Stoneridge, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing was submitted November 1, 2023. Stoneridge designs and manufactures electrical and electronic systems and vehicle components, reported through Control Devices, Electronics and Stoneridge Brazil.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $238.2 | $226.8 | $746.3 | $668.8 |
| Gross margin | 22.0% | 21.8% | 20.9% | 19.4% |
| Operating income (loss) | $6.5 | $5.9 | $6.8 | $(3.0) |
| Operating margin | 2.7% | 2.6% | 0.9% | (0.4)% |
| Net income (loss) | $2.2 | $0.7 | $(8.2) | $(14.3) |
| Diluted earnings (loss) per share | $0.08 | $0.03 | $(0.30) | $(0.52) |
| Interest expense, net | $3.3 | $1.8 | $9.2 | $4.8 |
- Q3 sales increased 5.0%; nine-month sales rose 11.6%. Electronics led growth, with sales up 8.5% in Q3 and 17.1% year to date. Control Devices Q3 sales were nearly flat (+0.5%); Stoneridge Brazil rose 2.7%.
- Q3 operating income improved modestly, while nine-month operating results turned positive. Q3 net income benefited from higher sales, negotiated price increases and favorable foreign-exchange transaction results; higher interest, business realignment and engineering costs partly offset the gains.
- Cash used in operating activities was $5.7 million for the nine months, compared with $24.1 million used in 2022. Investing activities used $26.9 million, including $28.6 million of capital expenditures and intangibles. Financing activities provided $15.5 million.
- Cash was $36.8 million at September 30, down from $54.8 million at year-end 2022. Total debt was $186.0 million, including $183.9 million drawn on the revolving facility; cash less total debt implies net debt of about $149.2 million. The company reported $116.1 million of undrawn facility commitments.
- Current assets were $436.4 million and current liabilities $381.9 million. Inventory increased to $183.2 million from $152.6 million at year-end; management attributed cash usage partly to higher working capital and elevated inventory.
Changes, outlook and key risks
- Margins and costs: Nine-month gross margin improved year over year, with lower material cost as a share of sales and reduced electronic-component spot-buy activity. Q3 overhead costs, labor inflation, warranty expense and supplier support remained pressures. Spot-buy customer recoveries added $14.4 million to nine-month sales; management expects this activity to continue declining as supply normalizes.
- Market outlook: Management expects fourth-quarter 2023 softness in commercial vehicles and lower Control Devices volumes, partly from UAW-related customer stoppages and lower electrified-vehicle production expectations. Tentative labor agreements had been reached in late October, but management expected stoppage and restart effects to hurt Q4 sales and operating performance. It also forecast 2024 European and North American commercial-vehicle market volumes down 15.3% and 13.3%, respectively, while expecting Electronics sales to outperform those markets on product launches and program ramps. No company-wide quantified earnings or revenue guidance is provided in the filing.
- Costs and initiatives: Management expects inflationary input costs to persist into 2024, while pursuing customer price recoveries, manufacturing improvements and cost reductions. It expects Q4 net design-and-development spending to decline with lower launch activity, customer reimbursements and engineering realignment. Q3 business realignment charges were $1.2 million; nine-month charges were $4.4 million.
- Refinancing and liquidity: The $300 million revolving facility matures June 5, 2024. Borrowings bear variable interest; Q3 interest expense rose with benchmark rates. The company said refinancing was at an advanced stage and anticipated completion before issuance of its 2023 year-end financial statements, but gave no assurance. It stated that its ability to continue as a going concern depends on refinancing; failure to refinance could raise substantial-doubt and covenant-default concerns. It was in compliance with facility covenants at September 30.
- Contingencies: Brazilian civil, labor and tax matters totaling about $8.1 million were assessed as reasonably possible, not probable, and were not accrued; this includes a challenged CADE fine of about $1.6 million. A customer arbitration asserts warranty claims on discontinued PM sensor products; management said it did not currently consider a material loss probable. Product warranty and recall reserves were $18.7 million, up from $13.5 million at year-end.
- Other exposures: Risks include customer and vehicle-production levels, supplier availability and costs, inflation, foreign exchange, product warranty or recall claims, and debt refinancing. Cash was held predominantly outside the United States (94.5%). Management reported disclosure controls effective and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether the revolving-credit refinancing was completed on acceptable terms before the June 2024 maturity, and the resulting interest costs, covenants and available liquidity.
- Whether operating cash flow improves as inventory and working-capital requirements normalize; inventory remained elevated and nine-month operating cash flow was negative.
- Whether commercial-vehicle market declines, UAW-related production disruptions and launch ramps affect Q4 2023 and 2024 sales and margins as management anticipated.
- Whether pricing and cost actions continue to offset inflation, supplier support costs and higher labor, warranty and engineering expenses as spot-buy activity recedes.
- Developments in the Brazilian contingencies and PM sensor warranty arbitration, including any changes to loss assessments or recorded reserves.