Stoneridge, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Stoneridge designs and manufactures electrical and electronic systems and components for automotive, commercial, off-highway and agricultural vehicle markets. Its reportable segments are Control Devices, Electronics and Stoneridge Brazil.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $241.3 million | $221.1 million |
| Gross margin | 17.7% | 18.7% |
| Operating loss | $4.0 million | $3.0 million |
| Net loss | $7.4 million | $7.7 million |
| Diluted loss per share | $0.27 | $0.28 |
| Cash used for operating activities | $9.2 million | $19.8 million |
| Capital expenditures, including intangibles | $10.1 million | $7.4 million |
Sales increased 9.2% year over year, while gross margin declined and operating loss widened. Net loss improved modestly, helped by higher sales contribution and a $0.7 million income tax benefit; higher realignment and interest costs partly offset those gains. Interest expense rose to $2.7 million from $1.8 million, primarily from higher benchmark rates on floating-rate debt. Operating cash use improved year over year but remained negative; higher receivables and inventory were significant cash uses.
At March 31, cash was $35.2 million, down from $54.8 million at year-end. Total debt was approximately $168.8 million, including $167.4 million outstanding on the revolving facility and $1.5 million of current debt. The $300 million facility had approximately $132.6 million of undrawn commitments. Current assets were $423.1 million and current liabilities were $202.0 million. Management reported compliance with facility covenants at quarter-end.
Business performance and changes
- Electronics: Sales rose 12.9% to $141.1 million, primarily on higher European and North American commercial vehicle volumes and product launches. Segment operating income improved to $1.4 million from a $2.7 million loss.
- Control Devices: Sales rose 2.2% to $85.9 million, but operating income fell to $2.1 million from $6.8 million, reflecting higher material costs and unfavorable mix.
- Stoneridge Brazil: Sales increased 18.4% to $14.3 million and operating income rose to $1.3 million from $0.5 million, driven by OEM products and tracking devices.
- North American sales increased 19.2% to $123.7 million; Europe and Other sales declined 1.8% to $103.3 million, including adverse currency translation and lower spot-buy recoveries.
Management attributed improved sales to stronger volumes, better material availability and customer production schedules, as well as negotiated price increases. Gross margin nevertheless fell from 18.7% to 17.7%, with inflation, foreign exchange and mix pressures. Electronic-component spot-buy activity contributed $9.1 million to Q1 sales and related costs were mostly passed through to customers.
Outlook, risks and unusual items
Management expects 2023 revenue growth, supported by new product launches, commercial vehicle demand, electrification-related content and the planned North American OEM launch of MirrorEye. It cited an external forecast for North American automotive production of 15.1 million units in 2023, compared with 14.3 million in 2022. The filing does not provide a consolidated numerical revenue or earnings forecast. Management expects material-cost inflation and higher interest expense to continue to pressure results; supply chain constraints, labor and input costs, production volatility, foreign exchange and customer price recoveries remain important uncertainties.
Amendment No. 4 to the credit agreement, entered into March 1, 2023, temporarily adjusted leverage and interest-coverage covenant thresholds through the period tied to delivery of the September 2023 compliance certificate and added restrictions, including on restricted payments and acquisitions. Management said the company was compliant at March 31 but warned that weaker-than-expected performance could limit future borrowing flexibility.
Q1 included $1.3 million of business realignment charges and a $0.9 million gain on disposal of fixed assets. The product warranty and recall reserve increased to $16.0 million from $13.5 million at year-end. Additional potential settlements and legal fees related to the PM sensor product-line exit were estimated at up to $4.2 million. Brazilian civil, labor and non-income-tax contingencies of approximately $9.4 million were assessed as reasonably possible, not probable, and were not accrued. Groundwater remediation liabilities were $0.3 million.
Other disclosed risks include dependence on suppliers and semiconductor availability, inflation and customer price recovery, customer or supplier concentration, vehicle production levels, foreign exchange, product warranty/recall and liability claims, cybersecurity, and the company’s debt and covenant restrictions. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing and customer recoveries continue to offset material, labor and spot-buy costs, and whether gross margins recover.
- Progress in reducing inventory and working-capital needs, and the company’s ability to generate operating cash flow.
- Future covenant compliance, borrowing availability and interest expense under the amended revolving facility.
- Whether projected segment growth and product launches materialize, particularly in Electronics and Control Devices.
- Developments in Brazilian contingencies, product warranty and recall claims, and remaining PM sensor exit costs.