Stoneridge, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 2, 2023. Stoneridge designs and manufactures electrical and electronic products for automotive, commercial, off-highway and agricultural vehicles. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $266.8 | $220.9 | $508.1 | $442.0 |
| Gross margin | 22.7% | 17.5% | 20.3% | 18.1% |
| Operating income (loss) | $4.3 | $(5.9) | $0.3 | $(8.9) |
| Net income (loss) | $(3.0) | $(7.3) | $(10.4) | $(15.0) |
| Diluted loss per share | $(0.11) | $(0.27) | $(0.38) | $(0.55) |
| Operating cash flow | Not separately stated for the quarter | $(4.7) | $(17.8) |
Q2 sales increased 20.8% year over year, primarily on higher commercial-vehicle and automotive volumes and negotiated price increases. Electronics sales rose 29.9%, Control Devices 8.9%, and Stoneridge Brazil 11.7%. For the first half, sales increased 15.0%; Electronics rose 21.3%, Control Devices 5.6%, and Brazil 14.8%.
Q2 operating results improved to a profit, led by higher sales and improved Electronics contribution. Lower material-cost pressure and reduced spot-buy activity also supported gross margin. Increased design and development (D&D), selling, general and administrative costs, interest expense and foreign-currency transaction losses partly offset those gains. First-half operating income was near breakeven; Control Devices operating income declined while Electronics and Brazil improved.
At June 30, cash was $34.7, down from $54.8 at year-end 2022. Working capital increased, including accounts receivable of $185.3 and inventories of $175.3. First-half capital expenditures, including intangibles, were $18.0. The company used $20.1 of cash overall in the first half.
Revolving-credit-facility borrowings were $171.6, versus $167.8 at December 31, 2022, at an 8.00% interest rate. The facility matures June 5, 2024; $128.4 of undrawn commitments and $34.7 of cash were reported at June 30. The full facility balance was classified as current. The company reported covenant compliance at June 30, but said its ability to continue as a going concern is contingent on refinancing the facility.
Changes, outlook and risks
- Margins and costs: Q2 gross margin improved by 5.2 percentage points year over year; first-half gross margin rose 2.2 points. Management cited lower material-cost variances, negotiated pricing and lower spot-buy costs, while inflation, labor, warranty, launch and engineering costs remain pressures.
- Management outlook: For 2023, the company expects Control Devices sales to increase from 2022, Electronics sales to increase on commercial-vehicle demand and new product launches, and Brazil’s served markets to remain stable. It expects spot-buy activity to moderate but persist, inflationary costs to continue, higher interest expense, and engineering expense and customer reimbursements to normalize in the second half. No specific consolidated revenue or earnings guidance was provided.
- Refinancing and liquidity: Refinancing discussions were ongoing with no agreement reached at filing. Management expected to refinance before issuance of the 2023 annual financial statements, but gave no assurance an agreement would be reached. Failure to refinance could create substantial doubt about going concern and, as described by the company, could lead to a covenant breach and insufficient liquidity to repay debt.
- Other risks: Ongoing exposure includes supply-chain and semiconductor availability, inflation and input costs, customer production volatility, foreign-exchange movements, higher floating-rate interest, and possible UAW and Unifor labor-related disruption. The company also cited customer acceptance and execution risks for product launches.
- Contingencies and unusual items: A customer sought arbitration over warranty claims on PM sensor products from a line exited in 2019; management considered the claims overstated and did not believe a material loss was probable, while noting no assurance on outcome. Brazil civil, labor and tax contingencies of about $10.1 were reasonably possible but not probable and were not accrued. Warranty and recall reserves totaled $17.5. Groundwater-remediation accrual was $0.3. A 2022 $3.7 net-investment-hedge gain initially recorded in earnings was later reclassified to other comprehensive income; the company said the prior-period error was not material.
Most important facts for investors to verify
- Progress and final terms of refinancing the $171.6 revolving facility before its June 2024 maturity, including covenant conditions and available borrowing capacity.
- Whether operating cash flow improves as working capital and inventory are reduced; first-half operating cash use was $4.7.
- Durability of gross-margin improvement as inflation, labor, warranty, customer pricing recoveries and electronic-component spot buys evolve.
- Revenue and profitability contribution from commercial-vehicle demand and new product launches, particularly in Electronics.
- Outcome and potential exposure from the PM sensor arbitration and unaccrued Brazil contingencies.