Stoneridge, Inc (SRI)

Q3 2010 Earnings Call

October 22, 2010 10:00 am EST

Executives

TST Recommends

John C. Corey – President, CEO, Director

George E. Strickler – Executive Vice President, CFO, Treasurer

Kenneth A. Kure - Corporate Treasurer, Director of Finance

Analysts

Bob Nicholson - Pine Cobble Capital

Matthew Mishan - KeyBanc Capital Markets

Robert Kosowsky - Sidoti & Co.

Tony Venturino – Federated Investors, Inc.

Presentation

Operator

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Previous Statements by SRI
» Stoneridge Incorporated Q2 2010 Earnings Conference Call Transcript
» Stoneridge, Inc. Q1 2010 Earnings Call Transcript
» Stoneridge, Inc. Q4 2009 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Stoneridge Conference Call. My name is Stephanie and I'll be your operator for today. At this time all participants are in listen-only mode, later we will conduct a question-and-answer session. (Operator Instructions) I will now like to turn the conference over to your host for today Mr. Ken Kure, Corporate Treasurer and Director of Finance. You may proceed.

Kenneth A

.

Kure

Good morning everyone, and thank you for joining us on today's call. By now you should have received our third quarter earnings release. The release has been filed with the SEC and has been posted to our website at

www.stoneridge.com

. Joining me today on today's call are John Corey, our President and Chief Executive Officer and George Strickler our Chief Financial Officer.

Before I begin, I need to inform you that certain statements today may be made forward-looking statements. Forward-looking statements include statements that are not historical in nature and include information concerning our future results or plans. Although we believe that such statements are based upon fact or reasonable assumptions, you should understand that these statements are subject to risk and uncertainties and actual results may differ materially.

Additional information about such factors and uncertainties that could cause actual results to differ may be found in our 10-K filed with the Securities and Exchange Commission under the heading Forward-Looking Statements.

During today's call, we’ll also be referring to certain non-GAAP financial measures. Please see the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

John will begin the call with an update on our growth strategy and business development and his thoughts on the market conditions. George will discuss the financial and operational details of the quarter and future outlook.

After John and George have finished their formal remarks, we will then open up the call to questions. With that, I would like to turn the call over to John.

John C

.

Corey

Good morning, although our net sales or net income increased in the third quarter versus the prior year period, our results were negatively impacted by the additional costs associated with the launch of a major customer program and supply shortages of electronic chips and electrical connectors. I will cover these in more detail later. However, these issues are being resolved in the actions we are taking to support our customer commitments will benefit our future.

Our other methods of performing in the ranges as expected. Sales for the quarter were $160.4 million, up $42.4 million or 36% higher than the prior year quarter. Increases in North American automotive production and higher North American and European commercial vehicle production provided the revenue improvement over the prior year period.

Based on the continuing strength in the market, we are raising our 2010 sales guidance range to be between $630 to $640 million from our previous guidance of $605 to $625 million. We expect future increases in sales as our primary serve markets continue to improve in 2011. Our third quarter gross margin of 22.5% is slightly below our range of 23% to 25%. But it is the fifth quarter in a row where we are above the 22% gross margin. Third quarter gross profit includes $1.3 million of premium freight costs and $1.7 million from a core product launch in one facility.

Operating income for the quarter was $5 million. Finally, we recorded net income of $648,000 or an EPS of $0.03 a share which included a $1.3 million book provision for – of deferred tax of $0.05 per share due to improved financial results of PST in Brazil.

This book provision does not impact our cash taxes. Our quarter end cash position was $84.9 million and in early October we used $9 million of our cash position to retire a portion of the principal balance of our debt as part of the refinancing initiative which we completed on October 4. Cash on hand after the refinancing will support our future growth plans.

Now let me go into the details behind the operational shortfall in the third quarter which was primarily from our North American Electronics Group. As we reported in prior quarters, the industry has experienced shortages of electronic components and various electrical connectors. Vendor allocations and erratic deliveries; a condition we have dealt with for most of the year resulted in inefficiencies in our production.

To manage material supply and customer deliveries, we utilized expedited freight to obtain parts and to ship product to avoid line shut down situations at our customer's facilities. This cost us about $1.3 million for the quarter compared to last year. Our team has done a good job of managing a part shortage and matching the most immediate needs of the customers to the product availability.

However, managing customer demand and material availability we did not fill all customer orders on time and built a back order on some products. Where we did not do a good job was in the managing and execution of a major program launch. There are several reasons this launch did not go well including the part shortage discussed above. However, the majority of the poor launch issues are our responsibility.

The end result was we fell behind this customer's requirements and created a back order build up. As we progressed through the quarter we saw progress in our launch but it was clear that we would not significantly reduce the back up – the build up and back orders from both the launch and the part shortages unless we scheduled the plants to work additional overtime and added people to support our production rates.

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