Stoneridge, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Stoneridge designs and manufactures electrical and electronic products for vehicle markets through its Control Devices, Electronics, and Stoneridge Brazil segments. Unless noted, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $181.7 million | $175.8 million | $566.8 million | $458.3 million |
| Gross margin | 19.8% | 26.2% | 22.0% | 22.8% |
| Operating income (loss) | $(8.9) million | $9.8 million | $19.8 million | $(13.3) million |
| Net income (loss) | $(10.4) million | $6.7 million | $9.6 million | $(11.5) million |
| Diluted earnings (loss) per share | $(0.38) | $0.25 | $0.35 | $(0.43) |
- Q3 sales grew 3.4%; Electronics sales increased 23.2% and Stoneridge Brazil sales increased 28.5%, while Control Devices sales fell 12.3%.
- For the first nine months, sales rose 23.7%, reflecting recovery from 2020 pandemic impacts and growth in Electronics and other markets. Results included a $30.7 million net gain on the Canton facility sale; this materially contributed to the return to year-to-date operating and net income.
- Q3 gross margin fell to 19.8% from 26.2%, mainly as supply-chain constraints, material price increases, freight costs and production volatility raised costs. Q3 operating loss also reflected higher design and development and SG&A expenses.
- Operating cash flow was $(19.7) million for the first nine months, versus $9.0 million in 2020, with increased cash tied up in inventory and other working capital. Investing activities provided $12.9 million, including Canton sale proceeds; financing activities used $14.7 million.
- Cash and equivalents were $50.0 million at September 30, down from $73.9 million at year-end 2020. Revolver borrowings were $130.0 million; additional current debt was $1.65 million. The company reported $268.3 million of undrawn credit commitments and stated cash plus undrawn commitments exceeded $318.3 million. It was in compliance with credit-facility covenants.
- Total assets were $626.7 million and shareholders’ equity was $297.7 million at September 30. Current assets were $357.1 million and current liabilities were $166.6 million.
Material changes and unusual items
- Q3 net income declined $17.1 million year over year, turning to a loss despite modest revenue growth. Management attributed the deterioration chiefly to supply-chain costs, lower gross margin, higher D&D spending and higher SG&A.
- The Canton facility sale generated $35.2 million of net proceeds and a $30.7 million gain in the first half of 2021. The PM sensor business was also sold; remaining supply and transition arrangements generated sales and service revenue.
- The Brazil earn-out liability was $6.9 million at September 30 and is uncapped, based on 2021 segment performance. Fair-value changes increased Q3 SG&A, according to management.
- The company recognized $6.7 million of income tax expense for the first nine months; the 41.3% effective tax rate was elevated by the Canton gain, jurisdictional earnings mix, valuation allowances and U.S. taxes on foreign earnings.
Outlook, risks and contingencies
- The filing gives no consolidated numerical sales or earnings guidance. Management expected supply-chain disruptions, semiconductor shortages, production volatility, incremental costs and gross-margin pressure to continue through the remainder of 2021.
- Management expected 2021 Electronics sales to increase from 2020 and described potential sales growth from MirrorEye launches in late 2021 and 2022, alongside higher D&D spending. It expected the effective tax rate to remain above normal for the rest of 2021 and return to previous rates in 2022.
- Key risks include semiconductor and component availability, commodity and freight costs, customer production changes, pricing pressure, foreign exchange exposure, customer or supplier concentration, debt covenants, product warranty/recall claims, and COVID-19-related disruption.
- Additional PM sensor exit settlement and legal costs were estimated at $1.4–$4.2 million. Brazilian civil, labor and tax contingencies of approximately $8.3 million were considered reasonably possible but not probable, so no provision was recorded. The company is contesting a Brazilian competition-authority ruling that included a $1.6 million fine. Sarasota groundwater remediation accruals were $434,000; product warranty and recall liabilities were $9.6 million.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether semiconductor and other supply constraints continue to limit customer production, sales volumes and margins.
- How much of year-to-date profitability depends on the one-time Canton facility gain, and the company’s underlying operating performance excluding it.
- Working-capital cash use, especially the inventory increase, and progress toward restoring positive operating cash flow.
- Revolver covenant compliance and available borrowing capacity if performance weakens; reported availability remains subject to facility terms.
- Final costs and timing for PM sensor settlements, the Brazil earn-out and Brazilian legal/tax contingencies.