.

The lower volumes experienced in our European automotive vehicle market during the first half of 2012 are expected to continue for the second half. If this forecasted continued lower production volumes occurs, it will negatively affect our European Electronics segment.

Agricultural vehicle production increased for the second quarter of 2012 when compared to the second quarter of 2011, which favorably affected both our Electronics and Control Devices segments. We believe that this market will continue to improve during the remainder of 2012.

Our PST segment revenues are now expected to be in the range of $195.0 million to $214.0 million in 2012. This lower revenue range is due to the weakening of the Brazilian economy and an unfavorable foreign currency translation resulting from the depreciation of the Brazilian real against the U.S. dollar.

Our future results could be unfavorably affected by increased commodity prices, specifically copper. Copper prices fluctuated during 2011 and have continued to fluctuate in 2012. We entered into fixed price commodity contracts for a portion of our 2012 copper purchases and have a portion of our 2012 sales subject to copper surcharge billings which will mitigate some of the increase in our raw material costs. Our 2012 results could also be unfavorably affected by unfavorable foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Mexico, Sweden and Brazil. We have entered into foreign currency forward contracts to reduce our exposure related to the Mexican peso.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011



Condensed consolidated statements of operations as a percentage of net sales are
presented in the following table (in thousands):



                                                                                                 Dollar
                                                                                             increase /
Three months ended June 30                           2012                         2011       (decrease)

Net sales                         $ 234,265         100.0 %    $ 190,417         100.0 %   $     43,848

Costs and expenses:
Cost of goods sold                  180,606          77.1        152,699          80.2           27,907
Selling, general and
administrative                       52,042          22.2         30,305          15.9           21,737

Operating income                      1,617           0.7          7,413           3.9           (5,796 )

Interest expense, net                 5,162           2.2          4,289           2.3              873
Equity in earnings of investees         (97 )           -         (1,808 )        (0.9 )          1,711
Other expense, net                    2,734           1.2            534           0.3            2,200

Income (loss) before income
taxes                                (6,182 )        (2.7 )        4,398           2.3          (10,580 )

Provision (benefit) for income
taxes                                  (884 )        (0.4 )        1,158           0.6           (2,042 )

Net income (loss)                    (5,298 )        (2.3 )        3,240           1.7           (8,538 )

Net loss attributable to
noncontrolling interest              (1,740 )        (0.7 )         (124 )           -           (1,616 )

Net income (loss) attributable
to Stoneridge, Inc. and
subsidiaries                      $  (3,558 )        (1.6 )%   $   3,364           1.7 %   $     (6,922 )

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):

                                                                                    Dollar       Percent
Three months ended June 30                    2012                      2011      increase      increase

Electronics                  $ 127,227        54.3 %   $ 124,085        65.2 %   $   3,142           2.5 %
Control Devices                 68,564        29.3        66,332        34.8         2,232           3.4 %
PST                             38,474        16.4             -           -        38,474            NM
Total net sales              $ 234,265       100.0 %   $ 190,417       100.0 %   $  43,848          23.0 %

NM - not meaningful

Our Electronics segment sales were positively affected by increased volume in our served markets by approximately $4.1 million as well as new business for the second quarter of 2012 when compared to the prior year second quarter. The increase in net sales for our Electronics segment was primarily due to production volume increases in the agricultural vehicle market of $5.5 million during the second quarter of 2012 when compared to the prior year second quarter. Net sales within our Electronics segment were also favorably affected by volume increases for our European commercial vehicle products. Commercial vehicle market production volumes in Europe increased during the second quarter of 2012 when compared to the prior year second quarter. The increase in European commercial vehicle production positively affected net sales in our Electronics segment for the second quarter of 2012. The Electronics segment increase in net sales volume was partially offset by lower European automotive vehicle sales and an unfavorable foreign currency translation of approximately $3.6 million for the second quarter of 2012 when compared to the second quarter of 2011.

Our Control Devices segment sales were positively affected by increased volume in our served markets by approximately $3.6 million for the second quarter of 2012 when compared to the prior year second quarter. The increase in net sales for our Control Devices segment was primarily attributable to production volume increases at our major customers in the North American automotive vehicle market, which increased during the second quarter of 2012 when compared to the second quarter of 2011. Volume increases within the automotive vehicle market of our Control Devices segment increased net sales for the second quarter of 2012 by approximately $2.8 million, when compared to the prior year second quarter. In addition, our Control Devices net sales were approximately $0.7 million higher for the second quarter of 2012, when compared to the second quarter of 2011 as a result of production volume increases within the commercial vehicle market.

Our PST segment had revenue of $38.5 million for the second quarter of 2012. PST revenues were negatively impacted by a weakened Brazilian economy and an unfavorable foreign currency translation.

Net sales by geographic location are summarized in the following table (in thousands):

                                                                                                          Percent
                                                                                         Dollar        increase /
Three months ended June 30                      2012                        2011       increase        (decrease)
North America                $ 159,216          68.0 %   $ 147,608          77.5 %   $   11,608               7.9 %
South America                   38,474          16.4             -             -         38,474                NM
Europe and Other                36,575          15.6        42,809          22.5         (6,234 )           (14.6 )%
Total net sales              $ 234,265         100.0 %   $ 190,417         100.0 %   $   43,848              23.0 %

The North American geographic location consists of the results of our operations in the United States and Mexico.

The increase in North American net sales was primarily attributable to increased sales volume in our North American agricultural, automotive and commercial vehicle markets. These increased volume levels had a positive effect on our net sales for the second quarter of 2012 of $5.7 million, $2.8 million and $0.6 million for our North American agricultural, automotive and commercial vehicle markets, respectively.

Our net sales in South America were due to the acquisition of a controlling interest in PST such that PST's revenues are consolidated for the second quarter of 2012.

Our decrease in net sales in Europe and Other was primarily due to decreased sales volume of European automotive vehicle market products and an unfavorable foreign currency translation of approximately $3.5 million.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by $27.9 million primarily due to the acquisition of the additional controlling interest in PST, which had cost of goods sold of $24.8 million for second quarter of 2012 including purchase accounting inventory costs of $1.7 million and business realignment charges of $0.6 million, with the majority of the remaining increase attributable to the increase in sales in both our Electronics and Control Devices segments.

Our gross margin increased 3.1% for the second quarter of 2012 compared to 19.8% for the second quarter of 2011 primarily due to a higher gross margin of our newly consolidated PST segment which had a gross margin of 35.5%, improvements in labor productivity, a favorable fluctuation in foreign currency exchange rates, primarily the Mexican peso related to our North American operations, and lower overhead costs.

Our Electronics segment gross margin improved due to improvements in labor productivity, lower premium freight, a favorable fluctuation in foreign currency exchange rates, primarily the Mexican peso, and lower overhead costs. The improvement in labor productivity and premium freight positively affected gross margin by $1.3 million. The change in foreign exchange rates positively impacted our results by approximately $1.3 million during the current quarter.

Our Control Devices segment gross margin declined as it was negatively impacted by a change in mix of products sold during the current quarter.

Selling, General and Administrative Expenses. SG&A expenses increased by $21.7 million for the second quarter of 2012 primarily due to the consolidation of the operations of PST which had SG&A expenses of $18.6 million including purchase accounting depreciation and amortization of $1.1 million and business realignment charges of $0.7 million. Product development expenses included within SG&A increased by $5.2 million to $12.5 million for the second quarter of 2012 from $7.3 million for the second quarter of 2011 primarily due to PST's product development expenses which were $2.5 million for the second quarter of 2012. The majority of the remaining increase relates to reduced customer reimbursement for product development activities.

Interest Expense, net. Interest expense, net increased by $0.9 million during the second quarter of 2012 when compared to the same period in 2011 primarily due to additional interest of PST, which was $0.7 million for the second quarter of 2012 and a higher asset-based credit facility outstanding balance.

Equity in Earnings of Investees. Equity earnings of investees decreased by $1.7 million which was due to the acquisition of the additional controlling interest in PST as of December 31, 2011. Prior to the acquisition, PST was an unconsolidated joint venture accounted for under the equity method of accounting. As of and for the three months ended June 30, 2012, PST is a consolidated subsidiary of the Company. Equity earnings for PST were $1.6 million for the three months ended June 30, 2011. Equity earnings for Minda decreased from $0.2 million for the second quarter of 2011 to $0.1 million for the second quarter of 2012.

Other Expense, net. Other expense, net was $2.7 million expense for the three months ended June 30, 2012 compared to $0.5 million for the second quarter of 2011. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense, net on the condensed consolidated statement of operations. Our results for the three months ended June 30, 2012 were unfavorably affected due to the volatility in certain foreign exchange rates between periods compared to the second quarter of 2011. The majority of the increase relates to the foreign currency loss related to the translation of PST's U.S. dollar denominated debt resulting from an unfavorable change in exchange rates in the second quarter of 2012.

Income (Loss) Before Income Taxes. Income (loss) before income taxes is summarized in the following table by reportable segment (in thousands).

                                                                    Dollar          Percent
                                                                increase /       increase /
Three months ended June 30              2012         2011       (decrease)       (decrease)

Electronics                         $  2,354     $    464     $      1,890            407.3 %
Control Devices                        3,829        6,018           (2,189 )          (36.4 )%
PST                                   (8,124 )      1,595           (9,719 )         (609.3 )%
Other corporate activities              (259 )        151             (410 )         (271.5 )%
Corporate interest expense            (3,982 )     (3,830 )           (152 )           (4.0 )%
Income (loss) before income taxes   $ (6,182 )   $  4,398     $    (10,580 )         (240.6 )%

The increase in income before taxes in the Electronics reportable segment was primarily due to increased sales volume in the second quarter of 2012 when compared to the second quarter of 2011. Production volume increases favorably affected our net sales within the Electronics segment by approximately $4.1 million for the second quarter of 2012 when compared to the prior year second quarter. Also, our Electronics reportable segment was positively affected by improvements in labor productivity, premium freight, a fluctuation in foreign currency exchange rates, primarily the Mexican peso. The improvement in labor productivity and premium freight that positively affected our results totaled $1.3 million. The change in foreign exchange rates positively impacted our results by approximately $1.3 million during the current quarter. Our Electronics segment was negatively impacted by higher product development costs of $1.5 million primarily due to reduced customer reimbursement.

The decrease in income before income taxes in our Control Devices segment during the second quarter of 2012 was due to a change in mix of products sold and reduced customer reimbursement for product development activities which more than offset the increase in sales.

The loss at our PST segment was primarily due to lower sales volume as a result of a weakened Brazilian economy, an unfavorable change in mix of products sold, depreciation and amortization expense related to purchase accounting adjustments for inventory, property, plant and equipment and intangible assets of $2.8 million, business realignment charges of $1.3 million and an unfavorable change in foreign currency translation.

The decrease in income before income taxes from Other corporate activities was primarily the result of losses on foreign currency.

Income (loss) before income taxes by geographic location is summarized in the following table (in thousands):

                                                                                            Dollar          Percent
                                                                                        increase /       increase /
Three months ended June 30                      2012                         2011       (decrease)       (decrease)

North America                $   2,338         (37.8 )%   $     515          11.7 %   $      1,823            354.4 %
South America                   (8,124 )       131.4          1,595          36.3           (9,719 )         (609.5 )%
Europe and Other                  (396 )         6.4          2,288          52.0           (2,685 )         (117.3 )%
Income (loss) before
income taxes                 $  (6,182 )       100.0 %    $   4,398         100.0 %   $    (10,581 )         (240.6 )%

North American income before income taxes includes interest expense, net of approximately $3.9 million and $3.7 million for the quarters ended June, 2012 and 2011, respectively.

Our North American results improved, primarily as a result of increased sales volume in the North American agriculture, automotive and commercial vehicle markets and lower operating costs related to improvements in labor productivity and premium freight during the second quarter of 2012 as compared to 2011. The improvements were partially offset by an unfavorable change in mix of products sold.

The decrease in profitability within our South American results was primarily due to lower sales volume as a result of a weakened Brazilian economy, an unfavorable change in mix of products sold, depreciation and amortization expense related to purchase accounting adjustments for inventory, property, plant and equipment and intangible assets of $2.8 million, business realignment charges of $1.3 million and an unfavorable change in foreign currency translation.

Our European and Other results declined due to a combination of decreased sales volume of European automotive vehicle market products and an unfavorable change in foreign currency translation in the current period.

Provision (Benefit) for Income Taxes. We recognized an income tax (benefit) expense of ($0.9) million and $1.2 million for federal, state and foreign income taxes for the second quarter of 2012 and 2011, respectively, primarily due to a loss before taxes in the current period compared to income for the same quarter of 2011. The decrease in the effective tax rate from 26.3% for the second quarter of 2011 to (14.3)% for the second quarter of 2012 was attributable to the negative impact of recognizing a tax benefit for the PST loss at a tax vote significantly lower than the U.S. statutory tax vote.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011



Condensed consolidated statements of operations as a percentage of net sales are
presented in the following table (in thousands):

                                                                                               Dollar
                                                                                            increase/
Six months ended june 30                             2012                        2011      (decrease)

Net sales                         $ 496,532         100.0 %   $ 383,461         100.0 %   $   113,071

Costs and Expenses:
Cost of goods sold                  377,735          76.1       306,453          79.9          71,282
Selling, general and
administrative                      105,331          21.2        62,895          16.4          42,436

Operating Income                     13,466           2.7        14,113           3.7            (647 )

Interest expense, net                10,517           2.1         8,555           2.2           1,962
Equity in earnings of investees        (236 )        (0.1 )      (3,724 )        (1.0 )         3,488
Other expense, net                    2,403           0.5         1,533           0.4             870

Income before income taxes              782           0.2         7,749           2.1          (6,967 )

Provision for income taxes              334           0.1         1,835           0.5          (1,501 )

Net income                              448           0.1         5,914           1.6          (5,466 )

Net loss attributable to
noncontrolling interest              (1,873 )        (0.4 )        (339 )           -          (1,534 )

Net income attributable to
Stoneridge, Inc. and
subsidiaries                      $   2,321           0.5 %   $   6,253           1.6 %   $    (3,932 )

Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):

. . .
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