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 SeptemberJune 30, 20172018

 

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.) 
     
 

39675 MacKenzie Drive, Suite 400,

Novi, Michigan

 

48377

 
 (Address of principal executive offices) (Zip Code) 

 

 (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.

xYes¨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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

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 OctoberJuly 27, 20172018 was 28,171,209.28,482,746.

 

 

 

 

 

STONERIDGE, INC. AND SUBSIDIARIES

 

INDEX   Page
PART I–FINANCIAL INFORMATION  
     
Item 1.Financial Statements  
 Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172018 (Unaudited) and December 31, 20162017 3
 Condensed Consolidated Statements of Operations (Unaudited) for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 20162017 4
 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and NineSix Months Ended SeptemberJune 30, 20172018 and 20162017 5
 Condensed Consolidated Statements of Cash Flows (Unaudited) for the NineSix Months Ended SeptemberJune 30, 20172018 and 20162017 6
 Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 2827
Item 3.Quantitative and Qualitative Disclosures About Market Risk 3837
Item 4.Controls and Procedures 3837
     
PART II–OTHER INFORMATION  
     
Item 1.Legal Proceedings 3938
Item 1A.Risk Factors 3938
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 3938
Item 3.Defaults Upon Senior Securities 3938
Item 4.Mine Safety Disclosures 3938
Item 5.Other Information 4038
Item 6.Exhibits 4039
     
Signatures 4140

 

 1 

 

 

Forward-Looking Statements

 

Portions of this quarterly report on Form 10-Q 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 may 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, (iv) growth opportunities related to awarded business, and (v) expectations related to current and future market conditions. 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;customer or supplier;

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

·a significant change in automotive, commercial, off-highway, motorcycle 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 Argentinian peso, Brazilian real, Chinese renminbi, euro, Argentinian peso, Swedish krona, Mexican peso and Chinese Renminbi;Swedish krona;

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

·a significant changecustomer acceptance of new products;
·our ability to successfully launch/produce products for awarded business;
·adverse changes in general economiclaws, government regulations or market conditions, in any of the various countries inincluding tariffs, affecting our products or our customers’ products;
·our ability to protect our intellectual property and successfully defend against assertions made against us;
·liabilities arising from warranty claims, product recall or field actions, product liability and legal proceedings to which we operate;are or may become a party, or the impact of product recall or field actions on our customers;

·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;basis, including the impact of potential tariffs and trade considerations on their operations and output;

·the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving 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;
·risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber attack and other similar disruptions; and

·those items described in Part I, Item IA (“Risk Factors”) of the Company's 2016Company’s 2017 Form 10-K.

 

In addition, the

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

  June 30,  December 31, 
(in thousands) 2018  2017 
  (Unaudited)    
ASSETS        
         
Current assets:        
Cash and cash equivalents $58,965  $66,003 
 Accounts receivable, less reserves of $1,106 and $1,109, respectively  147,729   142,438 
Inventories, net  80,232   73,471 
Prepaid expenses and other current assets  29,056   21,457 
Total current assets  315,982   303,369 
         
Long-term assets:        
Property, plant and equipment, net  111,245   110,402 
Intangible assets, net  66,006   75,243 
Goodwill  37,389   38,419 
Investments and other long-term assets, net  30,024   31,604 
Total long-term assets  244,664   255,668 
Total assets $560,646  $559,037 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
         
Current liabilities:        
Current portion of debt $3,184  $4,192 
Accounts payable  84,461   79,386 
Accrued expenses and other current liabilities  60,358   52,546 
Total current liabilities  148,003   136,124 
         
Long-term liabilities:        
Revolving credit facility  110,000   121,000 
Long-term debt, net  1,790   3,852 
Deferred income taxes  17,767   18,874 
Other long-term liabilities  25,040   35,115 
Total long-term liabilities  154,597   178,841 
         
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 28,966 shares issued and 28,483 and 28,180 shares outstanding at        
June 30, 2018 and December 31, 2017, respectively, with no stated value  -   - 
Additional paid-in capital  228,856   228,486 
Common Shares held in treasury, 483 and 786 shares at June 30, 2018        
and December 31 2017, respectively, at cost  (8,911)  (7,118)
Retained earnings  120,552   92,264 
Accumulated other comprehensive loss  (82,451)  (69,560)
Total shareholders' equity  258,046   244,072 
Total liabilities and shareholders' equity $560,646  $559,037 

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

 

  September 30,�� December 31, 
(in thousands) 2017  2016 
  (Unaudited)    
ASSETS        
         
Current assets:        
Cash and cash equivalents $50,791  $50,389 
Accounts receivable, less reserves of $1,173 and $1,630, respectively  144,475   113,225 
Inventories, net  78,643   60,117 
Prepaid expenses and other current assets  23,264   17,162 
Total current assets  297,173   240,893 
         
Long-term assets:        
Property, plant and equipment, net  108,919   91,500 
Intangible assets, net  78,011   39,260 
Goodwill  38,224   931 
Investments and other long-term assets, net  17,942   21,945 
Total long-term assets  243,096   153,636 
Total assets $540,269  $394,529 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
         
Current liabilities:        
Current portion of debt $4,421  $8,626 
Accounts payable  80,069   62,594 
Accrued expenses and other current liabilities  48,258   41,489 
Total current liabilities  132,748   112,709 
         
Long-term liabilities:        
Revolving credit facility  126,000   67,000 
Long-term debt, net  5,102   8,060 
Deferred income taxes  20,337   9,760 
Other long-term liabilities  31,553   4,923 
Total long-term liabilities  182,992   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 28,966 shares issued and 28,171 and 27,850 shares outstanding at        
September 30, 2017 and December 31, 2016, respectively, with no stated value  -   - 
Additional paid-in capital  227,143   206,504 
Common Shares held in treasury, 795 and 1,116 shares at September 30, 2017        
and December 31, 2016, respectively, at cost  (7,056)  (5,632)
Retained earnings  73,356   45,356 
Accumulated other comprehensive loss  (68,914)  (67,913)
Total Stoneridge, Inc. shareholders' equity  224,529   178,315 
Noncontrolling interest  -   13,762 
Total shareholders' equity  224,529   192,077 
Total liabilities and shareholders' equity $540,269  $394,529 
3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

  Three months ended  Six months ended 
  June 30,  June 30, 
(in thousands, except per share data) 2018  2017  2018  2017 
             
Net sales $220,602  $209,111  $446,532  $413,422 
                 
Costs and expenses:                
Cost of goods sold  153,184   145,697   311,145   288,857 
Selling, general and administrative  35,256   35,704   72,517   69,970 
Design and development  12,981   12,034   26,842   23,755 
                 
Operating income  19,181   15,676   36,028   30,840 
                 
Interest expense, net  1,170   1,518   2,524   2,928 
Equity in earnings of investee  (665)  (555)  (1,186)  (735)
Other expense (income), net  (264)  605   (863)  795 
                 
Income before income taxes  18,940   14,108   35,553   27,852 
                 
Provision for income taxes  3,820   5,189   7,053   9,760 
                 
Net income  15,120   8,919   28,500   18,092 
                 
Net loss attributable to noncontrolling interest  -   (100)  -   (130)
                 
Net income attributable to Stoneridge, Inc. $15,120  $9,019  $28,500  $18,222 
                 
Earnings per share attributable to Stoneridge, Inc.:                
Basic $0.53  $0.32  $1.01  $0.65 
Diluted $0.52  $0.32  $0.99  $0.64 
                 
Weighted-average shares outstanding:                
Basic  28,449   28,133   28,349   28,026 
Diluted  28,978   28,517   28,907   28,531 

 

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

 

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

  Three months ended  Nine months ended 
  September 30,  September 30, 
(in thousands, except per share data) 2017  2016  2017  2016 
                 
Net sales $203,582  $173,846  $617,004  $523,365 
                 
Costs and expenses:                
Cost of goods sold  141,033   124,098   429,890   375,705 
Selling, general and administrative  37,277   27,817   107,247   82,836 
Design and development  11,976   10,151   35,731   30,912 
                 
Operating income  13,296   11,780   44,136   33,912 
                 
Interest expense, net  1,508   1,684   4,436   5,038 
Equity in earnings of investee  (465)  (307)  (1,200)  (603)
Other expense (income), net  395   (497)  1,190   (722)
                 
Income before income taxes  11,858   10,900   39,710   30,199 
                 
Provision for income taxes  3,809   919   13,569   3,114 
                 
Net income  8,049   9,981   26,141   27,085 
                 
Net loss attributable to noncontrolling interest  -   (303)  (130)  (2,009)
                 
Net income attributable to Stoneridge, Inc. $8,049  $10,284  $26,271  $29,094 
                 
Earnings per share attributable to Stoneridge, Inc.:                
Basic $0.29  $0.37  $0.94  $1.05 
Diluted $0.28  $0.36  $0.92  $1.03 
                 
Weighted-average shares outstanding:                
Basic  28,136   27,792   28,062   27,753 
Diluted  28,652   28,359   28,613   28,266 

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

 4 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 

 Three months ended Nine months ended  Three months ended Six months ended 
 September 30, September 30,  June 30, June 30. 
(in thousands) 2017  2016  2017  2016  2018  2017  2018  2017 
                  
Net income $8,049  $9,981  $26,141  $27,085  $15,120  $8,919  $28,500  $18,092 
Less: Net loss attributable to noncontrolling interest  -   (303)  (130)  (2,009)  -   (100)  -   (130)
Net income attributable to Stoneridge, Inc.  8,049   10,284   26,271   29,094   15,120   9,019   28,500   18,222 
                                
Other comprehensive income (loss), net of tax attributable to                
Stoneridge, Inc.:                
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.:                
Foreign currency translation  6,483   (638)  15,822   5,923   (17,421)  6,276   (13,527)  9,339 
Benefit plan adjustment  -   (84)  -   (84)
Unrealized gain (loss) on derivatives(1)  (138)  (64)  172   (473)  (159)  (7)  636   310 
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.  6,345   (786)  15,994   5,366   (17,580)  6,269   (12,891)  9,649 
                                
Comprehensive income attributable to Stoneridge, Inc. $14,394  $9,498  $42,265  $34,460 
Comprehensive income (loss) attributable to Stoneridge, Inc. $(2,460) $15,288  $15,609  $27,871 
                

 

(1)Net of tax benefit of $(74)$(41) and $0$(3) for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. Net of tax expense of $93$171 and $0$167 for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively.

 

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

 5 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

Nine months ended September 30, (in thousands) 2017  2016 
Six months ended June 30, (in thousands) 2018  2017 
          
OPERATING ACTIVITIES:                
Net income $26,141  $27,085  $28,500  $18,092 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation  15,922   14,717   11,535   10,538 
Amortization, including accretion of deferred financing costs  4,993   2,677   3,503   3,200 
Deferred income taxes  6,233   714   1,765   5,450 
Earnings of equity method investee  (1,200)  (603)  (1,186)  (735)
Loss (gain) on sale of fixed assets  6   (409)
Gain on sale of fixed assets  (18)  (4)
Share-based compensation expense  5,713   4,587   2,838   4,065 
Tax benefit related to share-based compensation expense  (759)  -   (879)  (758)
Change in fair value of earn-out contingent consideration  4,645   -   1,417   2,347 
Changes in operating assets and liabilities, net of effect of business combination:                
Accounts receivable, net  (18,232)  (25,486)  (11,594)  (13,494)
Inventories, net  (6,564)  281   (10,610)  (6,739)
Prepaid expenses and other assets  1,530   (5,879)  (8,417)  (4,174)
Accounts payable  11,611   13,991   8,678   11,675 
Accrued expenses and other liabilities  1,079   5,342   3,379   (2,442)
Net cash provided by operating activities  51,118   37,017   28,911   27,021 
                
INVESTING ACTIVITIES:                
Capital expenditures  (24,892)  (18,484)  (16,845)  (15,167)
Proceeds from sale of fixed assets  66   652   41   20 
Insurance proceeds for fixed assets  1,403   - 
Business acquisition, net of cash acquired  (77,258)  -   -   (77,538)
Net cash used for investing activities  (102,084)  (17,832)  (15,401)  (92,685)
                
FINANCING ACTIVITIES:                
Acquisition of noncontrolling interest, including transaction costs  (1,848)  -   -   (1,796)
Revolving credit facility borrowings  91,000   -   26,500   84,000 
Revolving credit facility payments  (32,000)  (13,000)  (37,500)  (19,000)
Proceeds from issuance of debt  2,557   13,317   273   1,901 
Repayments of debt  (10,307)  (21,312)  (2,459)  (6,174)
Other financing costs  (61)  (339)  -   (61)
Repurchase of Common Shares to satisfy employee tax withholding  (2,222)  (1,384)  (4,242)  (2,207)
Net cash provided by (used for) financing activities  47,119   (22,718)
Net cash (used for) provided by financing activities  (17,428)  56,663 
                
Effect of exchange rate changes on cash and cash equivalents  4,249   (268)  (3,120)  2,832 
Net change in cash and cash equivalents  402   (3,801)  (7,038)  (6,169)
Cash and cash equivalents at beginning of period  50,389   54,361   66,003   50,389 
                
Cash and cash equivalents at end of period $50,791  $50,560  $58,965  $44,220 
                
Supplemental disclosure of cash flow information:                
Cash paid for interest $4,286  $4,573  $2,679  $2,755 
Cash paid for income taxes, net $5,745  $2,019  $7,967  $3,424 
        
Supplemental disclosure of non-cash operating and financing activities:        
Bank payment of vendor payables under short-term debt obligations $-  $3,764 

 

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

 

 6 

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 (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC's rules and regulations. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's 20162017 Form 10-K. 

 

On January 31, 2017, the Company acquired Exploitatiemaatschappij Berghaaf B.V. (“Orlaco”), an electronics business which designs, manufactures and sells camera-based vision systems, monitors and related products. The acquisition was accounted for as a business combination, and accordingly, the Company’s condensed consolidated financial statements herein include the results of Orlaco from the acquisition date to SeptemberJune 30, 2017.2018. See Note 34 to the condensed consolidated financial statements for additional details regarding the Orlaco acquisition.

 

The Company had a 74% controlling interest in PST Electronica Ltda. (“PST”) from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26% noncontrolling interest in PST, which was accounted for as an equity transaction. As such, PST is now a wholly owned subsidiary.subsidiary as of May 16, 2017. See Note 15 to the condensed consolidated financial statements for additional details regarding the acquisition of PST’s noncontrolling interest.

 

Also, see Note 2 for the impact of the adoption of various accounting standards on the condensed consolidated financial statements herein.

 

(2)  Recently Issued Accounting Standards

 

Recently Adopted Accounting Standards

 

In AugustJanuary 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements.  As early adoption is permitted, the Company adopted this standard in the third quarter of 2017, which did not have a material impact on its condensed consolidated financial statements. 

In May 2017, FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718)”, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award changes as a result of the change in terms or conditions. If an award is not probable of vesting at the time a change is made, the new guidance clarifies that no new measurement date will be required if there is no change to the fair value, vesting conditions, and classification. As early adoption is permitted, the Company adopted this standard in the second quarter of 2017, which did not have a material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)”. 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 goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill.  The Company adopted this standard on January 1, 2017, which did not have a material impact on its condensed consolidated financial statements.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

In March 2016, the FASB issued 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 simplifies the treatment of share based payment transactions by recognizing the impact of excess tax benefits or deficiencies related to exercised or vested awards in income tax expense in the period of exercise or vesting. The new standard also 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 cash flows was also modified to be included with other income tax cash flows as an operating activity.  The Company adopted this standard as of January 1, 2017 utilizing the prospective transition method for excess tax benefits in the condensed consolidated statement of cash flows. The Company had 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 cumulative effect of 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 Company adopted this standard as of January 1, 2017, which did not have a material impact on the its condensed consolidated financial statements or disclosures.

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 iswas effective for annual periods beginning after December 15, 2017.  The Company expects to adoptadopted this standard as ofon January 1, 2018 which isdid not expected tohave a material impact on its condensed consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory (Topic 740)”. This guidance requires that the tax effects of all intra-entity sales of assets other than inventory be recognized in the period in which the transaction occurs. The Company adopted this standard on January 1, 2018, which did not have a material 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 iswas effective for interim and annual periods beginning after December 15, 20172017. The Company adopted this standard as of January 1, 2018, which did not have a material impact on its condensed consolidated financial statements.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and related amendments, which is the new comprehensive revenue recognition standard (collectively known as Accounting Standard Codification (“ASC”) 606) that has superseded 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 a 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. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, the Company would have recognized the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application; however, the Company did not have any material adjustments as of the date of the adoption. The Company does not expect the adoption of ASC 606 to have a material impact on its results of operations on an ongoing basis; however, the Company has expanded its disclosures consistent with the requirements of the new standard and the Company will continue to evaluate new contracts to apply the framework of ASC 606. In particular, the Company will evaluate new contracts with customers analyzing the impact, if any, on revenue from the sale of production parts, particularly in regards to material rights, variable consideration and the impact of termination clauses on the timing of revenue recognition. The majority of our revenue continues to be recognized when products are shipped from our manufacturing facilities. The Company has not changed how it accounts for reimbursable pre-production costs, currently accounted for as a reduction of costs incurred. Refer to Note 3 for the expanded revenue disclosures.

Accounting Standards Not Yet Adopted

In January 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the enactment of Tax Cuts and Jobs Act related to items in accumulated other comprehensive income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Tax Legislation was enacted. The Company will adopt this standard as of January 1, 2019, which is not expected to have a material impact on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019, and early adoption permitted.is permitted for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of adoptingits pending adoption of ASU 2016-13 on the consolidated financial statements. The Company will adopt this standard as of January 1, 2020 and it is not expected to have a material impact 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 recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. The Company is currently evaluatingcontinues to evaluate the impact of adopting this standard on its condensed consolidated financial statements, which will require right of use assets and lease liabilities to be recorded in the condensed consolidated balance sheet for operating leases.

 

 8 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

In May 2014,

(3) Revenue

The Company adopted ASC 606 using the FASB issued ASU 2014-09 “Revenue from Contractsmodified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with Customers”,the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606. The Company did not record a cumulative adjustment related to the adoption of ASC 606, and the effects of the adoption were not significant.

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principleparts are shipped or delivered to the customer’s premises. Revenue is that a company will recognize revenue when it transfers promised goods or servicesmeasured as the amount of consideration we expect to a customer in an amount that reflects the consideration to which a company expects to be entitledreceive in exchange for thosetransferring goods or providing services. To achieve this principle, an entity identifiesThe transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. The expected costs associated with our base warranties continue to be recognized as expense when the products are sold. Customer returns only occur if products do not meet the specifications of the contract and are not connected to any repurchase obligations of the Company.

The Company does not have any financing components or significant payment terms as payment occurs shortly after the point of sale.Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer identifies the separate performance obligationsare excluded from revenue. Amounts billed to customers related to shipping and handling costs are included in net sales in the contract, determinescondensed consolidated statements of operations. Shipping and handling costs associated with outbound freight after control over a product is transferred to the customer are accounted for as a fulfillment cost and are included in cost of sales.

Revenue by Reportable Segment

Control Devices.Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as sensors, actuators, valves and switches. We sell these products principally to the automotive market in the North American, European, and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in our North America and European markets. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“tier one supplier”).

Electronics.Our Electronics segment designs and manufactures electronic instrument clusters, electronic control units and other driver information systems and includes the acquired Orlaco business, which designs and manufactures camera-based vision systems, monitors and related products. These products are sold principally to the commercial vehicle market primarily through our OEM and aftermarket channels in the North American and European regions, and to a lesser extent, the Asia Pacific region. The camera-based vision systems and related products are sold principally to the off-highway vehicle market in the North American and European regions.

PST.Our PST segment primarily serves the South American market and specializes in the design, manufacture and sale of in-vehicle audio and video devices, electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services primarily for the automotive and motorcycle markets. PST sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The following tables disaggregate our revenue by reportable segment and geographical location(1) for the periods ended June 30, 2018 and 2017:

Three months ended June 30 Control Devices  Electronics  PST  Consolidated 
Net Sales: 2018  2017  2018  2017  2018  2017  2018  2017 
North America $98,564  $105,485  $22,321  $16,002  $-  $-  $120,885  $121,487 
South America  -   -   -   -   20,333   23,500   20,333   23,500 
Europe  3,669   1,939   67,411   55,258   -   -   71,080   57,197 
Asia Pacific  7,723   6,577   581   350   -   -   8,304   6,927 
Total net sales $109,956  $114,001  $90,313  $71,610  $20,333  $23,500  $220,602  $209,111 

Six months ended June 30 Control Devices  Electronics  PST  Consolidated 
Net Sales: 2018  2017  2018  2017  2018  2017  2018  2017 
North America $203,007  $216,006  $42,307  $28,867  $-  $-  $245,314  $244,873 
South America  -   -   -   -   40,878   45,133   40,878   45,133 
Europe  6,560   3,648   135,955   105,332   -   -   142,515   108,980 
Asia Pacific  15,746   13,220   2,079   1,216   -   -   17,825   14,436 
Total net sales $225,313  $232,874  $180,341  $135,415  $40,878  $45,133  $446,532  $413,422 

(1)Company sales based on geographic location are where the sale originates not where the customer is located.

Performance Obligations

For OEM and tier one supplier customers, the Company typically enters into contracts with its customers to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts. The majority of the parts sold to OEM and tier one suppliers are specifically customized to the specific customer, with the exception of off-highway products that are common across all customers. The transaction price is equal to the contracted price per part and there is no expectation of material variable consideration in 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.  The new standard will become effective for annual and interim periods beginning after December 15, 2017. Currently,price. For most customer contracts, the Company does not expecthave an enforceable right to payment at any time prior to when the adoption of this standardparts are shipped or delivered to have a material impact on its results of operations or financial position; however,the customer; therefore, the Company expects expanded disclosures consistent withrecognizes revenue at the requirementspoint in time it satisfies a performance obligation by transferring control of a part to the customer. Certain customer contracts contain an enforceable right to payment if the customer terminates the contract for convenience and therefore are recognized over time using the cost to complete input method.

Our aftermarket products are focused on meeting the demand for repair and replacement parts, compliance parts and accessories and are sold primarily to aftermarket distributors and mass retailers in our South American, European and North American markets. Aftermarket products have one type of performance obligation which is the delivery of aftermarket parts and spare parts. For aftermarket customers, the Company typically has standard terms and conditions for all customers. In addition, aftermarket products have alternative use as they can be sold to multiple customers. Revenue for aftermarket part production contracts is recognized at a point in time when the control of the new standard. In particular,parts transfer to the Company doescustomer which is based on the shipping terms. Aftermarket contracts may include variable consideration related to discounts and rebates and is included in the transaction price upon recognizing the product revenue.

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

A small portion of the Company’s sales are comprised of monitoring services that include both monitoring devices and fees to individual, corporate, fleet and cargo customers in our PST segment. These monitoring service contracts are generally not expect any changes to how it accounts for reimbursable pre-production costs, currentlycapable of being distinct and are accounted for as a reductionsingle performance obligation. We recognize revenue for our monitoring products and services contracts over the life of costs incurred.  However,the contract. There is no variable consideration associated with these contracts. The Company has the right to consideration from a customer in the amount that corresponds directly with the value to the customer of the Company’s performance to date. Therefore the Company continues to evaluate its contracts with customers analyzingrecognizes revenue over time using the impact, if any, on revenue frompractical expedient ASC 606-10-55-18 in the sale of production parts, particularly in regards to material rights, variable consideration and the impact of termination clauses on the timing of revenue recognition. The Company will adopt this standard January 1, 2018 and expects to use the modified retrospective transition method. Under the modified retrospective method,amount the Company would recognize the cumulative effect of initially applying the standard ashas a “right to invoice” rather than selecting an adjustment to opening retained earnings at the date of initial application.output or input method.

Contract Balances

 

(3)The Company had no material contract assets, contract liabilities or capitalized contract acquisition costs as of June 30, 2018.

(4) Acquisition of Orlaco

 

On 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 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.  Stoneridge and Orlaco 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 vision processing technology and Stoneridge’s driver information capabilities as well as the combined software capabilities of both businesses. The acquisition of Orlaco enhances the Stoneridge’sour Electronics segmentsegment’s global technical capabilities in vision systems and facilitates entry into new markets.

 

The aggregate consideration for the Orlaco acquisition on January 31, 2017 was €74,939 ($79,675), which included customary estimated adjustments to the purchase price. The Company paid €67,439 ($71,701) in cash, and €7,500 ($7,974) is held in an escrow account for a period of eighteen months to secure the payment obligations of the 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 to pay an additional amount up to €7,500 ($8,762) as contingent consideration (“earn-out consideration”) if certain performance 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 consideration and other adjustments  4,208 
Total purchase price $83,883 

 

 911 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

The following table summarizes

Refer to the estimatedCompany’s 2017 Form 10-K for additional information on the acquisition including the fair value of the assets acquired and liabilities assumed aton the acquisition date (including measurement period adjustments).  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 and may be subsequently adjusted to reflect final valuation results and purchase price adjustments. Based upon information obtained, certain of the fair value amounts previously estimated were adjusted during the measurement period.  These measurement period adjustments related to updated valuation reportsmethods and appraisals received from our external valuation specialists, as well as revisions to internal estimates. The changes in estimates recorded at September 30, 2017 include an increase in inventory of $265; an increase in intangible assets of $113; a decrease in other long-term assets of $684; an increase in other current liabilities of $29; a decrease in accounts receivable of $201 and a decrease in earn-out consideration of $1,007. The measurement period and working capital adjustments resulted in a decrease to goodwill of $727.

At January 31, 2017   
Cash $2,165 
Accounts receivable  7,929 
Inventory  9,409 
Prepaid and other current assets  298 
Property, plant and equipment  6,668 
Identifiable intangible assets  38,739 
Other long-term assets  6 
Total identifiable assets acquired  65,214 
     
Accounts payable  3,020 
Other current liabilities  834 
Deferred tax liabilities  9,994 
Warranty liability  1,462 
Total liabilities assumed  15,310 
Net identifiable assets acquired  49,904 
Goodwill  33,979 
Net assets acquired $83,883 

Assets acquired and liabilities assumed were recorded at estimated fair values based on management's estimates, available information, and reasonable and supportable assumptions. Also, the 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 consideration was based on a Monte Carlo simulation utilizing forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 and 2018 measurement period

These fair value measurements are classified within Level 3 of the fair value hierarchy. See Note 6 for details on fair value hierarchy.

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Goodwill is calculated as the excess of the fair value of consideration transferred over the fair market value of the identifiable assets and liabilities and represents the future economic benefits arising from other assets acquired that could not be separately recognized. The goodwill is not deductible for income tax purposes.

Of the $38,739 of acquired identifiable intangible assets, $27,518 was provisionally assigned to 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.classifications.

 

The Company recognized $41 and $1,259 of acquisition related costs in the condensed consolidated statement of operations as a component of selling, general and administrative (“SG&A”) expense for the ninethree and six months ended SeptemberJune 30, 2017.2017, respectively. There were no acquisition related costs for the three and six months ended June 30, 2018.

 

Included in the Company's statement of operations for the three and nine months ended SeptemberJune 30, 2017 are post-acquisition sales of $18,502 and $46,956,$17,313 and net incomeloss of $1,254 and $1,299, respectively,$(547) related to Orlaco which are included in the results of the Electronics segment. Post-acquisition sales of $28,454 and net income of $45 were included in the Company’s statement of operations for the six months ended June 30, 2017. The Company’s statement of operations alsofor the three and six months ended June 30, 2017 included $0$657 and $1,636, respectively, of expense in cost of goods sold (“COGS”) for the three and nine months ended September 30, 2017, respectively, associated with the step-up of the Orlaco inventory to fair value andvalue. The Company’s statement of operations for the $1,823 and $3,926six months ended June 30, 2018 included $369 of expense for the fair value adjustment for earn-out consideration in SG&A expensesexpenses. There was no fair value adjustment for the earn-out consideration for three months ended June 30, 2018 due to the earn-out liability being capped in the first quarter of 2018. The Company’s statement of operations for the three and ninesix months ended SeptemberJune 30, 2017 respectively.included $2,103 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. See Note 6 for the fair value and foreign currency adjustments of the earn-out consideration.

 

The following unaudited pro forma information reflects the Company’s condensed consolidated results of operations as if the acquisition had taken place on January 1, 2016.2017. 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 Nine months ended  Six months ended 
 September 30, September 30,  June 30, 
 2017  2016  2017  2016  2017 
                   
Net sales $203,582  $187,626  $622,034  $566,518  $418,452 
Net income attributable to Stoneridge, Inc. and subsidiaries $8,049  $11,406  $26,375  $33,195  $18,326 

 

The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are directly related to the 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.

 1112 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

(4)

(5) Inventories

 

Inventories are valued at the lower of cost (using either the first-in, first-out (“FIFO”) or average cost methods) or 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-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,  June 30, December 31, 
 2017  2016  2018  2017 
Raw materials $47,840  $35,665  $51,806  $47,588 
Work-in-progress  8,249   7,483   4,991   5,806 
Finished goods  22,554   16,969   23,435   20,077 
Total inventories, net $78,643  $60,117  $80,232  $73,471 

 

Inventory valued using the FIFO method was $56,861$63,136 and $37,765$54,837 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Inventory valued using the average cost method was $21,782$17,096 and $22,352$18,634 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

 

(5) Goodwill and Intangibles

Goodwill

Goodwill was $38,224 and $931 at September 30, 2017 and December 31, 2016, respectively, 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 September 30, 2017 cost  amortization  Net 
Customer lists $58,470  $(12,196) $46,274 
Tradenames  24,305   (5,592) ��18,713 
Technology  17,849   (4,825)  13,024 
Other  42   (42)  - 
Total $100,666  $(22,655) $78,011 

  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 

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The Company recorded amortization expense of $1,711 and $869 related to finite-lived intangible assets for the three month period ended September 30, 2017 and 2016, respectively, and $4,750 and $2,402 for the nine month period ended September 30, 2017 and 2016, respectively.  The Company currently estimates annual amortization expense to be $6,500 for 2017 and $6,800 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 SeptemberJune 30, 2017,2018, 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 20172018 and 20162017 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 2016.2018.

 

These forward contracts were executed to hedge forecasted transactions and certain transactions 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.

 

13

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 expense (income), 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 SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company held foreign currency forward contracts with underlying notional amounts of $1,187$920 and $1,601,$1,486, respectively, to reduce the exposure related to the Company's euro-denominated intercompany loans. The current contract expires in June 2018.2019. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of $62 and a loss of $36 and a gain of $1$108 for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, in the condensed consolidated statements of operations as a component of other expense, (income), net related to the euro-denominated contract. For the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, the Company recognized a gain of $42 and a loss of $164 and $38$128, respectively, related to this contract.

13

U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedges

NOTES 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 June 30, 2018 of $3,800 which expire ratably on a monthly basis from July 2018 through December 2018. There were no such contracts at December 31, 2017.

(Unaudited)

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 June 30, 2018 of $1,000 which expire ratably on a monthly basis from July 2018 through December 2018. There were no such contracts at December 31, 2017.

 

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of June 30, 2018 and concluded that the hedges were highly effective.

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

 

The Company holds Mexican peso-denominated foreign currency forward contracts with notional amounts at SeptemberJune 30, 20172018 of $1,399$9,397 which expire ratably on a monthly basis from October 2017July 2018 through December 2017,2018, compared to a notional amount of $5,699$9,143 at December 31, 2016.2017. 

 

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of SeptemberJune 30, 20172018 and December 31, 20162017 and concluded that the hedges were highly effective.

 

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

 

    Prepaid expenses Accrued expenses and     Prepaid expenses Accrued expenses and 
 Notional amounts(A)  and other current assets  other current liabilities  Notional amounts(A)  and other current assets  other current liabilities 
 September 30, December 31, September 30, December 31, September 30, December 31,  June 30, December 31, June 30, December 31, June 30, December 31, 
 2017  2016  2017  2016  2017  2016  2018  2017  2018  2017  2018  2017 
Derivatives designated as hedging instruments:                        Derivatives designated as hedging instruments:        
Cash flow hedges:                                                
Forward currency contracts $1,399  $5,699  $237  $-  $-  $28  $14,197  $9,143  $586  $      -  $-  $221 
Derivatives not designated as hedging instruments:                                                
Forward currency contracts $1,187  $1,601  $-  $-  $37  $3  $920  $1,486  $-  $-  $6  $48 

 

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

 

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

 

    Gain (loss) reclassified from     Gain reclassified from 
 Gain (loss) recorded in other other comprehensive income  Gain recorded in other other comprehensive income 
 comprehensive income (loss)  (loss) into net income(A)  comprehensive income (loss)  (loss) into net income(A) 
 2017  2016  2017  2016  2018  2017  2018  2017 
Derivatives designated as cash flow hedges:                         
Forward currency contracts $56  $(129) $268  $(65) $24  $145  $224  $155 

 

Gross amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the ninesix months ended SeptemberJune 30 are as follows: 

 

     Gain (loss) reclassified from 
  Gain (loss) recorded in other  other comprehensive income 
  comprehensive income (loss)  (loss) into net income(A) 
  2017  2016  2017  2016 
Derivatives designated as cash flow hedges:                
Forward currency contracts $717  $(656) $452  $(183)

     Gain reclassified from 
  Gain recorded in other  other comprehensive income 
  comprehensive income (loss)  (loss) into net income(A) 
  2018  2017  2018  2017 
Derivatives designated as cash flow hedges:            
Forward currency contracts $1,182  $661  $375  $184 
                 
(A)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 gain of $237$586 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2017.2018.  

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

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.

 

The following table presents our assets and liabilities that 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 inputs used.

 

           September 30,
2017		  December 31,
2016		 
     Fair values estimated using    
     Level 1  Level 2  Level 3    
  Fair value  inputs  inputs  inputs  Fair value 
Financial assets carried at fair value:                    
Forward currency contracts $237  $-  $237  $-  $- 
Total financial assets carried at fair value $237  $-  $237  $-  $- 
                     
Financial liabilities carried at fair value:                    
Forward currency contracts $37  $-  $37  $-  $31 
Earn-out consideration  18,295   -   -   18,295   - 
Total financial liabilities carried at fair value $18,332  $-  $37  $18,295  $31 
15

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

           June 30,
2018		  December 31,
2017		 
     Fair values estimated using    
     Level 1  Level 2  Level 3    
  Fair value  inputs  inputs  inputs  Fair value 
Financial assets carried at fair value:               
Forward currency contracts $586  $-  $586  $-  $- 
Total financial assets carried at fair value $586  $-  $586  $-  $- 
                     
Financial liabilities carried at fair value:                    
Forward currency contracts $6  $-  $6  $-  $269 
Earn-out consideration  20,046   -   -   20,046   20,746 
Total financial liabilities carried at fair value $20,052  $-  $6  $20,046  $21,015 
                     

The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities related to earn-out consideration that are measured at fair value on a recurring basis.

 

  Orlaco  PST  Total 
Balance at December 31, 2016 $-  $-  $- 
Fair value on acquisition date  3,243   10,180   13,423 
Change in fair value  3,926   719   4,645 
Foreign currency adjustments  408   (181)  227 
Balance at September 30, 2017 $7,577  $10,718  $18,295 

  Orlaco  PST  Total 
Balance at December 31, 2017 $8,637  $12,109  $20,746 
Change in fair value  369   1,048   1,417 
Foreign currency adjustments  (244)  (1,873)  (2,117)
Balance at June 30, 2018 $8,762  $11,284  $20,046 

  Orlaco  PST  Total 
Balance at December 31, 2016 $-  $-  $- 
Fair value on acquisition date  3,243   10,400   13,643 
Change in fair value  2,103   244   2,347 
Foreign currency adjustments  224   (637)  (413)
Balance at June 30, 2017 $5,570  $10,007  $15,577 

 

The earn-out considerationsconsideration obligations related to Orlaco and PST are recorded within other current liabilities and other long-term liabilities, onrespectively, in the condensed consolidated balance sheet.sheet as of June 30, 2018.

The fair value for the Orlaco earn-out consideration is based on a Monte Carlo simulation utilizing forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return. The Company will be required to pay the PST earn-out consideration, which is not capped, based on PST’s financial performance in either 2020 or 2021. The fair value of the PST earn-out consideration is based on discounted cash flows utilizing forecasted EBITDA in 2020 and 2021.

 

The increase in fair value of earn-out consideration related to the Orlaco acquisition is primarily due to actual performance exceeding forecasted performance as well as the reduced time from the current period end to the payment date andoffset by foreign currency.currency translation. The increaseOrlaco earn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018. The decrease in fair value of earn-out consideration for PST was due to foreign currency translation partially offset by the reduced time from the current period end to the payment date, which was partially offset by foreign currency translation.date. The fair value of the Orlaco and PST earn-out consideration is based on forecasted EBITDA during the performance periods. The fair value adjustments of Orlaco and PST are recorded in SG&A in the condensed consolidated statements of operations. The foreign currency impact for the PST earn-out consideration is included in other expense (income), net in the condensed consolidated statements of operations.

 

 1516 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the ninesix months ended SeptemberJune 30, 2017.2018.

 

Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in Note 3,the Company’s 2017 Form 10-K, 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 SG&A expenses, was $1,648$1,434 and $1,699$1,726 for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. For the ninesix months ended SeptemberJune 30, 20172018 total share-based compensation was $5,713$2,838 compared to $4,587$4,065 for the ninesix months ended SeptemberJune 30, 2016.2017. The ninethree and six months ended SeptemberJune 30, 2018 included the forfeiture of certain grants associated with employee resignations. The three and six months ended June 30, 2017 included expenses related to higher attainment of performance based awards andthe accelerated expense associated with the retirement of eligible employees. The nine months ended September 30, 2016 included expenses related to modification of the retirement notice provisions of certain awards.

 

(8) Debt

 

Debt consisted of the following at SeptemberJune 30, 20172018 and December 31, 2016:2017:

  June 30,  December 31,  Interest rates at  
  2018  2017  June 30, 2018 Maturity
Revolving Credit Facility            
Credit Facility $110,000  $121,000  3.04% - 3.15% September 2021
             
Debt            
PST short-term obligations  1,056   -  11.26% March 2019
PST long-term notes  3,915   8,016  9.0% - 11.64% 2019-2021
Other  3   28     
Total debt  4,974   8,044     
Less: current portion  (3,184)  (4,192)    
Total long-term debt, net $1,790  $3,852     

  September 30,  December 31,  Interest rates at   
  2017  2016  September 30, 2017  Maturity
Revolving Credit Facility              
Credit Facility $126,000  $67,000   2.49% September 2021
               
Debt              
PST short-term obligations  -   5,097       
PST long-term notes  9,475   11,452   10.0% - 13.4% 2019-2021
Other  48   137       
Total debt  9,523   16,686       
Less: current portion  (4,421)  (8,626)      
Total long-term debt, net $5,102  $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.

 

17

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 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 to the Amended Agreement, 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 to the Amended Agreement, the Company capitalized deferred financing costs of $61, which will be amortized over the remaining term of the Credit Facility.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

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 were $126,000$110,000 and $67,000$121,000 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Borrowings increaseddecreased under the Credit Facility due to fund the Orlaco acquisition described in Note 3 during the first quarter of 2017 which were partially offset by subsequent voluntary principal repayments.

 

The Company was in compliance with all Credit Facility covenants at SeptemberJune 30, 20172018 and December 31, 2016.2017.

 

The Company also has outstanding letters of credit of $3,367 and $3,399$2,008 at SeptemberJune 30, 20172018 and December 31, 2016, respectively.2017.

 

Debt

 

PST maintains several short-term obligations and long-term notes used for working capital purposes which have fixed or variable interest rates. As of September 30, 2017 PST did not have any short-term obligations. The weighted-average interest rates of short term and long-term debt of PST at SeptemberJune 30, 20172018 was 11.7%11.30% and 10.03%.  Depending on the specific note, interest is payable either monthly or annually. Principal repayments on PST debt at SeptemberJune 30, 20172018 are as follows: $4,373$3,181 from October 2017 through September 2018, $1,211 from OctoberJuly 2018 through June 2019, $806 from July 2019 through December 2018, $2,685 in 2019, $629$513 in 2020 and $577$471 in 2021. PST was in compliance with all debt covenants at SeptemberJune 30, 20172018 and December 31, 2016.2017.

 

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 $2,455$2,236 and $2,196,$2,439, at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. At SeptemberJune 30, 20172018 and December 31, 2016,2017, there was no balance outstanding on this overdraft credit line.

 

(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. As the Company adopted ASU 2016-09 on January 1, 2017 utilizing the prospective transition method, theThe weighted-average dilutive Common Shares calculation excludes the excess tax benefit from the treasury stock method for the three and ninesix months ended SeptemberJune 30, 2017, while the calculation includes the excess tax benefits using the treasury stock method for the three2018 and nine months ended September 30, 2016.2017.

 

 1718 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

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

 

 Three months ended Nine months ended  Three months ended Six months ended 
 September 30, September 30,  June 30, June 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
Basic weighted-average Common Shares outstanding  28,135,705   27,792,469   28,062,438   27,753,015   28,449,303   28,133,432   28,349,362   28,025,805 
Effect of dilutive shares  516,637   566,808   550,188   513,074   528,444   384,010   557,995   504,874 
Diluted weighted-average Common Shares outstanding  28,652,342   28,359,277   28,612,626   28,266,089   28,977,747   28,517,442   28,907,357   28,530,679 

 

There were no performance-based restricted Common Shares outstanding at SeptemberJune 30, 20172018 or 2016.2017. There were 781,977614,670 and 843,140753,150 performance-based right to receive Common Shares outstanding at SeptemberJune 30, 2018 and 2017, and 2016, respectively. TheseThe 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.

 

18

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 SeptemberJune 30, 20172018 and 20162017 were as follows:

 

  Foreign  Unrealized  Benefit    
  currency  gain (loss)  plan    
  translation  on derivatives  adjustment  Total 
Balance at July 1, 2017 $(75,551) $292  $-  $(75,259)
                 
   Other comprehensive income before reclassifications  6,483   36   -   6,519 
Amounts reclassified from accumulated other                
comprehensive loss  -   (174)  -   (174)
Net other comprehensive income (loss), net of tax  6,483   (138)  -   6,345 
Balance at September 30, 2017 $(69,068) $154  $-  $(68,914)
                 
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)

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

  Foreign  Unrealized  Benefit    
  currency  gain (loss)  plan    
  translation  on derivatives  adjustment  Total 
Balance at January 1, 2017 $(67,895) $(18) $-  $(67,913)
                 
Other comprehensive income before reclassifications  15,822   466   -   16,288 
Amounts reclassified from accumulated other                
comprehensive loss  -   (294)  -   (294)
Net other comprehensive income, net of tax  15,822   172   -   15,994 
Reclassification of foreign currency translation associated                
with noncontrolling interest acquired  (16,995)  -   -   - 
Balance at September 30, 2017 $(69,068) $154  $-  $(68,914)
                 
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)
  Foreign  Unrealized    
  currency  gain (loss)    
  translation  on derivatives  Total 
Balance at April 1, 2018 $(65,523) $652  $(64,871)
             
Other comprehensive loss before reclassifications  (17,421)  19   (17,402)
Amounts reclassified from accumulated other            
comprehensive loss  -   (178)  (178)
Net other comprehensive loss, net of tax  (17,421)  (159)  (17,580)
Balance at June 30, 2018 $(82,944) $493  $(82,451)
             
Balance at April 1, 2017 $(64,832) $299  $(64,533)
             
Other comprehensive income before reclassifications  6,276   94   6,370 
Amounts reclassified from accumulated other            
comprehensive loss  -   (101)  (101)
Net other comprehensive income (loss), net of tax  6,276   (7)  6,269 
Reclassification of foreign currency translation associated with noncontrolling interest acquired  (16,995)  -   (16,995)
Balance at June 30, 2017 $(75,551) $292  $(75,259)

 

 19 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Changes in accumulated other comprehensive loss for the six months ended June 30, 2018 and 2017 were as follows:

  Foreign  Unrealized    
  currency  gain (loss)    
  translation  on derivatives  Total 
Balance at January 1, 2018 $(69,417) $(143) $(69,560)
             
   Other comprehensive income (loss) before reclassifications  (13,527)  933   (12,594)
Amounts reclassified from accumulated other            
comprehensive loss  -   (297)  (297)
Net other comprehensive income (loss), net of tax  (13,527)  636   (12,891)
Balance at June 30, 2018 $(82,944) $493  $(82,451)
             
Balance at January 1, 2017 $(67,895) $(18) $(67,913)
             
   Other comprehensive income before reclassifications  9,339   430   9,769 
Amounts reclassified from accumulated other            
comprehensive loss  -   (120)  (120)
Net other comprehensive income, net of tax  9,339   310   9,649 
Reclassification of foreign currency translation associated with noncontrolling interest acquired  (16,995)  -   (16,995)
Balance at June 30, 2017 $(75,551) $292  $(75,259)

 

(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 condensed 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 Companysite and 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 theA remedial action plan has beenwas approved by the Florida Department of Environmental Protection and groundwater remediation began in the fourth quarter of 2015. During the three and ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, environmental remediation costs incurred were immaterial. At SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company accrued a remaining undiscounted liability of $267$157 and $446,$265, respectively, related to future remediation costs. At SeptemberJune 30, 20172018 and December 31, 2016, $2182017, $157 and $370,$253, respectively, were 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. Costs associated with the recorded liability will be incurred to complete the groundwater remediation, 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 is currently required to maintain a $2,000$1,489 letter of credit for the benefit of the buyer.

 

During the third quarter of 2017, the Company resolved a legal proceeding,Verde v. Stoneridge, Inc. et al., that was 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 had alleged 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 had alleged that the Company breached express warranties and indemnification provisions by supplying a defective CD that was not capable of performing its intended function.  In May 2017, the District Court denied Plaintiff’s motion for class certification. On October 2, 2017, the Company and Plaintiff agreed to settle this matter, and the Plaintiff filed a motion with the Court requesting dismissal of the matter with prejudice. The settlement amount was $3.

Royal v. Stoneridge, Inc. et al. is a 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.  On September 28, 2017, the Company reached an agreement with Plaintiffs to settle the matter. Under the terms of the settlement, which remains subject to approval by the Court, the Company will provide a replacement CD to each member of the settlement class who files a claim form with evidence of eligibility to participate. The terms of the proposed settlement do not require the Company to provide members of the settlement class with any cash payments or to reimburse any installation costs associated with replacement of the CDs. Counsel for Plaintiffs and the settlement class will file a motion with the Court requesting an award of attorneys’ fees and costs in an amount not to exceed $375, and the Company has agreed not to object to any request that does not exceed $375 and to pay the amount of any award that does not exceed $375. Counsel for Plaintiffs and the settlement class will also file a motion requesting incentive payments to each of the three named Plaintiffs in an amount not to exceed $5 each, and the Company has agreed not to object to any request that does not exceed $15 total and to pay the amount of any award that does not exceed $15 total. The total cost of the settlement remains uncertain because it is difficult to predict how many members of the proposed settlement class will request a replacement CD. The Company believes the likelihood of loss is probable and reasonably estimable (although not certain), and therefore a liability of $525 for these claims has been recorded as a component of accrued expenses and other current liabilities at September 30, 2017.

 20 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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$99,100 ($31,300) which is comprised of Value Added Tax – ICMS of R$13,200 ($4,200) interest of R$74,500 ($23,500) and penalties of R$11,400 ($3,600).

 

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. The Company 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 reasonably possible, but not probable, although it may take years to resolve.  As a result of the above, as of September 30, 2017 and December 31, 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 months ended September 30, 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$34,90028,700 ($11,000)7,400) and R$31,80033,800 ($9,800)10,200) at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. An unfavorable outcome on these contingencies could result in significant cost to PSTthe Company and adversely affect its results of operations.

Insurance Recoveries

The Company incurred losses and incremental costs related to the damage to assets caused by a storm at its Mexican production facility in the fourth quarter of 2016 and is pursuing recovery of such costs under applicable insurance policies.  Anticipated proceeds from insurance recoveries related to losses and incremental costs that have been incurred (“loss recoveries”) are recognized when receipt is probable. Anticipated proceeds from insurance recoveries in excess of the net book value of damaged property, plant and equipment (“insurance gain contingencies”) are recognized when all contingencies related to the claim have been resolved.

Loss recoveries related to the damage of inventory and incremental costs included in costs of sales were not significant for the three and six months ended June 30, 2018 and 2017, respectively. There were no loss recoveries and insurance gain contingencies recognized in the three and six months ended June 30, 2018 and 2017 related to the damage of property, plant and equipment included within SG&A expense.  As of December 31, 2017, the Company had confirmation of the open insurance claim and recorded a receivable of $1,644. The cash payment was subsequently collected in January 2018. Cash proceeds related to the damage of inventory and incremental costs were $241 and $500 for the six months ended June 30, 2018 and 2017, respectively, and are included in cash flows from operating activities at June 30, 2018. Cash proceeds related to the damage of property, plant and equipment of $1,403 for the six months ended June 30, 2018 are included in cash flows from investing activities at June 30, 2018. There were no cash proceeds received during the three months ended June 30, 2018.

 

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 $3,481$3,261 and $2,617$3,112 of a long-term liability at SeptemberJune 30, 20172018 and December 31, 2016,2017, 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: 

Six months ended June 30 2018  2017 
Product warranty and recall at beginning of period $9,978  $9,344 
Accruals for products shipped during period  2,791   3,233 
Assumed warranty liability related to Orlaco  -   1,462 
Aggregate changes in pre-existing liabilities due to claim developments  1,569   1,202 
Settlements made during the period  (2,876)  (6,922)
Foreign currency translation  (524)  219 
Product warranty and recall at end of period $10,938  $8,538 

 21 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

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

Nine months ended September 30 2017  2016 
Product warranty and recall at beginning of period $9,344  $6,419 
Accruals for products shipped during period  6,408   3,010 
Assumed warranty liability related to Orlaco  1,462   - 
Aggregate changes in pre-existing liabilities due to claim developments  1,616   (272)
Settlements made during the period  (9,062)  (1,332)
Product warranty and recall at end of period $9,768  $7,825 

(12) Business Realignment and Corporate Headquarter Relocation

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, 
  2017  2016  2017  2016 
Electronics(A) $16  $-  $72  $1,180 
PST(B)  37   211   475   1,242 
Total business realignment charges $53  $211  $547  $2,422 
  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Control Devices(A) $128  $-  $128  $- 
Electronics(B)  295   56   295  56 
PST(C)  97   267   319   438 
Total business realignment charges $520  $323  $742  $494 

 

(A)Severance costs for the three and ninesix months ended SeptemberJune 30, 20172018 related to SG&A were $16. Severance costs for the nine months ended September 30, 2017 related to COGS were $56. Severance costs for the nine months ended September 30, 2016 related to SG&A and design and developmentdevelopement (“D&D”) were $196 and $984, respectively.$128.

 

(B)Severance costs for the three and six months ended SeptemberJune 30, 2018 related to SG&A were $295. Severance costs for the three and six months ended June 30, 2017 related to COGS were $56.

(C)Severance costs for the three and six months ended June 30, 2018 related to SG&A were $71 and D&D$293, respectively. Severance costs for the three and six months ended June 30, 2018 related to COGS were $17, $19 and $1, respectively.$26. Severance costs for the three months ended SeptemberJune 30, 20162017 related to COGS and SG&A were $20$248 and $191,$19, respectively. Severance costs for the ninesix months ended SeptemberJune 30, 2017 related to COGS and SG&A were $338 and D&D were $355, $119 and $1, respectively. Severance costs for the nine months ended September 30, 2016 related to COGS, SG&A and D&D were $307, $819 and $116,$100, respectively.

 

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

 

 Three months ended Nine months ended  Three months ended Six months ended 
 September 30, September 30,  June 30, June 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
Cost of goods sold $17  $20  $411  $307  $26  $304  $26  $394 
Selling, general and administrative  35   191   135   1,015   366   19   588   100 
Design and development  1   -   1   1,100 
Design and Development  128   -   128   - 
Total business realignment charges $53  $211  $547  $2,422  $520  $323  $742  $494 

(13) Income Taxes

The Company recognized income tax expense of $3,820 and $5,189 for U.S. federal, state and foreign income taxes for the three months ended June 30, 2018 and 2017, respectively.  The decrease in income tax expense for the three months ended June 30, 2018 compared to the same period for 2017 was primarily related to the impact of the Tax Cuts and Jobs Act (“Tax Legislation”) enacted in the United States on December 22, 2017. The effective tax rate decreased to 20.2% in the second quarter of 2018 from 36.8% in the second quarter of 2017 primarily due the impact of the Tax Legislation compared to the same period in 2017.

The Company recognized income tax expense of $7,053 and $9,760 for U.S. federal, state and foreign income taxes for the six months ended June 30, 2018 and 2017, respectively.  The decrease in income tax expense for the six months ended June 30, 2018 compared to the same period for 2017 was primarily related to the impact of the Tax Legislation. The effective tax rate decreased to 19.8% in the first half of 2018 from 35.0% in the first half of 2017 primarily due the impact of the Tax Legislation compared to the same period in 2017.

The Company has recognized the estimated impact of the Tax Legislation to its 2018 tax position in its estimated annual effective tax rate (“EAETR”) calculation. The Company continues to examine the potential impact of certain provisions of the Tax Legislation that could affect its 2018 EAETR, including the provisions related to global intangible low-taxed income (“GILTI”), foreign derived intangible income (“FDII”) and the base erosion and anti-abuse tax (“BEAT”). Accordingly, the Company's 2018 EAETR may change in subsequent interim periods as additional analysis is completed.

 

 22 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Corporate Headquarter Relocation

In March 2016,The Tax Legislation significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, imposing a base erosion and anti-abuse tax, and imposing a tax on global intangible low taxed income. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company announcedcontinues to analyze certain aspects of the relocationTax Legislation and refine its assessment, the ultimate impact of its corporate headquartersthe Tax Legislation may differ from Warren, Ohiothese estimates due to Novi, Michigan. As a result, the Company incurred relocation costs of $726 and $998 for the three and nine months ended September 30, 2016 which were recorded within SG&A expenses in the condensed consolidated statements of operations.

In connection with the headquarter relocation, the Company was approved for a Michigan Business Development Program grant of up to $1,400 based upon the number of new jobs created in Michigan through 2021.  Ascontinued analysis or further regulatory guidance that may be issued as a result of the attainment of the first milestone, grant income of $338 was recognized for the nine months ended September 30, 2017 within SG&A expense in the condensed consolidated statements of operations.Tax Legislation.

(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 (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 expense (benefit) 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 $3,809 and $919 for U.S. federal, state and foreign income taxes for the three months ended September 30, 2017 and 2016, respectively.  The increase in income tax expense for the three months ended September 30, 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 32.1% in the third quarter of 2017 from 8.4% in the third 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, as well as the impact in the third quarter of 2017 of the non-deductible fair value adjustment to earn-out considerations related to the Orlaco and PST acquisitions.

The Company recognized income tax expense of $13,569 and $3,114 from continuing operations for U.S. federal, state and foreign income taxes for the nine months ended September 30, 2017 and 2016, respectively. The increase in tax expense for the nine months ended September 30, 2017 compared to the same period for 2016 was primarily due 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 34.2% in the first nine months of 2017 from 10.3% in the first nine months of 2016 primarily due to the continued strong performance of the U.S. operations, which due to a full valuation allowance, favorably impacted the effective tax rate in 2016, as well as the impact in 2017 of the non-deductible fair value adjustment to earn-out considerations related to the Orlaco and PST acquisitions.

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

(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 other driver information systems and includes the recently acquired Orlaco business which designs and manufactures camera-based vision systems, monitors and related products using its vision processing technology. 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 20162017 Form 10-K. The Company's management evaluates the performance of its reportable segments based primarily on revenues from external customers and operating 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.

 

 2423 

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  Three months ended Six months ended 
 September 30,     September 30,  June 30, June 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
Net Sales:                                
Control Devices $106,842  $103,700  $339,716  $304,957  $109,956  $114,001  $225,313  $232,874 
Inter-segment sales  1,118   430   3,269   1,448   2,481   1,368   4,662   2,151 
Control Devices net sales  107,960   104,130   342,985   306,405   112,437   115,369   229,975   235,025 
                
Electronics  71,354   47,804   206,769   158,201 
Electronics(D)  90,313   71,610   180,341   135,415 
Inter-segment sales  8,959   9,495   30,538   24,706   9,771   10,223   20,243   21,579 
Electronics net sales  80,313   57,299   237,307   182,907   100,084   81,833   200,584   156,994 
                
PST  25,386   22,342   70,519   60,207   20,333   23,500   40,878   45,133 
Inter-segment sales  145   -   145   -   -   -   2   - 
PST net sales  25,531   22,342   70,664   60,207   20,333   23,500   40,880   45,133 
                                
Eliminations  (10,222)  (9,925)  (33,952)  (26,154)  (12,252)  (11,591)  (24,907)  (23,730)
Total net sales $203,582  $173,846  $617,004  $523,365  $220,602  $209,111  $446,532  $413,422 
Operating Income (Loss):                                
Control Devices $16,249  $15,319  $55,257  $47,133  $17,160  $19,924  $35,039  $39,008 
Electronics  4,896   3,735   13,267   12,050 
Electronics(D)  8,276   2,814   16,156   8,371 
PST  1,018   29   2,720   (4,179)  735   1,123   885   1,702 
Unallocated Corporate(A)  (8,867)  (7,303)  (27,108)  (21,092)  (6,990)  (8,185)  (16,052)  (18,241)
Total operating income $13,296  $11,780  $44,136  $33,912  $19,181  $15,676  $36,028  $30,840 
Depreciation and Amortization:                                
Control Devices $2,664  $2,561  $8,050  $7,345  $2,897  $2,687  $5,692  $5,386 
Electronics  2,136   996   5,947   3,076 
Electronics(D)  2,252   2,241   4,543   3,811 
PST  2,115   2,307   6,299   6,388   1,740   2,096   4,245   4,184 
Unallocated Corporate  181   115   376   309   199   96   396   195 
Total depreciation and amortization(B) $7,096  $5,979  $20,672  $17,118  $7,088  $7,120  $14,876  $13,576 
Interest Expense, net:                                
Control Devices $19  $56  $84  $172  $18  $11  $37  $65 
Electronics  24   33   68   196   23   6   57   44 
PST  378   934   1,482   2,686   194   532   532   1,104 
Unallocated Corporate  1,087   661   2,802   1,984   935   969   1,898   1,715 
Total interest expense, net $1,508  $1,684  $4,436  $5,038  $1,170  $1,518  $2,524  $2,928 
Capital Expenditures:                                
Control Devices $5,523  $3,229  $13,318  $9,260  $3,312  $4,347  $9,058  $7,795 
Electronics  2,417   1,244   6,451   5,229 
Electronics(D)  1,394   1,684   4,167   4,034 
PST  974   640   2,899   2,516   696   1,041   1,955   1,925 
Unallocated Corporate(C)  811   1,365   2,224   1,479   938   830   1,665   1,413 
Total capital expenditures $9,725  $6,478  $24,892  $18,484  $6,340  $7,902  $16,845  $15,167 

 

 2524 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

  September 30,  December 31, 
  2017  2016 
Total Assets:        
Control Devices $166,641  $150,623 
Electronics  245,568   99,964 
PST  108,162   107,405 
Corporate(C)  356,396   287,031 
Eliminations  (336,498)  (250,494)
Total assets $540,269  $394,529 

  June 30,  December 31, 
  2018  2017 
Total Assets:        
Control Devices $175,649  $164,632 
Electronics  268,619   252,324 
PST  84,313   100,382 
Corporate(C)  350,203   377,657 
Eliminations  (318,138)  (335,958)
Total assets $560,646  $559,037 

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

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Net Sales:                
North America $120,885  $121,487  $245,314  $244,873 
South America  20,333   23,500   40,878   45,133 
Europe and Other(D)  79,384   64,124   160,340   123,416 
Total net sales $220,602  $209,111  $446,532  $413,422 

  June 30,  December 31, 
  2018  2017 
Long-term Assets:        
North America $88,952  $89,997 
South America  47,824   58,989 
Europe and Other  107,888   106,682 
Total long-term assets $244,664  $255,668 

 

(A)Unallocated Corporate expenses include, among other items, finance, legal, human resources and information technology costs and 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, fixed assets for the corporate headquarter building, equity investments and investments in subsidiaries.

The following tables 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, 
  2017  2016  2017  2016 
Net Sales:                
North America $113,402  $108,605  $358,275  $321,973 
South America  25,386   22,342   70,519   60,207 
Europe and Other(D)  64,794   42,899   188,210   141,185 
Total net sales $203,582  $173,846  $617,004  $523,365 

  September 30,  December 31, 
  2017  2016 
       
Long-term Assets:        
North America $76,539  $73,835 
South America  62,500   63,497 
Europe and Other(D)  104,057   16,304 
Total long-term assets $243,096  $153,636 

(D)The amountsamount for the six months ended June 30, 2017 include net sales and long-term assetsincludes five months of activity from the acquisition date of January 31, 2017 related to Orlaco which is disclosed in Note 3.4.

 

 2625 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

 

(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 markets. 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 $9,475$10,572 and $7,952$10,131 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $465$665 and $307,$555, for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $1,200$1,186 and $603,$735, for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively.

 

PST Eletrônica Ltda.

 

The Company had a 74% controlling interest in PST from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the 26% noncontrolling interest in PST for $1,500 in cash along with earn-out consideration. The Company will be required to pay additional earn-out consideration, which is not capped, based on PST’s financial performance in either 2020 or 2021. The preliminary estimated fair value of the earn-out consideration as of the acquisition date was $10,400, which was subsequently adjusted to $10,180 and was based on discounted cash flows utilizing forecasted EBITDA in 2020 and 2021. The Company’s statement of operations for the three and six months ended June 30, 2018 included $513 and $1,048, respectively, of expense for the fair value adjustment for earn-out consideration in SG&A expenses. The Company’s statement of operations for the three and six months ended June 30, 2017 included $244 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. See Note 6 for the fair value and foreign currency adjustments of the earn-out consideration. This fair value measurement is classified within Level 3 of the fair value hierarchy. The transaction was accounted for as an equity transaction, and therefore no gain or loss was recognized in the statement of operations or comprehensive income. The noncontrolling interest balance on the May 16, 2017 acquisition date was $14,458, of which $31,453 and ($16,995) was related to the carrying value of the investment and foreign currency translation, respectively, and accordingly these amounts were reclassified to additional paid-in capital and accumulated other comprehensive loss, respectively.

 

The following table sets forth a summary of the change in noncontrolling interest:interest in 2017:

 

 Three months ended Nine months ended  Three months ended Six months ended 
 September 30, September 30,  June 30, June 30, 
 2017  2016  2017  2016  2017  2017 
Noncontrolling interest at beginning of period $-  $14,171  $13,762  $13,310  $14,489  $13,762 
Net loss  -   (303)  (130)  (2,009)  (100)  (130)
Foreign currency translation  -   (164)  826   2,403   69   826 
Comprehensive income (loss)  -   (467)  696   394   (31)  696 
Acquisition of noncontrolling interest  -   -   (14,458)  -   (14,458)  (14,458)
Noncontrolling interest at end of period $-  $13,704  $-  $13,704  $-  $- 

 

PST has dividends payable to former noncontrolling interest holders of $22,143R$22,749 Brazilian real ($7,004) at September 30, 2017, which includes the dividend declared on May 16, 2017 of $9,6105,868) and R$22,330 Brazilian real ($3,092)6,742) as of June 30, 2018 and $1,691December 31, 2017, respectively. The dividends payable balance at June 30, 2018 includes R$419 Brazilian real ($535)108) in monetary correction.correction for the year to date June 30, 2018 period. The dividend is payable on or before January 1, 2020, and is subject to monetary correction based on the Brazilian consumer price inflation index. The dividend payable related to PST is recorded within other long-term liabilities on the condensed consolidated balance sheet.

 

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

 

We are a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems primarily for the automotive, commercial, off-highway, motorcycle 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 SeptemberJune 30, 2017.2018. On May 16, 2017, the Company also acquired the remaining 26% noncontrolling interest in PST.

 

Segments

 

We are 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 produces electronic instrument clusters, electronic control units and other driver information systems and includes the newly acquired Orlaco business, which designs and manufactures camera-based vision systems, monitors and related products using its vision processing technology.

 

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.

 

ThirdSecond Quarter Overview

 

Net income attributable to Stoneridge, Inc. of $8.0$15.1 million, or $0.28$0.52 per diluted share, for the three months ended SeptemberJune 30, 2017, decreased2018, increased by $2.3$6.1 million, or $0.08$0.20 per diluted share, from $10.3$9.0 million, or $0.36$0.32 per diluted share, for the three months ended SeptemberJune 30, 2016, primarily due to a $2.9 million2017. The Electronics segment’s higher sales resulted in increased operating income of $5.5 million.  In addition, income tax expense decreased by $1.4 million as a result of the valuation allowance releaseTax Cuts and Jobs Act (“Tax Legislation”) enacted in the fourth quarter of 2016.  Gross profit increased by $12.8 million due to higher sales in all of our segments, the inclusion of the acquired Orlaco business, lower material and overhead costs as a percentage of sales and operating improvements.  The higher gross profit was partially offset by an increase in selling, general and administrative and design and development costs of $9.5 million and $1.8 million, respectively, primarily attributable to the acquired Orlaco business within our Electronics segment.2017. 

 

Net sales increased by $29.7$11.5 million, or 17.1%5.5%, compared to the thirdsecond quarter of 20162017 due to higher sales in each of our Electronics segment partially offset by a decrease in sales in our Control Devices and PST segments. The increase in sales in our Electronics segment was due to an increase in sales volume in our European and North American commercial vehicle and off-highway vehicle products. The decrease in sales in our Control Devices segment was primarily due to increasedcertain program volume reductions in the ChinaNorth American automotive market while the increase inmarket. Also, PST sales decreased slightly due to lower audio product sales partially offset by new product sales in our Electronics segment relates substantially to the Orlaco business acquired on January 31, 2017.  Also, PST sales mostly increased due tofactory authorized dealer installers and higher monitoring product and service revenues.

 

At SeptemberJune 30, 20172018 and December 31, 2016,2017, we had cash and cash equivalents balances of $50.8$59.0 million and $50.4$66.0 million, respectively. The increasedecrease during the first nine monthshalf of 20172018 was primarily due to the repayment of outstanding debt and capital expenditures being partially offset by cash flows from operations and net debt financing offset by capital expenditures and cash paid for business acquisition.operations. At SeptemberJune 30, 20172018 and December 31, 20162017 we had $126.0$110.0 million and $67.0$121.0 million, respectively, in borrowings outstanding on our $300.0 million Credit Facility. The increasedecrease in the Credit Facility balance during the first nine monthshalf of 20172018 was the result of borrowing to fund the Orlaco acquisition with a partial offset in voluntary principal payments.repayments.

 

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Outlook

 

In the third quarterfirst half of 2017,2018, the Company continued to drive financial performance through top-line growth that exceededin our underlying markets and continued operating efficiency improvement which contributed to higher, sustainable long-term margins.  Sales of our emission sensor products were strong and continued to contribute toElectronics segment including the Company’s growth, particularly in the China market.  Also, the acquired Orlaco business performed well contributingwhich continues to contribute to the growth in our Electronics segment.  The Company continuescontinued to benefit from its focus on a product portfolio with embedded intelligence.implement operating efficiency improvements which contributed to higher, sustainable long-term margins in all our segments.  The Company believes that focusing on intelligence products that address industry megatrends will have a positive impact on both our top-line growth and underlying margins. 

 

We expect sales growth in ourThe North American automotive vehicle market in 2017 relatedis expected to recent product launches by our Control Devices segment despite an expected decrease of 0.6increase 0.1 million production units in the North American automotive vehicle market to 17.2 million units in 2017. We also expect2018, however, based on our product mix, the Company expects sales growthvolumes in our China automotive market in 2017 relatedControl Devices segment to our sensor products.be consistent with the prior year.

 

The North American commercial vehicle market declinedincreased in 2016, however in 2017 and we expect it to remain at approximately the same level as 2016.increase again in 2018. We also expect the European commercial vehicle market to increase in 2017 to remain at approximately the same level as 2016.2018.

 

Our PST segment revenues and operating performance have begun to improve in the secondfirst half of 2018 was consistent with the first half of 2017, due to the stabilization of the Brazilian economy and the automotive and consumer markets we serve. In October 2017,July 2018, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow 0.7%1.8% in 20172018 and 1.5%2.5% in 2018.2019. As the Brazilian economy improves,remains relatively stable, we expect favorable movements in our served market channels that would resultto remain consistent except for our audio products which have had lower demand in improved2018 compared to the prior year. Our financial performance for PST.in our PST segment is subject to uncertainty in the Brazilian Real and Argentina Peso foreign currencies.

 

Trade actions initiated by the U.S. imposing tariffs on imports have been met with retaliatory tariffs by other countries, adding a level of uncertainty to the global economic environment. These and other actions are likely to impact trade polices with other countries and the overall global economy.

Other Matters

 

As a result of the Company no longer has a valuation allowance against its U.S. federal, certain state and foreign deferred tax assets, itsimpact of the Tax Legislation enacted in the fourth quarter of 2017, our effective tax rate will be higherlower in 20172018 as compared to 2016. Actual cash taxes paid as a percentage of income in 2017 is expected to be consistent with historical amounts.2017.

 

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. The U.S. dollar weakened significantly against the Swedish krona, euro and Brazilian real in 20162017 favorably impacting our material costs and our reported results. The U.S. dollar continued to weakenDollar strengthened against these currencies in the first nine months of 2017 favorablySwedish krona, euro and Brazilian real, unfavorably 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.

 

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Three Months Ended SeptemberJune 30, 20172018 Compared to Three Months Ended SeptemberJune 30, 20162017

 

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    2017     2016  (decrease) 
Three months ended June 30    2018     2017  (decrease) 
Net sales $203,582   100.0% $173,846   100.0% $29,736  $220,602   100.0% $209,111   100.0% $11,491 
Costs and expenses:                                        
Cost of goods sold  141,033   69.3   124,098   71.4   16,935   153,184   69.4   145,697   69.7   7,487 
Selling, general and administrative  37,277   18.3   27,817   16.0   9,460   35,256   16.0   35,704   17.1   (448)
Design and development  11,976   5.9   10,151   5.8   1,825   12,981   5.9   12,034   5.8   947 
                                        
Operating income  13,296   6.5   11,780   6.8   1,516   19,181   8.7   15,676   7.4   3,505 
Interest expense, net  1,508   0.7   1,684   1.0   (176)  1,170   0.5   1,518   0.7   (348)
Equity in earnings of investee  (465)  (0.2)  (307)  (0.2)  (158)  (665)  (0.3)  (555)  (0.3)  (110)
Other expense (income), net  395   0.2   (497)  (0.3)  892   (264)  (0.1)  605   0.3   (869)
Income before income taxes  11,858   5.8   10,900   6.3   958   18,940   8.6   14,108   6.7   4,832 
                                        
Provision for income taxes  3,809   1.8   919   0.5   2,890   3,820   1.7   5,189   2.5   (1,369)
                                        
Net income  8,049   4.0   9,981   5.8   (1,932)  15,120   6.9   8,919   4.2   6,201 
Net loss attributable to                                        
noncontrolling interest  -   -   (303)  (0.1)  303   -   -   (100)  (0.1)  100 
Net income attributable to Stoneridge, Inc. $8,049   4.0% $10,284   5.9% $(2,235) $15,120   6.9% $9,019   4.3% $6,101 
                    

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

 

          Dollar Percent           Dollar Percent 
Three months ended September 30    2017     2016  increase  increase 
          increase / increase / 
Three months ended June 30    2018     2017  (decrease)  (decrease) 
Control Devices $106,842   52.5% $103,700   59.7% $3,142   3.0% $109,956   49.9% $114,001   54.5% $(4,045)  (3.5)%
Electronics  71,354   35.0   47,804   27.4   23,550   49.3   90,313   40.9   71,610   34.3   18,703   26.1%
PST  25,386   12.5   22,342   12.9   3,044   13.6   20,333   9.2   23,500   11.2   (3,167)  (13.5)%
Total net sales $203,582   100.0% $173,846   100.0% $29,736   17.1% $220,602   100.0% $209,111   100.0% $11,491   5.5%

 

Our Control Devices segment net sales increaseddecreased primarily as a result of increased sales volume in the China automotive, commercial vehicle, agricultural and various other markets of $3.5 million, $1.0 million, $0.1 million and $0.7 million, respectively, during the third quarter of 2017. This was partially offset by a decrease indecreased sales volume in the North American automotive market of $2.1 million.$8.3 million as a result of certain program volume reductions partially offset by an increase in sales volume in commercial vehicle, China automotive and favorable foreign currency translation of $3.2 million, $0.9 million and $0.5 million, respectively.

 

Our Electronics segment net sales increased primarily due to an increase in sales volume in our European and North American commercial vehicle products of $7.4 million and $5.7 million, respectively, and increased sales of European and North American off-highway vehicle products of $15.3$3.0 million and $3.6$0.7 million, respectively, substantially related to the acquired Orlaco business as well as an increase in sales volume in our North American commercial vehicle products of $2.9 million and a favorable foreign currency translation of $1.5$2.4 million. This increase was partially offset by unfavorable pricing of $0.9 million on products nearing the end of product life.

29

 

Our PST segment net sales increaseddecreased primarily due to a lower volumes in our audio product markets as well as an unfavorable foreign currency translation that decreased sales by $2.6 million, or 10.9%. This reduction was partially offset by a slight increase in sales of new products to our factory authorized dealer installers and monitoring product and service revenues and higher products sales volume as well as a favorable foreign currency translation that increased sales by $0.6 million, or 2.7%.revenues.

30

 

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

 

    Dollar Percent     Dollar Percent 
Three months ended September 30    2017     2016  increase  increase 
    increase / increase / 
Three months ended June 30    2018     2017  (decrease)  (decrease) 
North America $113,402   55.7% $108,605   62.5% $4,797   4.4% $120,885   54.8% $121,487   58.1% $(602)  (0.5)%
South America  25,386   12.5   22,342   12.9   3,044   13.6   20,333   9.2   23,500   11.2   (3,167)  (13.5)%
Europe and Other  64,794   31.8   42,899   24.6   21,895   51.0   79,384   36.0   64,124   30.7   15,260   23.8%
Total net sales $203,582   100.0% $173,846   100.0% $29,736   17.1% $220,602   100.0% $209,111   100.0% $11,491   5.5%

 

The increaseslight decrease in North American net sales was primarily attributable to increased sales volume in our North American off-highway, commercial vehicle and various other markets of $3.6 million, $2.5 million and $0.6 million, respectively, which were offset by a decrease in sales volume in our North American automotive market of $2.1 million.$8.4 million resulting from certain program volume reductions which were partially offset by increased sales volume in our North American commercial vehicle and off-highway markets of $7.0 million and $0.7 million, respectively. The increasedecrease in net sales in South America was primarily due to an increasea decrease in monitoring product and service revenues,audio product sales volume as well as a favorablean unfavorable foreign currency translation that increaseddecreased sales by $0.6 million.$2.6 million, or 10.9%, partially offset by a slight increase of new products to factory authorized dealer installers and monitoring product and service revenues. The increase in net sales in Europe and Other was primarily due to the increase in our European commercial vehicle and European off-highway vehicle product salesmarkets of $15.3$9.4 million substantially related to Orlacoand $3.0 million, respectively as well as an increase in sales volume in our China automotive market of $0.9 million. Additionally, Europe and European commercial vehicle markets of $3.5 million and $2.0 million, respectively. Additionally,Other sales were favorably impacted by foreign currency translation of $1.5$2.9 million offset by unfavorable pricing of $0.6 million.$0.8 million on products nearing the end of product life.

 

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 13.6%5.1% primarily related to an increase in net sales. Our gross margin improved by 2.1%0.3% to 30.7%30.6% for the thirdsecond quarter of 20172018 compared to 28.6%30.3% for the thirdsecond quarter of 2016.2017. Our material cost as a percentage of net sales decreasedincreased by 0.6% to 50.1%51.3% for the thirdfirst quarter of 20172018 compared to 50.7% for the thirdsecond quarter of 2016.2017. The lower direct material costs as a percentage of net sales in our Electronics and PST segments resulted from favorable foreign currency movements associated with U.S. dollar denominated purchases whileproduct mix. The higher direct material costs as a percent of sales in our Control Devices segment decreased due to the benefit of a favorableresulted from unfavorable product mix. Also, our Electronics segment was benefited by lower direct material costs and overhead as a percent of sales associated with the acquired Orlaco business. Our Electronics segment overheadOverhead as a percentage of net sales decreased by 1.8%0.9% to 12.0%13.2% for the thirdsecond quarter of 20172018 compared to 13.8%14.1% for the thirdsecond quarter of 2016.2017.

 

Our Control Devices segment gross margin improved slightly due to an increase in sales and a decrease in overhead as a percentage of net sales offset by a decrease in sales.

 

Our Electronics segment gross margin improvedincreased primarily due to lower direct material, labor and overhead costs as a percentage of sales resulting from the Orlaco acquisition as well as lower material costs resulting from favorable movement in foreign currency exchange rateshigher sales and a favorable mix related to Orlaco product sales.

 

Our PST segment gross margin improved due to lower overhead and direct labor costs associated with 2016 business realignment actions as well as lower direct material costs related to a favorable movement in foreign currency exchange rates and a favorable sales mix related to higher monitoring service increases.fees and lower audio products which resulted in lower direct material costs as a percentage of sales.

 

Selling, General and Administrative (“SG&A”). SG&A expenses increaseddecreased by $9.5$0.4 million compared to the thirdsecond quarter of 20162017 primarily due to higher costsa decrease in our Electronics segment substantially relatedexpense of the fair value adjustment for the Orlaco earn-out consideration of $2.1 million, due to the acquisition of Orlaco of $5.6 million which includes expense of $2.2 million forearn-out consideration being capped in the increase in fair value of earn-out consideration. Our unallocated corporate, Control Devices and PST segment’s SG&A costs also increased. Unallocated corporate SG&A costs increased due to higher wages, incentive compensation and professional fees which werefirst quarter 2018. This was offset by lower headquarter relocation costs of $0.7 million. Control Devices SG&A costs increased due to higher wages and incentive compensation.direct support charges for procurement support in our Control Devices segment as well as higher business realignment charges of $0.3 million in the Electronics and PST segments. PST SG&A costs increaseddecreased during the current period due to lower wages and fringe benefit costs partially offset by expense for the fair value of earn-out consideration of $0.5 million, an unfavorable change in foreign currency exchange ratesmillion. Unallocated corporate SG&A costs decreased primarily due to higher allocation of direct support costs to operating segments for procurement and higher incentive compensation,manufacturing support due to the centralization of these activities which were partially offset by lower business realignment costs of $0.2 million.higher professional service costs.

30

 

Design and Development (“D&D”).D&D costs increased by $1.8$0.9 million substantiallyprimarily due to higher D&D costs in our ElectronicsControl Devices segment related to the acquired Orlaco business.program launches.

31

 

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

 

        Dollar  Percent 
        increase /  increase / 
Three months ended September 30 2017  2016  (decrease)  (decrease) 
Control Devices $16,249  $15,319  $930   6.1%
Electronics  4,896   3,735   1,161   31.1 
PST  1,018   29   989   NM 
Unallocated corporate  (8,867)  (7,303)  (1,564)  (21.4)
Operating income $13,296  $11,780  $1,516   12.9%

NM – not meaningful

        Dollar  Percent 
        increase /  increase / 
Three months ended June 30 2018  2017  (decrease)  (decrease) 
Control Devices $17,160  $19,924  $(2,764)  (13.9)%
Electronics  8,276   2,814   5,462   194.1%
PST  735   1,123   (388)  (34.6)%
Unallocated corporate  (6,990)  (8,185)  1,195   14.6%
Operating income $19,181  $15,676  $3,505   22.4%

 

Our Control Devices segment operating income increased slightlydecreased primarily due to an increase inlower sales, which were partially offset by higher SG&A costs.expenses related to direct support charges for procurement and manufacturing support and higher D&D costs partially related to program launches.

 

Our Electronics segment operating income increased slightly primarily due to the increasehigher sales and lower SG&A expenses, primarily due to no expense incurred for the fair value of earn-out consideration this quarter as compared to $2.1 million of expense in sales resulting from favorable movement in foreign currency exchange rates which werethe second quarter of the prior year. This was offset by higher D&Dallocated direct support costs from unallocated corporate for procurement and material and labor costs, excluding the impact of the acquired Orlaco business.manufacturing activities.

 

Our PST segment operating income increaseddecreased primarily due to highera decrease in sales and higher gross profit from a favorable sales mix of higher monitoring services. PST’s improved operating performance is expected to be sustained for the remainder of 2017.partially offset by lower SG&A costs.

 

Our unallocated corporate operating loss increaseddecreased primarily due to higher wages, incentive compensationallocations of direct support costs to operating segments for procurement and professional fees,manufacturing activities due to the centralization of these activities which were partially offset by lower headquarter relocation costs.higher professional fees.

 

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

 

      Dollar Percent       Dollar Percent 
      increase / increase /       increase / increase / 
Three months ended September 30 2017  2016  (decrease)  (decrease) 
Three months ended June 30 2018  2017  (decrease)  (decrease) 
North America $7,110  $8,852  $(1,742)  (19.7)% $9,900  $11,447  $(1,547)  (13.5)%
South America  1,018   29   989   NM   735   1,123   (388)  (34.6)%
Europe and Other  5,168   2,899   2,269   78.3   8,546   3,106   5,440   175.1%
Operating income $13,296  $11,780  $1,516   12.9% $19,181  $15,676  $3,505   22.4%

 

Our North American operating results decreased primarily due to decreases inlower sales volume in the North American automotive market as well as higher SG&A costs, which were partially offset by increased sales volume in the off-highway and commercial vehicle markets and slightly lower D&D costsoff-highway markets. The decrease in our Control Devices segment. The improved performanceoperating income in South America was primarily due toa decrease in product sales offset by lower SG&A costs and slightly higher sales and gross profit from a favorable sales mix or of higher monitoring services which were partially offset by higher SG&A costs.and new products sold to our factory authorized dealer installers. Our operating results in Europe and Other increased due to higher sales in our China automotivecommercial vehicle and European commercial vehicleoff-highway markets which were partially offset by higher D&D and material and labor costs, excluding the impact of the Orlaco business.costs.

 

Interest Expense, net. Interest expense, net decreased by $0.2$0.3 million compared to the prior year thirdsecond quarter primarily due to lower PST interest expense which was partially offset by higher interest on our Credit Facility resulting fromas a result of the additional borrowings to fund the Orlaco acquisition.decrease in outstanding debt balance.

 

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Equity in Earnings of Investee. Equity earnings for Minda were $0.5$0.7 million and $0.3$0.6 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The increase compared to the prior period was due to higher sales andwhich was benefitedoffset by a favorablean unfavorable change in foreign currency exchange rates.

 

Other (Income) Expense, (Income), net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other expense (income), net on the condensed consolidated statement of operations. Other expense, (income), net increaseddecreased by $0.9 million to other income of $0.3 million in thirdsecond quarter of 2018 compared to other expense of $0.6 million for the second quarter of 2017 compared to the third quarter of 2016 primarily due to a favorable change in foreign currency exchange rates in our PST and Electronics segments which was offset by an unfavorable change in foreign currency exchange rates in our Electronics segment partially offset by favorable foreign currency movements in our PSTunallocated corporate segment.

 

Provision for Income Taxes. We recognized income tax expense of $3.8 million and $0.9$5.2 million for federal, state and foreign income taxes for the thirdsecond quarter of 20172018 and 2016,2017, respectively. The increasedecrease in income tax expense for the three months ended SeptemberJune 30, 20172018 compared to the same period for 20162017 was primarily due to the release of the U.S. federal, certain state and foreign valuation allowancesTax Legislation enacted in the fourth quarter of 2016 that were previously recorded against certain deferred tax assets.2017. The effective tax rate increaseddecreased to 32.1%20.2% in the thirdsecond quarter of 20172018 from 8.4%36.8% in the thirdsecond quarter of 20162017 primarily due to the continued strong performance of the U.S. operations, which due to a full valuation allowance, favorably impacted the effective tax rate in 2016, as well as the impact in the third quarter of 2017 of the non-deductible fair value adjustments to earn-out considerations related to the Orlaco and PST acquisitions.Tax Legislation.

 

NineSix Months Ended SeptemberJune 30, 20172018 Compared to NineSix Months Ended SeptemberJune 30, 20162017

 

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

 

          Dollar           Dollar 
          increase /           increase / 
Nine months ended September 30    2017     2016  (decrease) 
Six months ended June 30    2018     2017  (decrease) 
Net sales $617,004   100.0% $523,365   100.0% $93,639  $446,532   100.0% $413,422   100.0% $33,110 
Costs and expenses:                                        
Cost of goods sold  429,890   69.7   375,705   71.8   54,185   311,145   69.7   288,857   69.9   22,288 
Selling, general and administrative  107,247   17.4   82,836   15.8   24,411   72,517   16.2   69,970   16.9   2,547 
Design and development  35,731   5.8   30,912   5.9   4,819   26,842   6.0   23,755   5.7   3,087 
                                        
Operating income  44,136   7.1   33,912   6.5   10,224   36,028   8.1   30,840   7.5   5,188 
Interest expense, net  4,436   0.7   5,038   0.9   (602)  2,524   0.6   2,928   0.7   (404)
Equity in earnings of investee  (1,200)  (0.2)  (603)  (0.1)  (597)  (1,186)  (0.3)  (735)  (0.2)  (451)
Other expense (income), net  1,190   0.2   (722)  (0.1)  1,912   (863)  (0.2)  795   0.2   (1,658)
Income before income taxes  39,710   6.4   30,199   5.8   9,511   35,553   8.0   27,852   6.8   7,701 
Provision for income taxes  13,569   2.2   3,114   0.6   10,455   7,053   1.6   9,760   2.4   (2,707)
Net income  26,141   4.2   27,085   5.2   (944)  28,500   6.4   18,092   4.4   10,408 
                                        
Net loss attributable to                                        
noncontrolling interest  (130)  -   (2,009)  (0.4)  1,879   -   -   (130)  -   130 
Net income attributable to Stoneridge, Inc. $26,271   4.2% $29,094   5.6% $(2,823) $28,500   6.4% $18,222   4.4% $10,278 

 

 3332 

 

 

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

 

          Dollar Percent           Dollar Percent 
Nine months ended September 30    2017     2016  increase  increase 
          increase / increase / 
Six months ended June 30    2018     2017  

(decrease)

  

(decrease)

 
Control Devices $339,716   55.1% $304,957   58.3% $34,759   11.4% $225,313   50.4% $232,874   56.3% $(7,561)  (3.2)%
Electronics  206,769   33.5   158,201   30.2   48,568   30.7%  180,341   40.4   135,415   32.8   44,926   33.2%
PST  70,519   11.4   60,207   11.5   10,312   17.1%  40,878   9.2   45,133   10.9   (4,255)  (9.4)%
Total net sales $617,004   100.0% $523,365   100.0% $93,639   17.9% $446,532   100.0% $413,422   100.0% $33,110   8.0%

 

Our Control Devices segment net sales increaseddecreased primarily as a result of new product sales and increaseddecreased sales volume in the North American automotive market of $22.9$16.6 million and increasedas a result of certain program volume reductions partially offset by an increase in sales volume in thecommercial vehicle, China automotive commercial vehicle, agricultural and various other markets of $6.4 million, $2.9 million, $1.1 million and $1.8 million, respectively, which were offset by an unfavorablefavorable foreign currency translation of $0.5 million.$6.5 million, $1.9 million and $1.1 million, respectively.

 

Our Electronics segment net sales increased primarily due to an increase in European and North American off-highway vehicle product sales of $39.4 million and $8.7 million, respectively, substantially related to the acquired Orlaco business as well as an increase in sales volume in our European and North American commercial vehicle products of $2.5$12.6 million and $2.8$10.6 million, respectively. These increases were partially offset by an unfavorablerespectively, and increased sales of European and North American off-highway vehicle products of $11.2 million and $2.9 million, respectively, as well as favorable foreign currency translation of $4.6 million and$8.5 million. This increase was partially offset by unfavorable pricing of $1.9 million.$1.8 million on products nearing the end of product life.

 

Our PST segment net sales increaseddecreased primarily due to lower volumes for our audio products as well as an unfavorable foreign currency translation that decreased sales by $3.3 million, or 7.3%. This reduction was partially offset by an increase in sales of new products to our factory authorized dealer installers and monitoring product and service revenues as well as a favorable foreign currency translation that increased sales by $5.9 million, or 9.9%, which were partially offset by lower product sales volume.revenues.

 

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

 

    Dollar Percent     Dollar  Percent 
Nine months ended September 30    2017     2016  increase  increase 
          increase / increase / 
Six months ended June 30    2018     2017  (decrease)  

(decrease)

 
North America $358,275   58.1% $321,973   61.5% $36,302   11.3% $245,314   54.9% $244,873   59.2% $441   0.2%
South America  70,519   11.4   60,207   11.5   10,312   17.1%  40,878   9.2   45,133   10.9   (4,255)  (9.4)%
Europe and Other  188,210   30.5   141,185   27.0   47,025   33.3%  160,340   35.9   123,416   29.9   36,924   29.9%
Total net sales $617,004   100.0% $523,365   100.0% $93,639   17.9% $446,532   100.0% $413,422   100.0% $33,110   8.0%

 

The slight increase in North American net sales was primarily attributable to new product sales and increased sales volumesvolume in our North American commercial vehicle and off-highway markets of $13.9 million and $2.9 million, respectively which was offset by a decrease in sales volume in our North American automotive market of $22.9$16.6 million and an increase in sales volumes in North American off-highway, agricultural, commercial vehicle, and various other markets of $8.7 million, $1.0 million, $1.9 million and $1.8 million, respectively.resulting from certain program volume reductions. The increasedecrease in net sales in South America was primarily due to a decrease in audio product sales volume as well as an unfavorable foreign currency translation that decreased sales by $3.3 million, or 7.3%, partially offset by a slight increase in sales of new products to our factory authorized dealer installers and monitoring product and service revenues as well as favorable foreign currency translation that increased sales by $5.9 million.revenues. The increase in net sales in Europe and Other was primarily due to the increase in our European commercial vehicle and European off-highway vehicle productsmarkets of $39.4$16.3 million substantially related to Orlacoand $11.2 million, respectively as well as an increase in sales volume in our European commercial vehicle products and China automotive market of $7.8 million$1.9 million. Additionally, Europe and $6.4 million, respectively. These increasesOther sales were partially offsetfavorably impacted by an unfavorable foreign currency translation of $5.1$9.5 million andoffset by unfavorable pricing of $1.8 million.million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 14.4% primarily related to an increase in net sales. Our7.7% and our gross margin improved by 2.1%0.2% to 30.3% for the first nine monthshalf of 20172018 compared to 28.2%30.1% for the first nine monthshalf of 2016.2017. Our material cost as a percentage of net sales decreasedincreased by 1.0%0.6% to 50.5%51.3% for the first nine monthshalf of 20172018 compared to 51.5%50.7% for the first nine monthshalf of 2016.2017. The lowerhigher direct material costs in our Electronics and PST segmentsControl Devices segment resulted from favorable foreign currency movements associated with U.S. dollar denominated purchases, which were partially offset by higherunfavorable product mix. The lower direct material costs as a percentage of net sales in our Control DevicesElectronics and PST segment related to a change inresulted from favorable product mix and the step up of the Orlaco inventory to fair value of $1.6 million in our Electronics segment. Also, our Electronics segment was benefited by lower direct material and overhead costs as a percentage of sales associated with the acquired Orlaco business. Our Electronics segment overheadmix. Overhead as a percentage of net sales decreased by 0.9% to 12.3%13.4% for the first nine monthshalf of 20172018 compared to 13.2%14.3% for the first nine monthshalf of 2016.2017.

 

 3433 

 

 

Our Control Devices segment gross margin increased slightlyremained consistent despite lower sales primarily due to an increasea decrease in sales offset by higher material costs and higher warranty costs.overhead.

 

Our Electronics segment gross margin improvedincreased primarily due to higher sales and lower direct material and overhead costs resulting from favorable movement in foreign currency exchange rates andas a percentage of sales primarily related to a favorable mix related toof Orlaco product sales.

 

Our PST segment gross margin improved due to lower direct material costs related to a favorable movement in foreign currency exchange rates and a favorable sales mix related to higher monitoring service revenuesfees and lower audio products which resulted in lower direct material costs as well as lower overhead costs resulting from 2016 business realignment actions. This increase was partially offset by lower product sales volume.a percentage of sales.

 

Selling, General and Administrative. SG&A expenses increased by $24.4$2.5 million compared to the first nine monthshalf of 20162017 primarily due to higher costs in our Electronics segment substantially relateddue to higher wages and fringe benefits, professional service costs and direct support charges for procurement support. In addition, there were higher business realignment charges of $0.5 million in our Electronics and PST segments compared to the acquisitionfirst half of Orlaco of $14.4 million which includes expense of $3.9 million for the increase in fair value of earn-out consideration. Our unallocated corporate, Control Devices and PST segments’ SG&A costs also increased, which2017. These were partially offset by a $0.9 million reductiondecrease in business realignment charges. Unallocated corporate SG&A costs increased due to higher wages, incentive compensation and professional fees as well as Orlaco transaction costs of $1.3 million. Additionally, unallocated corporate SG&A included grant income of $0.3 million (see Note 12 to our condensed consolidated financial statements)expense for the nine months ended September 30, 2017 compared to headquarter relocation expensefair value of $1.0 million for the first nine monthsOrlaco earn-out consideration of 2016.$1.7 million. Control Devices SG&A costs also increased due to higher wages and benefits.direct support charges for procurement support. PST SG&A costs increaseddecreased slightly during the current period due to lower wages and professional service costs which were mostly offset by expense for the fair value of earn-out consideration of $0.7$1.0 million a change in foreign currency exchange ratesduring the first half of 2018. Unallocated corporate SG&A costs decreased primarily due to higher allocation of direct support costs to operating segments for procurement and highermanufacturing support due to the centralization of these activities as well as lower incentive compensation costs which were partially offset by lower business realignment charges of $0.7 million.higher professional service costs.

 

Design and Development.D&D costs increased by $4.8$3.1 million primarily due to higher D&D costs in our Electronics segmentand Control Devices segments related to the acquired Orlaco businessprogram launches, investment in development activities and new product design and development in our Control Devices segment, which were partially offset by a $1.1 million decrease in business realignment charges primarily related to our Electronics segment.lower customer reimbursements.

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

      Dollar Percent       Dollar Percent 
      increase / increase /       increase / increase / 
Nine months ended September 30 2017  2016  (decrease)  (decrease) 
Six months ended June 30 2018  2017  (decrease)  (decrease) 
Control Devices $55,257  $47,133  $8,124   17.2% $35,039  $39,008  $(3,969)  (10.2)%
Electronics  13,267   12,050   1,217   10.1%  16,156   8,371   7,785   93.0%
PST  2,720   (4,179)  6,899   NM   885   1,702   (817)  (48.0)%
Unallocated corporate  (27,108)  (21,092)  (6,016)  (28.5)%  (16,052)  (18,241)  2,189   12.0%
Operating income $44,136  $33,912  $10,224   30.1% $36,028  $30,840  $5,188   16.8%

 

Our Control Devices segment operating income increaseddecreased primarily due to an increase inlower sales which was partially offset byand higher material, warranty, SG&A and D&D costs.costs partially related to program launches.

 

Our Electronics segment operating income increased slightly primarily due to lower material costs and a decrease in business realignment costs of $1.1 million which were partiallythe higher sales offset by higher SG&A as well as higher D&D costs, excluding the impact of the acquired Orlaco business.related to product launch and development activities.

35

 

Our PST segment operating performance improvedincome decreased primarily due to higher sales, higher gross profit resulting from a favorable sales mix of higher monitoring service revenues and a $0.8 million decrease in business realignment costs. PST’s improved operating performance is expected to be sustainedsales as well as the additional expense for the remainderfair value of 2017.earn-out consideration of $1.0 million during the first half of 2018.

 

Our unallocated corporate operating loss increaseddecreased primarily due to higher wagesallocations of direct support costs to operating segments for procurement and incentive compensationmanufacturing activities due to the centralization of these activities as well as Orlaco transactionlower incentive compensation costs which were offset by higher professional service costs.

34

 

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

      Dollar Percent       Dollar Percent 
Nine months ended September 30 2017  2016  increase  increase 
      increase / increase / 
Six months ended June 30 2018  2017  (decrease)  (decrease) 
North America $28,007  $27,303  $704   2.6% $18,193  $20,897  $(2,704)  (12.9)%
South America  2,720   (4,179)  6,899   NM   885   1,702   (817)  (48.0)%
Europe and Other  13,409   10,788   2,621   24.3%  16,950   8,241   8,709   105.7%
Operating income $44,136  $33,912  $10,224   30.1% $36,028  $30,840  $5,188   16.8%

 

Our North American operating results improveddecreased primarily due to increasedlower sales volume in the North American automotive market as well as higher SG&A and D&D costs, which were partially offset by higher wages, incentive compensation, warrantyincreased sales volume in the commercial vehicle and Orlaco transaction costs.off-highway markets. The improved performancedecrease in operating income in South America was primarily due toa decrease in audio product sales offset by slightly higher sales higherand gross profit resulting from a favorable sales mix of higher monitoring service revenuesservices and a decrease in business realignment costs.new products sold to our factory authorized dealer installers. Our operating results in Europe and Other improved primarilyincreased due to higher sales of European off-highway, China automotive andin our European commercial vehicle products and lower material and overhead costs resulting from a favorable movement in foreign currency exchange rates.off-highway markets which were partially offset by higher D&D costs.

 

Interest Expense, net. Interest expense, net decreased by $0.6$0.4 million compared to the first nine months of the prior year first half primarily due to lower PST interest expense which was partially offset by higher interest related to our Credit Facility resulting fromas a result of the additional borrowings to fund the Orlaco acquisition.decrease in outstanding debt balance.

 

Equity in Earnings of Investee. Equity earnings for Minda were $1.2 million and $0.6$0.7 million for the ninesix months ended SeptemberJune 30, 20172018 and 2016,2017, respectively. The increase compared to the prior period was due to higher sales and benefitedwhich was offset by a favorablean unfavorable change in foreign currency exchange rates.

Other (Income) Expense, (Income), net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other expense (income), net on the condensed consolidated statement of operations. Other expense (income), net increaseddecreased by $1.9$1.7 million to other income of $0.9 million in first nine monthshalf of 20172018 compared to other expense of $0.8 million for the first nine monthshalf of 20162017 primarily due to an unfavorablea favorable change in foreign currency exchange rates in our Electronics segment partially offset by favorable foreign currency movements in our PST segment.

Provision for Income Taxes. We recognized income tax expense of $13.6$7.1 million and $3.1$9.8 million for federal, state and foreign income taxes for the first nine monthshalf of 20172018 and 2016,2017, respectively. The increasedecrease in income tax expense for the ninesix months ended SeptemberJune 30, 20172018 compared to the same period for 20162017 was primarily due to the release of the U.S. federal, certain state and foreign valuation allowancesTax Legislation enacted in the fourth quarter of 2016 that were previously recorded against certain deferred tax assets.2017. The effective tax rate increaseddecreased to 34.2%19.8% in the first nine monthshalf of 20172018 from 10.3% in the first nine months of 2016 primarily due to the continued strong performance of the U.S. operations, which due to a full valuation allowance, favorably impacted the effective tax rate in 2016, as well as the impact35.0% in the first half of 2017 of the non-deductible fair value adjustment to earn-out considerations relatedprimarily due to the Orlaco and PST acquisitions.Tax Legislation.

36

Liquidity and Capital Resources

 

Summary of Cash Flows: 

 

Nine months ended September 30, (in thousands) 2017  2016 
Six months ended June 30, (in thousands) 2018  2017 
Net cash provided by (used for):                
Operating activities $51,118  $37,017  $28,911  $27,021 
Investing activities  (102,084)  (17,832)  (15,401)  (92,685)
Financing activities  47,119   (22,718)  (17,428)  56,663 
Effect of exchange rate changes on cash and cash equivalents  4,249   (268)  (3,120)  2,832 
Net change in cash and cash equivalents $402  $(3,801) $(7,038) $(6,169)

35

 

Cash provided by operating activities increased slightly compared to the first half of 2017 primarily due to an increase in non-cash items including deferrednet income taxes, change in fair valuebeing offset by a higher use of the PST and Orlaco earn-out considerations and amortization of Orlaco intangible assets.cash to fund working capital levels. Our receivable terms and collections rates have remained consistent between periods presented.

 

Net cash used for investing activities increaseddecreased primarily due to payments made for the business acquisition of Orlaco in the Orlaco business as well asfirst half of 2017 and insurance proceeds received in the first half of 2018. This was partially offset by higher capital expenditures.

 

Net cash provided by financing activities increaseddecreased primarily due to increased borrowingsthe significant decrease in borrowing activity on theour Credit Facility as we borrowed $77.3 million to fund the acquisition of the Orlaco business in the first quarter of 2017, which was partially offset by unscheduled partialan increase in voluntary principal repayments of our Credit Facility and PST debt obligations in the payment for the remaining noncontrolling interest in PST.first half of 2018.

 

As outlined in Note 8 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 $126.0$110.0 million at SeptemberJune 30, 2017.2018. The Company was in compliance with all covenants at SeptemberJune 30, 2017.2018. The covenants included in our Credit Facility to date have not and are not expected to limit our financing flexibility. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.

 

PST maintains several short-term and long-term loans used for working capital purposes. At SeptemberJune 30, 2017,2018, there was $9.5$5.0 million of PST debt outstanding.  Scheduled principal repayments on PST debt at SeptemberJune 30, 20172018 were as follows: $4.4$3.2 million from October 2017July 2018 to September 2018, $1.2June 2019, $0.8 million from October 2018July 2019 to December 2018, $2.72019, $0.5 million in 20192020 and $0.6$0.5 million in both 2020 and 2021. 

 

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 $2.5$2.2 million, at SeptemberJune 30, 2017.2018. At SeptemberJune 30, 2017,2018, there was no balance outstanding on this credit line.

 

Although the Company's notes and credit facilities contain various covenants, the Company has not experienced a violation which would limit or preclude their use or accelerate the maturity 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, United Kingdom and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 6 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. 

 

37

At SeptemberJune 30, 2017,2018, we had a cash and cash equivalents balance of approximately $50.8$59.0 million, all of which was held in foreign locations. The increasedecrease in cash from $50.4$66.0 million at December 31, 20162017 was primarily due to cash provided from operating activitiesthe voluntary principal repayments of outstanding debt and net debt financing, which werecapital expenditures partially offset by capital expenditures and cash paid for business acquisition during the first nine months of 2017.flows from operations.

 

Commitments and Contingencies

 

See Note 11 to the condensed consolidated financial statements for disclosures of the Company’s commitments and contingencies.

36

 

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 20162017 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 20162017 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates.There have been no significant changes in our significant accounting policies or critical accounting estimates during the second quarter of 2018. See Note 3, “Revenue,” to the condensed consolidated financial statements in this Form 10-Q for the updated revenue recognition policy adopted in the first quarter of 2018.

 

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 20162017 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.  

 

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 20162017 Form 10-K.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of SeptemberJune 30, 2017,2018, 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 SeptemberJune 30, 2017.2018.

 

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 SeptemberJune 30, 20172018 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 are excluding Orlaco from the assessment of internal control over financial reporting for 2017. However, we are extending our oversight and monitoring processes that support our internal control over financial reporting to include Orlaco’s operations.

 

 3837 

 

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 alitigation regarding civil, labor, and other tax assessmentcontingencies in Brazil related to value added taxes on vehicle tracking and monitoring servicesour PST segment for which we believe the likelihood of loss is reasonably possible, but not probable, although it maythese claims might 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 11 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 20162017 Form 10-K.

 

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

 

The following table presents information with respect to repurchases of Common Shares made by us during the three months ended SeptemberJune 30, 2017.2018. These shares were delivered to us by employees as payment for withholding taxes due upon vesting of restrictedperformance 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
7/1/17-7/31/17  978  $15.30   N/A  N/A
8/1/17-8/31/17  -   -   N/A  N/A
9/1/17-9/30/17  -   -   N/A  N/A
Total  978         
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 
4/1/18-4/30/18  14,171  $27.32   N/A   N/A 
5/1/18-5/31/18  2,061   28.98   N/A   N/A 
6/1/18-6/30/18  1,361   33.94   N/A   N/A 
Total  17,593             

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

39

 

Item 5. Other Information

 

None.

38

 

Item 6. Exhibits

Exhibit  
Exhibit
Number		 

Exhibit

10.1Amended and Restated 2018 Directors’ Restricted Shares Plan of Stoneridge, Inc. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on May 16, 2018).
   
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

XBRL 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

 

 4039 

 

 

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:  NovemberAugust 1, 20172018/s/ Jonathan B. DeGaynor
 

Jonathan B. DeGaynor

President and Chief Executive Officer

 (Principal Executive Officer)
  
Date:  NovemberAugust 1, 20172018/s/ Robert R. Krakowiak
 Robert R. Krakowiak
 Chief Financial Officer and Treasurer
 (Principal Financial Officer)

 

 4140