UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended September 30, 2016March 31, 2017

 

Commission file number: 001-13337

 

STONERIDGE, INC.

(Exact name of registrant as specified in its charter)

 

Ohio 34-1598949
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
9400 East Market Street, Warren, Ohio

39675 MacKenzie Drive, Suite 400, Novi, Michigan

 44484

48377

(Address of principal executive offices) (Zip Code)

 

 (330) 856-2443(248) 489-9300 
 Registrant's telephone number, including area code 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

¨YesxYes ¨No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

xYes¨No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, a small reporting company or an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨Accelerated filer xNon-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).¨YesxNo

 

The number of Common Shares, without par value, outstanding as of October 24, 2016April 28, 2017 was 27,842,883.28,143,870.

 

 

 

 

STONERIDGE, INC. AND SUBSIDIARIES

 

INDEX  Page
PART I–FINANCIAL INFORMATION  
    
Item 1.Financial Statements  
 Condensed Consolidated Balance Sheets as of September 30, 2016March 31, 2017 (Unaudited) and December 31, 20152016 3
 Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30,March 31, 2017 and 2016 and 2015 4
 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30,March 31, 2017 and 2016 and 2015 5
 Condensed Consolidated Statements of Cash Flows (Unaudited) for the NineThree Months Ended September 30,March 31, 2017 and 2016 and 2015 6
 Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 2425
Item 3.Quantitative and Qualitative Disclosures About Market Risk 3532
Item 4.Controls and Procedures 3532
    
PART II–OTHER INFORMATION  
    
Item 1.Legal Proceedings 3632
Item 1A.Risk Factors 3632
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 3633
Item 3.Defaults Upon Senior Securities 3633
Item 4.Mine Safety Disclosures 3633
Item 5.Other Information 3633
Item 6.Exhibits 3633
    
Signatures 3734
   
Index to Exhibits 3835


1

Forward-Looking Statements

 

Portions of this quarterly report contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, our directors or officers with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition or divestiture strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words “will,” “may,” “should,” “designed to,” “believes,” “plans,” “projects,” “intends,” “expects,” “estimates,” “anticipates,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:

 

·the reduced purchases, loss or bankruptcy of a major customer;

·the costs and timing of facility closures, business realignment activities, or similar actions;

·a significant change in automotive, commercial, motorcycle, off-highway or agricultural vehicle production;

·competitive market conditions and resulting effects on sales and pricing;

·the impact on changes in foreign currency exchange rates on sales, costs and results, particularly the Brazilian real, euro, Argentinian peso, Swedish krona, Mexican peso and Chinese Renminbi;

·our ability to achieve cost reductions that offset or exceed certain customer-mandated selling price reductions;

·a significant change in general economic conditions in any of the various countries in which we operate;

·labor disruptions at our facilities or at any of our significant customers or suppliers;

·the ability of our suppliers to supply us with quality parts and components at competitive prices on a timely basis;

·the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our credit facility;

·customer acceptance of new products;

·capital availability or costs, including changes in interest rates or market perceptions;

·the failure to achieve the successful integration of any acquired company or business; and

·those items described in Part I, Item IA (“Risk Factors”) of the Company's 2015 Form 10-K.
the reduced purchases, loss or bankruptcy of a major customer;
the costs and timing of facility closures, business realignment activities, or similar actions;
a significant change in automotive, commercial, motorcycle, off-highway or agricultural vehicle production;
competitive market conditions and resulting effects on sales and pricing;
the impact on changes in foreign currency exchange rates on sales, costs and results, particularly the Brazilian real, euro, Argentinian peso, Swedish krona, Mexican peso and Chinese Renminbi;
our ability to achieve cost reductions that offset or exceed certain customer-mandated selling price reductions;
a significant change in general economic conditions in any of the various countries in which we operate;
labor disruptions at our facilities or at any of our significant customers or suppliers;
the ability of our suppliers to supply us with quality parts and components at competitive prices on a timely basis;
the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our credit facility;
customer acceptance of new products;
capital availability or costs, including changes in interest rates or market perceptions;
the failure to achieve the successful integration of any acquired company or business; and
those items described in Part I, Item IA (“Risk Factors”) of the Company's 2016 Form 10-K.

 

In addition, the forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.


2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 September 30, December 31,  March 31, December 31, 
(in thousands) 2016  2015  2017  2016 
 (Unaudited)     (Unaudited)    
ASSETS                
                
Current assets:                
Cash and cash equivalents $50,560  $54,361  $44,909  $50,389 
Accounts receivable, less reserves of $1,563 and $1,066, respectively  122,286   94,937 
Accounts receivable, less reserves of $1,742 and $1,630, respectively  140,994   113,225 
Inventories, net  65,200   61,009   72,728   60,117 
Prepaid expenses and other current assets  31,677   21,602   24,482   17,162 
Total current assets  269,723   231,909   283,113   240,893 
                
Long-term assets:                
Property, plant and equipment, net  90,746   85,264   101,454   91,500 
Intangible assets, net and goodwill  41,294   36,699 
Intangible assets, net  77,668   39,260 
Goodwill  35,181   931 
Investments and other long-term assets, net  11,839   10,380   22,130   21,945 
Total long-term assets  143,879   132,343   236,433   153,636 
Total assets $413,602  $364,252  $519,546  $394,529 
                
LIABILITIES AND SHAREHOLDERS' EQUITY                
                
Current liabilities:                
Current portion of debt $9,901  $13,905  $6,885  $8,626 
Accounts payable  66,596   55,225   82,390   62,594 
Accrued expenses and other current liabilities  50,032   38,920   43,943   41,489 
Total current liabilities  126,529   108,050   133,218   112,709 
                
Long-term liabilities:                
Revolving credit facility  87,000   100,000   141,000   67,000 
Long-term debt, net  8,264   4,458   7,341   8,060 
Deferred income taxes  43,290   41,332   19,710   9,760 
Other long-term liabilities  3,898   3,983   10,638   4,923 
Total long-term liabilities  142,452   149,773   178,689   89,743 
                
Shareholders' equity:                
Preferred Shares, without par value, 5,000 shares authorized, none issued  -   -   -   - 
Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,907 shares issued and 27,843 and 27,912 shares outstanding at September 30, 2016 and December 31, 2015, respectively, with no stated value  -   - 
Common Shares, without par value, 60,000 shares authorized,
28,966 and 28,966 shares issued and 28,144 and 27,850 shares outstanding at
March 31, 2017 and December 31, 2016, respectively, with no stated value		  -   - 
Additional paid-in capital  203,976   199,254   208,331   206,504 
Common Shares held in treasury, 1,123 and 995 shares at September 30, 2016 and December 31, 2015, respectively, at cost  (5,592)  (4,208)
Accumulated deficit  (3,011)  (32,105)
Common Shares held in treasury, 822 and 1,116 shares at March 31, 2017 and December 31, 2016,
respectively, at cost		  (6,936)  (5,632)
Retained earnings  56,288   45,356 
Accumulated other comprehensive loss  (64,456)  (69,822)  (64,533)  (67,913)
Total Stoneridge, Inc. shareholders' equity  130,917   93,119   193,150   178,315 
Noncontrolling interest  13,704   13,310   14,489   13,762 
Total shareholders' equity  144,621   106,429   207,639   192,077 
Total liabilities and shareholders' equity $413,602  $364,252  $519,546  $394,529 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three months ended March 31 (in thousands, except per share data) 2017  2016 
       
Net sales $204,311  $162,616 
         
Costs and expenses:        
Cost of goods sold  143,160   117,455 
Selling, general and administrative  34,266   25,772 
Design and development  11,721   10,883 
         
Operating income  15,164   8,506 
         
Interest expense, net  1,410   1,514 
Equity in earnings of investee  (180)  (143)
Other expense, net  190   181 
         
Income before income taxes  13,744   6,954 
         
Provision for income taxes  4,571   845 
         
Net income  9,173   6,109 
         
Net loss attributable to noncontrolling interest  (30)  (1,130)
         
Net income attributable to Stoneridge, Inc. $9,203  $7,239 
         
Earnings per share attributable to Stoneridge, Inc.:        
Basic $0.33  $0.26 
Diluted $0.32  $0.26 
         
Weighted-average shares outstanding:        
Basic  27,917   27,676 
Diluted  28,580   28,156 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME

(Unaudited)

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
(in thousands, except per share data) 2016  2015  2016  2015 
             
Net sales $173,846  $162,057  $523,365  $490,171 
                 
Costs and expenses:                
Cost of goods sold  124,098   116,912   375,705   355,432 
Selling, general and administrative  27,817   26,331   82,836   85,555 
Design and development  10,151   9,867   30,912   29,696 
                 
Operating income  11,780   8,947   33,912   19,488 
                 
Interest expense, net  1,684   1,747   5,038   4,683 
Equity in earnings of investee  (307)  (160)  (603)  (492)
Other income, net  (497)  (83)  (722)  (343)
                 
Income before income taxes from continuing operations  10,900   7,443   30,199   15,640 
                 
Income tax expense (benefit) from continuing operations  919   32   3,114   (202)
                 
Income from continuing operations  9,981   7,411   27,085   15,842 
                 
Loss from discontinued operations  -   (113)  -   (226)
                 
Net income  9,981   7,298   27,085   15,616 
                 
Net loss attributable to noncontrolling interest  (303)  (69)  (2,009)  (1,074)
                 
Net income attributable to Stoneridge, Inc. $10,284  $7,367  $29,094  $16,690 
                 
Earnings per share from continuing operations attributable Stoneridge, Inc.:                
Basic $0.37  $0.27  $1.05  $0.62 
Diluted $0.36  $0.27  $1.03  $0.61 
                 
Loss per share attributable to discontinued operations:                
Basic $0.00  $(0.01) $0.00  $(0.01)
Diluted $0.00  $(0.01) $0.00  $(0.01)
                 
Earnings per share attributable to Stoneridge, Inc.:                
Basic $0.37  $0.26  $1.05  $0.61 
Diluted $0.36  $0.26  $1.03  $0.60 
                 
Weighted-average shares outstanding:                
Basic  27,792   27,444   27,753   27,299 
Diluted  28,359   28,008   28,266   27,927 
Three months ended March 31, (in thousands) 2017  2016 
       
Net income $9,173  $6,109 
Less: Net loss attributable to noncontrolling interest  (30)  (1,130)
Net income attributable to Stoneridge, Inc.  9,203   7,239 
        
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.:        
Foreign currency translation  3,063   4,728 
Unrealized gain (loss) on derivatives(1)  317   (450)
Other comprehensive income, net of tax attributable to Stoneridge, Inc.  3,380   4,278 
         
Comprehensive income attributable to Stoneridge, Inc. $12,583  $11,517 

(1)Net of tax expense of $170 and $0 for the three months ended March 31, 2017 and 2016, respectively.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


5

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWS

(Unaudited)

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
(in thousands) 2016  2015  2016  2015 
             
Net income $9,981  $7,298  $27,085  $15,616 
Less: Net loss attributable to noncontrolling interest  (303)  (69)  (2,009)  (1,074)
Net income attributable to Stoneridge, Inc.  10,284   7,367   29,094   16,690 
                 
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.:                
Foreign currency translation  (638)  (12,557)  5,923   (24,497)
Benefit plan liability  (84)  -   (84)  (45)
Unrealized loss on derivatives  (64)  (236)  (473)  (29)
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.  (786)  (12,793)  5,366   (24,571)
                 
Comprehensive income (loss) attributable to Stoneridge, Inc. $9,498  $(5,426) $34,460  $(7,881)

The Company has combined comprehensive income (loss) from continuing operations and comprehensive loss from discontinued operations herein.

Three months ended March 31, (in thousands) 2017  2016 
       
OPERATING ACTIVITIES:        
Net income $9,173  $6,109 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  5,063   4,542 
Amortization, including accretion of deferred financing costs  1,472   822 
Deferred income taxes  2,082   320 
Earnings of equity method investee  (180)  (143)
Loss on sale of fixed assets  -   (67)
Share-based compensation expense  2,339   960 
Tax benefit related to share-based compensation expense  (681)  - 
Changes in operating assets and liabilities, net of effect of business combination:        
Accounts receivable, net  (18,648)  (15,456)
Inventories, net  (2,445)  (5,658)
Prepaid expenses and other assets  (4,760)  (2,977)
Accounts payable  15,734   13,932 
Accrued expenses and other liabilities  661   (1,252)
 Net cash provided by operating activities  9,810   1,132 
         
INVESTING ACTIVITIES:        
Capital expenditures  (7,265)  (6,817)
Proceeds from sale of fixed assets  -   81 
Business acquisition, net of cash acquired  (77,538)  - 
Net cash used for investing activities  (84,803)  (6,736)
         
FINANCING ACTIVITIES:        
Revolving credit facility borrowings  81,000   - 
Revolving credit facility payments  (7,000)  - 
Proceeds from issuance of debt  886   2,922 
Repayments of debt  (4,135)  (2,816)
Other financing costs  (47)  - 
Repurchase of Common Shares to satisfy employee tax withholding  (1,820)  (1,344)
Net cash provided by (used for) financing activities  68,884   (1,238)
         
Effect of exchange rate changes on cash and cash equivalents  629   854 
Net change in cash and cash equivalents  (5,480)  (5,988)
Cash and cash equivalents at beginning of period  50,389   54,361 
         
Cash and cash equivalents at end of period $44,909  $48,373 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $1,450  $1,391 
Cash paid for income taxes, net $1,252  $549 
         
Supplemental disclosure of non-cash operating and financing activities:        
Bank payment of vendor payables under short-term debt obligations $-  $704 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Nine months ended September 30 (in thousands) 2016  2015 
       
OPERATING ACTIVITIES:        
Net income $27,085  $15,616 
Adjustments to reconcile net income to net cash provided by (used for) operating activities:        
Depreciation  14,717   14,843 
Amortization, including accretion of deferred financing costs  2,677   3,000 
Deferred income taxes  714   202 
Earnings of equity method investee  (603)  (492)
(Gain) loss on sale of fixed assets  (409)  55 
Share-based compensation expense  4,587   5,746 
Loss on disposal of Wiring business  -   226 
Changes in operating assets and liabilities:        
Accounts receivable, net  (25,486)  (17,768)
Inventories, net  281   (15,028)
Prepaid expenses and other assets  (5,879)  (703)
Accounts payable  13,991   9,459 
Accrued expenses and other liabilities  5,342   1,977 
Net cash provided by operating activities  37,017   17,133 
         
INVESTING ACTIVITIES:        
Capital expenditures  (18,484)  (23,521)
Proceeds from sale of fixed assets  652   53 
Payments related to sale of Wiring business  -   (1,230)
Business acquisition  -   (469)
Net cash used for investing activities  (17,832)  (25,167)
         
FINANCING ACTIVITIES:        
Revolving credit facility payment  (13,000)  - 
Proceeds from issuance of debt  13,317   19,116 
Repayments of debt  (21,312)  (20,015)
Other financing costs  (339)  (49)
Repurchase of Common Shares to satisfy employee tax withholding  (1,384)  (2,854)
Net cash used for financing activities  (22,718)  (3,802)
         
Effect of exchange rate changes on cash and cash equivalents  (268)  (1,896)
Net change in cash and cash equivalents  (3,801)  (13,732)
Cash and cash equivalents at beginning of period  54,361   43,021 
         
Cash and cash equivalents at end of period $50,560  $29,289 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $4,573  $4,539 
Cash paid for income taxes, net $2,019  $1,840 
         
Supplemental disclosure of non-cash operating and financing activities:        
Bank payment of vendor payables under short-term debt obligations $3,764  $3,286 
6

 

The Company has combined cash flows from continuing operations and cash flows from discontinued operations within the operating, investing and financing categories.

The accompanying notes are an integral part of these condensed consolidated financial statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

(1) Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the SEC's rules and regulations. The results of operations for the three and nine months ended September 30, 2016March 31, 2017 are not necessarily indicative of the results to be expected for the full year.

 

While the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's 20152016 Form 10-K.

On January 31, 2017, the Company acquired Exploitatiemaatschappij Berghaaf B.V. (“Orlaco”), an electronics business which designs, manufactures and sells a variety of camera-based vision systems, monitors and related products. As such, the Company’s condensed consolidated financial statements herein include the results of Orlaco from the acquisition date to March 31, 2017. See Note 3 to the condensed consolidated financial statements for additional details regarding the Orlaco acquisition.

Also, see the impact of the adoption of various accounting standards below on the condensed consolidated financial statements herein.

 

(2)  Recently Issued Accounting Standards

 

Recently Adopted Accounting Standards Not Yet Adopted

In August 2016,January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting StandardStandards Update (“ASU”) 2016-15, “Statement2017-04, “Simplifying the Test for Goodwill Impairment.” It eliminates Step 2 from the goodwill impairment test. As a result, an entity should recognize an impairment charge for the amount by which the carrying amount of Cash Flows - Classificationgoodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of Certain Cash Receipts and Cash Payments (Topic 230)” which provides guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows in order to reduce diversity in practice.  The ASU is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted.goodwill.  The Company is currently evaluating the impact of adoptingadopted this standard on January 1, 2017 which did not have an impact on its condensed consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, “Compensation - Stock Compensation (Topic 718)” which is intended to simplify several aspects of the accounting for share-based payment award transactions including how excess tax benefits should be classified in the Company’s condensed consolidated financial statements. The new standard also permits companies to recognize forfeitures as they occur as an alternative to utilizing estimated forfeitures rates which has beensimplifies the required practice.  The new accounting standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within that year.  The Company is currently evaluatingtreatment of share based payment transactions by recognizing the impact of adopting thisexcess tax benefits or deficiencies related to exercised or vested awards in income tax expense in the period of exercise or vesting. The new standard on itsalso modifies the diluted earnings per share calculation using the treasury stock method by eliminating the excess tax benefits or deficiencies from the calculation. These changes have been recognized prospectively.  The presentation of excess tax benefits in the condensed statement of consolidated financial statements.

In February 2016, the FASB issued ASU 2016 – 02, “Leases (Topic 842)” which will require that a lessee recognize assets and liabilities on the balance sheet for all leasescash flows is also modified to be included with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability.  The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within that year.other income tax cash flows as an operating activity.  The Company expects to adoptadopted this standard as of January 1, 2019.  The Company is currently evaluating2017 utilizing the impact of adopting this standard on its condensed consolidated financial statements, which will require right of use assets and lease liabilities be recordedprospective transition method for excess tax benefits in the condensed consolidated balance sheet for operating leases.  

In November 2015, the FASB issued ASU 2015 – 17, “Income Taxes (Topic 740)” which simplifies the presentationstatement of deferred income taxes.  Currently entities are required to separate deferred income tax liabilities and assets into current and noncurrent amounts in the balance sheet.  ASU 2015-17 requires that all deferred income taxes be classified as noncurrent in the balance sheet. The amendment is effective for fiscal years beginning after December 15, 2016 including interim periods within those fiscal years and may be applied either prospectively or retrospectively with early adoption permitted.cash flows. The Company is currently evaluatinghad unrecognized tax benefits related to share-based payment awards of $1,729 as of December 31, 2016 which upon adoption was recorded in other long-term assets with a corresponding increase to retained earnings associated with the impactcumulative effect of adopting this standard on its condensed consolidated financial statements.the accounting change.

 

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory” which requires that inventory be measured at the lower of cost or net realizable value.  Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. Replacing the concept of market with the single measurement of net realizable value is intended to reduce cost and complexity. The new accounting standard is effective for fiscal years beginning after December 15, 2016.  The Company expects to adoptadopted this standard as of January 1, 2017, which isdid not expected to have a material impact on the Company’s condensed consolidated financial statements or disclosures.


7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

Accounting Standards Not Yet Adopted

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”.  It revises the definition of a business and provides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. This guidance is effective for annual periods beginning after December 15, 2017.  The Company expects to adopt this standard as of January 1, 2018, which is not expected to have any impact on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” which provides guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows in order to reduce diversity in practice.  This ASU is effective for interim and annual periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability.  The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company expects to adopt this standard as of January 1, 2019.  The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements, which will require right of use assets and lease liabilities be recorded in the condensed consolidated balance sheet for operating leases.

 

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”Customers,” which is the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. This ASU allows for both retrospective and prospective methods of adoption.  In July 2015, the FASB approved a one-year deferral of the effective date of the standard. Therefore, theThe new standard will become effective for annual and interim periods beginning after December 15, 2017 with early adoption on the original effective date permitted. The Company is currently evaluating the impact of adopting this standard on its condensed consolidated financial statements.statements, and anticipate testing our new controls and processes designed to comply with the standard in 2017 to permit the Company’s adoption on January 1, 2018. The Company is evaluating changes to revenue recognition of pre-production activities such as customer funded tooling and engineering design and development cost recoveries, including the potential recording of these as revenue.

 

(3) Discontinued Operations

Wiring BusinessAcquisition of Orlaco

 

On August 1, 2014,January 31, 2017, Stoneridge B.V., an indirect wholly-owned subsidiary of Stoneridge, Inc., entered into and closed an agreement to acquire Orlaco. Orlaco designs, manufactures and sells a variety of camera-based vision systems, monitors and related electronic products primarily to the heavy off-road machinery, commercial vehicle, lifting crane and warehousing and logistics industries.  Since July 2015, Stoneridge and Orlaco have jointly developed the MirrorEye mirror replacement system, which is a system solution to improve the safety and fuel economy of commercial vehicles.  The MirrorEye system integrates Orlaco’s camera technology and Stoneridge’s driver information capabilities as well as the combined software capabilities of both companies. The acquisition of Orlaco enhances the Stoneridge’s Electronics segment global technical capabilities in vision systems and facilitates entry into new markets.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

The aggregate consideration for the Orlaco acquisition was €74,939 ($79,675), which included customary estimated adjustments to the purchase price. The Company completedpaid €67,439 ($71,701) in cash, and €7,500 ($7,974) is held in an escrow account to secure the salepayment obligations of substantially allthe seller under the terms of the purchase agreement. The purchase price is subject to certain customary adjustments set forth in the purchase agreement. The escrow amount will be transferred promptly following the completion of the escrow period. The Company may also be required pay up to an additional €7,500 as earnout consideration if certain targets are achieved during the first two years.

The acquisition date fair value of the total consideration transferred consisted of the following:

Cash $79,675 
Fair value of earn-out liability and other adjustments  5,471 
Total purchase price $85,146 

The following table summarizes the estimated fair values of the assets acquired and liabilities of its Wiring business to Motherson Sumi Systems Ltd., an India-based manufacturer of diversified products forassumed at the global automotive industry, and MSSL (GB) LIMITED (collectively, “Motherson”), for $71,386 in cash that consisted of the statedacquisition date. The purchase price and associated allocation is preliminary pending completion of the valuation of acquired inventory, property, plant and equipment, intangible assets and deferred income taxes.

At January 31, 2017   
Cash $2,165 
Accounts receivable  8,130 
Inventory  9,144 
Prepaids and other current assets  298 
Property, plant and equipment  6,668 
Identifiable intangible assets  38,626 
Other long-term assets  690 
Total identifiable assets acquired  65,721 
     
Accounts payable  3,020 
Other current liabilities  805 
Deferred tax liabilities  9,994 
Other long-term liabilities  1,462 
Total liabilities assumed  15,281 
Net identifiable assets acquired  50,440 
Goodwill  34,706 
Net assets acquired $85,146 

Assets acquired and liabilities assumed were recorded at estimated working capitalfair values based on management's estimates, available information, and reasonable and supportable assumptions. Also, the closing date.Company utilized a third-party to assist with certain estimates of fair values, including:

·Fair value estimate for inventory was based on a comparative sales method

·Fair value estimate for property, plant and equipment was based on appraised values utilizing cost and market approaches

·Fair values for intangible assets were based on a combination of market and income approaches, including the relief from royalty method

·Fair value for the earn-out liability was based on a Monte Carlo simulation utilizing forecasted EBITDA for the 2017 and 2018 measurement period

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

These non-recurring fair value measurements are classified within Level 3 of the fair value hierarchy. The finalpreliminary purchase price was subjectallocations may be subsequently adjusted to post-closing working capitalreflect final valuation results and otherpurchase price adjustments. Upon

Goodwill is calculated as the final resolutionexcess of the working capitalfair value of consideration transferred over the fair market value of the identifiable assets and liabilities and represents the future economic benefits arising from other adjustmentsassets acquired that could not be separately recognized. The goodwill is included in the second quarterCompany’s Electronics segment and is not deductible for income tax purposes.

Of the $38,626 of 2015, the Company returned $1,230 in cashacquired identifiable intangible assets, $27,405 was provisionally assigned to Motherson.customer lists with a 15-year useful life; $5,142 was provisionally assigned to trademarks with a 20 year useful life; and $6,079 was provisionally assigned to technology with a 7 year weighted-average useful life.

 

The Company also entered into short-term transition services agreements with Motherson substantially allrecognized $1,218 of which concluded in the second quarter of 2015 associated with information systems, accounting, administrative, occupancy and support services as well as contract manufacturing and production support in Estonia.

The Company had post-disposition sales to the Wiring business acquired by Motherson for the three and nine months ended September 30, 2016 of $4,627 and $15,378, respectively, and $7,299 and $21,574 for the three and nine months ended September 30, 2015, respectively. The Company had post-disposition purchases from the Wiring business acquired by Motherson of $121 and $315 for the three and nine months ended September 30, 2016, respectively, and $242 and $583 for the three and nine months ended September 30, 2015, respectively.

There was no activityacquisition related to discontinued operations for the Wiring businesscosts in the condensed consolidated statementsstatement of operations as a component of selling, general and administrative expense during the three months ended March 31, 2017.

Included in the Company's statement of operations for the three and nine months ended September 30, 2016.March 31, 2017 are post-acquisition sales of $11,100 and net income of $600 related to Orlaco which are included in the Electronics segment. The Company’s statement of operations for the three months ended March 31, 2017 also included $979 of expense in cost of goods sold associated with the step up of the Orlaco inventory to fair value.

 

The following table displays summarized activityunaudited pro forma information reflects the Company’s condensed consolidated results of operations as if the acquisition had taken place on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results of operations that the Company would have reported had the transaction actually occurred at the beginning of these periods, nor is it necessarily indicative of future results.

Three months ended March 31, 2017  2016 
Net sales $209,341  $177,491 
Net income attributable to Stoneridge, Inc. and subsidiaries $9,307  $8,896 

The unaudited pro forma financial information presented in the condensed consolidated statements of operations for discontinued operationstable above has been adjusted to give effect to adjustments that are directly related to the Wiring business:business combination and are factually supportable. These adjustments include, but are not limited to, depreciation and amortization related to fair value adjustments to property, plant, and equipment and finite-lived intangible assets. Also, an adjustment has been made for management fees expensed by Orlaco.

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2015  2015 
       
Loss on disposal(A) $(118) $(230)
Income tax expense on loss on disposal  5   4 
Loss from discontinued operations $(113) $(226)
10

 

(A)The loss on disposal for the three and nine months ended September 30, 2015 included transaction costs of $94 and $192, respectively. The loss on disposal also included a working capital and other adjustments of $24 and $38 for the three and nine months ended September 30, 2015, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

(4) Inventories

 

Inventories are valued at the lower of cost (using either the first-in, first-out (“FIFO”) or average cost methods) or market.net realizable value. The Company evaluates and adjusts as necessary its excess and obsolescence reserve on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on handon-hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. Inventory cost includes material, labor and overhead. Inventories consisted of the following:

 

 September 30, December 31,  March 31, December 31, 
 2016  2015  2017  2016 
Raw materials $36,707  $36,021  $42,439  $35,665 
Work-in-progress  8,568   7,162   8,138   7,483 
Finished goods  19,925   17,826   22,151   16,969 
Total inventories, net $65,200  $61,009  $72,728  $60,117 

 

Inventory valued using the FIFO method was $41,452$49,582 and $35,378$37,765 at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. Inventory valued using the average cost method was $23,748$23,146 and $25,631$22,352 at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively.

 

(5) Goodwill and Intangibles

Goodwill

Goodwill was $35,181 and $931 at March 31 2017 and December 31, 2016 all of which relates to the Electronics segment. The increase in goodwill is related to the Orlaco acquisition as further discussed in Note 3. Goodwill is not amortized, but instead is tested for impairment at least annually, or earlier when events and circumstances indicate that it is more likely than not that such assets have been impaired.

Intangibles

  Acquisition  Accumulated    
As of March 31, 2017 cost  amortization  Net 
Customer lists $55,698  $(10,315) $45,383 
Tradenames  23,976   (5,037)  18,939 
Technology  17,333   (3,987)  13,346 
Other  41   (41)  - 
Total $97,048  $(19,380) $77,668 

  Acquisition  Accumulated    
As of December 31, 2016 cost  amortization  Net 
Customer lists $27,476  $(9,138) $18,338 
Tradenames  18,116   (4,558)  13,558 
Technology  10,862   (3,498)  7,364 
Other  41   (41)  - 
Total $56,495  $(17,235) $39,260 

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

The Company recorded amortization expense of $1,394 and $726 related to finite-lived intangible assets for the three month ended March 31, 2017 and 2016, respectively.  The Company currently estimates annual amortization expense to be $6,100 for 2017 and $6,300 for 2018, 2019, 2020 and 2021.

(6) Financial Instruments and Fair Value Measurements

 

Financial Instruments

 

A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments.

 

Derivative Instruments and Hedging Activities

 

On September 30, 2016,March 31, 2017, the Company had open foreign currency forward contracts which are used solely for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company's best interest.  The counterparties to these financial instruments are financial institutions with investment grade credit ratings.

 

Foreign Currency Exchange Rate Risk

 

The Company conducts business internationally and therefore is exposed to foreign currency exchange rate risk. The Company uses derivative financial instruments as cash flow and fair value hedges to manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The currencies hedged by the Company during 20162017 and 20152016 included the euro and Mexican peso. In addition, the Company hedged the U.S. dollar against the Swedish krona and euro on behalf of its European subsidiaries in 2016 and 2015.2016.

 

These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, the effective portion of the unrealized gain or loss was deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive loss. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the currency.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

In certain instances, the foreign currency forward contracts do not qualify for hedge accounting or are not designated as hedges, and therefore are marked-to-market with gains and losses recognized in the Company's condensed consolidated statement of operations as a component of other income,expense, net.

 

The Company's foreign currency forward contracts offset a portion of the gains and losses on the underlying foreign currency denominated transactions as follows:

 

Euro-denominated Foreign Currency Forward Contract

 

At September 30, 2016March 31, 2017 and December 31, 2015,2016, the Company held a foreign currency forward contract with underlying notional amounts of $1,711$1,630 and $1,647,$1,601, respectively, to reduce the exposure related to the Company's euro-denominated intercompany loans. ThisThe current contract expires in December 2016.June 2017. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of $1 and a loss of $9$19 and $82 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively, in the condensed consolidated statements of operations as a component of other income,expense, net related to the euro-denominated contract. For the nine months ended September 30, 2016 and 2015, the Company recognized a loss of $38 and a gain of $307, respectively, related to this contract.

12

 

U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow HedgesNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the Swedish krona, U.S. dollar-denominated currency contracts with a notional amount at September 30, 2016 of $2,655 which expire ratably on a monthly basis from October 2016 through December 2016, compared to a notional amount of $10,007 at December 31, 2015.

The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the euro, U.S. dollar-denominated currency contracts with a notional amount at September 30, 2016 of $608 which expire ratably on a monthly basis from October 2016 through December 2016, compared to a notional amount of $2,421 at December 31, 2015.

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of September 30, 2016 and December 31, 2015 and concluded that the hedges were effective.(Unaudited)

 

Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedge

 

The Company holds Mexican peso-denominated foreign currency forward contracts with notional amounts at September 30, 2016March 31, 2017 of $2,417$4,248 which expire ratably on a monthly basis from October 2016April 2017 through December 2016,2017, compared to a notional amount of $9,780$5,699 at December 31, 2015. 2016.

 

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of September 30, 2016March 31, 2017 and December 31, 20152016 and concluded that the hedges were highly effective.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:

 

     Notional  Prepaid expenses  Accrued expenses and 
  amounts (A)  and other current assets  other current liabilities 
  September 30,  December 31,  September 30,  December 31,  September 30,  December 31, 
  2016  2015  2016  2015  2016  2015 
Derivatives designated as hedging instruments:                        
Cash flow hedges:                        
Forward currency contracts $5,680  $22,208  $163  $474  $246  $84 
                         
Derivatives not designated as hedging instruments:                        
Forward currency contracts $1,711  $1,647  $–  $–  $13  $9 

       Prepaid expenses  Accrued expenses and 
  Notionalamounts(A)  and other current assets  other current liabilities 
  March 31,  December 31,  March 31,  December 31,  March 31,  December 31, 
  2017  2016  2017  2016  2017  2016 
Derivatives designated as hedging instruments:                        
Cash flow hedges:                        
Forward currency contracts $4,248  $5,699  $459  $-  $-  $28 
Derivatives not designated as hedging instruments:                        
Forward currency contracts $1,630  $1,601  $-  $-  $-  $3 

 

(A)Notional amounts represent the gross contract in U.S. dollars of the derivatives outstanding.

 

AmountsGross amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the three months ended September 30March 31 are as follows:

 

  Loss recorded  Loss reclassified from 
  in other comprehensive  other comprehensive income 
  income (loss)  (loss) into net income 
  2016  2015  2016  2015 
Derivatives designated as cash flow hedges:                
Forward currency contracts $(129) $(578) $(65) $(342)
Total derivatives designated as cash flow hedges $(129) $(578) $(65) $(342)

Amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the nine months ended September 30 are as follows: 

 Loss recorded Loss reclassified from     Gain (loss) reclassified from 
 in other comprehensive other comprehensive income  Gain (loss) recorded in other other comprehensive income 
  income (loss)   (loss) into net income  comprehensive income  into net income 
  2016   2015   2016   2015  2017  2016  2017  2016 
Derivatives designated as cash flow hedges:                                
Forward currency contracts $(656) $(681) $(183) $(652) $516  $(494) $29  $(44)
Total derivatives designated as cash flow hedges $(656) $(681) $(183) $(652)

 

Gains and losses reclassified from other comprehensive income (loss) into net income were recognized in cost of goods sold in the Company's condensed consolidated statements of operations.

 

The net deferred lossgain of $83$459 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2016.  2017.

Fair Value Measurements

 

The Company’s assets and liabilities are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency contracts, inputs include foreign currency exchange rates. Fair values estimated using Level 3 inputs consist of significant unobservable inputs.


13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

TheExcept for the earn-out liability discussed in Note 3, the Company did not have any financial assets or liabilities fair valued using Level 1 or Level 3 inputs at September 30, 2016March 31, 2017 or December 31, 2015.2016. The fair value of financial assets using Level 2 inputs related to forward currency contracts were $163$459 and $474$0 at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. The fair value of financial liabilities using Level 2 inputs related to forward currency contracts were $259$0 and $93$31 at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. The fair value of the earn-out liability related to Orlaco using Level 3 inputs was approximately $4,200 at March 31, 2017.

 

(6)Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in Note 3, there were no non-recurring fair value measurements for the periods presented.

(7) Share-Based Compensation

 

Compensation expense for share-based compensation arrangements, which is recognized in the condensed consolidated statements of operations as a component of selling, general and administrative expenses, was $1,699$2,339 and $1,264$960 for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively. For the nine months ended September 30, 2016 total share-based compensation was $4,587 compared to $5,746 for the nine months ended September 30, 2015.

 

The nine months ended September 30, 2016 included $545 related to the modification of the retirement notice provisions of certain awards. The nine months ended September 30, 2015 included $2,225 from the accelerated vesting in connection with the retirement of the Company’s former President and Chief Executive Officer.

(7)(8) Debt

 

Debt consisted of the following at September 30, 2016March 31, 2017 and December 31, 2015:2016:

 

    Interest rates at  
 September 30, December 31, September 30,   March 31, December 31, Interest rates at    
 2016  2015  2016  Maturity 2017  2016  March 31, 2017  Maturity 
Revolving Credit Facility                             
Credit facility $87,000  $100,000   1.80% September 2021 $141,000  $67,000   2.04-2.23%   September 2021 
                             
Debt                             
PST short-term obligations  7,401   11,556   4.27% - 20.37% 2016 - 2017  2,996   5,097   4.27% - 8.00%   2017 - 2018 
PST long-term notes  10,573   6,428   6.20% - 18.00% 2017 - 2021  11,127   11,452   7.5% - 17.38%   2018 - 2021 
Other  191   379         103   137         
Total debt  18,165   18,363        14,226   16,686         
Less: current portion  (9,901)  (13,905)       (6,885)  (8,626)        
Total long-term debt, net $8,264  $4,458       $7,341  $8,060         

Revolving Credit Facility

 

On November 2, 2007, the Company entered into an asset-based credit facility, which permits borrowing up to a maximum level of $100,000. The Company entered into an Amended and Restated Credit and Security Agreement and a Second Amended and Restated Credit and Security Agreement on September 20, 2010 and December 1, 2011, respectively.


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

On September 12, 2014, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Agreement” or “Credit Facility”). The Amended Agreement provides for a $300,000 revolving credit facility, which replaced the Company’s existing $100,000 asset-based credit facility and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The Amended Agreement also has an accordion feature which allows the Company to increase the availability by up to $80,000 upon the satisfaction of certain conditions.The Amended Agreement extended the termination date to September 12, 2019 from December 1, 2016. On March 26, 2015, the Company entered into Amendment No. 1 to the Amended Agreement which modified the definition of Consolidated EBITDA to allow for the add back of cash premiums and other non-cash charges related to the amendment and restatement of the Amended Agreement and the early extinguishment of the Company’s 9.5% Senior Secured Notes. Consolidated EBITDA is used in computing the Company’s leverage ratio and interest coverage ratio which are covenants within the Amended Agreement. On February 23, 2016, the Company entered into Amendment No. 2 to the Amended Agreement which amended and waived any default or potential defaults with respect to the pledging as collateral additional shares issued by a wholly owned subsidiary and newly issued shares associated with the formation of a new subsidiary. On August 12, 2016, the Company entered into Amendment No. 3 (the “Amendment”) to the Amended Agreement which extended of the expiration date of the Agreement by two years to September 12, 2021, increased the borrowing sub-limit for the Company’s foreign subsidiaries by $30,000 to $80,000, increased the basket of permitted loans and investments in foreign subsidiaries by $5,000 to $30,000, and provided additional flexibility to the Company for certain permitted corporate transactions involving its foreign subsidiaries as defined in the Agreement. As a result of Amendment No. 3, the Company capitalized deferred financing costs of $339, which will be amortized over the remaining term of the Credit Facility. On January 30, 2017, the Company entered into Consent and Amendment No. 4 to the Amended Agreement which amended certain definitions, schedules and exhibits of the Credit Facility, consented to a Dutch Reorganization, and consented to the Orlaco acquisition. As a result of Amendment No. 4, the Company capitalized deferred financing costs of $47, which will be amortized over the remaining term of the Credit Facility.

 

Borrowings under the Amended Agreement bear interest at either the Base Rate, as defined, or the LIBOR Rate, at the Company’s option, plus the applicable margin as set forth in the Amended Agreement. The Company is also subject to a commitment fee ranging from 0.20% to 0.35% based on the Company’s leverage ratio. The Amended Agreement requires the Company to maintain a maximum leverage ratio of 3.00 to 1.00, and a minimum interest coverage ratio of 3.50 to 1.00 and places a maximum annual limit on capital expenditures. The Amended Agreement also contains other affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends.

Borrowings outstanding on the Credit Facility decreasedincreased from $100,000$67,000 at December 31, 20152016 to $87,000$141,000 at September 30, 2016 as a result of an unplanned partial repayment made againstMarch 31, 2017 because the Company borrowed under the Credit Facility duringin order to fund the three months ended September 30, 2016.Orlaco acquisition described in Note 3.

The Company also has outstanding letters of credit of $3,367 and $3,399 at March 31, 2017 and December 31, 2016, respectively.

 

The Company was in compliance with all Credit Facility covenants at September 30, 2016March 31, 2017 and December 31, 2015.2016.

Debt

 

PST maintains several short-term obligations and long-term notes used for working capital purposes which have fixed annual interest rates. The weighted-average interest rates of short-term and long-term debt of PST at September 30, 2016March 31, 2017 were 11.1%5.1% and 13.2%, respectively.  Depending on the specific note, interest is payable either monthly or annually. Principal repayments on PST debt at September 30, 2016March 31, 2017 are as follows: $9,710$6,806 from October 2016 through September 2017, $963 from OctoberApril 2017 through March 2018, $3,378 from April 2018 through December 2017, $3,972 in 2018, $2,566$2,718 in 2019, $398$637 in 2020, and $365$584 in 2021. PST was in compliance with all debt covenants at September 30, 2016March 31, 2017 and December 31, 2015.2016.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

The Company's wholly-owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary's bank account up to a maximum level of 20,000 Swedish krona, or $2,333$2,230 and $2,369,$2,196, at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. At September 30, 2016March 31, 2017 and December 31, 2015,2016, there was no balance outstanding on this bank account.

 

(8)(9) Earnings Per Share

 

Basic earnings per share was computed by dividing net income by the weighted-average number of Common Shares outstanding for each respective period. Diluted earnings per share was calculated by dividing net income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented. 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(As the Company adopted ASU 2016-09 on January 1, 2017 utilizing the prospective transition method, the weighted-average dilutive Common Shares calculation excludes the excess tax benefit from the treasury stock method for the three months ended March 31, 2017, while the calculation includes the excess tax benefits in thousands, except per share data, unless otherwise indicated)

(Unaudited)the treasury stock method for the three months ended March 31, 2016.

 

Weighted-average Common Shares outstanding used in calculating basic and diluted earnings per share were as follows:

 

 Three months ended Nine months ended 
 September 30, September 30, 
 2016  2015  2016  2015 
Three months ended March 31, 2017  2016 
Basic weighted-average Common Shares outstanding  27,792,469   27,444,221   27,753,015   27,299,319   27,916,652   27,675,938 
Effect of dilutive shares  566,808   563,988   513,074   627,723   663,545   479,835 
Diluted weighted-average Common Shares outstanding  28,359,277   28,008,209   28,266,089   27,927,042   28,580,197   28,155,773 

 

Performance-basedThere were no performance-based restricted Common Shares outstanding at September 30, 2016 and 2015 were 0 and 134,250, respectively.March 31, 2017 or 2016. There were also 843,140750,720 and 573,885803,100 performance-based right to receive Common Shares outstanding at September 30,March 31, 2017 and 2016, and 2015, respectively. These performance-based restricted and right to receive Common Shares are included in the computation of diluted earnings per share based on the number of Common Shares that would be issuable if the end of the quarter were the end of the contingency period.

 

16

(9)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

(10) Changes in Accumulated Other Comprehensive Loss by Component

 

Changes in accumulated other comprehensive loss for the three months ended September 30,March 31, 2017 and 2016 and 2015 were as follows:

 

  Foreign  Unrealized  Benefit    
  currency  gain (loss)  plan    
  translation  on derivatives  liability  Total 
Balance at July 1, 2016 $(63,735) $(19) $84  $(63,670)
                 
Other comprehensive loss before reclassifications  (638)  (129)  -   (767)
Amounts reclassified from accumulated other comprehensive loss  -   65   (84)  (19)
Net other comprehensive loss, net of tax  (638)  (64)  (84)  (786)
                 
Balance at September 30, 2016 $(64,373) $(83) $-  $(64,456)
                 
Balance at July 1, 2015 $(57,543) $208  $84  $(57,251)
Other comprehensive loss before reclassifications  (12,557)  (578)  -   (13,135)
Amounts reclassified from accumulated other comprehensive loss  -   342   -   342 
Net other comprehensive loss, net of tax  (12,557)  (236)  -   (12,793)
                 
Balance at September 30, 2015 $(70,100) $(28) $84  $(70,044)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

  Foreign  Unrealized  Benefit    
  currency  gain (loss)  plan    
  translation  on derivatives  liability  Total 
Balance at January 1, 2017 $(67,895) $(18) $-  $(67,913)
                 
Other comprehensive income before reclassifications  3,063   336   -   3,399 
Amounts reclassified from accumulated other comprehensive loss  -   (19)  -   (19)
Net other comprehensive income, net of tax  3,063   317   -   3,380 
                 
Balance at March 31, 2017 $(64,832) $299  $-  $(64,533)
                 
Balance at January 1, 2016 $(70,296) $390  $84  $(69,822)
                 
Other comprehensive income (loss) before reclassifications  4,728   (494)  -   4,234 
Amounts reclassified from accumulated other comprehensive loss  -   44   -   44 
Net other comprehensive income (loss), net of tax  4,728   (450)  -   4,278 
                 
Balance at March 31, 2016 $(65,568) $(60) $84  $(65,544)

 

Changes in accumulated other comprehensive loss for the nine months ended September 30, 2016 and 2015 were as follows:

  Foreign  Unrealized  Benefit    
  currency  gain (loss)  plan    
  translation  on derivatives  liability  Total 
Balance at January 1, 2016 $(70,296) $390  $84  $(69,822)
                 
Other comprehensive income (loss) before reclassifications  5,923   (656)  -   5,267 
Amounts reclassified from accumulated other comprehensive loss  -   183   (84)  99 
Net other comprehensive income (loss), net of tax  5,923   (473)  (84)  5,366 
                 
Balance at September 30, 2016 $(64,373) $(83) $-  $(64,456)
                 
Balance at January 1, 2015 $(45,603) $1  $129  $(45,473)
                 
Other comprehensive loss before reclassifications  (24,497)  (681)  (45)  (25,223)
Amounts reclassified from accumulated other comprehensive loss  -   652   -   652 
Net other comprehensive loss, net of tax  (24,497)  (29)  (45)  (24,571)
                 
Balance at September 30, 2015 $(70,100) $(28) $84  $(70,044)

(10)(11)  Commitments and Contingencies

 

In the ordinary course of business, the Company is subject to a broad range of claims and legal proceedings that relate to contractual allegations, product liability, tax audits, patent infringement, employment-related matters and environmental matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimable. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its consolidated results of operations or financial position.

 

As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at the site. The Company engaged an environmental engineering consultant to assess the level of contamination and to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. As the remedial action plan has been approved by the Florida Department of Environmental Protection, groundwater remediation began in the fourth quarter of 2015. During the three and nine months ended September 30,March 31, 2017 and 2016, and 2015, environmental remediation costs incurred were immaterial. At September 30, 2016March 31, 2017 and December 31, 2015,2016, the Company accrued a remaining undiscounted liability of $488$298 and $532,$446, respectively, related to future remediation costs. At September 30, 2016March 31, 2017 and December 31, 2015, $3962016, $232 and $469,$370, respectively, waswere recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets while the remaining amount was recorded as a component of other long-term liabilities. A majority of the costs associated with the recorded liability will be incurred at the start of the groundwater remediation, which is expected to begin in November 2016, with the balance relating to monitoring costs to be incurred over multiple years. The recorded liability is based on assumptions in the remedial action plan. Although the Company sold the Sarasota facility and related property in December 2011, the liability to remediate the site contamination remains the responsibility of the Company. Due to the ongoing site remediation, the closing terms of the sale agreement included a requirement for the Company to maintain a $2,000 letter of credit for the benefit of the buyer.


17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

The Company has a legal proceeding,Verde v. Stoneridge, Inc. et al., currently pending in the United States District Court for the Eastern District of Texas, Cause No. 6:14-cv-00225- KNM.  The plaintiff filed this putative class action against the Company and others on March 26, 2014.  The plaintiff alleges that the Company was involved in the vertical chain of manufacture, distribution, and sale of a control device (“CD”) that was incorporated into a Dodge Ram truck purchased by Plaintiff in 2006.  Plaintiff alleges that the Company breached express warranties and indemnification provisions by supplying a defective CD that was not capable of performing its intended function.  The putative class consists of all Texas residents who own manual transmission Chrysler vehicles model years 1997–2007 equipped with the subject CD.  Plaintiff seeks recovery of economic loss damages incurred by him and the putative class members associated with inspecting and replacing the allegedly defective CD, as well as attorneys’ fees and costs.  Plaintiff filed a motion for class certification seeking to certify a class of Texas residents who own or lease certain automobiles sold by Chrysler from 1997–2007.  Plaintiff alleges this putative class would include approximately 120,000 people.  In the motion for class certification, the Plaintiff states that damages are no more than $1 per person.  A hearing on the Plaintiff’s motion for class certification was held on November 16, 2015, and the United States District Court has not yet ruled on class certification.  On April 8, 2016, the Magistrate Judge granted the Company’s motion for partial summary judgment dismissing the Plaintiff’s indemnification claim; that ruling was later adopted by the United States District Court.Court (the “Court”). On November 7, 2016, the Magistrate Judge issued a Report and Recommendation Concerning Class certification, in which she recommended denying Plaintiff’s motion for class certification. Plaintiff filed an objection to the Report and Recommendation concerning a motion for reconsideration concerning class certification. The Magistrate’s Report and Recommendation concerning class certification, and plaintiff’s objection and motion for reconsideration are currently before the Court pending a ruling from the District Judge. The Company believes the likelihood of loss is not probable or reasonably estimable, and therefore no liability has been recorded for these claims at March 31, 2017.

Similarly,Royal v. Stoneridge, Inc. et al. is anothera legal proceeding currently pending in the United States District Court for the Western District of Oklahoma, Case No. 5:14-cv-01410-F.  Plaintiffs filed this putative class action against the Company, Stoneridge Control Devices, Inc., and others on December 19, 2014.  Plaintiffs allege that the Company was involved in the vertical chain of manufacture, distribution, and sale of a CD that was incorporated into Dodge Ram trucks purchased by Plaintiffs between 1999 and 2006.  Plaintiffs allege that the Company and Stoneridge Control Devices, Inc. breached various express and implied warranties, including the implied warranty of merchantability.  Plaintiffs also seek indemnity from the Company and Stoneridge Control Devices, Inc.  The putative class consists of all owners of vehicles equipped with the subject CD, which includes various Dodge Ram trucks and other manual transmission vehicles manufactured from 1997–2007, which Plaintiffs allege is more than one million vehicles.  Plaintiffs seek recovery of economic loss damages associated with inspecting and replacing the allegedly defective CD, diminished value of the subject CDs and the trucks in which they were installed, and attorneys’ fees and costs.  The amount of compensatory or other damages sought by Plaintiffs and the putative class members is unknown. On January 12, 2016, the United States District Court granted in part the Company’s and Stoneridge Control Devices, Inc.’s motions to dismiss, and dismissed four of the Plaintiffs’ five claims against the Company and Stoneridge Control Devices, Inc. Plaintiffs filed a motion for reconsideration of the United States District Court’s ruling, which was denied. The Company filed a motion for judgment on the pleadings on March 3, 2017, which is currently before the Court. The Company is vigorously defending itself against the Plaintiffs’ allegations, and has and will continue to challenge the claims as well as class action certification. The Company believes the likelihood of loss is not probable or reasonably estimable, and therefore no liability has been recorded for these claims at September 30, 2016.

In September 2013, two legal proceedings were initiated by Actia Automotive (“Actia”) in a French court (the tribunal de grande instance de Paris) alleging infringement of its patents by the Company’s Electronics segment. The euro (“€”) and U.S. dollar equivalent (“$”) that Actia was seeking has been €7,000 ($7,900) for each claim for injunctive relief and monetary damages resulting from such alleged infringement. The Company believed that its products did not infringe on any of the patents claimed by Actia, and the claims were without merit.  The Company vigorously defended itself against these allegations, and challenged certain Actia patents in the European Patent Office.  In September 2015, the French court ruled in favor of the Company on one claim, which was subject to appeal by Actia.  However, on July 28, 2016 the Company reached a settlement with Actia with regard to both claims.  Under the settlement the Company agreed to forego a payment by Actia of €50 ($56) that had been ordered by the French Court and Actia agreed (i) not to appeal the French court’s ruling against it on the first claim and (ii) to dismiss its infringement claims against the Company with respect to the second claim.  Under the settlement Actia agreed not to enforce any of the patents in question against the Company, or the Company’s successors and assigns.  As a result this matter has been settled and no liability has been recorded for these claims at September 30, 2016.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)March 31, 2017.

 

On May 24, 2013, the State Revenue Services of São Paulo issued a tax deficiency notice against PST claiming that the vehicle tracking and monitoring services it provides should be classified as communication services, and therefore subject to the State Value Added Tax – ICMS. The State Revenue Services assessment imposed the 25.0% ICMS tax on all revenues of PST related to the vehicle tracking and monitoring services rendered during the period from January 2009 through December 2010. The Brazilian real (“R$”) and U.S. dollar equivalent (“$”) of the aggregate tax assessment is approximately R$92,500 ($28,500)29,600) which is comprised of Value Added Tax – ICMS of R$13,200 ($4,100)4,200) interest of R$11,400 ($3,500)3,700) and penalties of R$67,900 ($20,900)21,700).

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

The Company believes that the vehicle tracking and monitoring services are non-communication services, as defined under Brazilian tax law, subject to the municipal ISS tax, not communication services subject to state ICMS tax as claimed by the State Revenue Services of São Paulo. PST has, and will continue to collect the municipal ISS tax on the vehicle tracking and monitoring services in compliance with Brazilian tax law and will defend its tax position. PST has received a legal opinion that the merits of the case are favorable to PST, determining among other things that the imposition on the subsidiary of the State ICMS by the State Revenue Services of São Paulo is not in accordance with the Brazilian tax code. Management believes, based on the legal opinion of the Company’s Brazilian legal counsel and the results of the Brazil Administrative Court's ruling in favor of another vehicle tracking and monitoring company related to the tax deficiency notice it received, the likelihood of loss is not probable although it may take years to resolve.  As a result of the above, as of September 30, 2016March 31, 2017 and December 31, 2015,2016, no accrual has been recorded with respect to the tax assessment.  An unfavorable judgment on this issue for the years assessed and for subsequent years could result in significant costs to PST and adversely affect its results of operations. There have been no significant changes to the facts and circumstances related to this notice for the three or nine months ended September 30, 2016.March 31, 2017.

 

In addition, PST has civil, labor and other tax contingencies for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$34,60023,900 ($10,700)7,700) and R$25,40031,800 ($6,500)9,800) at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. An unfavorable outcome on these contingencies could result in significant cost to PST and adversely affect its results of operations.

Product Warranty and Recall

 

Amounts accrued for product warranty and recall claims are established based on the Company's best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations including insurance coverage. The Company can provide no assurances that it will not experience material claims or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. The current portion of product warranty and recall is included as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets. Product warranty and recall included $2,293$3,991 and $1,973$2,617 of a long-term liability at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively, which is included as a component of other long-term liabilities in the condensed consolidated balance sheets.

 

The following provides a reconciliation of changes in product warranty and recall liability:

 

Nine months ended September 30 2016  2015 
Product warranty and recall at beginning of period $6,419  $7,601 
Accruals for products shipped during period  3,010   2,716 
Aggregate changes in pre-existing liabilities due to claim developments  (272)  (122)
Settlements made during the period  (1,332)  (3,715)
Product warranty and recall at end of period $7,825  $6,480 

(11) Headquarter Relocation

In March 2016, the Company announced the relocation of its corporate headquarters from Warren, Ohio to Novi, Michigan which will primarily occur during the fourth quarter of 2016. As a result, the Company incurred relocation costs of $726 and $998 for the three and nine months ended September 2016, respectively. The relocation costs incurred included employee retention, relocation, severance, recruiting, duplicate wages and professional fees.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

In April 2016, the Company entered into a long-term lease agreement for its new corporate headquarters. The Company establishes assets and liabilities for the estimated construction costs incurred under build-to-suit lease arrangements to the extent the Company was involved in the construction of structural improvements or takes construction risk prior to the commencement of a lease. As of September 30, 2016, the Company recorded a non-cash build-to-suit lease asset under construction of $4,322 (within Prepaid and other currents assets) and a corresponding obligation (within accrued expenses and other current liabilities) in the condensed consolidated balance sheet.

Also, the Company concluded that the Warren, Ohio headquarter building, which had a net book value of $481 at September 30, 2016 and is actively marketed for sale, met the criteria for held for sale accounting treatment. As such, it was reclassified from Property, plant and equipment, net to Prepaid and other current assets at September 30, 2016.

Three months ended March 31 2017  2016 
Product warranty and recall at beginning of period $9,344  $6,419 
Accruals for products shipped during period  1,524   1,358 
Assumed warranty liability related to Orlaco  1,462   - 
Aggregate changes in pre-existing liabilities due to claim developments  1,614   (302)
Settlements made during the period  (2,281)  (348)
Product warranty and recall at end of period $11,663  $7,127 

 

(12) Business Realignment

 

The Company regularly evaluates the performance of its businesses and cost structures, including personnel, and makes necessary changes thereto in order to optimize its results.  The Company also evaluates the required skill sets of its personnel and periodically makes strategic changes.  As a consequence of these actions, the Company incurs severance related costs which are referred to as business realignment charges.

 

Business realignment charges by reportable segment were as follows:

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2016  2015  2016  2015 
Electronics(A) $-  $317  $1,180  $317 
PST(B)  211   403   1,242   403 
Unallocated Corporate(C)  -   309   -   309 
Total business realignment charges $211  $1,029  $2,422  $1,029 

(A)19Severance costs for the nine months ended September 30, 2016 related to selling, general and administrative (“SG&A”) and design and development (“D&D”) were $196 and $984, respectively. Severance costs for both the three and nine months ended September 30, 2015 related to SG&A and D&D were $102 and $215, respectively.

(B)Severance costs for the three months ended September 30, 2016 related to cost of goods sold (“COGS”) and SG&A were $20 and $191, respectively. Severance costs for the nine months ended September 30, 2016 related to COGS, SG&A and D&D were $307, $819 and $116, respectively. Severance costs for both the three and nine months ended September 30, 2015 related to COGS, SG&A and D&D were $172, $117 and $114, respectively.

(C)Severance costs for both the three and nine months ended September 30, 2015 related to SG&A were $309.

Business realignment charges classified by statement of operations line item were as follows:

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2016  2015  2016  2015 
Cost of goods sold $20  $171  $307  $171 
Selling, general and administrative  191   529   1,015   529 
Design and development  -   329   1,100   329 
Total business realignment charges $211  $1,029  $2,422  $1,029 

18

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

Business realignment charges by reportable segment were as follows:

Three months ended March 31, 2017  2016 
Electronics(A) $-  $1,180 
PST(B)  171   722 
Total business realignment charges $171  $1,902 

(A)There were no severance costs for the three months ended March 31, 2017. Severance costs for the three months ended March 31, 2016 related to Selling, General and Administration (“SG&A”) and Design and Development (“D&D”) were $196 and $984, respectively.

(B)Severance costs for the three months ended March 31, 2017 related to cost of goods sold (“COGS”) and SG&A were $90 and $81, respectively. Severance costs for the three months ended March 31, 2016 related to COGS, SG&A and D&D were $179, $468 and $75, respectively.

Business realignment charges classified by statement of operations line item were as follows:

Three months ended March 31, 2017  2016 
Cost of goods sold $90  $179 
Selling, general and administrative  81   664 
Design and development  -   1,059 
Total business realignment charges $171  $1,902 

 

(13) Income Taxes

 

The Company computes its consolidated income tax provision each quarter based on a projected annual effective tax rate, as required. The Company is required to reduce deferred tax assets by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the benefit of the deferred tax assets will not be realized in future periods. The Company also records the income tax impact of certain discrete, unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.

 

When a company maintains a valuation allowance in a particular jurisdiction, no net income tax expense or (benefit) will typically be provided on income (loss) for that jurisdiction on an annual basis. Jurisdictions with projected income that maintain a valuation allowance typically will form part of the projected annual effective tax rate calculation discussed above. However, jurisdictions with a projected loss for the year that maintain a valuation allowance are excluded from the projected annual effective income tax rate calculation. Instead, the income tax for these jurisdictions is computed separately.

 

The actual year to date income tax expense (benefit) is the product of the most current projected annual effective income tax rate and the actual year to date pre-tax income (loss) adjusted for any discrete tax items. The income tax expense (benefit) for a particular quarter, except for the first quarter, is the difference between the year to date calculation of income tax expense (benefit) and the year to date calculation for the prior quarter.

 

Therefore, the actual effective income tax rate during a particular quarter can vary significantly based upon the jurisdictional mix and timing of actual earnings compared to projected annual earnings, permanent items, earnings for those jurisdictions that maintain a valuation allowance, tax associated with jurisdictions excluded from the projected annual effective income tax rate calculation and discrete items.

 

The Company recognized income tax expense of $919 and $32 from continuing operations for federal, state and foreign income taxes for the three months ended September 30, 2016 and 2015, respectively.  The increase in income tax expense for the three months ended September 30, 2016 compared to the same period for 2015 was primarily due to the increase in consolidated earnings. Also, income tax expense increased due to PST’s operating loss which generated a benefit for the third quarter of 2015, however, due to the valuation allowance position taken in the fourth quarter of 2015, no longer provides a tax benefit in 2016. The effective tax rate increased to 8.4% in the third quarter of 2016 from 0.4% in the third quarter of 2015 primarily due to a full valuation allowance on PST’s loss that negatively impacted the effective tax rate. The impact of PST on the effective tax rate was partially offset by the continued strong performance of the U.S. operations which, due to a full valuation allowance, positively impacted the effective tax rate.

The Company recognized income tax expense (benefit) of $3,114 and $(202) from continuing operations for federal, state and foreign income taxes for the nine months ended September 30, 2016 and 2015, respectively.  The increase in income tax expense for the nine months ended September 30, 2016 compared to the same period for 2015 was primarily due to the increase in consolidated earnings. In addition, income tax expense increased due to PST’s operating loss which generated a benefit for the first nine months of 2015, however, due to the valuation allowance position taken in the fourth quarter of 2015, no longer provides a tax benefit in 2016. The effective tax rate increased to 10.3% in the first nine months of 2016 from (1.3)% in the first nine months of 2015 primarily due to a full valuation allowance on PST’s loss that negatively impacted the effective tax rate. The impact of PST on the effective tax rate was partially offset by the continued strong performance of the U.S. operations which, due to a full valuation allowance, positively impacted the effective tax rate.

19

20

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

The Company recognized income tax expense of $4,571 and $845 for federal, state and foreign income taxes for the three months ended March 31, 2017 and 2016, respectively.  The increase in income tax expense for the three months ended March 31, 2017 compared to the same period for 2016 was primarily related to the release of the U.S. federal, certain state and foreign valuation allowances in the fourth quarter of 2016 that were previously recorded against certain deferred tax assets. The effective tax rate increased to 33.3% in the first quarter of 2017 from 12.2% in the first quarter of 2016 primarily due the continued strong performance of the U.S. operations, which due to a full valuation allowance positively impacted the effective tax rate in 2016.

 

(14) Segment Reporting

 

Operating segments are defined as components of an enterprise that are evaluated regularly by the Company's chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the chief executive officer.

 

The Company has three reportable segments, Control Devices, Electronics, and PST, which also represent its operating segments. The Control Devices reportable segment produces sensors, switches, valves and actuators. The Electronics reportable segment produces electronic instrument clusters, electronic control units and driver information systems.systems and includes the newly acquired Orlaco business which designs and manufactures a variety of camera-based vision systems, monitors and related products. The PST reportable segment designs and manufactures electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices.

 

The accounting policies of the Company's reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company's 20152016 Form 10-K. The Company's management evaluates the performance of its reportable segments based primarily on revenues from external customers and operating income (loss).income. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

 

The financial information presented below is for our three reportable operating segments and includes adjustments for unallocated corporate costs and intercompany eliminations, where applicable.  Such costs and eliminations do not meet the requirements for being classified as an operating segment. Corporate costs include various support functions, such as information technology, corporate finance, legal, executive administration and human resources.


21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

A summary of financial information by reportable segment is as follows:

 

 Three months ended Nine months ended 
 September 30, September 30, 
 2016  2015  2016  2015 
Three months ended March 31, 2017  2016 
Net Sales:                        
Control Devices $103,700  $87,030  $304,957  $251,299  $118,873  $92,368 
Inter-segment sales  430   482   1,448   1,814   783   533 
Control Devices net sales  104,130   87,512   306,405   253,113   119,656   92,901 
                        
Electronics  47,804   50,688   158,201   165,015   63,805   52,636 
Inter-segment sales  9,495   6,567   24,706   17,651   11,356   7,027 
Electronics net sales  57,299   57,255   182,907   182,666   75,161   59,663 
                        
PST  22,342   24,339   60,207   73,857   21,633   17,612 
Inter-segment sales  -   -   -   -   -   - 
PST net sales  22,342   24,339   60,207   73,857   21,633   17,612 
                        
Eliminations  (9,925)  (7,049)  (26,154)  (19,465)  (12,139)  (7,560)
Total net sales $173,846  $162,057  $523,365  $490,171  $204,311  $162,616 
Operating Income (Loss):                        
Control Devices $15,319  $12,197  $47,133  $33,787  $19,084  $13,517 
Electronics  3,735   2,767   12,050   9,413   5,557   3,820 
PST  29   (640)  (4,179)  (5,881)  579   (3,117)
Unallocated Corporate(A)  (7,303)  (5,377)  (21,092)  (17,831)  (10,056)  (5,714)
Total operating income $11,780  $8,947  $33,912  $19,488  $15,164  $8,506 
Depreciation and Amortization:                        
Control Devices $2,561  $2,346  $7,345  $7,132  $2,699  $2,309 
Electronics  996   949   3,076   2,860   1,572   1,040 
PST  2,307   2,282   6,388   7,421   2,088   1,850 
Corporate  115   69   309   139 
Unallocated Corporate  99   70 
Total depreciation and amortization (B) $5,979  $5,646  $17,118  $17,552  $6,458  $5,269 
Interest Expense, net:                        
Control Devices $56  $81  $172  $246  $54  $61 
Electronics  33   38   196   124   38   39 
PST  934   839   2,686   2,063   572   750 
Corporate  661   789   1,984   2,250 
Unallocated Corporate  746   664 
Total interest expense, net $1,684  $1,747  $5,038  $4,683  $1,410  $1,514 
Capital Expenditures:                        
Control Devices $3,229  $3,953  $9,260  $11,835  $3,447  $2,727 
Electronics  1,244   2,729   5,229   5,751   2,351   3,131 
PST  640   1,477   2,516   4,889   884   854 
Corporate  1,365   133   1,479   1,046 
Unallocated Corporate(C)  583   105 
Total capital expenditures $6,478  $8,292  $18,484  $23,521  $7,265  $6,817 

 


22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

 

 September 30, December 31,  March 31, December 31, 
 2016  2015  2017  2016 
Total Assets:                
Control Devices $157,208  $127,649  $162,218  $150,623 
Electronics  110,216   97,443   214,390   99,964 
PST  111,935   100,143   109,895   107,405 
Corporate(C)  284,869   288,806   364,760   287,031 
Eliminations  (250,626)  (249,789)  (331,717)  (250,494)
Total assets $413,602  $364,252  $519,546  $394,529 

 

(A)Unallocated Corporate expenses include, among other items, finance, legal, human resources and information technology costs as well as share-based compensation.
(B)These amounts represent depreciation and amortization on property, plant and equipment and certain intangible assets.
(C)Assets located at Corporate consist primarily of cash, intercompany loan receivables, capital expenditures for the new headquarter building, equity investments and investments in subsidiaries.

 

The following table presentstables present net sales and long-term assets for each of the geographic areas in which the Company operates: 

 

  Three months ended  Nine months ended 
  September 30,  September 30, 
  2016  2015  2016  2015 
Net Sales:                
North America $108,605  $96,676  $321,973  $281,108 
South America  22,342   24,339   60,207   73,857 
Europe and Other  42,899   41,042   141,185   135,206 
Total net sales $173,846  $162,057  $523,365  $490,171 

Three months ended March 31, 2017  2016 
Net Sales:        
North America $123,386  $99,119 
South America  21,633   17,612 
Europe and Other  59,292   45,885 
Total net sales $204,311  $162,616 

 

  September 30,  December 31, 
  2016  2015 
Long-term Assets:        
North America $63,934  $60,099 
South America  63,925   56,943 
Europe and Other  16,020   15,301 
Total long-term assets $143,879  $132,343 

  March 31,  December 31, 
  2017  2016 
Long-term Assets:        
North America $76,354  $73,835 
South America  65,256   63,497 
Europe and Other  94,823   16,304 
Total long-term assets $236,433  $153,636 

 

(15) Investments

 

Minda Stoneridge Instruments Ltd.

 

The Company has a 49% interest in Minda Stoneridge Instruments Ltd. (“Minda”), a company based in India that manufactures electronics, instrumentation equipment and sensors primarily for the motorcycle and commercial vehicle market. The investment is accounted for under the equity method of accounting. The Company's investment in Minda, recorded as a component of investments and other long-term assets, net on the condensed consolidated balance sheets, was $7,846$8,514 and $6,929$7,952 at September 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $307$180 and $160,$143, for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively.  Equity in earnings of Minda included in the condensed consolidated statements of operations was $603 and $492 for the nine months ended September 30, 2016 and 2015, respectively.

 

22

23

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

PST Eletrônica Ltda.

 

The Company has a 74% controlling interest in PST. Noncontrolling interest in PST increased to $13,704$14,489 atSeptember 30, 2016 March 31, 2017 due to comprehensive income of $394$727 resulting from a favorable change in foreign currency translation of $2,403$757 partially offset by a proportionate share of its net loss of $2,009$30 for the ninethree months ended September 30, 2016.March 31, 2017. Noncontrolling interest in PST decreasedincreased to $14,273$13,370 at September 30, 2015March 31, 2016 due to comprehensive lossincome of $8,277$60 resulting from a favorable change in foreign currency translation of $1,190 partially offset by a proportionate share of its net loss of $1,074 and an unfavorable change in foreign currency translation of $7,203 for the nine months ended September 30, 2015. Comprehensive loss related to PST noncontrolling interest was $(467) and $(4,080)$1,130 for the three months ended September 30, 2016 and 2015, respectively.March 31, 2016.

 

PST has dividends payable declared in previous years to noncontrolling interest of $10,842 Brazilian real ($3,340)3,472) at September 30, 2016.March 31, 2017.


24

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Background

 

We are a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, commercial, motorcycle, off-highway and agricultural vehicle markets.

On January 31, 2017, the Company acquired Exploitatiemaatschappij Berghaaf B.V. (“Orlaco”). As such, the Company’s condensed consolidated financial statements herein include the results of Orlaco from the acquisition date to March 31, 2017. See Note 3 to the condensed consolidated financial statements for additional details regarding the Orlaco acquisition.

 

Segments

 

We are primarily organized by products produced and markets served. Under this structure, our continuing operations have been reported utilizing the following segments:

 

Control Devices.This segment includes results of operations that manufacture sensors, switches, valves and actuators.

 

Electronics.This segment includes results of operations from the production ofproduces electronic instrument clusters, electronic control units and driver information systems.systems and includes the newly acquired Orlaco business which designs and manufactures a variety of camera-based vision systems, monitors and related products.

 

PST.This segment includes results of operations that design and manufacture electronic vehicle alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices.

 

ThirdFirst Quarter Overview

 

Income from continuing operationsNet income attributable to Stoneridge. Inc. of $10.3$9.2 million, or $0.36$0.32 per diluted share for the three months ended September 30, 2016March 31, 2017 increased by $2.8$2.0 million, or $0.09$0.06 per diluted share from $7.5$7.2 million, or $0.27$0.26 per diluted share for the three months ended September 30, 2015. The increase in income from continuing operations is primarilyMarch 31, 2016, due to an increase in gross profit of $4.6$16.0 million related toresulting from higher sales, in our Control Devices segment and lower material costs and operating improvements which were partially offset by higher warranty expense and expense associated with the Orlaco inventory step-up.  The improvement in our Electronics and PST segments resulting from a favorable change in foreign currency exchange rates. Thisgross profit was partially offset by a $1.5an $8.5 million increase in selling, general and administrative costs primarily in our unallocated corporate segment (which included $0.7 million in costs associated with our headquarter relocation),and Electronics segments and a $0.9$3.7 million increase in income tax expense.

 

Net sales increased by $11.8$41.7 million, or 7.3%25.6%, compared to the thirdfirst quarter of 2015 as2016 due to higher sales in each of our Control Devices segment were partially offset by lower sales in our PST and Electronics segments.  The increase in sales in our Control Devices segment was primarily due to new product sales in the North American automotive market while the increase in sales in our Electronics segment relates to the Orlaco business acquired on January 31, 2017.  Also, PST segment sales decreasedprimarily increased due to weakness in the Brazilian economy and automotive market.favorable foreign currency exchange rates. 

 

At September 30, 2016March 31, 2017 and December 31, 2015,2016, we had cash and cash equivalents balances of $50.6$44.9 million and $54.4$50.4 million, respectively. The decrease during the first ninethree months of 20162017 was primarily due to higher working capital and capital expenditures, and repayment of debt, which was partially offset by net income. At September 30, 2016March 31, 2017 and December 31, 20152016 we had $87.0$141.0 million and $100.0$67.0 million, respectively, in borrowings outstanding on our $300.0 million Credit Facility. The increase in the Credit Facility balance during the first three months of 2017 was the result of borrowing to fund the Orlaco acquisition.

 

25

Outlook

 

We expect our financial performance to improve in the fourth quarter of 2016 compared to the fourth quarter of 2015 because of new product launches and savings from previously incurred business realignment activities.

We expect to continue to have significantsales growth in our North American automotive vehicle salesmarket in 20162017 related to newrecent product launches primarily our shift by wire product in our Control Devices segment. Also,segment despite that the North American automotive vehicle market production is expected to increasedecrease by 0.3 million units to approximately 17.917.5 million units in 2016 (an increase from the 17.5 million units produced in 2015), which we expect to have a favorable effect on our Control Devices segment.2017.

 


The North American commercial vehicle market is expecteddeclined in 2016 and we expect it to decline forslightly again in 2017. We expect the remainder of 2016 compared to the first nine months of 2016. The European commercial vehicle market is forecastedin 2017 to have a modest increase forremain at approximately the remainder of 2016 compared to the first nine months ofsame level with 2016.

 

Our PST segment revenues and operating performance continue to be adversely impacted by weakness of the Brazilian economy and automotive market, and has been negatively impacted by unfavorable foreign currency translation.market. In October 2016,April 2017, the International Monetary Fund (IMF) forecasted the Brazil gross domestic product (“GDP”) to decline 3.3%grow 0.2% in 20162017 and increase 0.5%1.7% in 2017.2018. Based on the weakness in PST’s sales and operating performance during 2016 and modest forecasted negative GDP growth of the Brazilian economy, in 2016, PST’s sales and earnings growth expectations in 2017 continue to be moderated.moderated for 2017. Because there is significant uncertainty regarding the timing and magnitude of a recovery in the Brazilian economy and automotive market, the Company continues to evaluate the need to further realign PST’s cost structure to mitigate theany effect on earnings and cash flows of possible continued weakened product demand and unfavorable foreign currency exchange rates.

   

We regularly evaluateAs the performanceCompany no longer has a valuation allowance against its U.S. federal, certain state and foreign deferred tax assets, its effective tax rate will be higher in 2017 as compared to 2016. Actual cash taxes paid as a percentage of our businesses and their cost structures, including personnel, and make necessary changes theretoincome in order2017 is expected to optimize our results.  We also evaluate the required skill sets of our personnel and periodically make strategic changes.  As a consequence of these actions, we incur severance related costs which we refer to as business realignment charges.be consistent with 2016.

 

A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and PST segments are denominated in U.S. dollars, and therefore movements in foreign currency exchange rates can also have a significant effect on our results of operations. While theThe U.S. dollar strengthenedweakened significantly against the Swedish krona, euro and Brazilian real in 2015 increasing2016 favorably impacting our material costs and reducing our reported results, theresults. The U.S. dollar weakenedcontinued to weaken against these currencies in the first nine monthsquarter of 2016.2017 favorably impacting our material costs and reported results.

We regularly evaluate the performance of our businesses and their cost structures, including personnel, and make necessary changes thereto in order to optimize our results.  We also evaluate the required skill sets of our personnel and periodically make strategic changes.  As a consequence of these actions, we incur severance related costs which we refer to as business realignment charges.

 

Because of the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which to date has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.

 

In March 2016, we announced the relocation of our corporate headquarters from Warren, Ohio to Novi, Michigan, which will occur primarily during the fourth quarter of 2016.  As a result, the Company will incur relocation costs of approximately $2.8 million to $3.4 million including employee retention, relocation, severance, recruiting, duplicate wages and professional fees.  The new headquarters will expand our presence in the Detroit metropolitan area and improve access to key customers, decision makers and influencers in the automotive and commercial vehicle markets that we serve.  In connection with the relocation, the Company is eligible for a Michigan Business Development Program grant of up to $1.4 million based upon the number of new jobs created in Michigan, along with talent services and training support from Oakland County Michigan Works!.

26

 


Three Months Ended September 30, 2016March 31, 2017 Compared to Three Months Ended September 30, 2015March 31, 2016

 

Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):

 

          Dollar           Dollar 
          increase /           increase / 
Three months ended September 30 2016  2015  (decrease) 
Three months ended March 31,    2017     2016  (decrease) 
Net sales $173,846   100.0% $162,057   100.0% $11,789  $204,311   100.0% $162,616   100.0% $41,695 
Costs and expenses:                                        
Cost of goods sold  124,098   71.4   116,912   72.1   7,186   143,160   70.1   117,455   72.2   25,705 
Selling, general and administrative  27,817   16.0   26,331   16.2   1,486   34,266   16.8   25,772   15.9   8,494 
Design and development  10,151   5.8   9,867   6.1   284   11,721   5.7   10,883   6.7   838 
                                        
Operating income  11,780   6.8   8,947   5.6   2,833   15,164   7.4   8,506   5.2   6,658 
Interest expense, net  1,684   1.0   1,747   1.1   (63)  1,410   0.7   1,514   0.9   (104)
Equity in earnings of investee  (307)  (0.2)  (160)  (0.1)  (147)  (180)  (0.1)  (143)  (0.1)  (37)
Other income, net  (497)  (0.3)  (83)  -   (414)
Income before income taxes from continuing operations  10,900   6.3   7,443   4.6   3,457 
Income tax expense from continuing operations  919   0.5   32   -   887 
Income from continuing operations  9,981   5.8   7,411   4.6   2,570 
Loss from discontinued operations  -   -   (113)  (0.1)  113 
Other expense, net  190   0.1   181   0.1   9 
Income before income taxes  13,744   6.7   6,954   4.3   6,790 
                    
Provision for income taxes  4,571   2.2   845   0.5   3,726 
                                        
Net income  9,981   5.8   7,298   4.5   2,683   9,173   4.5   6,109   3.8   3,064 
Net loss attributable to noncontrolling interest  (303)  (0.1)  (69)  -   (234)  (30)  -   (1,130)  (0.7)  1,100 
Net income attributable to Stoneridge, Inc. $10,284   5.9% $7,367   4.5% $2,917  $9,203   4.5% $7,239   4.5% $1,964 

 

Net Sales.Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):

 

    Dollar Percent     Dollar Percent 
          increase / increase /           increase / increase / 
Three months ended September 30 2016  2015  (decrease)  (decrease) 
Three months ended March 31,    2017     2016  (decrease)  (decrease) 
Control Devices $103,700   59.7% $87,030   53.7% $16,670   19.2% $118,873   58.2% $92,368   56.8% $26,505   28.7%
Electronics  47,804   27.4   50,688   31.3   (2,884)  (5.7)  63,805   31.2   52,636   32.4   11,169   21.2 
PST  22,342   12.9   24,339   15.0   (1,997)  (8.2)  21,633   10.6   17,612   10.8   4,021   22.8 
Total net sales $173,846   100.0% $162,057   100.0% $11,789   7.3% $204,311   100.0% $162,616   100.0% $41,695   25.6%

 

Our Control Devices segment net sales increased primarily due toas a result of new product sales and growth in the North American automotive market of $18.3$22.9 million, and new program sales and increased sales volume in the China automotive market of $1.4 million during the third quarter of 2016, which were offset by a decrease in commercial vehicle and various other markets of $1.6 million$2.3 and $0.8$1.7 million, respectively.

 

Our Electronics segment net sales declinedincreased $11.1 million primarily due to an increase in European off-highway vehicle products of $11.1 million related to the acquired Orlaco business as thewell as an increase in sales volume in our European commercial vehicle products of $3.0 million was more than$3.4 million. These were partially offset by a decrease in sales volume of our North American commercial vehicle and European off-highway vehicle products of $3.4$1.0 million and $1.2 million, respectively, and an unfavorable foreign currency translation of $1.2$2.8 million.

 


Our PST segment net sales decreasedincreased primarily due to continued weakness in the Brazilian economy and automotive market which was partially offset by a favorable foreign currency translation that increased sales by $2.0$3.5 million, or 8.2%. PST’s monitoring service sales modestly increased but was more than19.9% and price increases which were partially offset by a decline in product saleslower volume.

27

 

Net sales by geographic location are summarized in the following table (in thousands):

 

    Dollar Percent     Dollar Percent 
    increase / increase /     increase / increase / 
Three months ended September 30 2016  2015  (decrease)  (decrease) 
Three months ended March 31,    2017     2016  (decrease)  (decrease) 
North America $108,605   62.5% $96,676   59.7% $11,929   12.3% $123,386   60.4% $99,119   61.0% $24,267   24.5%
South America  22,342   12.9   24,339   15.0   (1,997)  (8.2)  21,633   10.6   17,612   10.8   4,021   22.8 
Europe and Other  42,899   24.6   41,042   25.3   1,857   4.5   59,292   29.0   45,885   28.2   13,407   29.2 
Total net sales $173,846   100.0% $162,057   100.0% $11,789   7.3% $204,311   100.0% $162,616   100.0% $41,695   25.6%

 

The increase in North American net sales was primarily attributable to new product sales and growth in our North American automotive market of $18.3$22.9 million and an increase in sales volumes in Control Devices North America other markets of $1.7 million, which waswere partially offset by decreased sales volume in our North American commercial vehicle market and various other markets of $5.0 million and $0.8 million, respectively.$1.0 million. The decreaseincrease in net sales in South America was primarily due to a decrease in product sales volume as a result of continued weakness in the Brazilian economy and automotive market which was partially offset by a favorable foreign currency translation.translation that increased sales by $3.5 million, or 19.9%. The increase in net sales in Europe and Other was primarily due to the increase in European off-highway vehicle products of $11.1 million related to Orlaco as well as an increase in sales volume ofin our European commercial vehicle products of $3.0 million and new program sales and increased sales volume in our China automotive market of $1.4$3.4 million whichand $2.3 million, respectively. These increases were partially offset by a sales volume decrease of our European off-highway vehicle products of $1.2 million as well as an unfavorable foreign currency translation of $1.2$2.8 million.

 

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 6.1%21.9% primarily related to an increase in net sales in our Control Devices segment.sales. Our gross margin improved by 0.7%2.1% to 28.6%29.9% for the thirdfirst quarter of 20162017 compared to 27.9%27.8% for the thirdfirst quarter of 2015 primarily due to lower material costs in our Electronics and PST segments.2016. Our material cost as a percentage of net sales decreased by 0.7% to 50.7% for the thirdfirst quarter of 20162017 compared to 51.4%51.4 % for the thirdfirst quarter of 2015 while our aggregated labor and overhead costs as a percentage of sales remained level.2016. The lower direct material costs in our Electronics and PST segments resulted from favorable foreign currency movements associated with U.S. dollar denominated purchases which were partially offset by higher direct material costs in our Control Devices segment related to a change in product mix. Our labor costs and overhead as a percentage of net sales decreased by 1.6% to 19.3%.

 

Our Control Devices segment gross margin decreased asslightly despite the benefit of increaseda significant increase in sales was more than offset bydue to higher warranty related costs and was negatively impacted by an unfavorable mixassociated with the settlement of products sold.claims.

 

Our Electronics segment gross margin improved primarily due to lower material costs resulting from favorable movement in foreign currency exchange rates.rates and a favorable mix related to Orlaco product sales partially offset by costs associated with the Orlaco inventory step-up.

 

Our PST segment gross margin increasedimproved due to lower direct material costs related to a favorable movement in foreign currency exchange rates but was negatively impacted byand a decrease infavorable sales volume.mix as well as lower overhead costs associated with 2016 business realignment actions.

 

Selling, General and Administrative (“SG&A”).SG&A expenses increased by $1.5$8.5 million compared to the thirdfirst quarter of 20152016 primarily due to higher costs related to the corporate headquarter relocation (including employee retention, relocation, severance, recruiting and duplicate wages) totaling $0.7 million as well as higher wages, share-based compensation (partially resulting from the modification of the retirement notice provisions of certain awards) and professional feesprimarily in our unallocated corporate segment. This increase wasoperations and Electronics segments which were partially offset by a slight decrease$0.6 million reduction in SG&A expenses in ourbusiness realignment charges. Our Electronics and Control Devices segments SG&A costs increased as well. Unallocated corporate SG&A costs increased due to higher wages and benefits of $0.9 million, incentive and share-based compensation of $1.7 million due to higher attainment of performance based awards and accelerated expense associated with retirement eligible employees in the current period as well as transaction costs associated with the Orlaco acquisition of $1.2 million. Electronics segment SG&A costs increased primarily from the acquisition of Orlaco. Control Devices SG&A costs increased due to higher wages and benefits. PST segments, a portion ofSG&A costs increased due to an unfavorable change in foreign currency exchange rates, higher wages, employee benefits and bad debt, which relates towere partially offset by lower business realignment charges which decreased by $0.3of $0.4 million.

 

Design and Development (“D&D”).D&D costs increased by $0.3$0.8 million primarily due to higher D&D costs related to new product launches in our Control Devices segment and product development costs inthe acquired Orlaco business within our Electronics segment, which werewas partially offset by lower employee costsa $1.0 million decrease in our PST segment as a result of business realignment actions.charges.

 


28

Operating Income.Operating income (loss) is summarized in the following table by continuing reportable segment (in thousands):

 

      Dollar Percent       Dollar Percent 
      increase / increase /       increase / increase / 
Three months ended September 30 2016  2015  (decrease)  (decrease) 
Three months ended March 31, 2017  2016  (decrease)  (decrease) 
Control Devices $15,319  $12,197  $3,122   25.6% $19,084  $13,517  $5,567   41.2%
Electronics  3,735   2,767   968   35.0   5,557   3,820   1,737   45.5 
PST  29   (640)  669   104.5   579   (3,117)  3,696   118.6 
Unallocated corporate  (7,303)  (5,377)  (1,926)  (35.8)  (10,056)  (5,714)  (4,342)  (76.0)
Operating income $11,780  $8,947  $2,833   31.7% $15,164  $8,506  $6,658   78.3%

 

Our Control Devices segment operating income increased primarily due to an increase in sales, which was partially offset by higher D&Dwarranty and warranty relatedSG&A costs.

 

Our Electronics segment operating income increased despite lower sales primarily due to higher sales resulting from the Orlaco acquisition, lower material costs and SG&Aa decrease in business realignment costs of $1.2 million which were partially offset by higherinventory step-up, SG&A and D&D costs.costs related to Orlaco.

 

Our PST segment operating performance improved primarily due to lower D&D costs resulting from business realignment actions anda higher sales, higher gross profit from lower material and overhead costs and favorable sales mix as well as a $0.2$0.6 million decrease in business realignment costs. PST’s improved operating performance is expected to continue infor the fourth quarterremainder of 2016.2017.

 

Our unallocated corporate operating loss increased primarily due to costs related to the corporate headquarter relocationhigher wages and benefits, incentive and share-based compensation as well as higher wages, share-based compensation and professional fees.transaction costs associated with the Orlaco acquisition.

 

Operating income (loss) by geographic location is summarized in the following table (in thousands):

 

      Dollar Percent       Dollar Percent 
      increase / increase /       increase / increase / 
Three months ended September 30 2016  2015  (decrease)  (decrease) 
Three months ended March 31, 2017  2016  (decrease)  (decrease) 
North America $8,852  $7,714  $1,138   14.8% $9,450  $8,339  $1,111   13.3%
South America  29   (640)  669   104.5   579   (3,117)  3,696   118.6 
Europe and Other  2,899   1,873   1,026   54.8   5,135   3,284   1,851   56.4 
Operating income $11,780  $8,947  $2,833   31.7% $15,164  $8,506  $6,658   78.3%

 

Our North American operating results improved primarily due to increased sales in the North American automotive market, which were partially offset by higher wages and benefits, incentive and share-based compensation, professional feeswarranty and costs related to the headquarter relocation.Orlaco transaction costs. The improved performance in South America was primarily due to lower D&D employee costs resulting from business realignment actions,a higher gross profit resulting from lower material and overhead costs, a favorable sales mix and a $0.2 million decrease in business realignment costs. Our operating results in Europe and Other improved due primarily to higher sales and gross profit associated with the Orlaco acquisition, lower material costs resulting from a favorable movement in foreign currency exchange rates and higher sales of European commercial vehicle and China automotive products.products which were partially offset by Orlaco inventory step-up costs.

 

Interest Expense, net. Interest expense, net decreased by $0.1 million compared to the prior year thirdfirst quarter primarily due to a lower PST interest rateexpense which was partially offset by higher interest related to our Credit Facility.Facility resulting from the additional borrowings to fund the Orlaco acquisition.

 

29

Equity in Earnings of Investee. Equity earnings for Minda were $0.3$0.2 million and $0.2$0.1 million for the three months ended September 30,March 31, 2017 and 2016, and 2015, respectively. The increase in Minda’s income from operations compared to the prior period was partially offset by an unfavorable change in foreign currency exchange rates.

 

Other Income,Expense, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other income,expense, net on the condensed consolidated statement of operations. Other income,expense, net increased by $0.4 million to $0.5 million for the thirdremained consistent in first quarter of 2016 primarily due2017 compared to an increasethe first quarter of 2016. The unfavorable change in foreign currency gains and several other items. Theexchange rates in our Electronics segment were substantially offset by a favorable change in certain foreign currency exchange rates in our PST segment and unallocated corporate and Electronics segments were partially offset by an unfavorable change in foreign currency exchange rates in our PST segment.corporate.

 


ExpenseProvision for Income Taxes from Continuing Operations.Taxes. We recognized income tax expense of $0.9$4.6 million and less than $0.1$0.8 million from continuing operations for federal, state and foreign income taxes for the thirdfirst quarter of 20162017 and 2015,2016, respectively. The increase in income tax expense for the three months ended September 30, 2016March 31, 2017 compared to the same period for 20152016 was primarily due to the increase in consolidated earnings. Also, income tax expense increased due torelease of the PST operating loss which generated a benefit for the third quarter of 2015, however, due to theU.S. federal, certain state and foreign valuation allowance position takenallowances in the fourth quarter of 2015, no longer provides a2016 that were previously recorded against certain deferred tax benefit in 2016.assets. The effective tax rate increased to 8.4%33.3% in the thirdfirst quarter of 2017 from 12.2% in the first quarter of 2016 from 0.4% in the third quarter of 2015 primarily due to a full valuation allowance on PST’s loss that negatively impacted the effective tax rate. The impact of PST on the effective tax rate was partially offset by the continued strong performance of ourthe U.S. operations, which due to a full valuation allowance, positivelyfavorably impacted the effective tax rate.

We will continue to maintain a full valuation allowance on our U.S. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance. As a result of the sale of the Wiring business and debt refinancing during the second half of 2014 and actual and anticipated earnings of the U.S. operations, we believe that there is a reasonable possibility that additional positive evidence may continue to developrate in the near term that may allow us to reach a conclusion that some or all of the valuation allowance on our U.S. deferred tax assets will no longer be needed. Reversal of some or all of the U.S. valuation allowance would result in the recognition of certain deferred tax assets and an income tax benefit in the period the reversal is recorded. However, the exact timing and amount of a valuation allowance reversal depends upon the level of profitability that we are able to actually achieve.


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):

              Dollar
 increase /		 
Nine months ended September 30    2016     2015  (decrease) 
Net sales $523,365   100.0% $490,171   100.0% $33,194 
Costs and expenses:                    
Cost of goods sold  375,705   71.8   355,432   72.5   20,273 
Selling, general and administrative  82,836   15.8   85,555   17.5   (2,719)
Design and development  30,912   5.9   29,696   6.0   1,216 
                     
Operating income  33,912   6.5   19,488   4.0   14,424 
Interest expense, net  5,038   0.9   4,683   1.0   355 
Equity in earnings of investee  (603)  (0.1)  (492)  (0.1)  (111)
Other income, net  (722)  (0.1)  (343)  (0.1)  (379)
Income before income taxes from continuing operations  30,199   5.8   15,640   3.2   14,559 
Income tax expense (benefit) from continuing operations  3,114   0.6   (202)  -   3,316 
Income from continuing operations  27,085   5.2   15,842   3.2   11,243 
Loss from discontinued operations  -   -   (226)  -   226 
Net income  27,085   5.2   15,616   3.2   11,469 
Net loss attributable to noncontrolling interest  (2,009)  (0.4)  (1,074)  (0.2)  (935)
Net income attributable to Stoneridge, Inc. $29,094   5.6% $16,690   3.4% $12,404 

Net Sales.Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):

     Dollar  Percent 
              increase /  increase / 
Nine months ended September 30    2016     2015  (decrease)  (decrease) 
Control Devices $304,957   58.3% $251,299   51.2% $53,658   21.4%
Electronics  158,201   30.2   165,015   33.7   (6,814)  (4.1)%
PST  60,207   11.5   73,857   15.1   (13,650)  (18.5)%
Total net sales $523,365   100.0% $490,171   100.0% $33,194   6.8%

Our Control Devices segment net sales increased primarily due to new product sales and growth in the North American automotive market of $54.8 million and new program sales and increased sales volume in the China automotive market of $3.5 million, which were partially offset by a decrease in various other markets of $2.1 million and our North American commercial vehicle market of $0.5 million during the first nine months of 2016.

 

Our Electronics segment net sales decreased primarily due to a decrease in sales volume in our North American commercial vehicle products of $9.6 million, an unfavorable foreign currency translation of $1.7 million and a decrease in our European off-highway vehicle products of $0.9 million, which were partially offset by an increase in sales volume in our European commercial vehicle products of $5.9 million.


Our PST segment net sales decreased primarily due to an unfavorable foreign currency translation which reduced sales by $7.9 million, or 10.7%, and lower product volume as a result of continued weakness in the Brazilian economy and automotive market while monitoring service sales volume modestly increased.

Net sales by geographic location are summarized in the following table (in thousands):

     Dollar  Percent 
     increase /  increase / 
Nine months ended September 30    2016     2015  (decrease)  (decrease) 
North America $321,973   61.5% $281,108   57.3% $40,865   14.5%
South America  60,207   11.5   73,857   15.1   (13,650)  (18.5)%
Europe and Other  141,185   27.0   135,206   27.6   5,979   4.4%
Total net sales $523,365   100.0% $490,171   100.0% $33,194   6.8%

The increase in North American net sales was primarily attributable to new product sales and growth in the North American automotive market of $54.8 million, which was partially offset by decreased sales volume in the North American commercial vehicle market of $9.6 million and decreased sales in various other markets of $2.1 million. The decrease in net sales in South America was due to an unfavorable foreign currency translation as well as lower product sales volume as a result of continued weakness in the Brazilian economy and automotive market. The increase in net sales in Europe and Other was primarily due to an increase in sales volume of our European commercial vehicle products of $5.9 million and new program sales and increased sales volume in our China automotive market of $3.5 million, which were partially offset by an unfavorable foreign currency translation of $1.7 million and lower sales of European off-highway vehicle products of $0.9 million.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 5.7% primarily related to an increase in sales in our Control Devices segment. Our gross margin improved by 0.7% to 28.2% for the first nine months of 2016 compared to 27.5% for the first nine months of 2015. Our material cost as a percentage of net sales increased by 0.1% to 51.5% for the first nine months of 2016 compared to 51.4% for the first nine months of 2015 while aggregated labor and overhead costs as a percentage of sales improved by 0.8% due to increased sales and a change in product mix in our Control Devices segment. The lower material costs in our Electronics and PST segments due to a favorable change in foreign currency exchange rates were offset by higher direct material costs as a percentage of sales in our Control Devices segment due to a change in mix of products sold.

Our Control Devices segment gross margin improved slightly primarily due to the benefit of increased sales levels which was partially offset by higher warranty related costs and was negatively impacted by an unfavorable change in mix of products sold.

Our Electronics segment gross margin improved primarily due to lower material costs resulting from a favorable movement in foreign currency exchange rates.

Our PST segment gross margin improved due to lower material costs resulting from a favorable movement in foreign currency exchange rates, which was partially offset by lower sales volume and a $0.1 million increase in business realignment charges.

Selling, General and Administrative. SG&A expenses decreased by $2.7 million compared to the first nine months of 2015 as lower SG&A costs in our PST and Electronics segments were partially offset by higher SG&A costs in our unallocated corporate segment.  PST SG&A costs decreased primarily due to lower employee costs as a result of business realignment actions, lower selling related expenses and professional fees and from movement in foreign currency exchange rates, which were partially offset by a $0.7 million increase in business realignment costs.  SG&A expenses in our Electronics segment decreased primarily due from movement in foreign currency exchange rates.  Unallocated corporate SG&A costs increased due to costs associated with the corporate headquarter relocation (including employee retention, relocation, severance, recruiting, other professional fees and duplicate wages) totaling $1.0 million as well as higher wages, incentive-based compensation (as a result of improved financial performance) and consulting fees.  These higher unallocated corporate SG&A costs were partially offset by lower share-based compensation expense as the additional expense related to modification of the retirement notice provisions of certain share-based awards of $0.5 million for the first nine months of 2016 were more than offset by $2.2 million of expense for the acceleration of the vesting associated with the retirement of our President and Chief Executive Officer (“CEO”) during the first nine months of 2015.


Design and Development.D&D costs increased by $1.2 million primarily due to development costs related to new product launches in our Control Devices segment as well as higher product development costs and business realignment charges in our Electronics segment. Business realignment charges related to our Electronics segment increased by $0.8 million during the first nine months of 2016 compared to 2015. This increase in D&D costs in our Control Devices and Electronics segments was partially offset by lower employee costs as a result of business realignment actions, lower product design costs and movement in foreign currency exchange rates in our PST segment.

Operating Income.Operating income (loss) is summarized in the following table by continuing reportable segment (in thousands):

        Dollar  Percent 
        increase /  increase / 
Nine months ended September 30 2016  2015  (decrease)  (decrease) 
Control Devices $47,133  $33,787  $13,346   39.5%
Electronics  12,050   9,413   2,637   28.0%
PST  (4,179)  (5,881)  1,702   28.9%
Unallocated corporate  (21,092)  (17,831)  (3,261)  (18.3)%
Operating income $33,912  $19,488  $14,424   74.0%

Our Control Devices segment operating income increased primarily due to an increase in sales, which was partially offset by higher D&D costs related to new product launches and higher warranty related costs.

Our Electronics segment operating income increased primarily due to lower material costs, which was partially offset by a $0.9 million increase in business realignment charges and lower sales during the first nine months of 2016 compared to 2015.

Our PST segment operating performance improved primarily due to lower SG&A and D&D expenses due to business realignment actions, lower selling expenses and professional fees. These were partially offset by lower gross profit resulting from lower product sales volume as well as an increase in business realignment charges of $0.8 million for the first nine months of 2016 compared to 2015.

Our unallocated corporate operating loss increased primarily due to higher costs associated with the corporate headquarter relocation as well as higher wages, incentive-based compensation and professional fees. These were partially offset by lower share-based compensation expense because the first nine months of 2015 included $2.2 million of expense for the acceleration of the vesting associated with the retirement of our President and CEO while the first nine months of 2016 had $0.5 million of expense related to the modification of the retirement notice provisions of certain awards.

Operating income (loss) by geographic location is summarized in the following table (in thousands):

        Dollar  Percent 
        increase /  increase / 
Nine months ended September 30 2016  2015  (decrease)  (decrease) 
North America $27,303  $19,310  $7,993   41.4%
South America  (4,179)  (5,881)  1,702   (28.9)%
Europe and Other  10,788   6,059   4,729   78.0%
Operating income $33,912  $19,488  $14,424   74.0%

32

Our North American operating results improved primarily due to increased sales in the North American automotive market which was partially offset by higher SG&A expenses in our unallocated corporate segment and higher D&D and warranty related costs in our Control Devices segment. The improvement in performance in South America was primarily due to lower SG&A and D&D employee expenses resulting from business realignment actions, lower selling costs and professional fees which was partially offset by lower gross profit resulting from lower product sales volume and a $0.8 million increase in business realignment costs. Our results in Europe and Other improved as higher D&D costs, an increase in product development and business realignment charges were more than offset by higher gross profit benefiting from lower material costs as well as lower SG&A expenses.

Interest Expense, net. Interest expense, net increased by $0.4 million compared to the prior year first nine months primarily due to a higher weighted-average interest rate related to our PST debt.

Equity in Earnings of Investee. Equity earnings for Minda were $0.6 million and $0.5 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in Minda’s income from operations compared to the prior period was partially offset by an unfavorable change in foreign currency exchange rates.

Other Income, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other income, net on the condensed consolidated statement of operations. Other income, net increased by $0.4 million compared to the first nine months of 2015 due to an increase in foreign currency gains and several other items. The favorable change in foreign currency exchange rates in our unallocated corporate and Electronics segments were partially offset by an unfavorable change in foreign currency exchange rates in our PST segment.

Expense (Benefit) for Income Taxes from Continuing Operations. We recognized income tax expense (benefit) of $3.1 million and $(0.2) million from continuing operations for federal, state and foreign income taxes for the first nine months of 2016 and 2015, respectively. The increase in income tax expense for the nine months ended September 30, 2016 compared to the same period for 2015 was primarily due to the increase in consolidated earnings. Also, income tax expense increased due to the PST operating loss which generated a benefit for the first nine months of 2015, however, due to the valuation allowance position taken in the fourth quarter of 2015, no longer provides a tax benefit in 2016. The effective tax rate increased to 10.3% in the first nine months of 2016 from (1.3)% in the first nine months of 2015 primarily due to a full valuation allowance on PST’s loss that negatively impacted the effective tax rate. The impact of PST on the effective tax rate was partially offset by the continued strong performance of our U.S. operations which, due to a full valuation allowance, positively impacted the effective tax rate.

We will continue to maintain a full valuation allowance on our U.S. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of this allowance. As a result of the sale of the Wiring business and debt refinancing during the second half of 2014 and actual and anticipated earnings of the U.S. operations, we believe that there is a reasonable possibility that additional positive evidence may continue to develop in the near term that may allow us to reach a conclusion that some or all of the valuation allowance on our U.S. deferred tax assets will no longer be needed. Reversal of some or all of the U.S. valuation allowance would result in the recognition of certain deferred tax assets and an income tax benefit in the period the reversal is recorded. However, the exact timing and amount of a valuation allowance reversal depends upon the level of profitability that we are able to actually achieve.

33

Liquidity and Capital Resources

 

Summary of Cash Flows (in thousands):Flows: 

 

      Dollar 
    increase / 
Nine months ended September 30 (in thousands) 2016  2015  (decrease) 
Three months ended March 31, (in thousands) 2017  2016 
Net cash provided by (used for):                    
Operating activities $37,017  $17,133  $19,884  $9,810  $1,132 
Investing activities  (17,832)  (25,167)  7,335   (84,803)  (6,736)
Financing activities  (22,718)  (3,802)  (18,916)  68,884   (1,238)
Effect of exchange rate changes on cash and cash equivalents  (268)  (1,896)  1,628   629   854 
Net change in cash and cash equivalents $(3,801) $(13,732) $9,931  $(5,480) $(5,988)

 

Cash provided by operating activities which includes cash flows from the Wiring discontinued operations in 2015, increased primarily due to lowera change in working capital movement and an increase in net income. Our receivable terms and collections rates have remained consistent between periods presented.

 

Net cash used for investing activities decreasedincreased primarily due to lower capital expenditures inpayments made for the current period. Also, there were payments related to the saleacquisition of the Wiring business in the prior period which did not recur in 2016.Orlaco business.

 

Net cash used for financing activities increased primarily due to increased borrowings on the Credit Facility to fund the acquisition of the Orlaco business which was partially offset by an unplannedunscheduled partial repayment of our Credit Facility and lower PST net borrowings incurred in the current period.

 

As outlined in Note 78 to our condensed consolidated financial statements, our Credit Facility permits borrowing up to a maximum level of $300.0 million which includes an accordion feature which allows the Company to increase the availability by up to $80.0 million upon the satisfaction of certain conditions. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through September 2021. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The Credit Facility had an outstanding balance of $87.0$141.0 million at September 30, 2016.March 31, 2017. The Company was in compliance with all covenants at September 30, 2016.March 31, 2017. The covenants included in our Credit Facility to date have not and are not expected to limit our financing flexibility.

 

PST maintains several short-term obligations and long-term loans used for working capital purposes. At September 30, 2016,March 31, 2017, there was $18.0$14.1 million of PST debt outstanding.  Scheduled principal repayments on PST debt at September 30, 2016March 31, 2017 were as follows: $9.7$6.8 million from October 2016April 2017 to September 2017, $1.0March 2018, $3.4 million from October 2017April 2018 to December 2017, $4.0 million in 2018, $2.6$2.7 million in 2019, $0.4$0.6 million in 2020 and $0.3 million in 2021.

30

 

The Company's wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary's bank account up to a maximum level of 20.0 million Swedish krona, or $2.3$2.2 million, at September 30, 2016.March 31, 2017. At September 30, 2016,March 31, 2017, there werewas no overdraftsbalance outstanding on thethis bank account.

 

Due to the deterioration of the Brazilian economy and automotive market in 2015 and first nine months of 2016, PST had lower earnings and cash flows.  Also, PST has experienced slower customer payments of receivables, which combined with lower earnings has made its liquidity more challenging.  As such,While PST’s performance has improved in 2017, PST has and continues to evaluate and utilize, as necessary, several funding sources including factoring receivables and short-term loans from banks to provide necessary funding.  

 

Although the Company's notes and credit facilities contain various covenants, the violation of which would limit or preclude their use or accelerate the maturity, the Company has not experienced and does not expect these covenants to restrict our financing flexibility. The Company has been and expects to continue to remain in compliance with these covenants during the term of the notes and credit facilities.


Our future results could also be adversely affected by unfavorable changes in foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden, Estonia, the Netherlands, and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 56 to the condensed consolidated financial statements for additional details. Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of our raw material purchases.

 

At September 30, 2016,March 31, 2017, we had a cash and cash equivalents balance of approximately $50.6$44.9 million, of which $18.2$9.8 million was held in the United States and $32.4$35.1 million was held in foreign locations. The decrease from $54.4$50.4 million at December 31, 20152016 was due to repayment of debt, higher working capital and capital expenditures which were offset by net income during the first ninethree months of 2016.2017.

 

Commitments and Contingencies

 

See Note 1011 to the condensed consolidated financial statements for disclosures of the Company’s commitments and contingencies.

 

Seasonality

 

Our Control Devices and Electronics segments are not typically affected by seasonality, however the demand for our PST segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.

 

Critical Accounting Policies and Estimates

 

The Company's critical accounting policies, which include management's best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company's 20152016 Form 10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management's Discussion and Analysis of the Company's 20152016 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates.

 

Information regarding other significant accounting policies is included in Note 2 to our consolidated financial statements in Item 8 of Part II of the Company’s 20152016 Form 10-K.

 

Inflation and International Presence

 

Given the current economic conditions of countries and recent fluctuations in certain foreign currency exchange rates and commodity prices, we believe that a negative change in such items could significantly affect our profitability.

31

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in market risk presented within Part II, Item 7A of the Company's 20152016 Form 10-K.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2016,March 31, 2017, an evaluation was performed under the supervision and with the participation of the Company's management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the PEO and PFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2016.March 31, 2017.


Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company's internal control over financial reporting during the three months ended September 30, 2016March 31, 2017 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting except that on January 31, 2017, the Company acquired Orlaco. As a result, the Company is currently integrating Orlaco's operations into its overall internal control over financial reporting. Under the guidelines established by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition. Accordingly, we expect to exclude Orlaco from the assessment of internal control over financial reporting for 2017.

 

PART II–OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are involved in certain legal actions and claims primarily arising in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these matters, we do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. We are subject to a tax assessment in Brazil related to value added taxes on vehicle tracking and monitoring services for which the likelihood of loss is not probable although it may take years to resolve. In addition, we are subject to litigation regarding patent infringement. We are also subject to the risk of exposure to product liability claims in the event that the failure of any of our products causes personal injury or death to users of our products as well as product warranty and recall claims. There can be no assurance that we will not experience any material losses related to product liability, warranty or recall claims. In addition, if any of our products prove to be defective, we may be required to participate in a government-imposed or customer OEM-instituted recall involving such products. See additional details of these matters in Note 1011 to the condensed consolidated financial statements.

 

Item 1A. Risk Factors

 

There have been no material changes with respect to risk factors previously disclosed in the Company's 20152016 Form 10-K.

32

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.The following table presents information with respect to repurchases of Common Shares made by us during the three months ended March 31, 2017. These shares were delivered to us by employees as payment for the withholding taxes due upon vesting of restricted share awards.

Period Total number
of shares
purchased		  Average price
paid per share		  Total number of
 shares purchased
 as part of publicly
 announced plans
 or programs		 Maximum
 number of
 shares that may
 yet be purchased
 under the plans
 or programs
1/1/17-1/31/17  9,967  $17.70  N/A N/A
2/1/17-2/28/17  1,514   16.85  N/A N/A
3/1/17-3/31/17  88,516   18.27  N/A N/A
Total  99,997         

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Reference is made to the separate, “Index to Exhibits,” filed herewith.


33

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 STONERIDGE, INC.
  
Date:  October 28, 2016May 3, 2017/s/ Jonathan B. DeGaynor
 

Jonathan B. DeGaynor


President and Chief Executive Officer

 (Principal Executive Officer)
  
Date:  October 28, 2016May 3, 2017/s/ Robert R. Krakowiak
 Robert R. Krakowiak
 Chief Financial Officer and Treasurer
 (Principal Financial Officer)

 

37

34

 

 

INDEX TO EXHIBITS

 

Exhibit
Number		 

Exhibit

2.1Share Sale and Purchase Agreement, dated as of January 31, 2017, by and among Stoneridge B.V., Stoneridge, Inc., Wide-Angle Management B.V., Exploitatiemaatschappij Berghaaf B.V., and Henrie G. van Beusekom (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 1, 2017).
   
10.1 Consent and Amendment No. 34 to Third Amended and Restated Credit Agreement, dated January 30, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 17, 2016)February 1, 2017).
   
31.1 Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
   

31.2

 Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
   

32.1

 Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
   

32.2

 

Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

 101XBRL Exhibits:
 101.INSXBRL Instance Document
 101.SCHXBRL Schema Document
 101.CALXBRL Calculation Linkbase Document
 101.DEFXBRL Definition Linkbase Document
 101.LABXBRL Labels Linkbase Document
 101.PREXBRL Presentation Linkbase Document

 35