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

Show all filings for STONERIDGE INC

Form 10-Q for STONERIDGE INC


9-Nov-2012

Quarterly Report


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

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 Eletrônica Ltda. ("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.

Because a controlling interest in PST was not acquired until the close of business on December 31, 2011, the results for the three and nine months ended September 30, 2011 were accounted for as an unconsolidated joint venture under the equity method of accounting such that our 50% portion of PST's after-tax earnings were included all within equity in earnings of investees in the statement of operations. See Note 3 to the condensed consolidated financial statements for additional details.

PST's results for the three and nine months ended September 30, 2012 were consolidated such that 100% of PST's operations are included in each line from sales through net income in the Company's statement of operations with the 26% noncontrolling interest presented in the net income (loss) attributable to noncontrolling interest line and used to compute our portion of PST's net income
(loss). Due to the acquisition of controlling interest the Company fair valued the assets and liabilities of PST as of December 31, 2011, the depreciation and amortization associated with these purchase accounting adjustments related to inventory, property, plant and equipment and finite lived intangibles have been included in the statement of operations for the three and nine months ended September 30, 2012.

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

This segment specializes in the design, manufacture and sale of electronic vehicle security alarms, convenience accessories, in-vehicle audio and video devices and vehicle tracking devices and monitoring services in South America. As noted above, PST's results of operations were 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.

Third Quarter Overview

Net income attributable to Stoneridge, Inc. was $0.4 million, or $0.02 per diluted share for the third quarter of 2012 compared to $4.5 million or $0.18 per diluted share for the third quarter of 2011.

The decrease in third quarter 2012 earnings compared to the third quarter of 2011 was primarily due to a decrease in profitability of our Electronics segment resulting from lower commercial vehicle sales volume, which was partially offset by lower labor and overhead costs as well as lower net product development expenses within selling, general and administrative expenses ("SG&A").

Our third quarter 2012 net sales were negatively affected by a decline in the North American commercial vehicle sales volume which decreased by $17.9 million during the third quarter of 2012 when compared to the third quarter of 2011 primarily related to a significant customer in that market. Offsetting the commercial vehicle market decline, our 2012 third quarter net sales increased by approximately $3.8 million from production volume increases within the agricultural vehicle market of our Electronics segment. Also, production volume increases in the automotive vehicle market had a positive effect on our North American automotive vehicle market net sales of approximately $1.3 million, within our Control Devices segment. Net sales were also unfavorably affected by foreign currency translation at our European Electronics operation of approximately $1.0 million during the third quarter of 2012 when compared to the third quarter of 2011.

Our SG&A expenses increased $14.2 million, or 46.5%, from $30.5 million for the third quarter of 2011 to $44.6 million for the third quarter of 2012. The increase was primarily due to the consolidation of PST's operations resulting from the acquisition of the additional controlling interest in PST, which had SG&A expenses of $15.5 million for the third quarter of 2012 including approximately $1.4 million of purchase accounting amortization, and was partially offset by lower SG&A expenses at both our Electronics and Control Devices segments, primarily related to lower net product development costs.

At September 30, 2012 and December 31, 2011, we maintained a cash and cash equivalents balance of $35.6 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 September 30, 2012 and December 31, 2011, we had $11.0 million and $38.0 million, respectively, in borrowings outstanding on our asset-based credit facility (the "Credit Facility"). At September 30, 2012 and December 31, 2011, we had undrawn borrowing capacity of $71.1 million and $29.5 million, respectively.

Outlook

The North American commercial vehicle market weakened during the first nine months of 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. The lower volumes experienced in our North American and European commercial vehicle markets during the first nine months of 2012 are expected to continue throughout the remainder of the year. If actual production is lower than forecasted, it will negatively affect our Electronics segment.

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 14.8 million to 15.0 million units. If this forecasted increase in production volume occurs, it will favorably affect our Control Devices segment.

Agricultural vehicle sales increased for the third quarter of 2012 when compared to the third quarter of 2011, which favorably affected our Electronics segment. 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 $185.0 million to $197.0 million in 2012, which are lower than previously forecasted, due to a weakened Brazilian economy and an unfavorable foreign currency translation resulting from the depreciation of the Brazilian real against the U.S. dollar.

Due to the competitive nature of the markets we serve, in the ordinary course of business we face pricing pressures from our customers. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations may be adversely affected.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 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 September 30                          2012                       2011        (decrease)

Net sales                              $ 219,256        100.0 %   $ 195,864        100.0 %   $      23,392

Costs and expenses:
Cost of goods sold                       168,018         76.6       158,413         80.9             9,605
Selling, general and administrative       44,623         20.4        30,454         15.5            14,169

Operating income                           6,615          3.0         6,997          3.6              (382 )

Interest expense, net                      4,878          2.2         4,247          2.2               631
Equity in earnings of investees             (207 )       (0.1 )      (1,353 )       (0.7 )           1,146
Other expense (income), net                  972          0.4        (1,697 )       (0.9 )           2,669

Income before income taxes                   972          0.5         5,800          3.0            (4,828 )

Provision for income taxes                   383          0.2         1,543          0.8            (1,160 )

Net income                                   589          0.3         4,257          2.2            (3,668 )

Net income (loss) attributable to
noncontrolling interest                      170          0.1          (272 )       (0.1 )             442

Net income attributable to
Stoneridge, Inc.                       $     419          0.2 %   $   4,529          2.3 %   $      (4,110 )

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 September 30                     2012                       2011      increase       increase

Electronics                       $ 110,679         50.4 %   $ 132,841         67.8 %   $ (22,162 )        (16.7 )%
Control Devices                      64,803         29.6        63,023         32.2         1,780            2.8 %
PST                                  43,774         20.0             -            -        43,774             NM
Total net sales                   $ 219,256        100.0 %   $ 195,864        100.0 %   $  23,392           11.9 %

NM - not meaningful

Our Electronics segment sales were negatively affected by decreased volume of approximately $20.3 million and an unfavorable foreign currency translation of approximately $1.0 million when compared to the third quarter of 2011. The decrease in net sales for our Electronics segment was due to volume decreases in the commercial market of $22.0 million, primarily related to a significant customer in the North American commercial vehicle market during the third quarter of 2012 when compared to the prior year third quarter. Also, the Electronics segment had a volume decrease of $2.2 million in the European automotive market. These were partially offset by a favorable volume increase of $3.7 million for our agricultural products in North America.

Our Control Devices segment sales increased primarily due to a $1.6 million increase in sales to customers in the North American automotive vehicle market when compared to the third quarter of 2011.

Our PST segment had sales of $43.8 million for the third quarter of 2012. PST sales 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):

                                                                                           Dollar        Percent
Three months ended September 30                     2012                       2011      increase       increase

North America                     $ 141,932         64.7 %   $ 154,671         79.0 %   $ (12,739 )         (8.2 )%
South America                        43,774         20.0             -            -        43,774             NM
Europe and Other                     33,550         15.3        41,193         21.0        (7,643 )        (18.6 )%
Total net sales                   $ 219,256        100.0 %   $ 195,864        100.0 %   $  23,392           11.9 %

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

The decrease in North American net sales was primarily attributable to decreased sales volume in our North American commercial vehicle market of $17.9 million. Offsetting this decreased volume were increased sales volume in our North American agricultural and automotive vehicle markets of $3.7 million and $1.3 million, respectively.

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

Our decrease in net sales in Europe and Other was primarily due to decreased sales volume of both European commercial and automotive vehicle market products and an unfavorable foreign currency translation of approximately $1.0 million.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by $9.6 million primarily due to the acquisition of the additional controlling interest in PST, which had cost of goods sold of $26.1 million. This was offset by lower cost of sales in our Electronics segment as a result of lower sales volume and lower labor and overhead costs.

Our gross margin increased 4.3% to 23.4% for the third quarter of 2012 compared to 19.1% for the third quarter of 2011 primarily due to the consolidation of PST in our 2012 results, which had a gross margin of 40.5% and lower labor and overhead costs.

Our Electronics segment gross margin decreased primarily due to lower sales, which were partially offset by lower labor and overhead costs.

Our Control Devices segment gross margin declined due to a change in mix of products sold during the current quarter.

Selling, General and Administrative Expenses. SG&A expenses increased by $14.2 million for the third quarter of 2012 primarily due to the consolidation of PST in our 2012 results which had SG&A expenses of $15.5 million including purchase accounting amortization of $1.4 million, which was partially offset by lower SG&A expenses in the Electronics and Control Devices segments. Product development expenses included within SG&A also increased by $0.2 million to $10.0 million for the third quarter of 2012 from $9.8 million for the third quarter of 2011 primarily due to PST's product development expenses which were $1.8 million for the third quarter of 2012, substantially offset by lower European Electronics net product development expenses.

Interest Expense, net. Interest expense, net increased by $0.6 million during the third quarter of 2012 when compared to the same period in 2011 primarily due to interest on PST's debt, which was $0.5 million for the third quarter of 2012.

Equity in Earnings of Investees. Equity earnings of investees decreased by $1.1 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 September 30, 2012, PST is a consolidated subsidiary of the Company. Equity earnings for PST were $1.0 million for the three months ended September 30, 2011. Equity earnings for Minda decreased by $0.2 million to $0.2 million for the third quarter of 2012 from $0.4 million for the third quarter of 2011.

Other Expense (Income), net. Other expense (income), net was $1.0 million expense for the three months ended September 30, 2012 compared to $1.7 million income for the third quarter of 2011. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense (income), net on the condensed consolidated statement of operations. Our results for the three months ended September 30, 2012 were unfavorably affected by the the volatility in certain foreign exchange rates, primarily the Mexican peso, between periods compared to the third quarter of 2011.

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

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