Stoneridge, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited; amounts below are in millions of U.S. dollars unless stated otherwise.
Business context and results
Stoneridge designs and manufactures vehicle electrical and electronic systems. Its reportable segments are Control Devices, Electronics, and Stoneridge Brazil. Results rebounded from the unusually weak second quarter of 2020, when COVID-19 sharply reduced customer production and demand. The company also recognized a substantial gain from selling its Canton facility.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $191.3 | $99.5 | $385.1 | $282.5 |
| Gross margin | 22.4% | 13.3% | 23.1% | 20.8% |
| Operating income (loss) | $26.7 | $(26.8) | $28.7 | $(23.2) |
| Net income (loss) | $19.8 | $(21.7) | $19.9 | $(18.2) |
| Diluted earnings (loss) per share | $0.72 | $(0.81) | $0.73 | $(0.67) |
Financial position, cash flow and segment performance
- Q2 sales increased 92.2%; first-half sales increased 36.3%. Growth reflected recovery in vehicle production and higher volumes across all three segments. Q2 segment sales rose 83.7% in Control Devices, 97.9% in Electronics and 112.6% in Stoneridge Brazil.
- Q2 operating income included a $30.7 million net gain on the Canton facility sale. The gain materially affects comparisons and reported profitability. Q2 gross margin improved, but management said supply-chain costs and adverse product mix raised material costs as a share of sales to 55.7%, versus 53.0% a year earlier.
- Electronics and Stoneridge Brazil remained at operating losses in Q2: $1.8 million and $0.7 million, respectively. Control Devices reported $37.1 million operating income, including the Canton gain.
- First-half operating cash flow was negative $22.6 million, compared with negative $6.5 million in 2020. Working-capital use included $17.2 million for receivables and $24.8 million for inventory. Investing activities provided $21.0 million, including $35.2 million net proceeds from the Canton sale; financing activities used $15.5 million.
- Cash was $55.6 million at June 30, down from $73.9 million at year-end 2020. Revolver borrowings were $126.0 million, down from $136.0 million; additional current debt was $4.5 million. The $400 million credit facility had $272.3 million of undrawn commitments. Cash plus undrawn commitments was approximately $327.9 million.
- Current assets were $362.4 million and current liabilities $163.5 million. Total assets were $635.9 million and shareholders’ equity $313.6 million.
Material changes, outlook and risks
- The Canton facility sale closed June 17 for an adjusted purchase price of $37.9 million, producing $35.2 million net proceeds and a $30.7 million net gain. This is a significant nonrecurring item.
- The company agreed to sell its particulate matter sensor business for $4.0 million, subject to a $1.1 million post-closing inventory adjustment and assumption of certain liabilities. The Gen 2 asset transfer is expected after supply commitments are completed, by year-end 2021. The planned product-line exit is expected to generate a further $1.7 million to $4.9 million in costs through Q4 2021.
- Management expects higher 2021 sales in Control Devices and Electronics versus 2020, based on production forecasts and program launches. MirrorEye OEM launches are expected in Q4 2021 and 2022, with increased development spending in the second half of 2021 and first half of 2022. The filing provides no specific consolidated revenue or earnings guidance.
- Management expects supply-chain disruptions to continue affecting vehicle production in the second half of 2021 and anticipates related costs will pressure gross margin. Semiconductor and other component shortages, longer lead times, higher material and logistics costs, labor volatility, and OEM schedule changes were cited. Management also expected an above-normal effective tax rate in the second half of 2021, returning to previous levels in 2022.
- The company was in compliance with credit-facility covenants at June 30. COVID-related covenant relief included liquidity and cash limits, restrictions on certain payments and acquisitions, and modified covenant calculations during the relief period. The company cautioned that weaker-than-expected performance could constrain future borrowing flexibility.
- Brazilian civil, labor and non-income-tax contingencies totaling $9.3 million were assessed as reasonably possible, not probable, and were not accrued. This includes a $1.6 million CADE fine that the company is challenging. Environmental remediation liabilities were $0.5 million; the company also maintains a $1.5 million letter of credit for the former Sarasota site.
- Other risks include foreign-exchange exposure, commodity-price increases, customer pricing pressure, warranty or recall claims, and continuing COVID-19 effects. The company reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
Most important facts for investors to verify
- How much of reported earnings and operating margin depends on the $30.7 million Canton sale gain, and what underlying profitability looks like excluding it.
- Whether semiconductor and component shortages, cost inflation, and production volatility persist, and how they affect volumes, margins and cash conversion.
- Whether working-capital needs—particularly receivables and inventory—ease after the first-half cash outflow.
- Progress on the PM sensor exit, remaining costs, and completion of the asset transfer and customer supply commitments.
- Developments in Brazil’s unaccrued contingencies, the CADE challenge, the earn-out obligation, and foreign-currency exposure.
- Ongoing compliance with credit-facility covenants and availability of borrowing capacity under changing operating conditions.