Stoneridge, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Stoneridge designs and manufactures electrical and electronic components and systems for vehicle markets. This unaudited filing covers the quarter and six months ended June 30, 2020. Its three segments are Control Devices, Electronics and Stoneridge Brazil. Management attributed the sharp deterioration in results primarily to COVID-19-related customer shutdowns and reduced vehicle production.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $99.5 | $222.2 | $282.5 | $440.5 |
| Operating income (loss) | $(26.8) | $49.2 | $(23.2) | $60.9 |
| Net income (loss) | $(21.7) | $39.8 | $(18.2) | $49.4 |
| Diluted earnings (loss) per share | $(0.81) | $1.41 | $(0.67) | $1.72 |
| Gross margin | 13.3% | 25.6% | 20.8% | 26.7% |
| Operating cash flow | Not separately presented for the quarter | $(6.5) | $6.7 |
Q2 sales fell 55.2% year over year; first-half sales declined 35.9%. Q2 operating margin was negative 26.9%, compared with positive 22.3% a year earlier. First-half operating margin was negative 8.1%, versus positive 13.8%. The 2019 comparisons included a $33.9 million gain on the disposal of non-core products and a $6.5 million Brazilian indirect-tax benefit, making the year-over-year earnings comparison additionally affected by prior-period items.
For the first half, investing cash outflow was $17.9 million, including $17.2 million of capital expenditures and intangible spending; financing cash inflow was $29.4 million. Cash increased by $3.0 million to $72.4 million, primarily supported by net borrowings. At June 30, current assets were $296.6 million and current liabilities were $104.0 million.
At June 30, borrowings under the revolving credit facility were $161.0 million, up from $126.0 million at year-end. The company also had $5.0 million of other debt, mostly current. Cash plus $237.0 million of undrawn facility commitments provided more than $309 million of reported available capital. Shareholders’ equity was $249.3 million, down from $289.9 million at December 31, 2019.
Material changes and segment trends
- Q2 sales decreased across all segments: Control Devices 58.8%, Electronics 50.3% and Stoneridge Brazil 57.8%. The first-half declines were 35.8%, 35.8% and 36.4%, respectively.
- Management cited customer and facility shutdowns, lower production volumes, adverse fixed-cost absorption and COVID-19-related incremental operating costs. The company began seeing production ramp-ups near quarter-end.
- Q2 gross margin fell 12.3 percentage points. Management said materials remained about 53% of sales, while overhead rose as a share of sales because of lower volumes and fixed costs.
- First-half results also reflect the absence of 2019 non-core product sales and disposal gains. Foreign currency movements adversely affected some sales and costs; other income benefited from foreign-currency transaction gains.
Outlook, risks and unusual items
- Management expected higher sales volumes in the second half of 2020 than in the first half, and anticipated global conditions strengthening through year-end. It nevertheless expected 2020 results and financial condition to be adversely affected by COVID-19. The filing gives no specific full-year revenue or earnings guidance.
- The credit facility amendment provides covenant relief through the delivery of the compliance certificate for Q2 2021, alongside restrictions including a minimum liquidity requirement of $150 million, a $130 million cap on aggregate cash, restricted-payment limits and lender approval requirements for certain acquisitions. The company reported covenant compliance at June 30, 2020.
- Stoneridge committed to exit its Control Devices particulate-matter sensor product line, targeting completion in Q3 2021. It recorded $2.6 million of related costs in the first half, including a $2.3 million asset impairment, and estimated additional costs of approximately $1.6 million to $4.7 million.
- Other restructuring included the Canton facility closure and Electronics realignment. Management estimated additional costs of up to $0.6 million for Canton and approximately $5.0 million for Electronics actions.
- The company reduced its global salaried workforce by approximately 5% and incurred $2.6 million of one-time separation costs in Q2. It suspended its new share repurchase program in April after spending $5.0 million in Q1.
- Risks include prolonged or renewed vehicle-production disruptions, supply-chain and workforce interruptions, foreign-exchange exposure, commodity costs, customer pricing pressure, and possible limits on borrowing flexibility if results weaken further.
- Brazilian civil, labor and non-income tax contingencies totaled approximately $5.6 million and were considered reasonably possible, not probable; no provision was recorded. The filing also describes ongoing product warranty and recall exposure. The company stated that ordinary-course legal matters were not expected to have a material adverse effect, but outcomes are uncertain.
Important facts for investors to verify
- Whether production recovery and the anticipated second-half volume improvement materialize, particularly in North America and Brazil.
- Cash generation, facility borrowing levels and compliance with the amended facility’s liquidity and other requirements.
- Actual remaining costs, timing and operational effects of the PM sensor exit and other restructuring programs.
- Developments in Brazilian tax-credit rights and the unaccrued Brazilian contingencies.
- Future warranty and recall claims, foreign-exchange effects, and the impact of continuing customer or supplier disruptions.