Stoneridge(SRI) - 2023 Q4 - Annual Report

Part I Business Stoneridge designs and manufactures engineered electrical and electronic systems, strategically shifting towards smart products, with commercial vehicles as its largest end market Overview and Strategy Stoneridge, founded in 1965, strategically shifted to smart products, now nearly 80% of sales, focusing on next-generation vehicle systems - Stoneridge is a global designer and manufacturer of highly engineered electrical and electronic systems for automotive, commercial, off-highway, and agricultural vehicle markets[14] - The company strategically shifted its product portfolio towards 'smart products' with embedded electronics, increasing content from over 50% of sales in 2014 to almost 80% in 2023[16] - Key growth drivers include the MirrorEye camera monitor system and the SE5000 Smart 2 tachograph product in European and North American commercial vehicle markets[21] Segments and Products Stoneridge operates three segments: Control Devices (automotive), Electronics (commercial vehicle), and Stoneridge Brazil (South America), with commercial vehicles as the largest end market - The company's business is conducted in three reportable segments: Control Devices, Electronics, and Stoneridge Brazil[22] - Control Devices manufactures actuators, sensors, switches, and connectors, primarily for the automotive market[23] - Electronics designs driver information systems, vision/safety systems, and ECUs, principally for the commercial vehicle market[24] - Stoneridge Brazil specializes in vehicle tracking, security alarms, and infotainment for the South American market[25] Net Sales by Principal End Market | Principal End Markets | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Commercial vehicle | 51% | 48% | 39% | | Automotive | 31% | 34% | 41% | | Off-highway and other | 12% | 12% | 12% | | Aftermarket distributors and monitoring services | 6% | 6% | 8% | Customers and Competition Stoneridge faces significant customer concentration and operates in highly competitive markets, competing on technology, price, quality, and service - The company has several significant customers, and the loss of any one would materially impact financial results; contracts are typically for the life of a vehicle model but can be terminated[31] - The markets for the company's products are highly competitive, with competition based on technological innovation, price, quality, performance, service, and delivery[33] Human Capital Management Stoneridge employs approximately 4,850 people globally, focusing on employee engagement, development, and DEI initiatives, with oversight from HR leadership - As of December 31, 2023, the company employed approximately 4,850 full-time and temporary employees in 14 countries, with about 86% located outside the United States[40] - The company has established talent management programs including engagement surveys, talent reviews, feedback and coaching, and training to foster employee engagement and development[41][42] - Stoneridge has a steering committee to drive diversity, equity, and inclusion (DEI) initiatives, reporting progress to executive leadership and the Board of Directors[43] Information about our Executive Officers This section provides a list of Stoneridge, Inc.'s executive officers, including their names, ages, positions, and professional biographies Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | James Zizelman | 63 | President, Chief Executive Officer and Director | | Matthew R. Horvath | 38 | Chief Financial Officer and Treasurer | | Susan C. Benedict | 57 | Chief Human Resources Officer and Assistant General Counsel | | Caetano R. Ferraiolo | 56 | President of the Stoneridge Brazil Division | | Robert J. Hartman Jr. | 57 | Chief Accounting Officer | | Salvatore D. Orsini | 54 | Chief Procurement Officer | | Peter Österberg | 55 | President of the Electronics Division | | Rajaey Kased | 44 | President of the Control Devices Division | Risk Factors Stoneridge faces market, customer concentration, financial, operational, and cybersecurity risks that could materially affect its business - The business is highly dependent on the cyclical automotive and commercial vehicle markets; an economic downturn could significantly reduce sales and profitability[54] - Significant customer concentration exists, with the top five customers comprising 55% of net sales in 2023; the loss of a principal customer would have a material adverse effect[57] - The company is dependent on the availability and price of raw materials, including semiconductors, memory chips, and resins, and has experienced difficulty obtaining adequate supplies[69] - International operations, accounting for approximately 49% of net sales in 2023, are subject to risks including political instability, trade policies, and currency exchange rate fluctuations[77] Cybersecurity Stoneridge implements a comprehensive cybersecurity risk management strategy, overseen by the Audit Committee, with no material threats identified to date - The company has processes to identify, assess, and monitor material risks from cybersecurity threats as part of its overall risk management strategy[95] - The Audit Committee of the Board of Directors is responsible for board-level oversight of cybersecurity risk and receives regular reports from the Chief Information Officer (CIO)[99] - The cybersecurity program is managed by the Director of Global IT Architecture and Cybersecurity and the CIO, both with over 30 years of relevant experience[100] - To date, no cybersecurity threats have materially affected or are reasonably likely to materially affect the company's business strategy, results of operations, or financial condition[98] Properties As of December 31, 2023, Stoneridge owned or leased seven manufacturing facilities totaling approximately 0.9 million square feet globally Key Manufacturing Facilities | Segment | Location | Ownership | Use | Square Footage | | :--- | :--- | :--- | :--- | :--- | | Control Devices | Lexington, Ohio | Owned | Manufacturing/Engineering | 219,612 | | Control Devices | Suzhou, China | Leased | Manufacturing/Engineering/Sales | 145,033 | | Electronics | Juarez, Mexico | Owned | Manufacturing/Engineering | 235,035 | | Electronics | Tallinn, Estonia | Leased | Manufacturing/Engineering | 85,911 | | Stoneridge Brazil | Manaus, Brazil | Owned | Manufacturing | 94,103 | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stoneridge common shares trade on the NYSE; the company repurchased limited shares for tax purposes and had no formal buyback program in 2023 or 2022 - The company's common shares are traded on the New York Stock Exchange (NYSE) under the symbol 'SRI'[107] - During the three months ended December 31, 2023, 1,236 common shares were delivered to the company by employees as payment for withholding taxes due upon vesting of equity awards[108] - The company did not have a Board-approved share repurchase program in effect in either 2023 or 2022[110] Management's Discussion and Analysis of Financial Condition and Results of Operations Stoneridge's 2023 net sales increased to $975.8 million, driven by Electronics, resulting in a reduced net loss despite anticipated market declines in 2024 Overview and Outlook In 2023, net sales increased to $975.9 million, reducing net loss, driven by new product launches, with 2024 outlook anticipating market outperformance despite volume decreases - In 2023, net sales increased by $75.9 million (8.4%), and operating income increased by $9.9 million[123] - The company reported a net loss of $5.2 million, or $(0.19) per diluted share, for 2023, an improvement from a net loss of $14.1 million, or $(0.52) per diluted share, in 2022[121][122] - The outlook for 2024 anticipates European and North American commercial vehicle end market volumes to decrease by 10.5% and 7.6%, respectively, though the Electronics segment expects to outperform[133] Year Ended December 31, 2023 Compared To Year Ended December 31, 2022 In 2023, net sales increased 8.4% to $975.8 million, driven by Electronics, improving gross margin and operating income, resulting in a reduced net loss Consolidated Statement of Operations Summary (in thousands) | Metric | 2023 | 2022 | Change ($) | | :--- | :--- | :--- | :--- | | Net sales | $975,818 | $899,923 | $75,895 | | Cost of goods sold | $774,512 | $724,997 | $49,515 | | Gross Margin % | 20.6% | 19.4% | +1.2 p.p. | | Operating income | $12,836 | $2,935 | $9,901 | | Net loss | $(5,183) | $(14,056) | $8,873 | Net Sales by Segment (in thousands) | Segment | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Control Devices | $342,065 | $342,596 | $(531) | (0.2)% | | Electronics | $576,539 | $505,097 | $71,442 | 14.1% | | Stoneridge Brazil | $57,214 | $52,230 | $4,984 | 9.5% | | Total net sales | $975,818 | $899,923 | $75,895 | 8.4% | Operating Income by Segment (in thousands) | Segment | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Control Devices | $13,582 | $23,917 | $(10,335) | (43.2)% | | Electronics | $27,309 | $5,128 | $22,181 | 432.5% | | Stoneridge Brazil | $4,454 | $3,150 | $1,304 | 41.4% | | Unallocated corporate | $(32,509) | $(29,260) | $(3,249) | (11.1)% | | Total operating income | $12,836 | $2,935 | $9,901 | 337.3% | Year Ended December 31, 2022 Compared To Year Ended December 31, 2021 In 2022, net sales increased 16.8% to $899.9 million, driven by Electronics, but gross margin declined, leading to a net loss due to higher costs and a prior-year gain absence Consolidated Statement of Operations Summary (in thousands) | Metric | 2022 | 2021 | Change ($) | | :--- | :--- | :--- | :--- | | Net sales | $899,923 | $770,462 | $129,461 | | Cost of goods sold | $724,997 | $603,604 | $121,393 | | Gross Margin % | 19.4% | 21.7% | -2.3 p.p. | | Operating income | $2,935 | $15,411 | $(12,476) | | Net (loss) income | $(14,056) | $3,406 | $(17,462) | Net Sales by Segment (in thousands) | Segment | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Control Devices | $342,596 | $355,775 | $(13,179) | (3.7)% | | Electronics | $505,097 | $357,910 | $147,187 | 41.1% | | Stoneridge Brazil | $52,230 | $56,777 | $(4,547) | (8.0)% | | Total net sales | $899,923 | $770,462 | $129,461 | 16.8% | - The decrease in 2022 operating income was primarily due to the absence of a $30.7 million gain on the sale of the Canton Facility recognized in 2021[176] Liquidity and Capital Resources As of December 31, 2023, cash decreased to $40.8 million due to capital expenditures and working capital, with $189.3 million drawn on the credit facility Summary of Cash Flows (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,946 | $6,806 | | Net cash used for investing activities | $(36,979) | $(28,581) | | Net cash provided by (used for) financing activities | $17,485 | $(7,297) | - Cash and cash equivalents decreased by $14.0 million during 2023, ending the year at $40.8 million[129][184] - The outstanding balance on the revolving Credit Facility was $189.3 million at December 31, 2023, with $85.7 million of undrawn commitments available[193][199] Critical Accounting Policies and Estimates Stoneridge's critical accounting policies, including revenue recognition, warranties, contingencies, and income taxes, require significant management judgment and estimates - Revenue Recognition: Revenue is recognized when control of products transfers to the customer, usually at shipment; the transaction price may include estimates of variable consideration[205] - Warranties: The warranty liability is based on management's best estimate, considering historical trends, production changes, and the status of existing claims, requiring significant judgment[206] - Income Taxes: Deferred tax assets are recognized but may be reduced by a valuation allowance if it is 'more likely than not' that some portion will not be realized, requiring significant judgment regarding future taxable income[209][210] Quantitative and Qualitative Disclosures About Market Risk Stoneridge is exposed to interest rate, currency exchange, and commodity price risks, with 98.9% of debt at floating rates and significant international currency exposure - Interest Rate Risk: With 98.9% of debt at floating rates, a 1.0% change in interest rates would alter annual interest expense by approximately $1.9 million[216] - Currency Exchange Rate Risk: A hypothetical 10.0% unidirectional change in currency exchange rates relative to the U.S. dollar would have changed income before income taxes for 2023 by approximately $3.0 million[219] - Commodity Price Risk: The company is subject to market risk from price fluctuations in commodities such as copper, steel, zinc, and resins[220] Financial Statements and Supplementary Data This section presents Stoneridge's audited consolidated financial statements for 2021-2023, including balance sheets, income statements, cash flows, and comprehensive notes Consolidated Financial Statements The consolidated financial statements for 2021-2023 show total assets increased to $679.9 million in 2023, with a net loss of $5.2 million Key Financial Metrics (in thousands) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Balance Sheet | | | | | Total Assets | $679,900 | $652,105 | N/A | | Total Liabilities | $392,183 | $371,163 | N/A | | Total Shareholders' Equity | $287,717 | $280,942 | $295,950 | | Income Statement | | | | | Net Sales | $975,818 | $899,923 | $770,462 | | Operating Income | $12,836 | $2,935 | $15,411 | | Net (Loss) Income | $(5,183) | $(14,056) | $3,406 | | Cash Flow | | | | | Net Cash from Operations | $4,946 | $6,806 | $(36,248) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial data, covering revenue, segments, debt, income taxes, and contingencies - Note 2 (Accounting Policies): Details critical estimates for warranties, contingencies, and income taxes, outlining policies for inventory valuation, goodwill impairment testing, and revenue recognition[241][243] - Note 3 (Revenue): Revenue is disaggregated by reportable segment and geographic location; in 2023, North America accounted for $495.5 million in sales, and Europe and Other for $423.1 million[304] - Note 5 (Debt): As of December 31, 2023, the company had $189.3 million outstanding on its revolving credit facility, which matures in November 2026[312][314] - Note 13 (Segment Reporting): Provides a financial summary by segment; in 2023, the Electronics segment generated $27.3 million in operating income, while the Control Devices segment generated $13.6 million[391] Controls and Procedures Management and independent auditors concluded that Stoneridge's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management, including the PEO and PFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[397] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework[398] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified attestation report on the Company's internal control over financial reporting as of December 31, 2023[400][403] Part III Directors, Executive Compensation, and Corporate Governance Information on directors, executive compensation, security ownership, and corporate governance is incorporated by reference from the May 14, 2024 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accounting fees is incorporated by reference from the company's Proxy Statement for the May 14, 2024 Annual Meeting of Shareholders[412][414][415] - The company has adopted a code of ethics for senior financial officers, which is available on its website[413] Part IV Exhibits, Financial Statement Schedule This section lists all documents filed as part of the Form 10-K, including financial statements, schedules, and various corporate and legal exhibits - This section lists the financial statements, financial statement schedules, and exhibits filed with the Form 10-K[421] - Key exhibits include the Fifth Amended and Restated Credit Agreement, various long-term incentive and compensation plans, and employment agreements with key executives[423][424] - Certifications from the Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[424]