Stoneridge, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Stoneridge designs and manufactures electrical and electronic systems and components for automotive, commercial, off-highway and agricultural vehicle markets.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $221.1 million | $193.8 million; up 14.1% |
| Gross margin | 18.7% | 23.8% |
| Operating income (loss) | $(3.0) million | $2.1 million |
| Net income (loss) | $(7.7) million; $(0.28) per diluted share | $0.1 million; $0.00 per diluted share |
| Cash from operating activities | $(19.8) million | $(17.1) million |
| Capital expenditures | $7.4 million | $7.7 million cash-flow statement amount |
| Cash and cash equivalents | $41.4 million at March 31 | $85.5 million at December 31, 2021 |
| Debt | $152.9 million total, including $147.7 million on revolving facility | $169.2 million total at December 31, 2021 |
Cost of goods sold rose to $179.6 million from $147.7 million, and material costs increased to 62.3% of sales from 54.8%. Cash declined by $44.2 million during the quarter, reflecting working-capital needs, capital spending and net repayments on the credit facility. Inventory was $148.4 million, up from $138.1 million at year-end. The company reported $152.3 million of undrawn credit commitments; cash plus undrawn commitments exceeded $192 million.
Sales growth was led by Electronics, up 51.0% to $125.0 million, including $24.4 million of customer recoveries for semiconductor spot buys and $4.0 million of negotiated price increases. Control Devices sales fell 15.6% to $84.1 million; Stoneridge Brazil sales rose 5.6% to $12.0 million. Electronics reported a $2.7 million operating loss, Control Devices $6.8 million operating income, and Brazil $0.5 million operating income.
Material changes and management commentary
- Despite higher sales, operating results deteriorated as supply-chain disruption, semiconductor spot purchases and material inflation compressed gross margin. Production shutdowns and changes to customer forecasts also affected results.
- Management said customer pricing actions recovered a large portion of incremental material and supply-chain costs, while work continued on further pricing and cost-reduction measures. Spot-buy revenue and its associated costs are passed through to customers; the company cannot predict the activity’s duration or magnitude.
- Cash used in operations increased year over year, primarily due to lower net income and working-capital investment. Prepaid expenses and other assets also contributed to cash use.
- Interest expense was $1.8 million, broadly unchanged. Other expense rose to $1.3 million, principally reflecting foreign-currency transaction losses. The company recorded $1.5 million of income-tax expense despite its pretax loss, in part because certain tax losses receive no benefit due to valuation allowances.
Outlook, risks and unusual items
- Management expects supply-chain disruptions, semiconductor shortages, inflation and production volatility to continue pressuring 2022 gross margin. It expects higher 2022 sales in Control Devices and Electronics, subject to supply constraints, and expects Electronics margin to improve sequentially and operating income to be above break-even for 2022. No specific consolidated revenue or earnings forecast is provided.
- Management intends to reduce elevated inventory through procurement changes to improve liquidity. It expects 2022 effective tax rate to remain elevated due to losses without recognized tax benefits in some jurisdictions.
- A February 2022 credit amendment reduced revolving commitments from $400 million to $300 million and introduced temporary covenant relief and additional restrictions through the specified period, expected to run until delivery of the March 2023 quarter compliance certificate. The company reported covenant compliance at March 31, 2022. Borrowing availability may nevertheless be constrained by financial performance and covenant terms.
- Contingencies include Brazilian civil, labor and non-income-tax claims of approximately $10.1 million deemed reasonably possible but not probable, for which no provision was recorded; this includes a disputed CADE fine. The company also disclosed up to $4.2 million of potential remaining PM sensor exit settlement and legal costs. It considers ordinary-course litigation unlikely to have a material adverse effect, but outcomes are uncertain.
- The company’s $8.7 million Stoneridge Brazil earn-out liability at quarter-end was paid in Q2 2022. A prior-year PM sensor disposal and related restructuring, and the 2021 Canton facility sale, affect comparability; no PM sensor exit expense was recorded in Q1 2022.
- Key risks include supplier and component availability, material-cost inflation, vehicle production changes, customer pricing recovery, foreign-exchange movements, COVID-19 and geopolitical impacts including the Russia-Ukraine conflict. The filing states disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing recoveries and cost actions can restore margins as spot-buy activity and supply constraints evolve.
- Inventory reduction, operating cash flow and cash levels, alongside the company’s ability to maintain covenant compliance and borrowing access.
- Progress toward management’s 2022 Electronics outlook and the assumptions behind segment volume expectations.
- Developments in Brazilian contingencies, PM sensor exit settlements and other warranty, recall or legal exposures.