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S&P Upgrades Stoneridge Rating to 'Positive'
NEW YORK -- Standard & Poor's Ratings Services has revised its outlook on Warren, Ohio-based auto and truck supplier Stoneridge Inc. to positive from stable. At the same time, all the ratings on the company, including the 'BB-' corporate credit rating, were affirmed.
"The outlook revision reflects our opinion that Stoneridge's profitability and cash flow could rise during 2013 to levels consistent with a higher corporate credit rating and that the company can sustain the improvement," said S&P credit analyst Lawrence Orlowski, in a prepared statement. "We currently project commercial-vehicle production in 2013 will rise modestly in North America (after increasing in 2012) and decline in Western Europe (after falling in 2012). Moreover, we expect light-vehicle production in North America to grow 3% in 2013 (after rising in 2012)."
In the first quarter, Stoneridge revenues were $235.7 million, down 10.1% year over year. The decrease in sales was partly the result of declines in volume for commercial-vehicle and agricultural products. Still, sales of commercial vehicles have risen sequentially over the past few years and suggest stabilization in this important market, Orlowski noted. Moreover, the average age of a commercial fleet is running at 6.7 years, making replacements more attractive to fleet owners as maintenance costs rise.
The gross margin in the quarter was 24.9% compared with 23.9% for all of 2012. “We expect gross margins to continue to improve as revenue returns to the key underlying business. Moreover, the company has been reducing costs in its North American Wiring, North American Instrumentation, and PST businesses, which we assume will result in $9 million to $11 million in savings in 2013. Additionally, the company has established agreements for copper recovery from substantially all of its customers,” the credit analyst said.
Stoneridge's geographical diversification has improved since it consolidated its PST business in Brazil. Regardless, most of its revenues come from North America. Sales in North America represent 65% of total revenue, South America 19%, and Europe/other 16%. Also, the company operates in four segments, which provide product diversification: electronics (17.5% of 2012 revenues), wiring (34.7%), control devices (28.6%), and PST (19.2%).
"We consider Stoneridge's business risk profile weak, reflecting its highly competitive and cyclical end markets," Orlowski said. "We believe these factors together limit the company's ability to mitigate adverse business, financial, or economic conditions."
In addition, Stoneridge's customer base is somewhat concentrated in that its largest single customer, Navistar International Corp., accounted for 17.5% of revenues in 2012. The Michigan-based automakers accounted for more than 10% of revenues and a majority of the company's North American light-vehicle-related business.
Stoneridge's senior secured debt now is rated 'BB-' with a recovery rating of '4', indicating the expectation of average (30%-50%) recovery in the event of default.
The rating outlook on Stoneridge is positive. "We believe there is at least a one-third probability that its improving business and financial risk profiles could support a higher rating over the next year," Orlowski said.
The outlook could be revised to stable if revenues fall or margins deteriorate, which would lead to declining credit measures, such as leverage increasing to more than 3.5 times on a sustained basis. This could occur if, for instance, revenues fall 5% in 2013 from 2012 results and gross margins decline to less than 24%. S&P also could lower the rating if the company generates negative free operating cash flow in 2013.
Published by The Business Journal, Youngstown, Ohio.
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