UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, ~~2017~~2018

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~~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 x	Non-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 October ~~27, 2017~~22, 2018 was ~~28,171,209.~~28,484,466.

STONERIDGE, INC. AND SUBSIDIARIES

INDEX			Page
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2018 (Unaudited) and December 31, ~~2016~~2017	3
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3839
Item 4.	Controls and Procedures	3839

PART II–OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3940
Item 3.	Defaults Upon Senior Securities	3940
Item 4.	Mine Safety Disclosures	3940
Item 5.	Other Information	40
Item 6.	Exhibits	4041

Signatures		4142

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 change~~customer acceptance of new products;

our ability to successfully launch/produce products for awarded business;

adverse changes in ~~general economic~~laws, government regulations or market conditions, ~~in any of the various countries in~~including 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 2016~~Company’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.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,		��	December 31,			September 30,			December 31,
(in thousands)	2017			2016			2018			2017
	(Unaudited)						(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	50,791		$	50,389		$	60,655		$	66,003
Accounts receivable, less reserves of $1,173 and $1,630, respectively		144,475			113,225
Accounts receivable, less reserves of $1,199 and $1,109, respectively								150,393			142,438
Inventories, net		78,643			60,117			86,755			73,471
Prepaid expenses and other current assets		23,264			17,162			22,107			21,457
Total current assets		297,173			240,893			319,910			303,369

Long-term assets:
Property, plant and equipment, net		108,919			91,500			111,012			110,402
Intangible assets, net		78,011			39,260			63,052			75,243
Goodwill		38,224			931			37,155			38,419
Investments and other long-term assets, net		17,942			21,945			28,123			31,604
Total long-term assets		243,096			153,636			239,342			255,668
Total assets	$	540,269		$	394,529		$	559,252		$	559,037

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of debt	$	4,421		$	8,626		$	1,808		$	4,192
Accounts payable		80,069			62,594			91,272			79,386
Accrued expenses and other current liabilities		48,258			41,489			52,663			52,546
Total current liabilities		132,748			112,709			145,743			136,124

Long-term liabilities:
Revolving credit facility		126,000			67,000			101,000			121,000
Long-term debt, net		5,102			8,060			1,218			3,852
Deferred income taxes		20,337			9,760			17,170			18,874
Other long-term liabilities		31,553			4,923			24,722			35,115
Total long-term liabilities		182,992			89,743			144,110			178,841

Shareholders' equity:
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		-			-
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 September 30, 2018 and December 31, 2017, respectively, with no stated value								-			-
Additional paid-in capital		227,143			206,504			230,229			228,486
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	)
Common Shares held in treasury, 483 and 786 shares at September 30, 2018 and December 31 2017, respectively, at cost								(8,875	)		(7,118	)
Retained earnings		73,356			45,356			133,803			92,264
Accumulated other comprehensive loss		(68,914	)		(67,913	)		(85,758	)		(69,560	)
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
Total shareholders’ equity								269,399			244,072
Total liabilities and shareholders’ equity							$	559,252		$	559,037

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended						Nine months ended						Three months ended						Nine months ended
	September 30,						September 30,						September 30,						September 30,
(in thousands, except per share data)	2017			2016			2017			2016			2018			2017			2018			2017

Net sales	$	203,582		$	173,846		$	617,004		$	523,365		$	208,853		$	203,582		$	655,385		$	617,004

Costs and expenses:
Cost of goods sold		141,033			124,098			429,890			375,705			145,568			141,033			456,713			429,890
Selling, general and administrative		37,277			27,817			107,247			82,836			32,589			37,277			105,106			107,247
Design and development		11,976			10,151			35,731			30,912			12,384			11,976			39,226			35,731

Operating income		13,296			11,780			44,136			33,912			18,312			13,296			54,340			44,136

Interest expense, net		1,508			1,684			4,436			5,038			1,155			1,508			3,679			4,436
Equity in earnings of investee		(465	)		(307	)		(1,200	)		(603	)		(249	)		(465	)		(1,435	)		(1,200	)
Other expense (income), net		395			(497	)		1,190			(722	)		647			395			(216	)		1,190

Income before income taxes		11,858			10,900			39,710			30,199			16,759			11,858			52,312			39,710

Provision for income taxes		3,809			919			13,569			3,114			3,467			3,809			10,520			13,569

Net income		8,049			9,981			26,141			27,085			13,292			8,049			41,792			26,141

Net loss attributable to noncontrolling interest		-			(303	)		(130	)		(2,009	)		-			-			-			(130	)

Net income attributable to Stoneridge, Inc.	$	8,049		$	10,284		$	26,271		$	29,094		$	13,292		$	8,049		$	41,792		$	26,271

Earnings per share attributable to Stoneridge, Inc.:
Basic	$	0.29		$	0.37		$	0.94		$	1.05		$	0.47		$	0.29		$	1.47		$	0.94
Diluted	$	0.28		$	0.36		$	0.92		$	1.03		$	0.46		$	0.28		$	1.44		$	0.92

Weighted-average shares outstanding:
Basic		28,136			27,792			28,062			27,753			28,453			28,136			28,384			28,026
Diluted		28,652			28,359			28,613			28,266			29,065			28,652			29,073			28,613

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended						Nine months ended						Three months ended						Nine months ended
	September 30,						September 30,						September 30,						September 30,
(in thousands)	2017			2016			2017			2016			2018			2017			2018			2017

Net income	$	8,049		$	9,981		$	26,141		$	27,085		$	13,292		$	8,049		$	41,792		$	26,141
Less: Net loss attributable to noncontrolling interest		-			(303	)		(130	)		(2,009	)		-			-			-			(130	)
Net income attributable to Stoneridge, Inc.		8,049			10,284			26,271			29,094			13,292			8,049			41,792			26,271

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			(3,339	)		6,483			(16,866	)		15,822
Benefit plan adjustment		-			(84	)		-			(84	)
Unrealized gain (loss) on derivatives⁽¹⁾		(138	)		(64	)		172			(473	)		32			(138	)		668			172
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.		6,345			(786	)		15,994			5,366			(3,307	)		6,345			(16,198	)		15,994

Comprehensive income attributable to Stoneridge, Inc.	$	14,394		$	9,498		$	42,265		$	34,460		$	9,985		$	14,394		$	25,594		$	42,265

(1)

Net of tax ~~benefit~~expense (benefit) of ~~$(74)~~$47 and $0$(74) for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Net of tax expense of ~~$93~~$218 and $0$93 for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine months ended September 30, (in thousands)	2017			2016			2018			2017

OPERATING ACTIVITIES:
Net income	$	26,141		$	27,085		$	41,792		$	26,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		15,922			14,717			17,073			15,922
Amortization, including accretion of deferred financing costs		4,993			2,677			5,112			4,993
Deferred income taxes		6,233			714			2,399			6,233
Earnings of equity method investee		(1,200	)		(603	)		(1,435	)		(1,200	)
Loss (gain) on sale of fixed assets		6			(409	)
(Loss) gain on sale of fixed assets								(21	)		6
Share-based compensation expense		5,713			4,587			4,214			5,713
Tax benefit related to share-based compensation expense		(759	)		-			(879	)		(759	)
Change in fair value of earn-out contingent consideration		4,645			-			1,918			4,645
Changes in operating assets and liabilities, net of effect of business combination:
Accounts receivable, net		(18,232	)		(25,486	)		(15,145	)		(18,232	)
Inventories, net		(6,564	)		281			(18,041	)		(6,564	)
Prepaid expenses and other assets		1,530			(5,879	)		(1,086	)		1,530
Accounts payable		11,611			13,991			15,280			11,611
Accrued expenses and other liabilities		1,079			5,342			(3,543	)		1,079
Net cash provided by operating activities		51,118			37,017			47,638			51,118

INVESTING ACTIVITIES:
Capital expenditures		(24,892	)		(18,484	)		(22,816	)		(24,892	)
Proceeds from sale of fixed assets		66			652			44			66
Insurance proceeds for fixed assets								1,403			-
Business acquisition, net of cash acquired		(77,258	)		-			-			(77,258	)
Net cash used for investing activities		(102,084	)		(17,832	)		(21,369	)		(102,084	)

FINANCING ACTIVITIES:
Acquisition of noncontrolling interest, including transaction costs		(1,848	)		-			-			(1,848	)
Revolving credit facility borrowings		91,000			-			27,500			91,000
Revolving credit facility payments		(32,000	)		(13,000	)		(47,500	)		(32,000	)
Proceeds from issuance of debt		2,557			13,317			369			2,557
Repayments of debt		(10,307	)		(21,312	)		(4,372	)		(10,307	)
Other financing costs		(61	)		(339	)		-			(61	)
Repurchase of Common Shares to satisfy employee tax withholding		(2,222	)		(1,384	)		(4,206	)		(2,222	)
Net cash provided by (used for) financing activities		47,119			(22,718	)

Net cash (used for) provided by financing activities								(28,209	)		47,119

Effect of exchange rate changes on cash and cash equivalents		4,249			(268	)		(3,408	)		4,249
Net change in cash and cash equivalents		402			(3,801	)		(5,348	)		402
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		$	60,655		$	50,791

Supplemental disclosure of cash flow information:
Cash paid for interest	$	4,286		$	4,573		$	3,899		$	4,286
Cash paid for income taxes, net	$	5,745		$	2,019		$	14,899		$	5,745

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.

~~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~~SEC’s rules and regulations. The results of operations for the three and nine months ended September 30, ~~2017~~2018 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 2016~~Company’s 2017 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 September 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 ~~August~~January 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.

~~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”. ItThis guidance 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 adopt~~adopted this standard ~~as of~~on January 1, 2018, which isdid not ~~expected to~~have 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, ~~2017 with early adoption permitted.~~2017. The Company ~~is currently evaluating the impact of adopting~~adopted this standard as of January 1, 2018, which did not have a material impact on its condensed consolidated financial statements.

~~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 ~~will supersede~~has superseded existing revenue recognition guidance under U.S. GAAP. The ~~standard's~~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. ~~This ASU allows for both~~The Company adopted this standard on January 1, 2018 using the modified retrospective ~~and prospective methods~~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 ~~new standard will become effective for annual and interim periods beginning after December 15, 2017. Currently, the~~ Company ~~does~~has not ~~expect the adoption of this standard to have~~experienced a material impact on its results of operations ~~or financial position;~~from the adoption of ASC 606; however, the Company ~~expects~~has expanded its disclosures consistent with the requirements of the new ~~standard.~~standard and the Company will continue to evaluate new contracts to apply the framework of ASC 606. In particular, the Company ~~does not expect any changes to how it accounts for reimbursable pre-production costs, currently accounted for as a reduction of costs incurred. However, the Company continues to~~will evaluate ~~its~~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, ~~2018~~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 ~~expects~~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 is permitted for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of its 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 new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company will adopt this standard as of January 1, 2019 using the modified retrospective approach and will elect the transition option to use the ~~modified retrospective~~effective date January 1, 2019, as the date of initial application. The Company will not adjust its comparative period financial statements for effects of the ASU 2016-02, or make the new required lease disclosures for periods before the effective date. The Company will recognize its cumulative effect transition ~~method. Under~~adjustment as of the effective date. In addition, the Company intends to elect the package of practical expedients permitted under the transition guidance within the new standard. The Company is currently evaluating the impact of this standard on the financial statements and disclosures, internal controls and accounting policies. This evaluation process includes reviewing all forms of leases and performing a completeness assessment over the lease population. The Company has launched a project to implement a third party supported lease accounting system solution, establish a new lease accounting process and design related internal controls. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. While the Company’s evaluation is ongoing, the Company does not expect the adoption of the new standard to have a material impact on its results of operations, however, it will have a material impact on the condensed consolidated balance sheet as right of use assets and lease liabilities will be recorded for all long-term operating leases.

(3) Revenue

The Company adopted ASC 606 using the modified 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 the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606. The Company ~~would recognize~~did not record a cumulative adjustment related to the ~~cumulative effect~~adoption of ~~initially applying~~ASC 606, and the ~~standard as an adjustment to opening retained earnings at~~effects of the ~~date of initial application.~~adoption were not significant.

~~(3)~~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 parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The 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 are excluded from revenue. Amounts billed to customers related to shipping and handling costs are included in net sales in the condensed 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 regions. 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 region 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.

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

Three months ended September 30 Control Devices Electronics PST Consolidated
2018 2017 2018 2017 2018 2017 2018 2017
Net Sales:
North America $ 97,017 $ 96,314 $ 22,458 $ 17,088 $ - $ - $ 119,475 $ 113,402
South America - - - - 18,864 25,386 18,864 25,386
Europe 4,174 2,009 58,315 53,190 - - 62,489 55,199
Asia Pacific 7,211 8,519 814 1,076 - - 8,025 9,595
Total net sales $ 108,402 $ 106,842 $ 81,587 $ 71,354 $ 18,864 $ 25,386 $ 208,853 $ 203,582
Nine months ended September 30 Control Devices Electronics PST Consolidated
2018 2017 2018 2017 2018 2017 2018 2017
Net Sales:
North America $ 300,024 $ 312,320 $ 64,765 $ 45,955 $ - $ - $ 364,789 $ 358,275
South America - - - - 59,742 70,519 59,742 70,519
Europe 10,734 5,657 194,270 158,522 - - 205,004 164,179
Asia Pacific 22,957 21,739 2,893 2,292 - - 25,850 24,031
Total net sales $ 333,715 $ 339,716 $ 261,928 $ 206,769 $ 59,742 $ 70,519 $ 655,385 $ 617,004
⁽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. For most customer contracts, the Company does not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer; therefore, the Company recognizes revenue at the point 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 parts transfer to the customer 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
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 capable of being distinct and are accounted for as a single performance obligation. We recognize revenue for our monitoring products and services contracts over the life of 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 recognizes revenue over time using the practical expedient ASC 606-10-55-18 in the amount the Company has a “right to invoice” rather than selecting an output or input method.
Contract Balances
The Company had no material contract assets, contract liabilities or capitalized contract acquisition costs as of September 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~~combines software capabilities of both businesses. The acquisition of Orlaco enhances ~~the Stoneridge’s~~our Electronics ~~segment~~segment’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 ($8,706) 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

9
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(in thousands, except per share data, unless otherwise indicated)~~
~~(Unaudited)~~
~~The following table summarizes~~Refer to the ~~estimated~~Company’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 reports~~methods 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 $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 nine months ended September 30, 2017. There were no acquisition related costs for the nine months ended September 30, 2018.

11
~~Included in the Company's~~
The Company’s statement of operations for the three and nine months ended September 30, 2017 are post-acquisition sales of $18,502 and $46,956, and net income of $1,254 and $1,299, respectively, related to Orlaco which are included in results of the Electronics segment. The Company’s statement of operations also includedincludes $0 and $1,636, respectively, of expense in cost of goods sold (“COGS”) associated with the step-up of the Orlaco inventory to fair value. The Company’s statement of operations for the nine months ended September 30, 2018 includes $369 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. There was no fair value adjustment for the earn-out consideration for three months ended September 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 nine months ended September 30, 2017 ~~respectively, associated with the step-up of the Orlaco inventory to fair value and the~~included $1,823 and $3,926 of expense for the fair value adjustment for earn-out consideration in SG&A ~~expenses~~expenses. See Note 6 for the ~~three~~fair value and ~~nine months ended September 30, 2017, respectively.~~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 Nine months ended
September 30, September 30, September 30,
2017 2016 2017 2016 2017

Net sales $ 203,582 $ 187,626 $ 622,034 $ 566,518 $ 622,034
Net income attributable to Stoneridge, Inc. and subsidiaries $ 8,049 $ 11,406 $ 26,375 $ 33,195 $ 26,375
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 primarily include depreciation and amortization related to fair value adjustments to property, plant, and equipment and finite-lived intangible assets.

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, September 30, December 31,
2017 2016 2018 2017
Raw materials $ 47,840 $ 35,665 $ 58,341 $ 47,588
Work-in-progress 8,249 7,483 5,395 5,806
Finished goods 22,554 16,969 23,019 20,077
Total inventories, net $ 78,643 $ 60,117 $ 86,755 $ 73,471

Inventory valued using the FIFO method was ~~$56,861~~$69,817 and ~~$37,765~~$54,837 at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Inventory valued using the average cost method was ~~$21,782~~$16,938 and ~~$22,352~~$18,634 at September 30, ~~2017~~2018 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 September 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~~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 ~~2017~~2018 and ~~2016~~2017 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
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~~Company’s condensed consolidated statement of operations as a component of other expense (income), net.

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

Euro-denominated Foreign Currency Forward Contract

At September 30, ~~2017~~2018 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~~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 $10 and a loss of $36 ~~and a gain of $1~~ for the three months ended September 30, ~~2017~~2018 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 nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the Company recognized a gain of $52 and a loss of $164, ~~and $38~~ 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 September 30, 2018 of $2,000 which expire ratably on a monthly basis from October 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 September 30, 2018 of $500 which expire ratably on a monthly basis from October 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 September 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 September 30, ~~2017~~2018 of ~~$1,399~~$4,612 which expire ratably on a monthly basis from October ~~2017~~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 September 30, ~~2017~~2018 and December 31, ~~2016~~2017 and concluded that the hedges were highly effective.
14

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, September 30, December 31, September 30, December 31, September 30, December 31,
2017 2016 2017 2016 2017 2016 2018 2017 2018 2017 2018 2017
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts $ 1,399 $ 5,699 $ 237 $ - $ - $ 28 $ 7,112 $ 9,143 $ 665 $        - $       - $ 221
Derivatives not designated as hedging instruments:
Forward currency contracts $ 1,187 $ 1,601 $ - $ - $ 37 $ 3 $ 920 $ 1,486 $ 4 $ - $ - $ 48

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

Gross amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the three months ended September 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 ) $ 637 $ 56 $ 558 $ 268

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

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 $ 717 $ (656 ) $ 452 $ (183 ) $ 1,819 $ 717 $ 933 $ 452

(A) Gains ~~and losses~~ reclassified from other comprehensive income (loss) into net income ~~were~~ recognized in cost of goods sold in the ~~Company's~~Company’s condensed consolidated statements of ~~operations.~~operations were $495 and $834 for the three and nine months ended September 30, 2018, respectively. Gains reclassified from other comprehensive income (loss) into net income recognized in design and development (“D&D”) in the Company’s condensed consolidated statements of operations were $63 and $99 for the three and nine months ended September 30, 2018, respectively. Gains reclassified from other comprehensive income (loss) were recognized in cost of goods sold for the three and nine months ended September 30, 2017.

The net deferred gain of ~~$237~~$665 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.

1415
~~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 September 30,
2018 December 31,
2017
Fair values estimated using Fair values estimated using
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Fair value inputs inputs inputs Fair value Fair value inputs inputs inputs Fair value
Financial assets carried at fair value:
Forward currency contracts $ 237 $ - $ 237 $ - $ - $ 669 $ - $ 669 $ - $ -
Total financial assets carried at fair value $ 237 $ - $ 237 $ - $ - $ 669 $ - $ 669 $ - $ -

Financial liabilities carried at fair value:
Forward currency contracts $ 37 $ - $ 37 $ - $ 31 $ - $ - $ - $ - $ 269
Earn-out consideration 18,295 - - 18,295 - 20,002 - - 20,002 20,746
Total financial liabilities carried at fair value $ 18,332 $ - $ 37 $ 18,295 $ 31 $ 20,002 $ - $ - $ 20,002 $ 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, 2017 $ 8,637 $ 12,109 $ 20,746
Change in fair value 369 1,549 1,918
Foreign currency adjustments (300 ) (2,362 ) (2,662 )
Balance at September 30, 2018 $ 8,706 $ 11,296 $ 20,002
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

The earn-out ~~considerations~~consideration 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 September 30, 2018.
16
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 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return.

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 ~~and~~offset by foreign ~~currency.~~currency translation. The ~~increase~~Orlaco earn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018. The net 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 adjustments of ~~the~~ Orlaco and PST earn-out ~~consideration~~considerations are recorded in SG&A in the condensed consolidated statements of operations. The foreign currency impact for the PST earn-out considerations is ~~based on forecasted EBITDA during~~included in other expense (income), net in the ~~performance periods.~~condensed consolidated statements of operations.
15
~~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 nine months ended September 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~~$1,376 and ~~$1,699~~$1,648 for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. For the nine months ended September 30, ~~2017~~2018 total share-based compensation was ~~$5,713~~$4,214 compared to ~~$4,587~~$5,713 for the nine months ended September 30, ~~2016.~~2017. The nine months ended September 30, 2018 included the forfeiture of certain grants associated with employee resignations. The nine months ended September 30, 2017 included expenses related to ~~higher attainment of performance based awards and~~ 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 September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

September 30, December 31, Interest rates at September 30, December 31, Interest rates at
2017 2016 September 30, 2017 Maturity 2018 2017 September 30, 2018 Maturity
Revolving Credit Facility
Credit Facility $ 126,000 $ 67,000 2.49 % September 2021 $ 101,000 $ 121,000 3.16% - 3.30 % September 2021

Debt
PST short-term obligations - 5,097 675 - 11.26 % March 2019
PST long-term notes 9,475 11,452 10.0% - 13.4 % 2019-2021 2,351 8,016 8.0% - 10.0 % 2019-2021
Other 48 137 - 28
Total debt 9,523 16,686 3,026 8,044
Less: current portion (4,421 ) (8,626 ) (1,808 ) (4,192 )
Total long-term debt, net $ 5,102 $ 8,060 $ 1,218 $ 3,852

17
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.

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. On September 11, 2018, the Company entered into Amendment No. 5 to the Amended Agreement which extended financial accommodations to permit the Company to invest in certain funds in an amount that does not exceed $10,000.

16
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
(On October 26, 2018, the Company entered into Consent and Amendment No. 6 to the Amended Agreement which amended certain definitions, sections and schedules of the Credit Facility and consented to realignment of certain foreign subsidiaries, and permits the Company to repurchase the Company’s outstanding common shares in ~~thousands, except per share data, unless otherwise indicated)~~an amount that does not exceed $50,000.
~~(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~~$101,000 and ~~$67,000~~$121,000 at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Borrowings ~~increased~~decreased 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 September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.
18

The Company also has outstanding letters of credit of ~~$3,367 and $3,399~~$2,008 at September 30, ~~2017~~2018 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 September 30, ~~2017~~2018 was ~~11.7%~~11.26% and 8.65%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments on PST debt at September 30, ~~2017~~2018 are as follows: ~~$4,373 from October 2017 through September 2018, $1,211~~$1,808 from October 2018 through September 2019, $330 from October 2019 through December ~~2018, $2,685 in~~ 2019, ~~$629~~$465 in 2020 and ~~$577~~$423 in 2021. PST was in compliance with all debt covenants at September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

The ~~Company's~~Company’s wholly-owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the ~~subsidiary's~~subsidiary’s bank account up to a maximum level of 20,000 Swedish krona, or ~~$2,455~~$2,250 and ~~$2,196,~~$2,439, at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. At September 30, ~~2017~~2018 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, the~~The weighted-average dilutive Common Shares calculation excludes the excess tax benefit from the treasury stock method for the three and nine months ended September 30, ~~2017, while the calculation includes the excess tax benefits using the treasury stock method for the three~~2018 and ~~nine months ended September 30, 2016.~~2017.
17
~~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 Nine months ended
September 30, September 30, September 30, September 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 28,452,807 28,135,705 28,383,843 28,062,438
Effect of dilutive shares 516,637 566,808 550,188 513,074 612,239 516,637 689,257 550,188
Diluted weighted-average Common Shares outstanding 28,652,342 28,359,277 28,612,626 28,266,089 29,065,046 28,652,342 29,073,100 28,612,626

There were no performance-based restricted Common Shares outstanding at September 30, ~~2017~~2018 or ~~2016.~~2017. There were ~~781,977~~626,500 and ~~843,140~~781,977 performance-based right to receive Common Shares outstanding at September 30, 2018 and 2017, ~~and 2016,~~ respectively. ~~These~~The 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.

1819
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(in thousands, except per share data, unless otherwise indicated)~~
~~(Unaudited)~~

(10) Changes in Accumulated Other Comprehensive Loss by Component

Changes in accumulated other comprehensive loss for the three months ended September 30, ~~2017~~2018 and ~~2016~~2017 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 )
Foreign Unrealized
currency gain (loss)
translation on derivatives Total
Balance at July 1, 2018 $ (82,944 ) $ 493 $ (82,451 )

Other comprehensive income (loss) before reclassifications (3,339 ) 258 (3,081 )
Amounts reclassified from accumulated other comprehensive loss - (226 ) (226 )
Net other comprehensive income (loss), net of tax (3,339 ) 32 (3,307 )
Balance at September 30, 2018 $ (86,283 ) $ 525 $ (85,758 )

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 )

Changes in accumulated other comprehensive loss for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 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 January 1, 2018 $ (69,417 ) $ (143 ) $ (69,560 )

Other comprehensive income (loss) before reclassifications (16,866 ) 1,372 (15,494 )
Amounts reclassified from accumulated other comprehensive loss - (704 ) (704 )
Net other comprehensive income (loss), net of tax (16,866 ) 668 (16,198 )
Balance at September 30, 2018 $ (86,283 ) $ 525 $ (85,758 )

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 ) - (16,995 )
Balance at September 30, 2017 $ (69,068 ) $ 154 $ (68,914 )

1920
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(in thousands, except per share data, unless otherwise indicated)~~
~~(Unaudited)~~

(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 Company~~site 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 the~~A remedial action plan ~~has been~~was approved by the Florida Department of Environmental Protection and groundwater remediation began in the fourth quarter of 2015. During the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, environmental remediation costs incurred were immaterial. At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company accrued a remaining undiscounted liability of ~~$267~~$155 and ~~$446,~~$265, respectively, related to future remediation costs. At September 30, ~~2017~~2018 and December 31, ~~2016, $218~~2017, $155 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 $525 for these claims has been recorded as a component of accrued expenses and other current liabilities at September 30, 2017.
20
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(in thousands, except per share data, unless otherwise indicated)~~
~~(Unaudited)~~
~~On May 24, 2013, the State Revenue Services of São Paulo issued a tax deficiency notice against~~Company’s PST claiming that the vehicle tracking and monitoring services it provides should be classified as communication services, and therefore subject to the State Value Added Tax – ICMS. The State Revenue Services assessment imposed the 25.0% ICMS tax on all revenues of PST related to the vehicle tracking and monitoring services rendered during the period from January 2009 through December 2010. The Brazilian real (“R$”) 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 ($3,600).
The Company believes that the vehicle tracking and monitoring services are non-communication services, as defined under Brazilian tax law, subject to the municipal ISS tax, not communication services subject to state ICMS tax as claimed by the State Revenue Services of São Paulo. PST has, and will continue to collect the municipal ISS tax on the vehicle tracking and monitoring services in compliance with Brazilian tax law and will defend its tax position. PST has received a legal opinion that the merits of the case are favorable to PST, determining among other things that the imposition on the subsidiary of the State ICMS by the State Revenue Services of São Paulo is not in accordance with the Brazilian tax code. The Company believes, based on the legal opinion of the Company’s Brazilian legal counsel and the results of the Brazil Administrative Court's ruling in favor of another vehicle tracking and monitoring company related to the tax deficiency notice it received, the likelihood of loss is reasonably possible, but not probable, although it may take years to resolve. As a result of the above, as of September 30, 2017 and December 31, 2016, no accrual has been recorded with respect to the tax assessment. An unfavorable judgment on this issue for the years assessed and for subsequent years could result in significant costs to PST and adversely affect its results of operations. There have been no significant changes to the facts and circumstances related to this notice for the three months ended September 30, 2017.
~~In addition, PST~~ has civil, labor and other tax contingencies for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$~~34,900~~30,100 ($~~11,000)~~7,400) and R$~~31,800~~33,800 ($~~9,800)~~10,200) at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. An unfavorable outcome on these contingencies could result in significant cost to ~~PST~~the 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 nine months ended September 30, 2018 and 2017, respectively. There were no loss recoveries and insurance gain contingencies recognized in the three and nine months ended September 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 nine months ended September 30, 2018 and 2017, respectively, and are included in cash flows from operating activities at September 30, 2018. Cash proceeds related to the damage of property, plant and equipment of $1,403 for the nine months ended September 30, 2018 are included in cash flows from investing activities at September 30, 2018. There were no cash proceeds received during the three months ended September 30, 2018 and 2017.
21

Product Warranty and Recall

Amounts accrued for product warranty and recall claims are established based on the ~~Company's~~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~~$3,273 and ~~$2,617~~$3,112 of a long-term liability at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively, which is included as a component of other long-term liabilities in the condensed consolidated balance sheets.

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 2018 2017
Product warranty and recall at beginning of period $ 9,344 $ 6,419 $ 9,978 $ 9,344
Accruals for products shipped during period 6,408 3,010 4,207 6,279
Assumed warranty liability related to Orlaco 1,462 - - 1,462
Aggregate changes in pre-existing liabilities due to claim developments 1,616 (272 ) 573 1,554
Settlements made during the period (9,062 ) (1,332 ) (4,259 ) (9,252 )
Foreign currency translation (561 ) 381
Product warranty and recall at end of period $ 9,768 $ 7,825 $ 9,938 $ 9,768

(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~~costs (benefit) 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 Nine months ended
September 30, September 30,
2018 2017 2018 2017
Control Devices^(A) $ 32 $ - $ 160 $ -
Electronics^(B) (80 ) 16 215 72
PST^(C) 35 37 354 475
Total business realignment costs (benefit) $ (13 ) $ 53 $ 729 $ 547

(A) Severance costs for the nine months ended September 30, 2018 related to D&D were $128. Severance costs for the three and nine months ended September 30, 2018 related to SG&A were $32.
(B) Severance costs (benefit) for the three and nine months ended September 30, 2018 related to SG&A were $(80) and $215, respectively. Severance costs for the three and nine months ended September 30, 2017 related to SG&A were $16. Severance costs for the nine months ended September 30, 2017 related to COGS were $56.
(C) Severance costs for the three and nine months ended September 30, ~~2016~~2018 related to SG&A were $19 and ~~design~~$312, respectively. Severance costs for the three and ~~development (“D&D”)~~nine months ended September 30, 2018 related to COGS were ~~$196~~$16 and ~~$984,~~$42, respectively.
~~(B)~~ Severance costs for the three months ended September 30, 2017 related to COGS, SG&A and D&D were $17, $19 and $1, respectively. Severance costs for the ~~three months ended September 30, 2016 related to COGS and SG&A were $20 and $191, respectively. Severance costs for the~~ nine months ended September 30, 2017 related to COGS, SG&A 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, respectively.~~
22

Business realignment ~~charges~~costs (benefit) classified by statement of operations line item were as follows:

Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
Cost of goods sold $ 17 $ 20 $ 411 $ 307
Selling, general and administrative 35 191 135 1,015
Design and development 1 - 1 1,100
Total business realignment charges $ 53 $ 211 $ 547 $ 2,422
22
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(in thousands, except per share data, unless otherwise indicated)~~
~~(Unaudited)~~
~~Corporate Headquarter Relocation~~
In March 2016, the Company announced the relocation of its corporate headquarters from Warren, Ohio 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. 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.
Three months ended Nine months ended
September 30, September 30,
2018 2017 2018 2017
Cost of goods sold $ 16 $ 17 $ 42 $ 411
Selling, general and administrative (29 ) 35 559 135
Design and development - 1 128 1
Total business realignment charges (benefit) $ (13 ) $ 53 $ 729 $ 547

(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~~$3,467 and ~~$919~~$3,809 for U.S. federal, state and foreign income taxes for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The ~~increase~~decrease in income tax expense for the three months ended September 30, ~~2017~~2018 compared to the same period for ~~2016~~2017 was primarily related to the ~~release~~impact of the ~~U.S. federal, certain state~~Tax Cuts and ~~foreign valuation allowances~~Jobs Act (“Tax Legislation”) enacted in the ~~fourth quarter of 2016 that were previously recorded against certain deferred tax assets.~~United States on December 22, 2017. The effective tax rate ~~increased~~decreased to 20.7% in the third quarter of 2018 from 32.1% in the third quarter of 2017 ~~from 8.4% in the third quarter of 2016~~ primarily due the ~~continued strong performance~~impact 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 relatedTax Legislation compared to the ~~Orlaco and PST acquisitions.~~same period in 2017.

The Company recognized income tax expense of ~~$13,569~~$10,520 and ~~$3,114 from continuing operations~~$13,569 for U.S. federal, state and foreign income taxes for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The ~~increase~~decrease in income tax expense for the nine months ended September 30, ~~2017~~2018 compared to the same period for ~~2016~~2017 was primarily ~~due~~related to the ~~release~~impact 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.~~Tax Legislation. The effective tax rate ~~increased~~decreased to 20.1% in the first nine months of 2018 from 34.2% in the first nine months of 2017 ~~from 10.3% in the first nine months of 2016~~ primarily due the impact of the Tax Legislation compared to the ~~continued strong performance~~same period in 2017.
The Company has recognized the estimated impact of the ~~U.S. operations, which due~~Tax Legislation to ~~a full valuation allowance, favorably impacted the~~its 2018 tax position in its estimated annual effective tax rate ~~in 2016, as well as~~(“EAETR”) calculation. The Company continues to examine the potential impact ~~in 2017~~of certain provisions of the ~~non-deductible fair value adjustment to earn-out considerations~~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 ~~Orlaco~~base erosion and ~~PST acquisitions.~~anti-abuse tax (“BEAT”). Accordingly, the Company’s 2018 EAETR may change in subsequent interim periods as additional analysis is completed.

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 September 30, 2018, the Company continues to analyze certain aspects of the Tax Legislation and refine its assessment, the ultimate impact of the Tax Legislation may differ from these estimates due to continued analysis or further regulatory guidance that may be issued as a result of the Tax Legislation.
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~~Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The ~~Company's~~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~~Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the ~~Company's 2016~~Company’s 2017 Form 10-K. The ~~Company's~~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.

24
~~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 Nine months ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016 2018 2017 2018 2017
Net Sales:
Control Devices $ 106,842 $ 103,700 $ 339,716 $ 304,957 $ 108,402 $ 106,842 $ 333,715 $ 339,716
Inter-segment sales 1,118 430 3,269 1,448 1,556 1,118 6,218 3,269
Control Devices net sales 107,960 104,130 342,985 306,405 109,958 107,960 339,933 342,985

Electronics 71,354 47,804 206,769 158,201
Electronics^(D) 81,587 71,354 261,928 206,769
Inter-segment sales 8,959 9,495 30,538 24,706 9,067 8,959 29,310 30,538
Electronics net sales 80,313 57,299 237,307 182,907 90,654 80,313 291,238 237,307

PST 25,386 22,342 70,519 60,207 18,864 25,386 59,742 70,519
Inter-segment sales 145 - 145 - - 145 2 145
PST net sales 25,531 22,342 70,664 60,207 18,864 25,531 59,744 70,664

Eliminations (10,222 ) (9,925 ) (33,952 ) (26,154 ) (10,623 ) (10,222 ) (35,530 ) (33,952 )
Total net sales $ 203,582 $ 173,846 $ 617,004 $ 523,365 $ 208,853 $ 203,582 $ 655,385 $ 617,004
Operating Income (Loss):
Control Devices $ 16,249 $ 15,319 $ 55,257 $ 47,133 $ 16,297 $ 16,249 $ 51,336 $ 55,257
Electronics 4,896 3,735 13,267 12,050
Electronics^(D) 8,951 4,896 25,107 13,267
PST 1,018 29 2,720 (4,179 ) 668 1,018 1,553 2,720
Unallocated Corporate^(A) (8,867 ) (7,303 ) (27,108 ) (21,092 ) (7,604 ) (8,867 ) (23,656 ) (27,108 )
Total operating income $ 13,296 $ 11,780 $ 44,136 $ 33,912 $ 18,312 $ 13,296 $ 54,340 $ 44,136
Depreciation and Amortization:
Control Devices $ 2,664 $ 2,561 $ 8,050 $ 7,345 $ 3,070 $ 2,664 $ 8,762 $ 8,050
Electronics 2,136 996 5,947 3,076
Electronics^(D) 2,213 2,136 6,756 5,947
PST 2,115 2,307 6,299 6,388 1,583 2,115 5,828 6,299
Unallocated Corporate 181 115 376 309 200 181 596 376
Total depreciation and amortization^(B) $ 7,096 $ 5,979 $ 20,672 $ 17,118 $ 7,066 $ 7,096 $ 21,942 $ 20,672
Interest Expense, net:
Control Devices $ 19 $ 56 $ 84 $ 172 $ 19 $ 19 $ 56 $ 84
Electronics 24 33 68 196 32 24 89 68
PST 378 934 1,482 2,686 230 378 762 1,482
Unallocated Corporate 1,087 661 2,802 1,984 874 1,087 2,772 2,802
Total interest expense, net $ 1,508 $ 1,684 $ 4,436 $ 5,038 $ 1,155 $ 1,508 $ 3,679 $ 4,436
Capital Expenditures:
Control Devices $ 5,523 $ 3,229 $ 13,318 $ 9,260 $ 3,938 $ 5,523 $ 12,996 $ 13,318
Electronics 2,417 1,244 6,451 5,229
Electronics^(D) 725 2,417 4,892 6,451
PST 974 640 2,899 2,516 522 974 2,477 2,899
Unallocated Corporate^(C) 811 1,365 2,224 1,479 786 811 2,451 2,224
Total capital expenditures $ 9,725 $ 6,478 $ 24,892 $ 18,484 $ 5,971 $ 9,725 $ 22,816 $ 24,892

25
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(in thousands, except per share data, unless otherwise indicated)~~
~~(Unaudited)~~

September 30, December 31, September 30, December 31,
2017 2016 2018 2017
Total Assets:
Control Devices $ 166,641 $ 150,623 $ 183,221 $ 164,632
Electronics 245,568 99,964 265,908 252,324
PST 108,162 107,405 81,267 100,382
Corporate^(C) 356,396 287,031 346,842 377,657
Eliminations (336,498 ) (250,494 ) (317,986 ) (335,958 )
Total assets $ 540,269 $ 394,529 $ 559,252 $ 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 Nine months ended
September 30, September 30,
2018 2017 2018 2017
Net Sales:
North America $ 119,475 $ 113,402 $ 364,789 $ 358,275
South America 18,864 25,386 59,742 70,519
Europe and Other^(D) 70,514 64,794 230,854 188,210
Total net sales $ 208,853 $ 203,582 $ 655,385 $ 617,004
September 30, December 31,
2018 2017

Long-term Assets:
North America $ 86,895 $ 89,997
South America 44,728 58,989
Europe and Other 107,719 106,682
Total long-term assets $ 239,342 $ 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 ~~amounts~~amount for the nine months ended September 30, 2017 ~~include net sales and long-term assets~~includes eight months of activity from the acquisition date of January 31, 2017 related to Orlaco which is disclosed in Note 3.4.

26
~~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% equity 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~~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~~$10,218 and ~~$7,952~~$10,131 at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was ~~$465~~$249 and ~~$307,~~$465, for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was ~~$1,200~~$1,435 and ~~$603,~~$1,200, for the nine months ended September 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 nine months ended September 30, 2018 included $501 and $1,549, 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 nine months ended September 30, 2017 included $475 and $719, respectively, 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 Nine months ended
September 30, September 30, September 30, September 30,
2017 2016 2017 2016 2017 2017
Noncontrolling interest at beginning of period $ - $ 14,171 $ 13,762 $ 13,310 $       - $ 13,762
Net loss - (303 ) (130 ) (2,009 ) - (130 )
Foreign currency translation - (164 ) 826 2,403 - 826
Comprehensive income (loss) - (467 ) 696 394
Comprehensive income - 696
Acquisition of noncontrolling interest - - (14,458 ) - - (14,458 )
Noncontrolling interest at end of period $ - $ 13,704 $ - $ 13,704 $ - $ -

PST has dividends payable to former noncontrolling interest holders of ~~$22,143~~R$23,096 Brazilian real ($~~7,004)~~5,706) and R$22,330 Brazilian real ($6,742) as of September 30, 2018 and December 31, 2017, respectively. The dividends payable balance at September 30, ~~2017, which~~2018 includes ~~the dividend declared on May 16, 2017 of $9,610~~R$766 Brazilian real ($~~3,092) and $1,691 Brazilian real ($535)~~189) in monetary ~~correction.~~correction for the year to date September 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.

27

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,~~a result, the Company’s condensed consolidated financial statements herein include the results of Orlaco from the acquisition date to September 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.

Third Quarter Overview

Net income attributable to Stoneridge, Inc. of $13.3 million, or $0.46 per diluted share, for the three months ended September 30, 2018, increased by $5.3 million, or $0.18 per diluted share, from $8.0 million, or $0.28 per diluted share, for the three months ended September 30, ~~2017, decreased by $2.3 million, or $0.08 per diluted share, from $10.3 million, or $0.36 per diluted share,~~2017. The Electronics segment’s higher sales for the three months ended September 30, ~~2016, primarily due to a $2.9 million higher~~2018 resulted in increased operating income of $4.1 million.  In addition, income tax expense for the third quarter decreased by $0.3 million as a result of the ~~valuation allowance release~~Tax 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~~$5.3 million, or ~~17.1%~~2.6%, compared to the third quarter of ~~2016~~2017 due to higher sales in ~~each of~~ our ~~segments.~~Electronics and Control Devices segments partially offset by a decrease in sales in our PST segment. 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 increase in sales in our Control Devices segment was primarily due to ~~increased volume in the China automotive market while the~~an increase in sales volume in our ~~Electronics segment relates substantially to the Orlaco business acquired on January 31, 2017.~~commercial vehicle market partially offset by decreased sales volume in our North American automotive market. Also, PST sales ~~mostly increased~~decreased due to lower sales of alarm and audio products and lower Argentina market sales partially offset by new product sales in our factory authorized dealer installers and higher sales of monitoring ~~product and service revenues.~~products.

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we had cash and cash equivalents balances of ~~$50.8~~$60.7 million and ~~$50.4~~$66.0 million, respectively. The ~~increase~~decrease during the first nine months of ~~2017~~2018 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 September 30, ~~2017~~2018 and December 31, ~~2016~~2017 we had ~~$126.0~~$101.0 million and ~~$67.0~~$121.0 million, respectively, in borrowings outstanding on our $300.0 million Credit Facility. The ~~increase~~decrease in the outstanding Credit Facility balance during the first nine months of ~~2017~~2018 was the result of ~~borrowing to fund the Orlaco acquisition with a partial offset in~~ voluntary principal ~~payments.~~repayments.

28

Outlook

In the ~~third quarter~~first nine months of ~~2017,~~2018, the Company continued to drive financial performance through top-line growth ~~that exceeded~~in 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 contributing~~which continues to contribute to the growth in our Electronics segment.  The Company ~~continues~~continued 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 our~~The North American automotive ~~vehicle~~ market ~~in 2017 related~~is expected to ~~recent~~remain consistent with 2017. Based on our product ~~launches by~~mix, the Company expects sales volumes in our Control Devices segment ~~despite an expected decrease of 0.6 million production units in~~to be consistent with the ~~North American automotive vehicle market to 17.2 million units in 2017. We also expect sales growth in our China automotive market in 2017 related to our sensor products.~~prior year.

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

Our PST segment revenues and operating performance ~~have begun to improve~~ in the ~~second half~~first nine months of 2018 decreased compared to the first nine months of 2017, mostly due to the ~~stabilization of~~decline in the ~~Brazilian economy~~alarm and audio demand as well as the ~~automotive and consumer markets we serve.~~decline in the Argentinian economy. In October ~~2017,~~2018, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow ~~0.7%~~1.4% in ~~2017~~2018 and ~~1.5%~~2.4% in ~~2018.~~2019. As the Brazilian economy ~~improves,~~remains relatively stable, we expect ~~favorable movements in~~ our served market channels ~~that would result~~to remain consistent except for our alarm and audio products which have had lower demand in ~~improved~~2018 compared to the prior year. Our financial performance ~~for PST.~~in our PST segment is subject to uncertainty from movements 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 which could adversely impact our results of operations.
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, its~~impact of the Tax Legislation enacted in the fourth quarter of 2017, our effective tax rate will be ~~higher~~lower in ~~2017~~2018 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~~Our Electronics and PST segments ~~are~~have non-U.S. based operations that purchase a significant portion of raw materials denominated in U.S. dollars and therefore ~~movements~~our results of operations are subject to fluctuations in foreign currency ~~exchange rates can also have a significant effect on our results of operations.~~rates. The U.S. dollar weakened ~~significantly~~ against the Swedish krona, euro and Brazilian real in ~~2016~~2017 favorably impacting our material costs and our reported results. The U.S. ~~dollar continued to weaken~~Dollar strengthened against ~~these currencies~~the Swedish krona, euro, Brazilian real and Argentinian peso in ~~the first nine months of 2017 favorably~~2018, 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.

29

Three Months Ended September 30, ~~2017~~2018 Compared to Three Months Ended September 30, ~~2016~~2017

Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar
increase /
Three months ended September 30 2018 2017 (decrease)
Net sales $ 208,853 100.0 % $ 203,582 100.0 % $ 5,271
Costs and expenses:
Cost of goods sold 145,568 69.7 141,033 69.3 4,535
Selling, general and administrative 32,589 15.6 37,277 18.3 (4,688 )
Design and development 12,384 5.9 11,976 5.9 408
Operating income 18,312 8.8 13,296 6.5 5,016
Interest expense, net 1,155 0.6 1,508 0.7 (353 )
Equity in earnings of investee (249 ) (0.1 ) (465 ) (0.2 ) 216
Other expense, net 647 0.3 395 0.2 252
Income before income taxes 16,759 8.0 11,858 5.8 4,901
Provision for income taxes 3,467 1.7 3,809 1.8 (342 )
Net income 13,292 6.4 8,049 4.0 5,243
Net loss attributable to noncontrolling interest - - - - -
Net income attributable to Stoneridge, Inc. $ 13,292 6.4 % $ 8,049 4.0 % $ 5,243
Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):
Dollar Percent
increase / increase /
Three months ended September 30 2018 2017 (decrease) (decrease)
Control Devices $ 108,402 51.9 % $ 106,842 52.5 % $ 1,560 1.5 %
Electronics 81,587 39.1 71,354 35.0 10,233 14.3
PST 18,864 9.0 25,386 12.5 (6,522 ) (25.7 )
Total net sales $ 208,853 100.0 % $ 203,582 100.0 % $ 5,271 2.6 %
Our Control Devices segment net sales increased primarily as a result of an increase in sales volume in our commercial vehicle market of $5.4 million partially offset by decreases in sales volume in our North American automotive market of $2.5 million as a result of certain program volume reductions and a decrease in sales volume in our China automotive market of $1.2 million.
Our Electronics segment net sales increased primarily due to an increase in sales volume in our European and North American commercial vehicle products of $7.6 million and $4.1 million, respectively, and increased sales of European and North American off-highway vehicle products of $1.4 million and $1.2 million, respectively. This increase was partially offset by unfavorable foreign currency translation of $3.1 million and unfavorable pricing of $0.8 million on products nearing the end of product life.
30
Our PST segment net sales decreased primarily due to a lower volumes for our alarm and audio product and sales in our Argentina market as well as an unfavorable foreign currency translation that decreased sales by $5.1 million, or 20.0%. This reduction was partially offset by a slight increase in sales of new products to our factory authorized dealer installers and higher sales of monitoring products.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar Percent
increase / increase /
Three months ended September 30 2018 2017 (decrease) (decrease)
North America $ 119,475 57.2 % $ 113,402 55.7 % $ 6,073 5.4 %
South America 18,864 9.0 25,386 12.5 (6,522 ) (25.7 )
Europe and Other 70,514 33.8 64,794 31.8 5,720 8.8
Total net sales $ 208,853 100.0 % $ 203,582 100.0 % $ 5,271 2.6 %
The slight decrease in North American net sales was primarily attributable to increased sales volume in our North American commercial vehicle and off-highway markets of $7.2 million and $1.2 million, respectively which were partially offset by a decrease in sales volume in our North American automotive market of $2.5 million resulting from certain program volume reductions. The decrease in net sales in South America was primarily due to a decrease in alarm and audio product and Argentina market sales volume as well as an unfavorable foreign currency translation that decreased sales by $5.1 million, or 20.0%, partially offset by an increase of new products to factory authorized dealer installers and higher sales of monitoring products. The increase in net sales in Europe and Other was primarily due to the increase in our European commercial vehicle and European off-highway markets of $9.5 million and $1.4 million, respectively, partially offset by a decrease in sales volume in our China automotive market of $1.2 million. Additionally, Europe and Other sales were unfavorably impacted by foreign currency translation of $3.3 million and unfavorable pricing of $0.7 million on products nearing the end of product life.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 3.2% primarily related to an increase in net sales. Our gross margin decreased by 0.4% to 30.3% for the third quarter of 2018 compared to 30.7% for the third quarter of 2017. Our material cost as a percentage of net sales increased by 0.8% to 50.9% for the third quarter of 2018 compared to 50.1% for the third quarter of 2017. The higher direct material costs as a percentage of net sales in our Electronics segment resulted from unfavorable product mix and the impact of U.S. denominated material purchases at non-U.S. operations. Lower direct material costs as a percentage of net sales in our Control Devices and PST segment resulted from favorable product mix with PST favorability being offset by the adverse impact of U.S. denominated material purchases. Overhead as a percentage of net sales decreased by 0.2% to 14.0% for the third quarter of 2018 compared to 14.2% for the third quarter of 2017.
Our Control Devices segment gross margin improved slightly due to an increase in sales and a decrease in direct material and labor as a percentage of net sales.
Our Electronics segment gross margin was consistent with the prior year as higher sales, lower labor and overhead costs as a percentage of sales and a favorable mix related to Orlaco product sales were offset by higher direct material costs as a percentage of net sales.
Our PST segment gross margin decreased due to lower sales and the adverse impact of U.S. denominated material purchases partially offset by a favorable sales mix related to lower sales of alarm and audio products.
31

Dollar
increase /
Three months ended September 30 2017 2016 (decrease)
Net sales $ 203,582 100.0 % $ 173,846 100.0 % $ 29,736
Costs and expenses:
Cost of goods sold 141,033 69.3 124,098 71.4 16,935
Selling, general and administrative 37,277 18.3 27,817 16.0 9,460
Design and development 11,976 5.9 10,151 5.8 1,825

Operating income 13,296 6.5 11,780 6.8 1,516
Interest expense, net 1,508 0.7 1,684 1.0 (176 )
Equity in earnings of investee (465 ) (0.2 ) (307 ) (0.2 ) (158 )
Other expense (income), net 395 0.2 (497 ) (0.3 ) 892
Income before income taxes 11,858 5.8 10,900 6.3 958

Provision for income taxes 3,809 1.8 919 0.5 2,890

Net income 8,049 4.0 9,981 5.8 (1,932 )
Net loss attributable to
noncontrolling interest - - (303 ) (0.1 ) 303
Net income attributable to Stoneridge, Inc. $ 8,049 4.0 % $ 10,284 5.9 % $ (2,235 )

Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $4.7 million compared to the third quarter of 2017 primarily due to a decrease in expense of the fair value adjustment for the Orlaco earn-out consideration of $1.8 million in the Electronics segment. The Orlaco earn-out consideration was fully recognized in the first quarter of 2018. In addition, there were lower business realignment charges of $0.1 million in our Electronics, Control Devices and PST segments. Control Devices SG&A costs decreased primarily due to higher wages. PST SG&A costs decreased during the current period due to lower wages, fringe benefit costs and lower professional services. Unallocated corporate SG&A costs decreased primarily due to higher allocation of direct support costs to operating segments for procurement and manufacturing support due to the centralization of these activities.
Design and Development (“D&D”).D&D costs increased by $0.4 million primarily due to higher D&D costs in our Electronics segment related to product launch and development activities.
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 2018 2017 (decrease) (decrease)
Control Devices $ 16,297 $ 16,249 $ 48 0.3 %
Electronics 8,951 4,896 4,055 82.8
PST 668 1,018 (350 ) (34.4 )
Unallocated corporate (7,604 ) (8,867 ) 1,263 14.2
Operating income $ 18,312 $ 13,296 $ 5,016 37.7 %
Our Control Devices segment operating income increased slightly primarily due to higher sales partially offset by higher SG&A expenses and D&D costs.
Our Electronics segment operating income increased primarily due to the higher 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 $1.8 million of expense in the third quarter of the prior year. This was offset by higher D&D costs as well as higher allocated direct support costs from unallocated corporate for procurement and manufacturing activities.
Our PST segment operating income decreased primarily due to a decrease in sales partially offset by lower SG&A costs.
Our unallocated corporate operating loss decreased primarily due to higher allocations of direct support costs to operating segments for procurement and manufacturing activities due to the centralization of these activities.
Operating income by geographic location is summarized in the following table (in thousands):
Dollar Percent
increase / increase /
Three months ended September 30 2018 2017 (decrease) (decrease)
North America $ 9,158 $ 7,110 $ 2,048 28.8 %
South America 668 1,018 (350 ) (34.4 )
Europe and Other 8,486 5,168 3,318 64.2
Operating income $ 18,312 $ 13,296 $ 5,016 37.7 %
32
Our North American operating results increased primarily due to increased sales volume in our commercial vehicle and off-highway markets which were partially offset by a decrease in sales volume in our North American automotive market as well as higher SG&A costs. The decrease in operating income in South America was primarily due a decrease in alarm and audio products and lower sales in the Argentina market offset by lower SG&A costs and slightly higher sales and gross profit from a favorable sales mix of new products sold to our factory authorized dealer installers and higher sales of monitoring products. Our operating results in Europe and Other increased due to higher sales in our commercial vehicle and European off-highway markets which were partially offset by higher D&D and material costs.
Interest Expense, net. Interest expense, net decreased by $0.4 million compared to the prior year third quarter primarily due to lower unallocated corporate and PST interest expense as a result of the decrease in outstanding credit facility and debt balances, respectively and lower interest rates of PST debt.
Equity in Earnings of Investee. Equity earnings for Minda were $0.2 million and $0.5 million for the three months ended September 30, 2018 and 2017, respectively. The decrease compared to the prior period is primarily due to unfavorable changes in foreign currency exchange rates with an offset of an increase in sales.
Other Expense, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other expense, net on the condensed consolidated statement of operations. Other expense, net increased by $0.2 million to $0.6 million in the third quarter of 2018 compared to other expense, net of $0.4 million for the third quarter of 2017 primarily due to an unfavorable change in foreign currency exchange rates in our PST segment.
Provision for Income Taxes. We recognized income tax expense of $3.5 million and $3.8 million for federal, state and foreign income taxes for the third quarter of 2018 and 2017, respectively. The decrease in income tax expense for the three months ended September 30, 2018 compared to the same period for 2017 was primarily due to the Tax Legislation enacted in the fourth quarter of 2017. The effective tax rate decreased to 20.7% in the third quarter of 2018 from 32.1% in the third quarter of 2017 primarily due to the Tax Legislation.
33
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar
increase /
Nine months ended September 30 2018 2017 (decrease)
Net sales $ 655,385 100.0 % $ 617,004 100.0 % $ 38,381
Costs and expenses:
Cost of goods sold 456,713 69.7 429,890 69.7 26,823
Selling, general and administrative 105,106 16.0 107,247 17.4 (2,141 )
Design and development �� 39,226 6.0 35,731 5.8 3,495
Operating income 54,340 8.3 44,136 7.1 10,204
Interest expense, net 3,679 0.5 4,436 0.7 (757 )
Equity in earnings of investee (1,435 ) (0.2 ) (1,200 ) (0.2 ) (235 )
Other expense (income), net (216 ) - 1,190 0.2 (1,406 )
Income before income taxes 52,312 8.0 39,710 6.4 12,602
Provision for income taxes 10,520 1.6 13,569 2.2 (3,049 )
Net income 41,792 6.4 26,141 4.2 15,651
Net loss attributable to noncontrolling interest - - (130 ) - 130
Net income attributable to Stoneridge, Inc. $ 41,792 6.4 % $ 26,271 4.2 % $ 15,521

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 /
Nine months ended September 30 2018 2017 (decrease) (decrease)
Control Devices $ 106,842 52.5 % $ 103,700 59.7 % $ 3,142 3.0 % $ 333,715 50.9 % $ 339,716 55.1 % $ (6,001 ) (1.8 )%
Electronics 71,354 35.0 47,804 27.4 23,550 49.3 261,928 40.0 206,769 33.5 55,159 26.7 %
PST 25,386 12.5 22,342 12.9 3,044 13.6 59,742 9.1 70,519 11.4 (10,777 ) (15.3 )%
Total net sales $ 203,582 100.0 % $ 173,846 100.0 % $ 29,736 17.1 % $ 655,385 100.0 % $ 617,004 100.0 % $ 38,381 6.2 %

Our Control Devices segment net sales ~~increased~~decreased 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.~~$19.1 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 $11.9 million, $0.7 million and $0.9 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 $20.2 million and $14.7 million, respectively, and increased sales of European and North American off-highway vehicle products of ~~$15.3~~$12.6 million and ~~$3.6~~$4.1 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~~$5.4 million. This increase was partially offset by unfavorable pricing of $2.6 million on products nearing the end of product life.

Our PST segment net sales ~~increased~~decreased primarily due to ~~an increase in monitoring product~~lower volumes for our audio products and ~~service revenues and higher products sales volume~~Argentina market as well as ~~a favorable~~an unfavorable foreign currency translation that ~~increased~~decreased sales by ~~$0.6~~$8.3 million, or ~~2.7%~~11.8%. This reduction was partially offset by an increase in sales of new products to our factory authorized dealer installers and higher sales of monitoring products and services.

3034

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

Dollar Percent
Three months ended September 30 2017 2016 increase increase
North America $ 113,402 55.7 % $ 108,605 62.5 % $ 4,797 4.4 %
South America 25,386 12.5 22,342 12.9 3,044 13.6
Europe and Other 64,794 31.8 42,899 24.6 21,895 51.0
Total net sales $ 203,582 100.0 % $ 173,846 100.0 % $ 29,736 17.1 %
Dollar Percent
increase / increase /
Nine months ended September 30 2018 2017 (decrease) (decrease)
North America $ 364,789 55.7 % $ 358,275 58.1 % $ 6,514 1.8 %
South America 59,742 9.1 70,519 11.4 (10,777 ) (15.3 )%
Europe and Other 230,854 35.2 188,210 30.5 42,644 22.7 %
Total net sales $ 655,385 100.0 % $ 617,004 100.0 % $ 38,381 6.2 %

The increase in North American net sales was primarily attributable to increased sales volume in our North American ~~off-highway,~~ commercial vehicle and ~~various other~~off-highway markets of ~~$3.6 million, $2.5~~$21.1 million and ~~$0.6~~$4.1 million, respectively which ~~were~~was offset by a decrease in sales volume in our North American automotive ~~market~~ of ~~$2.1 million.~~$19.1 million resulting from certain program volume reductions. The ~~increase~~decrease in net sales in South America was primarily due to ~~an increase~~a decrease in ~~monitoring product~~audio products and ~~service revenues, product~~lower Argentina market sales volume as well as ~~a favorable~~an unfavorable foreign currency translation that ~~increased~~decreased sales by ~~$0.6 million.~~$8.3 million, or 11.8%, partially offset by a slight increase in sales of new products to our factory authorized dealer installers and higher sales of monitoring products and services. 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 sales~~markets of ~~$15.3~~$25.8 million ~~substantially related to Orlaco~~and $12.6 million, respectively, as well as an increase in sales volume in our China automotive market of $0.7 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~~$6.2 million offset by unfavorable pricing of ~~$0.6 million.~~$2.6 million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by ~~13.6% primarily related to an increase in net sales. Our~~6.2% and our gross margin ~~improved by 2.1% to 30.7% for~~remained consistent with the ~~third quarter~~first nine months of 2017 ~~compared to 28.6% for the third quarter of 2016.~~at 30.3%. Our material cost as a percentage of net sales ~~decreased~~increased by 0.6% to ~~50.1%~~51.1% for the ~~third quarter~~first nine months of ~~2017~~2018 compared to ~~50.7%~~50.5% for the ~~third quarter~~first nine months of ~~2016.~~2017. The higher direct material costs in our Control Devices segment resulted from unfavorable product mix while our Electronics segment was adversely impacted by U.S. denominated material purchases at non-U.S. based operations. The lower direct material costs as a percentage of net sales in our Electronics and PST ~~segments~~segment resulted from favorable foreign currency movements associated with U.S. dollar denominated purchases while direct material costs as a percent of sales in our Control Devices segment decreased due to the benefit of a favorable 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 overhead~~Overhead as a percentage of net sales decreased by ~~1.8%~~0.7% to ~~12.0%~~13.6% for the ~~third quarter~~first nine months of ~~2017~~2018 compared to ~~13.8%~~14.3% for the ~~third quarter~~first nine months of ~~2016.~~2017.

Our Control Devices segment gross margin ~~improved~~increased slightly despite lower sales primarily due to ~~an increase in sales and~~ a decrease in overhead asfrom a ~~percentage of net sales.~~reduction in warranty costs.

Our Electronics segment gross margin ~~improved primarily due to lower overhead costs~~was consistent with the prior year as higher sales were offset by a ~~percentage of sales resulting from the Orlaco acquisition as well as lower material costs resulting from favorable movement~~proportional increase in ~~foreign currency exchange rates~~higher labor and ~~a favorable mix related to Orlaco product sales.~~overhead.

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 ~~monitoring service increases.~~lower audio products which resulted in lower direct material costs as a percentage of sales.

Selling, General and ~~Administrative (“SG&A”).~~Administrative. SG&A expenses ~~increased~~decreased by ~~$9.5~~$2.1 million compared to the ~~third quarter~~first nine months of ~~2016~~2017 primarily due to ~~higher costs~~a decrease in expense for the fair value of the Orlaco earn-out consideration of $3.6 million in our Electronics segment, ~~substantially related to the acquisition of Orlaco of $5.6 million which includes expense of $2.2 million~~partially offset by higher wages and higher direct support charges for ~~the increase~~procurement support in ~~fair value of earn-out consideration. Our unallocated corporate,~~our Control Devices and ~~PST segment’s SG&A costs also increased. Unallocated corporate SG&A costs increased due~~Electronics segments. In addition, there were higher business realignment charges of $0.4 million in our operating segments compared to ~~higher wages, incentive compensation and professional fees which were offset by lower headquarter relocation costs~~the first nine months of ~~$0.7 million. Control Devices SG&A costs increased due to higher wages and incentive compensation.~~2017. PST SG&A costs ~~increased~~decreased during the current period due to lower wages and professional service costs which were partially offset by expense for the fair value of earn-out consideration of ~~$0.5~~$0.8 million ~~an unfavorable change in foreign currency exchange rates~~during the first nine months of 2018. 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.

Design and ~~Development (“D&D”).~~Development.D&D costs increased by ~~$1.8~~$3.5 million ~~substantially~~primarily due to higher D&D costs in our Electronics ~~segment~~and Control Devices segments related to ~~the acquired Orlaco business.~~program launches and investment in development activities.

3135

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 /
Nine months ended September 30 2018 2017 (decrease) (decrease)
Control Devices $ 51,336 $ 55,257 $ (3,921 ) (7.1 )%
Electronics 25,107 13,267 11,840 89.2 %
PST 1,553 2,720 (1,167 ) (42.9 )%
Unallocated corporate (23,656 ) (27,108 ) 3,452 12.7 %
Operating income $ 54,340 $ 44,136 $ 10,204 23.1 %

Our Control Devices segment operating income ~~increased slightly~~decreased primarily due to ~~an increase in~~lower sales ~~which were partially offset by~~and higher SG&A ~~costs.~~and D&D costs partially related to program launches.

Our Electronics segment operating income increased slightly primarily due to the increase in sales resulting from favorable movement in foreign currency exchange rates which were offset by higher D&D and material and labor costs, excluding the impact of the acquired Orlaco business.
~~Our PST~~ segment operating income increased primarily due to higher sales offset by higher SG&A as well as higher D&D related to product launch and ~~higher gross profit from~~development activities.
Our PST segment operating income decreased primarily due to a ~~favorable~~decrease in sales ~~mix of higher monitoring services. PST’s improved operating performance is expected to be sustained~~as well as the additional expense for the ~~remainder~~fair value of ~~2017.~~earn-out consideration of $0.8 million during the first nine months of 2018.

Our unallocated corporate operating loss ~~increased~~decreased primarily due to higher ~~wages,~~allocations of direct support costs to operating segments for procurement and manufacturing activities due to the centralization of these activities as well as lower incentive compensation ~~and professional fees,~~costs which were ~~partially~~ offset by ~~lower headquarter relocation~~higher professional service costs.

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)
Nine months ended September 30 2018 2017 (decrease) (decrease)
North America $ 7,110 $ 8,852 $ (1,742 ) (19.7 )% $ 27,351 $ 28,007 $ (656 ) (2.3 )%
South America 1,018 29 989 NM 1,553 2,720 (1,167 ) (42.9 )%
Europe and Other 5,168 2,899 2,269 78.3 25,436 13,409 12,027 89.7 %
Operating income $ 13,296 $ 11,780 $ 1,516 12.9 % $ 54,340 $ 44,136 $ 10,204 23.1 %

Our North American operating results slightly decreased primarily due to ~~decreases in~~lower sales volume in the North American automotive market as well as higher ~~SG&A~~D&D costs, which were partially offset by increased sales volume in the ~~off-highway and~~ commercial vehicle ~~markets~~ and ~~slightly lower D&D costs~~off-highway markets. The decrease in ~~our Control Devices segment. The improved performance~~operating income in South America was primarily due toa decrease in alarm and audio product sales and lower sales in the Argentina market offset by slightly higher sales and gross profit from a favorable sales mix of higher monitoring products and services ~~which were partially offset by higher SG&A costs.~~and products sold to our factory authorized dealer installers. Our operating results in Europe and Other increased due to higher sales in our ~~China automotive and~~ European commercial vehicle and off-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~~$0.8 million compared to the prior year ~~third quarter~~ primarily due to lower ~~PST~~ interest expense ~~which was partially offset by higher interest on~~at our ~~Credit Facility resulting~~unallocated corporate and PST segments as a result of the decrease in outstanding credit facility and debt balances, respectively, from ~~the additional borrowings to fund the Orlaco acquisition.~~voluntary principal prepayments.
32

Equity in Earnings of Investee. Equity earnings for Minda were ~~$0.5~~$1.4 million and ~~$0.3~~$1.2 million for the ~~three~~nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The increase compared to the prior period was due to higher sales ~~and~~which was ~~benefited~~offset by ~~a favorable~~an unfavorable change in foreign currency exchange rates.
36

Other 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 ~~increased~~decreased by ~~$0.9~~$1.4 million to other income of $0.2 million in ~~third quarter~~first nine months of ~~2017~~2018 compared to other expense of $1.2 million for the ~~third quarter~~first nine months of ~~2016~~2017 primarily due to ~~an unfavorable~~a favorable change in foreign currency exchange rates in our Electronics ~~segment partially offset by favorable foreign currency movements in our~~and PST ~~segment.~~segments.

Provision for Income Taxes. We recognized income tax expense of ~~$3.8~~$10.5 million and $0.9 million for federal, state and foreign income taxes for the third quarter of 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 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 32.1% in the third quarter of 2017 from 8.4% in the third quarter 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 the third quarter of 2017 of the non-deductible fair value adjustments to earn-out considerations related to the Orlaco and PST acquisitions.
~~Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016~~
~~Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):~~
Dollar
increase /
Nine months ended September 30 2017 2016 (decrease)
Net sales $ 617,004 100.0 % $ 523,365 100.0 % $ 93,639
Costs and expenses:
Cost of goods sold 429,890 69.7 375,705 71.8 54,185
Selling, general and administrative 107,247 17.4 82,836 15.8 24,411
Design and development 35,731 5.8 30,912 5.9 4,819

Operating income 44,136 7.1 33,912 6.5 10,224
Interest expense, net 4,436 0.7 5,038 0.9 (602 )
Equity in earnings of investee (1,200 ) (0.2 ) (603 ) (0.1 ) (597 )
Other expense (income), net 1,190 0.2 (722 ) (0.1 ) 1,912
Income before income taxes 39,710 6.4 30,199 5.8 9,511
Provision for income taxes 13,569 2.2 3,114 0.6 10,455
Net income 26,141 4.2 27,085 5.2 (944 )

Net loss attributable to
noncontrolling interest (130 ) - (2,009 ) (0.4 ) 1,879
Net income attributable to Stoneridge, Inc. $ 26,271 4.2 % $ 29,094 5.6 % $ (2,823 )
33
~~Net Sales.~~ ~~Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):~~
Dollar Percent
Nine months ended September 30 2017 2016 increase increase
Control Devices $ 339,716 55.1 % $ 304,957 58.3 % $ 34,759 11.4 %
Electronics 206,769 33.5 158,201 30.2 48,568 30.7 %
PST 70,519 11.4 60,207 11.5 10,312 17.1 %
Total net sales $ 617,004 100.0 % $ 523,365 100.0 % $ 93,639 17.9 %
Our Control Devices segment net sales increased primarily as a result of new product sales and increased sales volume in the North American automotive market of $22.9 million and increased sales volume in the 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 unfavorable foreign currency translation of $0.5 million.
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 million and $2.8 million, respectively. These increases were partially offset by an unfavorable foreign currency translation of $4.6 million and unfavorable pricing of $1.9 million.
Our PST segment net sales increased primarily due to an increase in 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.
~~Net sales by geographic location are summarized in the following table (in thousands):~~
Dollar Percent
Nine months ended September 30 2017 2016 increase increase
North America $ 358,275 58.1 % $ 321,973 61.5 % $ 36,302 11.3 %
South America 70,519 11.4 60,207 11.5 10,312 17.1 %
Europe and Other 188,210 30.5 141,185 27.0 47,025 33.3 %
Total net sales $ 617,004 100.0 % $ 523,365 100.0 % $ 93,639 17.9 %
The increase in North American net sales was primarily attributable to new product sales and increased sales volumes in our North American automotive market of $22.9 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. The increase in net sales in South America was primarily due to an increase in monitoring product and service revenues as well as favorable foreign currency translation that increased sales by $5.9 million. The increase in net sales in Europe and Other was primarily due to the increase in European off-highway vehicle products of $39.4 million substantially related to Orlaco as well as an increase in sales volume in our European commercial vehicle products and China automotive market of $7.8 million and $6.4 million, respectively. These increases were partially offset by an unfavorable foreign currency translation of $5.1 million and unfavorable pricing of $1.8 million.
~~Cost of Goods Sold and Gross Margin.~~ Cost of goods sold increased by 14.4% primarily related to an increase in net sales. Our gross margin improved by 2.1% to 30.3% for the first nine months of 2017 compared to 28.2% for the first nine months of 2016. Our material cost as a percentage of net sales decreased by 1.0% to 50.5% for the first nine months of 2017 compared to 51.5% for the first nine months of 2016. The lower direct material costs in our Electronics and PST segments resulted from favorable foreign currency movements associated with U.S. dollar denominated purchases, which were partially offset by higher direct material costs as a percentage of sales in our Control Devices segment related to a change in 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 overhead as a percentage of net sales decreased by 0.9% to 12.3% for the first nine months of 2017 compared to 13.2% for the first nine months of 2016.
34
~~Our Control Devices segment gross margin increased slightly due to an increase in sales offset by higher material costs and higher warranty costs.~~
Our Electronics segment gross margin improved primarily due to lower material and overhead costs resulting from favorable movement in foreign currency exchange rates and a favorable mix related to 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 revenues as well as lower overhead costs resulting from 2016 business realignment actions. This increase was partially offset by lower product sales volume.
~~Selling, General and Administrative.~~ SG&A expenses increased by $24.4 million compared to the first nine months of 2016 primarily due to higher costs in our Electronics segment substantially related to the acquisition 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, which were partially offset by a $0.9 million reduction 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) for the nine months ended September 30, 2017 compared to headquarter relocation expense of $1.0 million for the first nine months of 2016. Control Devices SG&A costs increased due to higher wages and benefits. PST SG&A costs increased during the current period due to expense for the fair value of earn-out consideration of $0.7 million, a change in foreign currency exchange rates and higher incentive compensation, which were partially offset by lower business realignment charges of $0.7 million.
~~Design and Development.~~D&D costs increased by $4.8 million primarily due to higher D&D costs in our Electronics segment related to the acquired Orlaco business 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.
~~Operating Income.~~ ~~Operating income (loss) is summarized in the following table by reportable segment (in thousands):~~
Dollar Percent
increase / increase /
Nine months ended September 30 2017 2016 (decrease) (decrease)
Control Devices $ 55,257 $ 47,133 $ 8,124 17.2 %
Electronics 13,267 12,050 1,217 10.1 %
PST 2,720 (4,179 ) 6,899 NM
Unallocated corporate (27,108 ) (21,092 ) (6,016 ) (28.5 )%
Operating income $ 44,136 $ 33,912 $ 10,224 30.1 %
~~Our Control Devices segment operating income increased primarily due to an increase in sales, which was partially offset by higher material, warranty, SG&A and D&D costs.~~
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 partially offset by higher D&D costs, excluding the impact of the acquired Orlaco business.
35
Our PST segment operating performance improved 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 sustained for the remainder of 2017.
~~Our unallocated corporate operating loss increased primarily due to higher wages and incentive compensation as well as Orlaco transaction costs.~~
~~Operating income (loss) by geographic location is summarized in the following table (in thousands):~~
Dollar Percent
Nine months ended September 30 2017 2016 increase increase
North America $ 28,007 $ 27,303 $ 704 2.6 %
South America 2,720 (4,179 ) 6,899 NM
Europe and Other 13,409 10,788 2,621 24.3 %
Operating income $ 44,136 $ 33,912 $ 10,224 30.1 %
Our North American operating results improved due to increased sales in the North American automotive market, which were partially offset by higher wages, incentive compensation, warranty and Orlaco transaction costs. The improved performance in South America was primarily due to higher sales, higher gross profit resulting from a favorable sales mix of higher monitoring service revenues and a decrease in business realignment costs. Our operating results in Europe and Other improved primarily due to higher sales of European off-highway, China automotive and European commercial vehicle products and lower material and overhead costs resulting from a favorable movement in foreign currency exchange rates.
~~Interest Expense, net.~~ Interest expense, net decreased by $0.6 million compared to the first nine months of the prior year primarily due to lower PST interest expense which was partially offset by higher interest related to our Credit Facility resulting from the additional borrowings to fund the Orlaco acquisition.
~~Equity in Earnings of Investee.~~ Equity earnings for Minda were $1.2 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively. The increase compared to the prior period was due to higher sales and benefited by a favorable change in foreign currency exchange rates.
~~Other 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 increased by $1.9 million in first nine months of 2017 compared to the first nine months of 2016 primarily due to an unfavorable 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 ~~million and $3.1~~ million for federal, state and foreign income taxes for the first nine months of ~~2017~~2018 and ~~2016,~~2017, respectively. The ~~increase~~decrease in income tax expense for the nine months ended September 30, ~~2017~~2018 compared to the same period for ~~2016~~2017 was primarily due to ~~the release of the U.S. federal, certain state and foreign valuation allowances~~Tax Legislation enacted in the fourth quarter of ~~2016 that were previously recorded against certain deferred tax assets.~~2017. The effective tax rate ~~increased~~decreased to 20.1% in the first nine months of 2018 from 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 the first half of 2017 of the non-deductible fair value adjustment to earn-out considerations related 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 2018 2017
Net cash provided by (used for):
Operating activities $ 51,118 $ 37,017 $ 47,638 $ 51,118
Investing activities (102,084 ) (17,832 ) (21,369 ) (102,084 )
Financing activities 47,119 (22,718 ) (28,209 ) 47,119
Effect of exchange rate changes on cash and cash equivalents 4,249 (268 ) (3,408 ) 4,249
Net change in cash and cash equivalents $ 402 $ (3,801 ) $ (5,348 ) $ 402

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

Net cash used for investing activities ~~increased~~decreased primarily due to ~~payments made for~~ the business acquisition of Orlaco in the ~~Orlaco business~~first nine months of 2017 as well as ~~higher~~insurance proceeds received and lower capital ~~expenditures.~~expenditures in the first nine months of 2018.

Net cash provided by (used for) financing activities ~~increased~~decreased primarily due to ~~increased borrowings~~the significant decrease in borrowing activity on ~~the~~our Credit Facility as we borrowed $77.3 million to fund the acquisition of the Orlaco business ~~which was partially offset by unscheduled partial~~in the first quarter of 2017 and an increase in voluntary principal repayments of our Credit Facility and PST debt obligations in the ~~payment for the remaining noncontrolling interest in PST.~~first nine months 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~~$101.0 million at September 30, ~~2017.~~2018. The Company was in compliance with all covenants at September 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.

37
PST maintains several short-term and long-term loans used for working capital purposes. At September 30, ~~2017,~~2018, there was ~~$9.5~~$3.0 million of PST debt outstanding. Scheduled principal repayments on PST debt at September 30, ~~2017~~2018 were as follows: ~~$4.4 million from October 2017 to September 2018, $1.2~~$1.8 million from October 2018 to September 2019, $0.3 million from October 2019 to December ~~2018, $2.7~~2019, $0.5 million in ~~2019~~2020 and ~~$0.6~~$0.4 million in both ~~2020 and~~ 2021.

The ~~Company's~~Company’s wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the ~~subsidiary's~~subsidiary’s bank account up to a maximum level of 20.0 million Swedish krona, or ~~$2.5~~$2.3 million, at September 30, ~~2017.~~2018. At September 30, ~~2017,~~2018, there was no balance outstanding on this credit line.

Although the ~~Company's~~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 September 30, ~~2017,~~2018, we had a cash and cash equivalents balance of approximately ~~$50.8~~$60.7 million, all of which was held in foreign locations. The ~~increase~~decrease in cash from ~~$50.4~~$66.0 million at December 31, ~~2016~~2017 was primarily due to ~~cash provided from operating activities~~the voluntary principal repayments of outstanding debt and ~~net debt financing, which were~~capital 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.

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~~Company’s critical accounting policies, which include ~~management's~~management’s best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the ~~Company's 2016~~Company’s 2017 Form 10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of ~~Management's~~Management’s Discussion and Analysis of the ~~Company's 2016~~Company’s 2017 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 third 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 ~~2016~~2017 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.
38

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 2016~~Company’s 2017 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2017,~~2018, an evaluation was performed under the supervision and with the participation of the ~~Company's~~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~~Company’s disclosure controls and procedures. Based on that evaluation, the ~~Company's~~Company’s management, including the PEO and PFO, concluded that the ~~Company's~~Company’s disclosure controls and procedures were effective as of September 30, ~~2017.~~2018.

Changes in Internal Control Over Financial Reporting

There were no changes in the ~~Company's~~Company’s internal control over financial reporting during the three months ended September 30, ~~2017~~2018 that materially affected, or are reasonably likely to materially affect, the ~~Company's~~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.

38
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 ~~assessment~~contingencies in ~~Brazil related to value added taxes on vehicle tracking and monitoring services~~our PST segment for which we believe the likelihood of loss is reasonably possible, but not probable, although ~~it may~~these 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

With a global footprint, rising threats of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adversely affect our business and results of operations.
Recent steps taken by the U.S. government to apply and consider applying tariffs on certain products and materials (e.g., steel) have the potential to disrupt existing supply chains and impose additional costs on our business. The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively impacting overall economic conditions, which could have negative repercussions on the Company. Furthermore imposition of tariffs has caused and could cause further increases in the costs of our raw materials, which we may not be able to pass on to our customers, which would directly and negatively impact our business.
There ~~have been~~were no other material changes with respect to risk factors previously disclosed in the ~~Company's 2016~~Company’s 2017 Form 10-K.
39

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 September 30, ~~2017. These~~2018. There were no shares ~~were~~ delivered to us by employees as payment for withholding taxes due upon vesting of ~~restricted~~performance share ~~awards.~~awards during the three months ended September 30, 2018.

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
7/1/18-7/31/18 - $ - N/A N/A
8/1/18-8/31/18 - - N/A N/A
9/1/18-9/30/18 - - N/A N/A
Total -

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.
39

Item 5. Other Information

~~None.~~Consent and Amendment No. 6 to Third Amended and Restated Credit Agreement
On October 26, 2018, the Company entered into a Consent and Amendment No. 6 (“Amendment No. 6”) to the Third Amended and Restated Credit Agreement (the “Amended Agreement” or “Credit Facility”), by and among the Company and certain of its subsidiaries as Borrowers, PNC Bank, National Association, as Administrative Agent and Collateral Agent; and PNC Bank, National Association, JPMorgan Chase Bank, N.A., Compass Bank, Citizens Bank, National Association, The Huntington National Bank, U.S. Bank National Association, BMO Harris Bank, N.A., First Niagara Bank, N.A. and First Commonwealth Bank, as Lenders.
Amendment No. 6 (a) which amended certain definitions, sections and schedules of the Credit Facility and consented to realignment of certain foreign subsidiaries, and (b) permits the Company to repurchase the Company’s outstanding common shares in an amount that does not exceed $50,000.
40
The foregoing description of Amendment No. 6 and the transactions contemplated thereby does not purport to be complete and is subject to and qualified in its entirety by reference to the full text of Amendment No. 6, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

Item 6. Exhibits

Exhibit
Number Exhibit

~~Number~~10.1 ~~Exhibit~~Amendment No. 5 to the Third Amended and Restated Credit Agreement dated September 11, 2018, filed herewith.
10.2 First Amendment to the Stoneridge, Inc. Deferred Compensation plan dated September 10, 2018, filed herewith.
10.3 Consent and Amendment No. 6 to the Third Amended and Restated Credit Agreement dated October 26, 2018, filed herewith.

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.

101 ~~101~~ XBRL Exhibits:
101.INS ~~101.INS~~ XBRL Instance Document
101.SCH ~~101.SCH~~ XBRL Schema Document
101.CAL ~~101.CAL~~ XBRL Calculation Linkbase Document
101.DEF ~~101.DEF~~ XBRL Definition Linkbase Document
101.LAB ~~101.LAB~~ XBRL Labels Linkbase Document
101.PRE ~~101.PRE~~ XBRL Presentation Linkbase Document

4041

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:  ~~November 1, 2017~~October 26, 2018 /s/ Jonathan B. DeGaynor

Jonathan B. DeGaynor
President and Chief Executive Officer
(Principal Executive Officer)

Date:  ~~November 1, 2017~~October 26, 2018 /s/ Robert R. Krakowiak
Robert R. Krakowiak
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)

4142

Three months ended September 30	Control Devices				Electronics				PST				Consolidated
	2018		2017		2018		2017		2018		2017		2018		2017
Net Sales:
North America	$	97,017	$	96,314	$	22,458	$	17,088	$	-	$	-	$	119,475	$	113,402
South America		-		-		-		-		18,864		25,386		18,864		25,386
Europe		4,174		2,009		58,315		53,190		-		-		62,489		55,199
Asia Pacific		7,211		8,519		814		1,076		-		-		8,025		9,595
Total net sales	$	108,402	$	106,842	$	81,587	$	71,354	$	18,864	$	25,386	$	208,853	$	203,582

Nine months ended September 30	Control Devices				Electronics				PST				Consolidated
	2018		2017		2018		2017		2018		2017		2018		2017
Net Sales:
North America	$	300,024	$	312,320	$	64,765	$	45,955	$	-	$	-	$	364,789	$	358,275
South America		-		-		-		-		59,742		70,519		59,742		70,519
Europe		10,734		5,657		194,270		158,522		-		-		205,004		164,179
Asia Pacific		22,957		21,739		2,893		2,292		-		-		25,850		24,031
Total net sales	$	333,715	$	339,716	$	261,928	$	206,769	$	59,742	$	70,519	$	655,385	$	617,004

Cash	$	79,675
Fair value of earn-out consideration and other adjustments		4,208
Total purchase price	$	83,883

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

	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

					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,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2017		2016		2017		2016		2017		2016		2018		2017		2018		2017		2018		2017
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$	1,399	$	5,699	$	237	$	-	$	-	$	28	$	7,112	$	9,143	$	665	$	-	$	-	$	221
Derivatives not designated as hedging instruments:
Forward currency contracts	$	1,187	$	1,601	$	-	$	-	$	37	$	3	$	920	$	1,486	$	4	$	-	$	-	$	48

						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	)	$	637	$	56	$	558	$	268

							September 30, 2017		December 31, 2016				September 30, 2018						December 31, 2017
			Fair values estimated using										Fair values estimated using
			Level 1		Level 2		Level 3						Level 1		Level 2		Level 3
	Fair value		inputs		inputs		inputs		Fair value		Fair value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contracts	$	237	$	-	$	237	$	-	$	-	$	669	$	-	$	669	$	-	$	-
Total financial assets carried at fair value	$	237	$	-	$	237	$	-	$	-	$	669	$	-	$	669	$	-	$	-

Financial liabilities carried at fair value:
Forward currency contracts	$	37	$	-	$	37	$	-	$	31	$	-	$	-	$	-	$	-	$	269
Earn-out consideration		18,295		-		-		18,295		-		20,002		-		-		20,002		20,746
Total financial liabilities carried at fair value	$	18,332	$	-	$	37	$	18,295	$	31	$	20,002	$	-	$	-	$	20,002	$	21,015

	Orlaco			PST			Total
Balance at December 31, 2017	$	8,637		$	12,109		$	20,746
Change in fair value		369			1,549			1,918
Foreign currency adjustments		(300	)		(2,362	)		(2,662	)
Balance at September 30, 2018	$	8,706		$	11,296		$	20,002

	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

	September 30,			December 31,			Interest rates at				September 30,			December 31,			Interest rates at
	2017			2016			September 30, 2017			Maturity	2018			2017			September 30, 2018			Maturity
Revolving Credit Facility
Credit Facility	$	126,000		$	67,000			2.49	%	September 2021	$	101,000		$	121,000			3.16% - 3.30	%	September 2021

Debt
PST short-term obligations		-			5,097							675			-			11.26	%	March 2019
PST long-term notes		9,475			11,452			10.0% - 13.4	%	2019-2021		2,351			8,016			8.0% - 10.0	%	2019-2021
Other		48			137							-			28
Total debt		9,523			16,686							3,026			8,044
Less: current portion		(4,421	)		(8,626	)						(1,808	)		(4,192	)
Total long-term debt, net	$	5,102		$	8,060						$	1,218		$	3,852

	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	)

											Dollar
											increase /
Three months ended September 30	2018					2017					(decrease)
Net sales	$	208,853		100.0	%	$	203,582		100.0	%	$	5,271
Costs and expenses:
Cost of goods sold		145,568		69.7			141,033		69.3			4,535
Selling, general and administrative		32,589		15.6			37,277		18.3			(4,688	)
Design and development		12,384		5.9			11,976		5.9			408
Operating income		18,312		8.8			13,296		6.5			5,016
Interest expense, net		1,155		0.6			1,508		0.7			(353	)
Equity in earnings of investee		(249	)	(0.1	)		(465	)	(0.2	)		216
Other expense, net		647		0.3			395		0.2			252
Income before income taxes		16,759		8.0			11,858		5.8			4,901
Provision for income taxes		3,467		1.7			3,809		1.8			(342	)
Net income		13,292		6.4			8,049		4.0			5,243
Net loss attributable to noncontrolling interest		-		-			-		-			-
Net income attributable to Stoneridge, Inc.	$	13,292		6.4	%	$	8,049		4.0	%	$	5,243

									Dollar			Percent
									increase /			increase /
Three months ended September 30	2018				2017				(decrease)			(decrease)
Control Devices	$	108,402	51.9	%	$	106,842	52.5	%	$	1,560			1.5	%
Electronics		81,587	39.1			71,354	35.0			10,233			14.3
PST		18,864	9.0			25,386	12.5			(6,522	)		(25.7	)
Total net sales	$	208,853	100.0	%	$	203,582	100.0	%	$	5,271			2.6	%

Exhibit Number		Exhibit

~~Number~~10.1		~~Exhibit~~Amendment No. 5 to the Third Amended and Restated Credit Agreement dated September 11, 2018, filed herewith.

10.2		First Amendment to the Stoneridge, Inc. Deferred Compensation plan dated September 10, 2018, filed herewith.

10.3		Consent and Amendment No. 6 to the Third Amended and Restated Credit Agreement dated October 26, 2018, filed herewith.

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.

101	~~101~~	XBRL Exhibits:
101.INS	~~101.INS~~	XBRL Instance Document
101.SCH	~~101.SCH~~	XBRL Schema Document
101.CAL	~~101.CAL~~	XBRL Calculation Linkbase Document
101.DEF	~~101.DEF~~	XBRL Definition Linkbase Document
101.LAB	~~101.LAB~~	XBRL Labels Linkbase Document
101.PRE	~~101.PRE~~	XBRL Presentation Linkbase Document

	STONERIDGE, INC.

Date: ~~November 1, 2017~~October 26, 2018	/s/ Jonathan B. DeGaynor
	Jonathan B. DeGaynor
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: ~~November 1, 2017~~October 26, 2018	/s/ Robert R. Krakowiak
	Robert R. Krakowiak
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)