Stoneridge, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filing dated February 27, 2020. Stoneridge designs and manufactures electronic and electrical vehicle components and systems through Control Devices, Electronics, and Stoneridge Brazil. Amounts below are U.S. dollars.
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $834.3 million | $866.2 million |
| Gross profit / margin | $213.7 million / 25.6% | $256.6 million / 29.6% |
| Operating income / margin | $71.3 million / 8.5% | $67.0 million / 7.7% |
| Net income attributable to Stoneridge | $60.3 million | $53.8 million |
| Diluted EPS | $2.13 | $1.85 |
| Cash from operations | $24.5 million | $80.8 million |
| Capital expenditures, including intangibles | $39.5 million | $29.0 million |
| Cash and cash equivalents at year-end | $69.4 million | $81.1 million |
| Revolving credit facility borrowings | $126.0 million | $96.0 million |
Net cash from operations less capital expenditures was approximately negative $15.0 million in 2019, versus positive $51.7 million in 2018. Year-end working capital was $192.7 million. Total debt, including the revolving facility and other borrowings, was approximately $129.1 million; cash less total debt was approximately negative $59.7 million. The company reported compliance with credit-facility covenants.
Business and material changes
- Revenue declined 3.7%. By segment, Control Devices sales fell 2.2%, Electronics fell 2.8%, and Stoneridge Brazil fell 15.8%. Weaker North American automotive volumes, European commercial vehicle sales, and Brazilian/Argentinian demand and currency effects weighed on results.
- Gross margin fell four percentage points, reflecting higher material costs, tariffs, product mix, low-margin transitional manufacturing for sold products, and $7.6 million of restructuring costs in cost of goods sold.
- Net income increased by $6.4 million despite lower sales and gross profit. Results included a $33.6 million net gain on the sale of non-core switches and connectors and a $6.5 million Brazilian indirect-tax recovery benefit. These items were partly offset by $12.5 million of Canton restructuring expense and weaker underlying sales and margins.
- Cash from operations fell $56.3 million, with higher working-capital use, including inventory builds and delayed collections, and payment of the Orlaco earn-out contributing. The company also spent $50.0 million on an accelerated share repurchase and received proceeds from the product-line disposal.
- Strategically, the company reported that “smart” products represented almost 68% of sales in 2019. It sold the non-core product lines for an initial $40.0 million, subject to a $1.6 million post-closing inventory adjustment, and expected to close and consolidate its Canton facility by March 31, 2020.
Outlook, risks, and contingencies
- Management did not provide formal consolidated earnings or revenue guidance. It expected 2020 North American automotive production to rise from 16.3 million to 16.7 million units, but expected North American and European commercial vehicle volumes to decline. It anticipated higher Stoneridge Brazil OEM revenue from new program launches and potential improvement with Brazil’s economy.
- As of the filing, operational limitations at the Suzhou, China facility from the coronavirus outbreak were expected to have a material impact in the first quarter of 2020; the overall duration and financial effect were uncertain.
- Management expected another $1.5–$1.9 million of Canton restructuring costs through 2020 and approximately $0.4 million of remaining Electronics restructuring costs.
- Key risks include vehicle-market cyclicality, customer concentration and customer ability to cancel or change program volumes, pricing pressure, production launches, supplier and component availability, tariffs, foreign exchange, and reliance on international operations. The top five customers represented 35% of 2019 sales; Ford alone represented 11%.
- The Brazilian tax-credit recovery could be challenged. A favorable decision allowed offset of eligible federal tax liabilities, with administrative approval received in January 2020, but further proceedings could affect the amount realized. Brazilian civil, labor, and other non-income-tax contingencies totaled about $7.3 million and were assessed as reasonably possible, not probable; no provision was recorded.
- The Brazil earn-out liability was valued at $12.0 million at year-end; the payment is uncapped and depends on Brazil’s financial performance in 2020 or 2021. The company also carried $10.8 million in product warranty and recall reserves.
- After year-end, the company entered into a $50.0 million interest-rate swap and authorized a further $50.0 million share-repurchase program. Citibank also completed final settlement of the prior accelerated repurchase, delivering 364,604 additional shares on February 27, 2020.
Important facts for investors to verify
- How much of 2019 earnings and operating-margin improvement is sustainable without the disposal gain and Brazilian tax recovery, and how the Canton closure affects future costs and margins.
- Whether working capital converts back to cash and whether operating cash flow can support capital spending, debt service, and repurchases.
- Actual 2020 vehicle volumes, program launches, coronavirus-related disruption, and supplier availability versus management’s expectations.
- Final realization of Brazilian tax credits and the timing and amount of the uncapped Brazil earn-out.
- Customer and market concentration, backlog conversion, and credit-facility leverage and covenant headroom. The $3.2 billion of estimated sourced future sales is not firm orders and may change or be cancelled.
Audit: Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and financial-reporting controls at year-end.