Business context and reporting period
Stoneridge, Inc. designs and manufactures electrical and electronic products for automotive, commercial, off-highway and agricultural vehicles. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; comparative periods are the corresponding 2021 periods. Reportable segments are Control Devices, Electronics and Stoneridge Brazil. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $226.8 | $181.7 | $668.8 | $566.8 |
| Gross margin | 21.8% | 19.8% | 19.4% | 22.0% |
| Operating income (loss) | $5.9 | $(8.9) | $(3.0) | $19.8 |
| Net income (loss) | $0.7 | $(10.4) | $(14.3) | $9.6 |
| Diluted EPS | $0.03 | $(0.38) | $(0.52) | $0.35 |
| Operating cash flow | Not separately presented for the quarter | $(24.1) | $(19.7) |
- Q3 sales increased 24.8% year over year, led by Electronics, whose sales rose 59.9%. Control Devices sales rose 1.5%; Stoneridge Brazil sales declined 16.3%.
- Q3 operating results improved by $14.8 million year over year, primarily on higher sales and contribution. For the nine-month comparison, 2021 included a $30.7 million gain on the Canton facility sale; 2022 did not.
- Nine-month sales rose 18.0%, but gross margin fell 2.6 percentage points. Management cited higher material costs, inflation, foreign-exchange effects and supply-chain-related spot purchases.
- Cash and cash equivalents were $32.3 million at September 30, 2022, down from $85.5 million at year-end 2021. Total assets were $633.1 million and shareholders’ equity was $264.2 million.
- Debt included $165.7 million outstanding on the revolving facility and $2.8 million of current local borrowings. The facility commitment was reduced to $300 million; the company reported $134.3 million of undrawn commitments and total cash plus undrawn commitments above $164.9 million. Facility maturity is June 2024.
- Nine-month investing cash outflow was $19.7 million, including $22.9 million of capital expenditures; financing cash outflow was $5.5 million. Working capital, especially receivables and inventory, was a significant use of cash.
Material changes and unusual items
- Q3 revenue included $12.8 million of customer recoveries for electronic-component spot buys and $7.4 million of negotiated price increases. Spot-buy sales and related costs were largely passed through; management said the activity reduced Q3 gross margin by 1.3 percentage points.
- For the first nine months, spot-buy recoveries increased sales by $52.4 million and negotiated price increases by $15.2 million, while unfavorable currency translation reduced Electronics sales. The filing states spot buys were mostly passed through, but associated purchases and unrecovered costs affected margins.
- Other expense was $2.3 million in Q3, mainly from foreign-currency transaction losses. For the nine months, it was $3.1 million, including a $3.7 million gain from unwinding two net-investment hedges in May 2022, offset in part by currency losses.
- Q3 interest expense rose to $1.8 million from $1.4 million, reflecting higher benchmark rates on floating-rate debt. The company reported compliance with its credit-facility covenants at September 30.
- The Stoneridge Brazil earn-out payment of $8.3 million was made in April 2022. The nine-month cash-flow statement classifies $6.3 million in financing and $2.0 million in operating activities.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or cash-flow guidance. Management expected 2022 Electronics sales to increase versus 2021 and anticipated higher Control Devices sales, supported by production forecasts, program launches and customer pricing actions. It expected Stoneridge Brazil revenues to decline versus the prior year.
- Management described improving material availability and vehicle volumes in Q3 and expected further improvement in Q4, while cautioning that semiconductor shortages, supply-chain disruption, production volatility, inflation and COVID-19 could continue to pressure volumes and margins. It expects material-cost inflation to persist into 2023 and plans to pursue customer price increases and cost-recovery measures.
- Management cited MirrorEye demand and electrified-vehicle platforms as growth opportunities. It also noted continued product-development spending to support launches, with spending expected to stabilize as customer reimbursements increase.
- Liquidity and financing risks include cash consumption from working capital and capital expenditures, variable-rate debt, foreign-currency exposure and covenant constraints. A temporary covenant-relief period runs through delivery of the March 2023 quarter compliance certificate; the facility requires specified leverage and interest-coverage tests and restricts certain actions. The company cautioned future borrowing flexibility could be affected by weaker-than-expected performance.
- Brazil civil, labor and other tax contingencies totaling approximately $7.5 million were deemed reasonably possible but not probable, so no provision was recorded. The company is contesting a Brazilian competition-authority ruling that included a fine of approximately $1.5 million, included in that contingency amount.
- Product warranty and recall liabilities were $11.7 million at September 30, 2022, versus $9.8 million at year-end 2021. Sarasota groundwater remediation accruals were $0.3 million. Potential additional PM-sensor-exit settlements and legal fees were estimated at up to $4.2 million.
- Management stated disclosure controls were effective as of September 30, 2022, and reported no material changes in internal control over financial reporting or material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Q4 and 2023 sales, production volumes and gross margins improve as management expects, and how much of reported sales growth reflects pass-through spot buys and pricing rather than underlying volume.
- Whether customer recoveries and negotiated price increases fully offset material inflation, spot-buy costs, currency effects and other supply-chain expenses.
- Working-capital trends, inventory levels, operating cash flow and cash balances, given the $24.1 million operating cash outflow for the first nine months.
- Facility covenant headroom and borrowing availability under the amended $300 million revolving facility, particularly as specified covenant tests tighten into December 2022 and March 2023.
- Exposure to foreign exchange, variable interest rates, warranty and recall claims, and the outcome and potential cost of Brazilian contingencies and PM-sensor-related settlements.