Stoneridge, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Stoneridge designs and manufactures electronic and electrical products for automotive, commercial, off-highway and agricultural vehicles, through Control Devices, Electronics and Stoneridge Brazil. This is an annual report; the figures below are for the full year, not Q4 alone.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $770.5 million | $648.0 million |
| Gross margin | 21.7% | 23.8% |
| Operating income (loss) | $15.4 million | $(7.7) million |
| Net income (loss) | $3.4 million | $(8.0) million |
| Diluted EPS | $0.12 | $(0.29) |
| Cash from operating activities | $(36.2) million | $28.6 million |
| Cash and cash equivalents at year-end | $85.5 million | $73.9 million |
| Credit Facility borrowings at year-end | $164.0 million | $136.0 million |
Sales rose 18.9%. Electronics grew 38.9%, Control Devices 3.9% and Stoneridge Brazil 19.1%. Reported results benefited materially from a $30.7 million gain on sale of the Canton facility; other 2021 disposal gains included approximately $1.8 million on MSIL and $1.1 million on the PM sensor business. The filing attributes the return to net income principally to the Canton gain, partly offset by higher product-development and selling, general and administrative expenses.
Gross margin fell by 2.1 percentage points as material costs and supply-chain disruption, including semiconductor spot purchases, weighed on margins. The company reported $17.6 million of customer recoveries related to spot-bought materials; this activity was passed through to customers and recorded in both revenue and material costs. Design and development expense increased to $66.2 million from $49.4 million.
Operating cash use reflected a $51.3 million increase in cash tied up in inventory, alongside higher receivables. Investing activities provided $28.0 million, including proceeds from the Canton facility and MSIL sales; financing activities provided $22.9 million, primarily reflecting net facility borrowings. Year-end current assets were $410.8 million and current liabilities $173.1 million. Total debt, including current borrowings, was approximately $169.2 million.
Material changes and unusual items
- Sales rebounded from 2020, but remained below FY2019 sales of $834.3 million. FY2021 net income also remained well below FY2019’s $60.3 million.
- The $30.7 million Canton facility gain was a significant, non-recurring contributor to 2021 operating income. The facility sale generated $35.2 million in net proceeds.
- Stoneridge sold its minority interest in MSIL for $21.6 million, receiving net proceeds of $21.0 million and recognizing a $1.8 million gain. It also sold PM sensor assets; the strategic exit generated $2.4 million of restructuring expense in 2021, with up to $4.2 million of additional settlement and legal costs estimated.
- Net income was affected by a 72.6% effective tax rate, which the company attributed largely to jurisdictional earnings mix, valuation allowances and the MSIL sale tax impact.
- Estimated sourced future sales, or backlog, were $3.4 billion at year-end versus $3.0 billion in 2020. These estimates are not firm orders: customer volumes are not committed and programs can be changed or cancelled.
Liquidity, debt and outlook
At December 31, 2021, the $400 million revolving Credit Facility had $164.0 million outstanding and approximately $236.0 million of undrawn commitments, before outstanding letters of credit. About 96.9% of debt was floating-rate; the company estimated a 1 percentage-point rate change would affect annual interest expense by approximately $1.6 million. On February 28, 2022, after the reporting date, the company amended the facility, reducing commitments to $300 million and adding covenant relief and restrictions. The amendment includes leverage and interest-coverage tests and restrictions on further borrowing, acquisitions and restricted payments. The company reported compliance with covenants at December 31, 2021, as amended.
Management expected 2022 vehicle volumes to improve but warned that semiconductor shortages and other supply constraints would continue to disrupt production and pressure gross margin, particularly in the first half of 2022. It expected higher sales in Control Devices and Electronics, citing production forecasts, electrified-vehicle programs, commercial and off-highway markets, new launches and MirrorEye OEM launches. No specific company-wide revenue, earnings or margin guidance is provided. Management also expected development spending to moderate from elevated levels and the effective tax rate to return to previous rates.
Risks, contingencies and governance
- Key risks include semiconductor and component availability and cost, vehicle-production cyclicality, customer pricing pressure, customer concentration, program launch execution, foreign-exchange movements, floating-rate debt and restrictive credit covenants.
- The top five customers represented 34% of sales and the top ten 55%. Volvo and VW Group each represented 9% of sales. Approximately 49% of sales came from outside North America.
- Brazilian civil, labor and other tax contingencies of approximately $8.3 million were considered reasonably possible but not probable; no provision was recorded. The amount includes a challenged CADE fine of approximately $1.6 million. The company stated that ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging outcomes could differ from estimates.
- Product warranty and recall reserves were $9.8 million. The auditor identified this reserve as a critical audit matter because of estimation uncertainty. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Important facts for investors to verify
- How much of 2021 operating income and net income is repeatable after excluding the Canton gain and other disposal-related gains?
- Whether supply shortages, spot-buy costs and customer recoveries continue, and how they affect sales volumes, gross margin and working capital.
- Progress in reducing inventory and restoring positive operating cash flow after the $36.2 million operating cash outflow.
- Compliance with the amended Credit Facility covenants, borrowing availability under its reduced $300 million commitment, and the timing of debt repayment.
- Realization and timing of the $3.4 billion estimated awarded-program backlog, given that it is not a firm customer commitment.
- Resolution and potential cost of the PM sensor settlements, Brazilian contingencies and warranty or recall claims.