Stoneridge, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 6, 2020. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. Amounts below are in U.S. dollars; financial statement figures have been converted from thousands to millions where appropriate.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $183.0 million | $218.3 million |
| Gross margin | 24.8% | 27.9% |
| Operating income / margin | $3.7 million / 2.0% | $11.7 million / 5.3% |
| Net income | $3.5 million | $9.7 million |
| Diluted EPS | $0.13 | $0.33 |
| Operating cash flow | $(6.6) million | $(5.6) million |
| Cash and equivalents | $81.3 million | $69.4 million at December 31, 2019 |
| Revolving credit facility borrowings | $161.0 million | $126.0 million at December 31, 2019 |
Investing cash outflow was $7.1 million, including $7.1 million of capital expenditures and intangibles; financing cash inflow was $28.2 million, largely reflecting net revolver borrowings. Total debt, including the revolving facility, was approximately $163.8 million. The company reported about $239 million of undrawn revolving commitments and cash plus undrawn commitments exceeding $320 million. It was in compliance with credit covenants at quarter-end; the facility requires a maximum leverage ratio below 3.50:1 and minimum interest coverage above 3.50:1. Approximately 66.8% of cash was held outside the United States.
Other comprehensive loss was $20.8 million, primarily reflecting $17.1 million of foreign-currency translation losses and $3.7 million of derivative losses.
Material changes versus Q1 2019
- Sales declined $35.3 million, or 16.2%; operating income fell $8.0 million, or 68.7%, and net income declined $6.2 million.
- Control Devices sales fell 12.0% to $96.9 million and operating income fell 38.7% to $7.3 million. Lower North American volumes and the 2019 sale of non-core product lines contributed; some European and China automotive sales increased.
- Electronics sales declined 21.2% to $71.5 million and operating income fell 68.2% to $2.9 million, amid lower commercial-vehicle and off-highway volumes, unfavorable mix, legacy-product price reductions and currency effects.
- Stoneridge Brazil sales fell 15.9% to $14.6 million, mainly due to currency translation and lower Argentina aftermarket, audio and alarm sales. Operating income increased to $0.9 million, helped by a favorable earn-out fair-value adjustment.
- Gross margin contracted 3.1 percentage points. Management attributed pressure to lower volumes, fixed-cost under-absorption, product mix, material costs and price reductions. SG&A decreased $6.4 million, partly offsetting the operating decline.
Outlook, commentary and risks
- Management said COVID-19 had reduced demand and disrupted operations and supply chains, and expected lower overall margins until conditions moderate. It expected full-year 2020 results and financial condition to be adversely affected but did not provide company-level full-year revenue or earnings guidance.
- Management expected North American automotive production to decline from 16.3 million units in 2019 to 12.2 million in 2020, and expected significant declines in North American and European commercial-vehicle volumes. It anticipated lower Control Devices volumes and weaker served markets in Brazil, partly offset by new OEM program launches.
- The company drew additional revolver funds to maintain liquidity. Management cautioned that future borrowing capacity could be constrained if COVID-19 further weakens financial performance and demand. The share-repurchase program was temporarily suspended amid uncertainty.
- A Mexican government decree was expected to keep the Juarez manufacturing facility shut at least through May 30, 2020. On May 4, after quarter-end, the company reduced its global salaried workforce by about 5% and expected $1.5–$2.0 million of separation costs in Q2.
- The Canton, Massachusetts facility closed March 31, 2020. Q1 restructuring expense was $2.2 million; approximately $0.7 million of additional Canton costs and $0.75 million of Electronics restructuring costs were expected through 2020.
- Brazilian civil, labor and other non-income-tax contingencies totaled approximately $5.6 million and were assessed as reasonably possible, not probable; no provision was recorded. The company also disclosed product warranty, recall, product-liability and legal risks. Warranty and recall liabilities were $9.8 million at quarter-end.
- The company had received administrative approval to use Brazilian tax credits from a favorable court decision, but further Brazilian tax-authority clarification could affect the credits and their ultimate realization. The filing does not state a clear remaining realizable amount.
- Foreign-exchange exposure, commodity costs, customer pricing pressure, vehicle production levels, supplier continuity and debt covenants are material risks. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent quarterly sales, margins, cash flow and customer production trends as COVID-19 and facility restrictions evolve.
- Revolver availability, covenant headroom and liquidity needs if operating cash outflows persist.
- Actual restructuring and workforce-separation costs, savings and implementation progress.
- Whether Brazilian tax credits are fully usable and how the outstanding Brazilian contingencies and uncapped Stoneridge Brazil earn-out develop.
- Exposure to foreign currency movements, warranty or recall claims, and the timing or continuation of share repurchases.