Stoneridge, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statements are unaudited. Stoneridge designs and manufactures electrical and electronic systems and components for automotive, commercial, off-highway and agricultural vehicles. Its reportable segments are Control Devices, Electronics and Stoneridge Brazil.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $220.9 million | $191.3 million | $442.0 million | $385.1 million |
| Gross margin | 17.5% | 22.4% | 18.1% | 23.1% |
| Operating income (loss) | $(5.9) million | $26.7 million | $(8.9) million | $28.7 million |
| Net income (loss) | $(7.3) million | $19.8 million | $(15.0) million | $19.9 million |
| Diluted EPS | $(0.27) | $0.72 | $(0.55) | $0.73 |
Q2 sales increased 15.5%, and first-half sales increased 14.8%. Sales growth was led by Electronics, including customer recoveries for electronic-component spot buys and negotiated price increases. These recoveries and related spot-buy sales add to reported revenue, while management said most spot-buy costs were passed through to customers. Gross margin nevertheless contracted as material costs, inflation, foreign exchange and supply-chain disruption outweighed pricing and higher volumes.
Q2 2021 operating income included a $30.7 million gain on the Canton facility sale; the comparison therefore includes a significant prior-year one-time benefit. Segment sales in Q2 were $84.6 million for Control Devices (down 2.1%), $123.0 million for Electronics (up 36.6%) and $13.3 million for Stoneridge Brazil (down 10.4%). First-half segment sales were $168.6 million, $248.0 million and $25.4 million, respectively.
Six-month operating cash flow was $(17.8) million, versus $(22.6) million in 2021. Investing cash flow was $(11.4) million, compared with $21.0 million provided in 2021, which included Canton sale proceeds. Financing cash flow was $(13.5) million. Cash declined $44.9 million during the half to $40.7 million; management cited working-capital needs, particularly inventory, capital expenditures and debt repayments. Capital expenditures were $14.9 million.
At June 30, cash was $40.7 million (90.6% held outside the United States). Revolver borrowings were $157.8 million, down from $164.0 million at year-end; additional current borrowings were $4.2 million. The amended facility has $300 million of commitments, with approximately $142.2 million undrawn. Cash plus undrawn commitments totaled more than $181.2 million. Total shareholders’ equity was $272.5 million, down from $296.0 million at December 31, 2021.
Material changes and management commentary
- Electronics sales benefited from stronger commercial-vehicle and off-highway volumes, new product launches, negotiated price increases and $15.3 million of customer recoveries for spot-buy materials in Q2. Segment operating loss widened to $2.5 million, primarily on higher material costs, spot buys, inflation and adverse currency effects.
- Control Devices sales fell amid lower European automotive and commercial-vehicle volumes, including the PM sensor business exit. Operating income fell sharply versus Q2 2021, also reflecting the prior-year Canton facility gain.
- Stoneridge Brazil sales declined, but the segment returned to operating income, helped by favorable Brazilian indirect-tax adjustments and lower selling costs.
- A $3.7 million gain from unwinding net-investment hedges in May 2022 was included in other income; foreign-currency transaction losses partly offset it. The company also paid $8.3 million of Stoneridge Brazil earn-out consideration in April.
Outlook, risks and contingencies
The filing provides directional expectations, not a consolidated earnings or revenue forecast. Management expected 2022 Control Devices sales to increase from 2021, supported by anticipated production and electrified-vehicle program launches, and Electronics sales to increase on market volumes, new launches and MirrorEye demand. It expected Stoneridge Brazil revenue to be lower than 2021. Management anticipated continued supply-chain and semiconductor constraints, inflation and production volatility; customer price increases were expected to offset most, but not necessarily all, related costs. It expected ongoing spot-buy activity, with lower overall spot-buy costs in the second half, and intended to reduce elevated inventory to improve liquidity. Management also expected an elevated effective tax rate.
The February 2022 credit amendment reduced revolving commitments from $400 million to $300 million and established temporary covenant relief and additional restrictions through the period ending with the March 2023 compliance certificate. The company reported compliance with covenants at June 30, 2022. The facility matures in June 2024; future borrowing flexibility could be affected by financial performance. The filing reports no material change in previously disclosed risk factors and no material change in market-risk disclosures.
- Key risks include semiconductor and other component shortages, supplier availability and pricing, customer production changes, inflation and the ability to recover costs through pricing.
- Other exposures include foreign exchange movements, Russia-Ukraine-related geopolitical effects, customer or supplier losses, product warranty/recall claims, labor disruptions and debt covenants.
- Brazil civil, labor and tax contingencies totaled approximately $8.1 million and were assessed as reasonably possible but not probable; no provision was recorded. This includes a challenged Brazilian competition-authority fine.
- Product warranty and recall liabilities were $10.8 million. Sarasota groundwater remediation accruals were $0.3 million; the company also maintained a $1.5 million letter of credit for that site.
- Potential remaining PM sensor exit commercial settlements and legal fees were estimated at up to $4.2 million.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting that product liability, warranty and recall losses cannot be ruled out.
Important facts for investors to verify
- Whether customer pricing and spot-buy recoveries continue to offset rising material and supply-chain costs, and how much reported sales reflect pass-through activity.
- Inventory levels, working-capital needs and operating cash flow, given the first-half cash decline and cash used in operations.
- Compliance with amended credit covenants, remaining facility availability and liquidity under the company’s operating and production assumptions.
- Whether Electronics growth and MirrorEye launches translate into improved segment margins, and whether Control Devices and Brazil meet the stated directional outlook.
- Developments in the Brazilian contingencies, product warranty and recall claims, and potential PM sensor exit costs.