Stoneridge, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Business context and results
Stoneridge designs and manufactures vehicle electrical and electronic components and systems. Its reportable segments are Control Devices, Electronics, and Stoneridge Brazil. COVID-19 disrupted customer production and demand, particularly in the first half of 2020. Management reported a strong sequential recovery in Q3 as end-market production rebounded.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $175.8 million | $203.4 million | $458.3 million | $643.9 million |
| Gross margin | 26.2% | 25.5% | 22.8% | 26.3% |
| Operating income (loss) | $9.8 million | $9.3 million | ($13.3 million) | $70.2 million |
| Net income (loss) | $6.7 million | $6.7 million | ($11.5 million) | $56.1 million |
| Diluted EPS | $0.25 | $0.24 | ($0.43) | $1.97 |
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $9.0 million, down from $20.5 million in 2019. Investing cash flow was a use of $25.0 million; financing cash flow provided $14.8 million. Cash decreased $1.1 million to $68.3 million.
- Capital expenditures, including intangibles, were $24.3 million in the cash flow statement, compared with $30.8 million in 2019.
- At September 30, cash was $68.3 million and revolver borrowings were $144.0 million, versus $69.4 million and $126.0 million, respectively, at year-end 2019. Total reported debt was approximately $151.6 million, including short-term and other debt.
- Undrawn revolver commitments were $254.3 million; cash plus undrawn commitments totaled approximately $322.6 million. The company reported compliance with amended facility covenants.
- The June 2020 credit amendment provides temporary covenant relief through delivery of the June 2021 compliance certificate, but requires liquidity of at least $150 million, caps cash at $130 million, restricts certain payments and acquisitions, and changes interest-rate pricing. Management cautioned that future borrowing flexibility could be limited if results weaken.
Changes versus comparable periods
- Q3 sales fell 13.6% year over year, while operating income rose 5.4% and net income was nearly flat. Sequentially, revenue increased 76.6% from Q2 2020 as vehicle production recovered.
- Q3 segment sales declined 8.0% in Control Devices, 19.4% in Electronics and 22.5% in Stoneridge Brazil. Electronics operating income fell to $0.6 million from $7.7 million; Control Devices and Brazil operating income improved.
- Nine-month sales declined 28.8%. The company recorded a $13.3 million operating loss, compared with $70.2 million of operating income in 2019. The comparison includes a $33.6 million 2019 gain on disposal of non-core products and a $6.5 million 2019 Brazilian indirect-tax benefit; lower 2020 volume and fixed-cost under-absorption also weighed on results.
- Nine-month gross margin contracted 3.5 percentage points, primarily from lower volumes, fixed-cost deleverage and COVID-related operating costs. Q3 gross margin improved year over year, helped by sales mix and lower restructuring costs.
Outlook, commentary and risks
- No full-year company revenue or EPS guidance is provided. Management expected 2020 North American automotive volumes to decline to 12.9 million units from 16.3 million in 2019, and expected significant declines in European and North American commercial-vehicle volumes. It expected second-half 2020 sales volumes to exceed first-half levels.
- For 2021, management anticipated growth in camera-based vision systems from MirrorEye launches and a large global instrument-cluster program. Brazil outlook remained exposed to economic contraction and currency movements, with new OEM program launches expected to support revenue.
- The company committed to exit its Control Devices particulate-matter sensor product line, with completion expected in Q3 2021. It recorded $2.9 million of related costs in the first nine months and estimated $1.3–$4.0 million of additional costs.
- Other restructuring includes the Canton facility closure and Electronics segment changes; additional costs were estimated at approximately $0.3 million and $0.5 million, respectively. A global salaried-workforce reduction of approximately 5% began in May 2020.
- Key risks include COVID-19 effects on demand, production and supply chains; customer and supplier concentration; currency and commodity exposure; pricing pressure; and the facility’s debt and covenant restrictions. Management stated the full duration and impact of the pandemic remained uncertain.
- Brazilian civil, labor, regulatory and tax contingencies of approximately $6.8 million were considered reasonably possible but not probable; no provision was recorded. The company also reported product warranty and recall liabilities of $12.2 million and an ongoing environmental remediation liability of $0.2 million.
- The Brazilian indirect-tax credits recognized in 2019 are being used to offset eligible taxes, but potential further challenge by Brazilian tax authorities could affect the amount ultimately realized. The company also has an uncapped Stoneridge Brazil earn-out obligation; its September 2020 fair value was $5.5 million.
Most important facts for investors to verify
- Whether the Q3 recovery in customer production and sales persists, especially in commercial vehicles and automotive markets.
- Cash generation, working-capital needs and capital spending relative to the $150 million minimum-liquidity covenant and available revolver capacity.
- Progress against the amended credit-facility covenants and the effect of borrowing costs and variable interest rates.
- Actual costs, timing and expected benefits of the PM sensor exit and other restructuring programs.
- Resolution and recoverability of Brazilian tax credits, contingencies and the Stoneridge Brazil earn-out.