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 ~~June~~September 30, 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.

x Yes¨ 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).

x Yes¨ 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).¨ Yesx No

The number of Common Shares, without par value, outstanding as of ~~July 27,~~October 22, 2018 was ~~28,482,746.~~28,484,466.

STONERIDGE, INC. AND SUBSIDIARIES

INDEX			Page
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2018 (Unaudited) and December 31, 2017	3
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ (Unaudited) for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2018 and 2017	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Six~~Nine Months Ended ~~June~~September 30, 2018 and 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	2728
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3739
Item 4.	Controls and Procedures	3739

PART II–OTHER INFORMATION

Item 1.	Legal Proceedings	3839
Item 1A.	Risk Factors	3839
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3840
Item 3.	Defaults Upon Senior Securities	3840
Item 4.	Mine Safety Disclosures	3840
Item 5.	Other Information	3840
Item 6.	Exhibits	3941

Signatures		4042

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 or supplier;

the costs and timing of business realignment, 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, Mexican peso and Swedish krona;

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

customer acceptance of new products;

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

adverse changes in laws, government regulations or market conditions, 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 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 parts and components at competitive prices on a timely 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;

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 2017 Form 10-K.

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~~

CONDENSED CONSOLIDATED BALANCE SHEETS

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

Current assets:
Cash and cash equivalents	$	58,965		$	66,003		$	60,655		$	66,003
Accounts receivable, less reserves of $1,106 and $1,109, respectively		147,729			142,438
Accounts receivable, less reserves of $1,199 and $1,109, respectively								150,393			142,438
Inventories, net		80,232			73,471			86,755			73,471
Prepaid expenses and other current assets		29,056			21,457			22,107			21,457
Total current assets		315,982			303,369			319,910			303,369

Long-term assets:
Property, plant and equipment, net		111,245			110,402			111,012			110,402
Intangible assets, net		66,006			75,243			63,052			75,243
Goodwill		37,389			38,419			37,155			38,419
Investments and other long-term assets, net		30,024			31,604			28,123			31,604
Total long-term assets		244,664			255,668			239,342			255,668
Total assets	$	560,646		$	559,037		$	559,252		$	559,037

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current portion of debt	$	3,184		$	4,192		$	1,808		$	4,192
Accounts payable		84,461			79,386			91,272			79,386
Accrued expenses and other current liabilities		60,358			52,546			52,663			52,546
Total current liabilities		148,003			136,124			145,743			136,124

Long-term liabilities:
Revolving credit facility		110,000			121,000			101,000			121,000
Long-term debt, net		1,790			3,852			1,218			3,852
Deferred income taxes		17,767			18,874			17,170			18,874
Other long-term liabilities		25,040			35,115			24,722			35,115
Total long-term liabilities		154,597			178,841			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 28,483 and 28,180 shares outstanding at
June 30, 2018 and December 31, 2017, 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		228,856			228,486			230,229			228,486
Common Shares held in treasury, 483 and 786 shares at June 30, 2018
and December 31 2017, respectively, at cost		(8,911	)		(7,118	)
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		120,552			92,264			133,803			92,264
Accumulated other comprehensive loss		(82,451	)		(69,560	)		(85,758	)		(69,560	)
Total shareholders' equity		258,046			244,072
Total liabilities and shareholders' equity	$	560,646		$	559,037
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)

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~
~~(Unaudited)~~

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

Net sales	$	220,602		$	209,111		$	446,532		$	413,422		$	208,853		$	203,582		$	655,385		$	617,004

Costs and expenses:
Cost of goods sold		153,184			145,697			311,145			288,857			145,568			141,033			456,713			429,890
Selling, general and administrative		35,256			35,704			72,517			69,970			32,589			37,277			105,106			107,247
Design and development		12,981			12,034			26,842			23,755			12,384			11,976			39,226			35,731

Operating income		19,181			15,676			36,028			30,840			18,312			13,296			54,340			44,136

Interest expense, net		1,170			1,518			2,524			2,928			1,155			1,508			3,679			4,436
Equity in earnings of investee		(665	)		(555	)		(1,186	)		(735	)		(249	)		(465	)		(1,435	)		(1,200	)
Other expense (income), net		(264	)		605			(863	)		795			647			395			(216	)		1,190

Income before income taxes		18,940			14,108			35,553			27,852			16,759			11,858			52,312			39,710

Provision for income taxes		3,820			5,189			7,053			9,760			3,467			3,809			10,520			13,569

Net income		15,120			8,919			28,500			18,092			13,292			8,049			41,792			26,141

Net loss attributable to noncontrolling interest		-			(100	)		-			(130	)		-			-			-			(130	)

Net income attributable to Stoneridge, Inc.	$	15,120		$	9,019		$	28,500		$	18,222		$	13,292		$	8,049		$	41,792		$	26,271

Earnings per share attributable to Stoneridge, Inc.:
Basic	$	0.53		$	0.32		$	1.01		$	0.65		$	0.47		$	0.29		$	1.47		$	0.94
Diluted	$	0.52		$	0.32		$	0.99		$	0.64		$	0.46		$	0.28		$	1.44		$	0.92

Weighted-average shares outstanding:
Basic		28,449			28,133			28,349			28,026			28,453			28,136			28,384			28,026
Diluted		28,978			28,517			28,907			28,531			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 (LOSS)~~
~~(Unaudited)~~

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended						Six months ended						Three months ended						Nine months ended
	June 30,						June 30.						September 30,						September 30,
(in thousands)	2018			2017			2018			2017			2018			2017			2018			2017

Net income	$	15,120		$	8,919		$	28,500		$	18,092		$	13,292		$	8,049		$	41,792		$	26,141
Less: Net loss attributable to noncontrolling interest		-			(100	)		-			(130	)		-			-			-			(130	)
Net income attributable to Stoneridge, Inc.		15,120			9,019			28,500			18,222			13,292			8,049			41,792			26,271

Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.:
Foreign currency translation		(17,421	)		6,276			(13,527	)		9,339			(3,339	)		6,483			(16,866	)		15,822
Unrealized gain (loss) on derivatives⁽¹⁾		(159	)		(7	)		636			310			32			(138	)		668			172
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.		(17,580	)		6,269			(12,891	)		9,649			(3,307	)		6,345			(16,198	)		15,994

Comprehensive income (loss) attributable to Stoneridge, Inc.	$	(2,460	)	$	15,288		$	15,609		$	27,871

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

(1)

Net of tax ~~benefit~~expense (benefit) of ~~$(41)~~$47 and ~~$(3)~~$(74) for the three months ended ~~June~~September 30, 2018 and 2017, respectively. Net of tax expense of ~~$171~~$218 and ~~$167~~$93 for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively.

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

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~
~~(Unaudited)~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

OPERATING ACTIVITIES:
Net income	$	28,500		$	18,092		$	41,792		$	26,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		11,535			10,538			17,073			15,922
Amortization, including accretion of deferred financing costs		3,503			3,200			5,112			4,993
Deferred income taxes		1,765			5,450			2,399			6,233
Earnings of equity method investee		(1,186	)		(735	)		(1,435	)		(1,200	)
Gain on sale of fixed assets		(18	)		(4	)
(Loss) gain on sale of fixed assets								(21	)		6
Share-based compensation expense		2,838			4,065			4,214			5,713
Tax benefit related to share-based compensation expense		(879	)		(758	)		(879	)		(759	)
Change in fair value of earn-out contingent consideration		1,417			2,347			1,918			4,645
Changes in operating assets and liabilities, net of effect of business combination:
Accounts receivable, net		(11,594	)		(13,494	)		(15,145	)		(18,232	)
Inventories, net		(10,610	)		(6,739	)		(18,041	)		(6,564	)
Prepaid expenses and other assets		(8,417	)		(4,174	)		(1,086	)		1,530
Accounts payable		8,678			11,675			15,280			11,611
Accrued expenses and other liabilities		3,379			(2,442	)		(3,543	)		1,079
Net cash provided by operating activities		28,911			27,021			47,638			51,118

INVESTING ACTIVITIES:
Capital expenditures		(16,845	)		(15,167	)		(22,816	)		(24,892	)
Proceeds from sale of fixed assets		41			20			44			66
Insurance proceeds for fixed assets		1,403			-			1,403			-
Business acquisition, net of cash acquired		-			(77,538	)		-			(77,258	)
Net cash used for investing activities		(15,401	)		(92,685	)		(21,369	)		(102,084	)

FINANCING ACTIVITIES:
Acquisition of noncontrolling interest, including transaction costs		-			(1,796	)		-			(1,848	)
Revolving credit facility borrowings		26,500			84,000			27,500			91,000
Revolving credit facility payments		(37,500	)		(19,000	)		(47,500	)		(32,000	)
Proceeds from issuance of debt		273			1,901			369			2,557
Repayments of debt		(2,459	)		(6,174	)		(4,372	)		(10,307	)
Other financing costs		-			(61	)		-			(61	)
Repurchase of Common Shares to satisfy employee tax withholding		(4,242	)		(2,207	)		(4,206	)		(2,222	)

Net cash (used for) provided by financing activities		(17,428	)		56,663			(28,209	)		47,119

Effect of exchange rate changes on cash and cash equivalents		(3,120	)		2,832			(3,408	)		4,249
Net change in cash and cash equivalents		(7,038	)		(6,169	)		(5,348	)		402
Cash and cash equivalents at beginning of period		66,003			50,389			66,003			50,389

Cash and cash equivalents at end of period	$	58,965		$	44,220		$	60,655		$	50,791

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,679		$	2,755		$	3,899		$	4,286
Cash paid for income taxes, net	$	7,967		$	3,424		$	14,899		$	5,745

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 ~~six~~nine months ended ~~June~~September 30, 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~~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 ~~June~~September 30, 2018. See Note 4 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 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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 was effective for annual periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018, which did not 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 was effective for interim and annual periods beginning after December 15, 2017. The Company 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 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. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, the Company would have recognized the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application; however, the Company did not have any material adjustments as of the date of the adoption. The Company ~~does~~has not ~~expect the adoption of ASC 606 to have~~experienced a material impact on its results of operations ~~on an ongoing basis;~~from the adoption of ASC 606; however, the Company has expanded its disclosures consistent with the requirements of the new standard and the Company will continue to evaluate new contracts to apply the framework of ASC 606. In particular, the Company will evaluate new contracts with customers analyzing the impact, if any, on revenue from the sale of production parts, particularly in regards to material rights, variable consideration and the impact of termination clauses on the timing of revenue recognition. The majority of our revenue continues to be recognized when products are shipped from our manufacturing facilities. The Company has not changed how it accounts for reimbursable pre-production costs, currently accounted for as a reduction of costs incurred. Refer to Note 3 for the expanded revenue disclosures.

Accounting Standards Not Yet Adopted

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

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019, and early adoption 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 ~~amendment~~new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company ~~expects to~~will adopt this standard as of January 1, ~~2019.~~2019 using the modified retrospective approach and will elect the transition option to use the 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 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. ~~The~~While the Company’s evaluation is ongoing, the Company ~~continues~~does not expect the adoption of the new standard to ~~evaluate the~~have a material impact ~~of adopting this standard~~ on its results of operations, however, it will have a material impact on the condensed consolidated ~~financial statements, which will require~~balance sheet as right of use assets and lease liabilities towill be recorded ~~in the condensed consolidated balance sheet~~ for all long-term operating leases.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

(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 did not record a cumulative adjustment related to the adoption of ASC 606, and the effects of the adoption were not significant.

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the 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 ~~markets.~~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 ~~market~~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.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

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

Three months ended June 30	Control Devices				Electronics				PST				Consolidated
Three months ended September 30																	Control Devices				Electronics				PST				Consolidated
																	2018		2017		2018		2017		2018		2017		2018		2017
Net Sales:	2018		2017		2018		2017		2018		2017		2018		2017
North America	$	98,564	$	105,485	$	22,321	$	16,002	$	-	$	-	$	120,885	$	121,487	$	97,017	$	96,314	$	22,458	$	17,088	$	-	$	-	$	119,475	$	113,402
South America		-		-		-		-		20,333		23,500		20,333		23,500		-		-		-		-		18,864		25,386		18,864		25,386
Europe		3,669		1,939		67,411		55,258		-		-		71,080		57,197		4,174		2,009		58,315		53,190		-		-		62,489		55,199
Asia Pacific		7,723		6,577		581		350		-		-		8,304		6,927		7,211		8,519		814		1,076		-		-		8,025		9,595
Total net sales	$	109,956	$	114,001	$	90,313	$	71,610	$	20,333	$	23,500	$	220,602	$	209,111	$	108,402	$	106,842	$	81,587	$	71,354	$	18,864	$	25,386	$	208,853	$	203,582

Six months ended June 30	Control Devices				Electronics				PST				Consolidated
Nine months ended September 30																	Control Devices				Electronics				PST				Consolidated
																	2018		2017		2018		2017		2018		2017		2018		2017
Net Sales:	2018		2017		2018		2017		2018		2017		2018		2017
North America	$	203,007	$	216,006	$	42,307	$	28,867	$	-	$	-	$	245,314	$	244,873	$	300,024	$	312,320	$	64,765	$	45,955	$	-	$	-	$	364,789	$	358,275
South America		-		-		-		-		40,878		45,133		40,878		45,133		-		-		-		-		59,742		70,519		59,742		70,519
Europe		6,560		3,648		135,955		105,332		-		-		142,515		108,980		10,734		5,657		194,270		158,522		-		-		205,004		164,179
Asia Pacific		15,746		13,220		2,079		1,216		-		-		17,825		14,436		22,957		21,739		2,893		2,292		-		-		25,850		24,031
Total net sales	$	225,313	$	232,874	$	180,341	$	135,415	$	40,878	$	45,133	$	446,532	$	413,422	$	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.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

A small portion of the Company’s sales are comprised of monitoring services that include both monitoring devices and fees to individual, corporate, fleet and cargo customers in our PST segment. These monitoring service contracts are generally not 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 ~~June~~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 our Electronics 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 ($79,675), which included customary estimated adjustments to the purchase price. The Company is required to pay an additional amount up to €7,500 ($~~8,762)~~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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

Refer to the Company’s 2017 Form 10-K for additional information on the acquisition including the fair value of assets acquired and liabilities assumed on the acquisition date and the fair value measurement methods and classifications.

The Company recognized ~~$41 and~~ $1,259 of acquisition related costs in the condensed consolidated statement of operations as a component of selling, general and administrative (“SG&A”) expense for the ~~three and six~~nine months ended ~~June~~September 30, ~~2017, respectively.~~2017. There were no acquisition related costs for the ~~three and six~~nine months ended ~~June~~September 30, 2018.

Included in the Company's statement of operations for the three months ended June 30, 2017 are post-acquisition sales of $17,313 and net loss of $(547) related to Orlaco which are included in the results of the Electronics segment. Post-acquisition sales of $28,454 and net income of $45 were included in the Company’s statement of operations for the six months ended June 30, 2017.

The Company’s statement of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2017 ~~included $657~~includes $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 ~~six~~nine months ended ~~June~~September 30, 2018 ~~included~~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 ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2017 included ~~$2,103~~$1,823 and $3,926 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. See Note 6 for the fair value and foreign currency adjustments of the earn-out consideration.

The following unaudited pro forma information reflects the Company’s condensed consolidated results of operations as if the acquisition had taken place on January 1, 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.

Six months ended
June 30,
2017

Net sales $ 418,452
Net income attributable to Stoneridge, Inc. and subsidiaries $ 18,326

	Nine months ended
	September 30,
	2017

Net sales	$	622,034
Net income attributable to Stoneridge, Inc. and subsidiaries	$	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 ~~but are not limited to,~~ depreciation and amortization related to fair value adjustments to property, plant, and equipment and finite-lived intangible assets. ~~Also, an adjustment has been made for management fees expensed by Orlaco.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

(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:

	June 30,		December 31,		September 30,		December 31,
	2018		2017		2018		2017
Raw materials	$	51,806	$	47,588	$	58,341	$	47,588
Work-in-progress		4,991		5,806		5,395		5,806
Finished goods		23,435		20,077		23,019		20,077
Total inventories, net	$	80,232	$	73,471	$	86,755	$	73,471

Inventory valued using the FIFO method was ~~$63,136~~$69,817 and $54,837 at ~~June~~September 30, 2018 and December 31, 2017, respectively. Inventory valued using the average cost method was ~~$17,096~~$16,938 and $18,634 at ~~June~~September 30, 2018 and December 31, 2017, respectively.

(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 ~~June~~September 30, 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 2018 and 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 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.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

In certain instances, the foreign currency forward contracts do not qualify for hedge accounting or are not designated as hedges, and therefore are marked-to-market with gains and losses recognized in the ~~Company's~~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 ~~June~~September 30, 2018 and December 31, 2017, the Company held foreign currency forward contracts with underlying notional amounts of $920 and $1,486, respectively, to reduce the exposure related to the ~~Company's~~Company’s euro-denominated intercompany loans. The current contract expires in June 2019. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of ~~$62~~$10 and a loss of ~~$108~~$36 for the three months ended ~~June~~September 30, 2018 and 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 ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, the Company recognized a gain of ~~$42~~$52 and a loss of ~~$128,~~$164, respectively, related to this contract.

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

The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the Swedish krona, U.S. dollar-denominated currency contracts with a notional amount at ~~June~~September 30, 2018 of ~~$3,800~~$2,000 which expire ratably on a monthly basis from ~~July~~October 2018 through December 2018. There were no such contracts at December 31, 2017.

The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the euro, U.S. dollar-denominated currency contracts with a notional amount at ~~June~~September 30, 2018 of ~~$1,000~~$500 which expire ratably on a monthly basis from ~~July~~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 ~~June~~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 ~~June~~September 30, 2018 of ~~$9,397~~$4,612 which expire ratably on a monthly basis from ~~July~~October 2018 through December 2018, compared to a notional amount of $9,143 at December 31, 2017.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of ~~June~~September 30, 2018 and December 31, 2017 and concluded that the hedges were highly effective.

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

						Prepaid expenses				Accrued expenses and								Prepaid expenses				Accrued expenses and
		Notional amounts^(A)				and other current assets				other current liabilities				Notional amounts^(A)				and other current assets				other current liabilities
		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
		2018		2017		2018		2017		2018		2017		2018		2017		2018		2017		2018		2017
Derivatives designated as hedging instruments:	Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts		$	14,197	$	9,143	$	586	$	-	$	-	$	221	$	7,112	$	9,143	$	665	$	-	$	-	$	221
Derivatives not designated as hedging instruments:
Forward currency contracts		$	920	$	1,486	$	-	$	-	$	6	$	48	$	920	$	1,486	$	4	$	-	$	-	$	48

(A)

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

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

					Gain reclassified from								Gain reclassified from
	Gain 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)
	2018		2017		2018		2017		2018		2017		2018		2017
Derivatives designated as cash flow hedges:
Forward currency contracts	$	24	$	145	$	224	$	155	$	637	$	56	$	558	$	268

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

					Gain reclassified from								Gain reclassified from
	Gain 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)
	2018		2017		2018		2017
��									2018		2017		2018		2017
Derivatives designated as cash flow hedges:
Forward currency contracts	$	1,182	$	661	$	375	$	184	$	1,819	$	717	$	933	$	452

(A)

Gains 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 ~~$586~~$665 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2018.

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

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

June 30,
2018 December 31,
2017
Fair values estimated using
Level 1 Level 2 Level 3
Fair value inputs inputs inputs Fair value
Financial assets carried at fair value:
Forward currency contracts $ 586 $ - $ 586 $ - $ -
Total financial assets carried at fair value $ 586 $ - $ 586 $ - $ -

Financial liabilities carried at fair value:
Forward currency contracts $ 6 $ - $ 6 $ - $ 269
Earn-out consideration 20,046 - - 20,046 20,746
Total financial liabilities carried at fair value $ 20,052 $ - $ 6 $ 20,046 $ 21,015

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

	Orlaco			PST			Total			Orlaco			PST			Total
Balance at December 31, 2017	$	8,637		$	12,109		$	20,746		$	8,637		$	12,109		$	20,746
Change in fair value		369			1,048			1,417			369			1,549			1,918
Foreign currency adjustments		(244	)		(1,873	)		(2,117	)		(300	)		(2,362	)		(2,662	)
Balance at June 30, 2018	$	8,762		$	11,284		$	20,046
Balance at September 30, 2018										$	8,706		$	11,296		$	20,002

	Orlaco		PST			Total			Orlaco		PST			Total
Balance at December 31, 2016	$	-	$	-		$	-		$	-	$	-		$	-
Fair value on acquisition date		3,243		10,400			13,643			3,243		10,180			13,423
Change in fair value		2,103		244			2,347			3,926		719			4,645
Foreign currency adjustments		224		(637	)		(413	)		408		(181	)		227
Balance at June 30, 2017	$	5,570	$	10,007		$	15,577
Balance at September 30, 2017									$	7,577	$	10,718		$	18,295

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

The fair value for the Orlaco earn-out consideration is based on a Monte Carlo simulation utilizing forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return. The Company will be required to pay the PST earn-out consideration, which is not capped, based on PST’s financial performance in either 2020 or 2021. The fair value of the PST earn-out consideration is based on discounted cash flows utilizing forecasted EBITDA in 2020 and ~~2021.~~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 offset by foreign currency translation. The 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. The fair value adjustments of ~~the~~ Orlaco and PST earn-out ~~consideration is based on forecasted EBITDA during the performance periods. The fair value adjustments of Orlaco and PST~~considerations are recorded in SG&A in the condensed consolidated statements of operations. The foreign currency impact for the PST earn-out ~~consideration~~considerations is included in other expense (income), net in the condensed consolidated statements of operations.

~~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 ~~six~~nine months ended ~~June~~September 30, 2018.

Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in 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 ~~$1,434~~$1,376 and ~~$1,726~~$1,648 for the three months ended ~~June~~September 30, 2018 and 2017, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2018 total share-based compensation was ~~$2,838~~$4,214 compared to ~~$4,065~~$5,713 for the ~~six~~nine months ended ~~June~~September 30, 2017. The ~~three and six~~nine months ended ~~June~~September 30, 2018 included the forfeiture of certain grants associated with employee resignations. The ~~three and six~~nine months ended ~~June~~September 30, 2017 included ~~the~~expenses related to accelerated expense associated with the retirement of eligible employees.

(8) Debt

Debt consisted of the following at ~~June~~September 30, 2018 and December 31, 2017:

June 30, December 31, Interest rates at
2018 2017 June 30, 2018 Maturity
Revolving Credit Facility
Credit Facility $ 110,000 $ 121,000 3.04% - 3.15% September 2021

Debt
PST short-term obligations 1,056 - 11.26% March 2019
PST long-term notes 3,915 8,016 9.0% - 11.64% 2019-2021
Other 3 28
Total debt 4,974 8,044
Less: current portion (3,184 ) (4,192 )
Total long-term debt, net $ 1,790 $ 3,852

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

Debt
PST short-term obligations		675			-			11.26	%	March 2019
PST long-term notes		2,351			8,016			8.0% - 10.0	%	2019-2021
Other		-			28
Total debt		3,026			8,044
Less: current portion		(1,808	)		(4,192	)
Total long-term debt, net	$	1,218		$	3,852

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.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

On September 12, 2014, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Agreement” or “Credit Facility”). The Amended Agreement provides for a $300,000 revolving credit facility, which replaced the Company’s existing $100,000 asset-based credit facility and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The Amended Agreement also has an accordion feature which allows the Company to increase the availability by up to $80,000 upon the satisfaction of certain conditions. The Amended Agreement extended the termination date to September 12, 2019 from December 1, 2016. On March 26, 2015, the Company entered into Amendment No. 1 to the Amended Agreement which modified the definition of Consolidated EBITDA to allow for the add back of cash premiums and other non-cash charges related to the amendment and restatement of the Amended Agreement and the early extinguishment of the Company’s 9.5% Senior Secured Notes. Consolidated EBITDA is used in computing the Company’s leverage ratio and interest coverage ratio which are covenants within the Amended Agreement. On February 23, 2016, the Company entered into Amendment No. 2 to the Amended Agreement which amended and waived any default or potential defaults with respect to the pledging as collateral additional shares issued by a wholly owned subsidiary and newly issued shares associated with the formation of a new subsidiary. On August 12, 2016, the Company entered into Amendment No. 3 to the Amended Agreement which extended of the expiration date of the Agreement by two years to September 12, 2021, increased the borrowing sub-limit for the Company’s foreign subsidiaries by $30,000 to $80,000, increased the basket of permitted loans and investments in foreign subsidiaries by $5,000 to $30,000, and provided additional flexibility to the Company for certain permitted corporate transactions involving its foreign subsidiaries as defined in the Agreement. As a result of Amendment No. 3 to the Amended Agreement, the Company capitalized deferred financing costs of $339, which will be amortized over the remaining term of the Credit Facility. On January 30, 2017, the Company entered into Consent and Amendment No. 4 to the Amended Agreement which amended certain definitions, schedules and exhibits of the Credit Facility, consented to a Dutch Reorganization, and consented to the Orlaco acquisition. As a result of Amendment No. 4 to the Amended Agreement, the Company capitalized deferred financing costs of $61, which will be amortized over the remaining term of the Credit Facility. 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.

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 an amount that does not exceed $50,000.

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 ~~$110,000~~$101,000 and $121,000 at ~~June~~September 30, 2018 and December 31, 2017, respectively. Borrowings decreased under the Credit Facility due to voluntary principal repayments.

The Company was in compliance with all Credit Facility covenants at ~~June~~September 30, 2018 and December 31, 2017.

The Company also has outstanding letters of credit of $2,008 at ~~June~~September 30, 2018 and December 31, 2017.

Debt

PST maintains several short-term obligations and long-term notes used for working capital purposes which have fixed or variable interest rates. The weighted-average interest rates of short term and long-term debt of PST at ~~June~~September 30, 2018 was ~~11.30%~~11.26% and ~~10.03%~~8.65%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments on PST debt at ~~June~~September 30, 2018 are as follows: ~~$3,181~~$1,808 from ~~July~~October 2018 through ~~June~~September 2019, ~~$806~~$330 from ~~July~~October 2019 through December 2019, ~~$513~~$465 in 2020 and ~~$471~~$423 in 2021. PST was in compliance with all debt covenants at ~~June~~September 30, 2018 and December 31, 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 ~~$2,236~~$2,250 and $2,439, at ~~June~~September 30, 2018 and December 31, 2017, respectively. At ~~June~~September 30, 2018 and December 31, 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. The weighted-average dilutive Common Shares calculation excludes the excess tax benefit from the treasury stock method for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017.

~~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				Six months ended				Three months ended				Nine months ended
	June 30,				June 30,				September 30,				September 30,
	2018		2017		2018		2017		2018		2017		2018		2017
Basic weighted-average Common Shares outstanding		28,449,303		28,133,432		28,349,362		28,025,805		28,452,807		28,135,705		28,383,843		28,062,438
Effect of dilutive shares		528,444		384,010		557,995		504,874		612,239		516,637		689,257		550,188
Diluted weighted-average Common Shares outstanding		28,977,747		28,517,442		28,907,357		28,530,679		29,065,046		28,652,342		29,073,100		28,612,626

There were no performance-based restricted Common Shares outstanding at ~~June~~September 30, 2018 or 2017. There were ~~614,670~~626,500 and ~~753,150~~781,977 performance-based right to receive Common Shares outstanding at ~~June~~September 30, 2018 and 2017, respectively. 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.

(10) Changes in Accumulated Other Comprehensive Loss by Component

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

Foreign Unrealized
currency gain (loss)
translation on derivatives Total
Balance at April 1, 2018 $ (65,523 ) $ 652 $ (64,871 )

Other comprehensive loss before reclassifications (17,421 ) 19 (17,402 )
Amounts reclassified from accumulated other
comprehensive loss - (178 ) (178 )
Net other comprehensive loss, net of tax (17,421 ) (159 ) (17,580 )
Balance at June 30, 2018 $ (82,944 ) $ 493 $ (82,451 )

Balance at April 1, 2017 $ (64,832 ) $ 299 $ (64,533 )

Other comprehensive income before reclassifications 6,276 94 6,370
Amounts reclassified from accumulated other
comprehensive loss - (101 ) (101 )
Net other comprehensive income (loss), net of tax 6,276 (7 ) 6,269
Reclassification of foreign currency translation associated with noncontrolling interest acquired (16,995 ) - (16,995 )
Balance at June 30, 2017 $ (75,551 ) $ 292 $ (75,259 )

	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	)

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

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

	Foreign			Unrealized						Foreign			Unrealized
	currency			gain (loss)						currency			gain (loss)
	translation			on derivatives			Total			translation			on derivatives			Total
Balance at January 1, 2018	$	(69,417	)	$	(143	)	$	(69,560	)	$	(69,417	)	$	(143	)	$	(69,560	)

Other comprehensive income (loss) before reclassifications		(13,527	)		933			(12,594	)		(16,866	)		1,372			(15,494	)
Amounts reclassified from accumulated other
comprehensive loss		-			(297	)		(297	)
Amounts reclassified from accumulated other comprehensive loss											-			(704	)		(704	)
Net other comprehensive income (loss), net of tax		(13,527	)		636			(12,891	)		(16,866	)		668			(16,198	)
Balance at June 30, 2018	$	(82,944	)	$	493		$	(82,451	)
Balance at September 30, 2018										$	(86,283	)	$	525		$	(85,758	)

Balance at January 1, 2017	$	(67,895	)	$	(18	)	$	(67,913	)	$	(67,895	)	$	(18	)	$	(67,913	)

Other comprehensive income before reclassifications		9,339			430			9,769			15,822			466			16,288
Amounts reclassified from accumulated other
comprehensive loss		-			(120	)		(120	)
Amounts reclassified from accumulated other comprehensive loss											-			(294	)		(294	)
Net other comprehensive income, net of tax		9,339			310			9,649			15,822			172			15,994
Reclassification of foreign currency translation associated with noncontrolling interest acquired		(16,995	)		-			(16,995	)		(16,995	)		-			(16,995	)
Balance at June 30, 2017	$	(75,551	)	$	292		$	(75,259	)
Balance at September 30, 2017										$	(69,068	)	$	154		$	(68,914	)

(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 and engaged an environmental engineering consultant to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. A remedial action plan was approved by the Florida Department of Environmental Protection and groundwater remediation began in the fourth quarter of 2015. During the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, environmental remediation costs incurred were immaterial. At ~~June~~September 30, 2018 and December 31, 2017, the Company accrued a remaining undiscounted liability of ~~$157~~$155 and $265, respectively, related to future remediation costs. At ~~June~~September 30, 2018 and December 31, 2017, ~~$157~~$155 and $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 Company is currently required to maintain a $1,489 letter of credit for the benefit of the buyer.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

The Company’s PST subsidiary 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$~~28,700~~30,100 ($7,400) and R$33,800 ($10,200) at ~~June~~September 30, 2018 and December 31, 2017, respectively. An unfavorable outcome on these contingencies could result in significant cost to 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 ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively. There were no loss recoveries and insurance gain contingencies recognized in the three and ~~six~~nine months ended ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively, and are included in cash flows from operating activities at ~~June~~September 30, 2018. Cash proceeds related to the damage of property, plant and equipment of $1,403 for the ~~six~~nine months ended ~~June~~September 30, 2018 are included in cash flows from investing activities at ~~June~~September 30, 2018. There were no cash proceeds received during the three months ended ~~June~~September 30, ~~2018.~~2018 and 2017.

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 ~~$3,261~~$3,273 and $3,112 of a long-term liability at ~~June~~September 30, 2018 and December 31, 2017, respectively, which is included as a component of other long-term liabilities in the condensed consolidated balance sheets.

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

Six months ended June 30	2018			2017
Nine months ended September 30							2018			2017
Product warranty and recall at beginning of period	$	9,978		$	9,344		$	9,978		$	9,344
Accruals for products shipped during period		2,791			3,233			4,207			6,279
Assumed warranty liability related to Orlaco		-			1,462			-			1,462
Aggregate changes in pre-existing liabilities due to claim developments		1,569			1,202			573			1,554
Settlements made during the period		(2,876	)		(6,922	)		(4,259	)		(9,252	)
Foreign currency translation		(524	)		219			(561	)		381
Product warranty and recall at end of period	$	10,938		$	8,538		$	9,938		$	9,768

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

(12) Business Realignment

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

Business realignment ~~charges~~costs (benefit) by reportable segment were as follows:

	Three months ended				Six months ended				Three months ended					Nine months ended
	June 30,				June 30,				September 30,					September 30,
	2018		2017		2018		2017		2018			2017		2018		2017
Control Devices^(A)	$	128	$	-	$	128	$	-	$	32		$	-	$	160	$	-
Electronics^(B)		295		56		295		56		(80	)		16		215		72
PST^(C)		97		267		319		438		35			37		354		475
Total business realignment charges	$	520	$	323	$	742	$	494
Total business realignment costs (benefit)									$	(13	)	$	53	$	729	$	547

(A)

Severance costs for the ~~three and six~~nine months ended ~~June~~September 30, 2018 related to ~~design~~D&D were $128. Severance costs for the three and ~~developement (“D&D”)~~nine months ended September 30, 2018 related to SG&A were ~~$128.~~$32.

(B)

Severance costs (benefit) for the three and ~~six~~nine months ended ~~June~~September 30, 2018 related to SG&A were ~~$295.~~$(80) and $215, respectively. Severance costs for the three and ~~six~~nine months ended ~~June~~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 ~~six~~nine months ended ~~June~~September 30, 2018 related to SG&A were ~~$71~~$19 and ~~$293,~~$312, respectively. Severance costs for the three and ~~six~~nine months ended ~~June~~September 30, 2018 related to COGS were ~~$26.~~$16 and $42, respectively. Severance costs for the three months ended ~~June~~September 30, 2017 related to COGS, ~~and~~ SG&A and D&D were ~~$248~~$17, $19 and ~~$19,~~$1, respectively. Severance costs for the ~~six~~nine months ended ~~June~~September 30, 2017 related to COGS, ~~and~~ SG&A and D&D were ~~$338~~$355, $119 and ~~$100,~~$1, respectively.

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

	Three months ended				Six months ended				Three months ended					Nine months ended
	June 30,				June 30,				September 30,					September 30,
	2018		2017		2018		2017		2018			2017		2018		2017
Cost of goods sold	$	26	$	304	$	26	$	394	$	16		$	17	$	42	$	411
Selling, general and administrative		366		19		588		100		(29	)		35		559		135
Design and Development		128		-		128		-
Total business realignment charges	$	520	$	323	$	742	$	494
Design and development										-			1		128		1
Total business realignment charges (benefit)									$	(13	)	$	53	$	729	$	547

(13) Income Taxes

The Company recognized income tax expense of ~~$3,820~~$3,467 and ~~$5,189~~$3,809 for U.S. federal, state and foreign income taxes for the three months ended ~~June~~September 30, 2018 and 2017, respectively. The decrease in income tax expense for the three months ended ~~June~~September 30, 2018 compared to the same period for 2017 was primarily related to the impact of the Tax Cuts and Jobs Act (“Tax Legislation”) enacted in the United States on December 22, 2017. The effective tax rate decreased to ~~20.2%~~20.7% in the ~~second~~third quarter of 2018 from ~~36.8%~~32.1% in the ~~second~~third quarter of 2017 primarily due the impact of the Tax Legislation compared to the same period in 2017.

The Company recognized income tax expense of ~~$7,053~~$10,520 and ~~$9,760~~$13,569 for U.S. federal, state and foreign income taxes for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively. The decrease in income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2018 compared to the same period for 2017 was primarily related to the impact of the Tax Legislation. The effective tax rate decreased to ~~19.8%~~20.1% in the first ~~half~~nine months of 2018 from ~~35.0%~~34.2% in the first ~~half~~nine months of 2017 primarily due the impact of the Tax Legislation compared to the same period in 2017.

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

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

The Tax Legislation significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, imposing a base erosion and anti-abuse tax, and imposing a tax on global intangible low taxed income. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of ~~December 31, 2017,~~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.

(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 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~~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.

2324

~~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						Six months ended						Three months ended						Nine months ended
	June 30,						June 30,						September 30,						September 30,
	2018			2017			2018			2017			2018			2017			2018			2017
Net Sales:
Control Devices	$	109,956		$	114,001		$	225,313		$	232,874		$	108,402		$	106,842		$	333,715		$	339,716
Inter-segment sales		2,481			1,368			4,662			2,151			1,556			1,118			6,218			3,269
Control Devices net sales		112,437			115,369			229,975			235,025			109,958			107,960			339,933			342,985
Electronics^(D)		90,313			71,610			180,341			135,415			81,587			71,354			261,928			206,769
Inter-segment sales		9,771			10,223			20,243			21,579			9,067			8,959			29,310			30,538
Electronics net sales		100,084			81,833			200,584			156,994			90,654			80,313			291,238			237,307
PST		20,333			23,500			40,878			45,133			18,864			25,386			59,742			70,519
Inter-segment sales		-			-			2			-			-			145			2			145
PST net sales		20,333			23,500			40,880			45,133			18,864			25,531			59,744			70,664

Eliminations		(12,252	)		(11,591	)		(24,907	)		(23,730	)		(10,623	)		(10,222	)		(35,530	)		(33,952	)
Total net sales	$	220,602		$	209,111		$	446,532		$	413,422		$	208,853		$	203,582		$	655,385		$	617,004
Operating Income (Loss):
Control Devices	$	17,160		$	19,924		$	35,039		$	39,008		$	16,297		$	16,249		$	51,336		$	55,257
Electronics^(D)		8,276			2,814			16,156			8,371			8,951			4,896			25,107			13,267
PST		735			1,123			885			1,702			668			1,018			1,553			2,720
Unallocated Corporate^(A)		(6,990	)		(8,185	)		(16,052	)		(18,241	)		(7,604	)		(8,867	)		(23,656	)		(27,108	)
Total operating income	$	19,181		$	15,676		$	36,028		$	30,840		$	18,312		$	13,296		$	54,340		$	44,136
Depreciation and Amortization:
Control Devices	$	2,897		$	2,687		$	5,692		$	5,386		$	3,070		$	2,664		$	8,762		$	8,050
Electronics^(D)		2,252			2,241			4,543			3,811			2,213			2,136			6,756			5,947
PST		1,740			2,096			4,245			4,184			1,583			2,115			5,828			6,299
Unallocated Corporate		199			96			396			195			200			181			596			376
Total depreciation and amortization^(B)	$	7,088		$	7,120		$	14,876		$	13,576		$	7,066		$	7,096		$	21,942		$	20,672
Interest Expense, net:
Control Devices	$	18		$	11		$	37		$	65		$	19		$	19		$	56		$	84
Electronics		23			6			57			44			32			24			89			68
PST		194			532			532			1,104			230			378			762			1,482
Unallocated Corporate		935			969			1,898			1,715			874			1,087			2,772			2,802
Total interest expense, net	$	1,170		$	1,518		$	2,524		$	2,928		$	1,155		$	1,508		$	3,679		$	4,436
Capital Expenditures:
Control Devices	$	3,312		$	4,347		$	9,058		$	7,795		$	3,938		$	5,523		$	12,996		$	13,318
Electronics^(D)		1,394			1,684			4,167			4,034			725			2,417			4,892			6,451
PST		696			1,041			1,955			1,925			522			974			2,477			2,899
Unallocated Corporate^(C)		938			830			1,665			1,413			786			811			2,451			2,224
Total capital expenditures	$	6,340		$	7,902		$	16,845		$	15,167		$	5,971		$	9,725		$	22,816		$	24,892

2425

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~(Unaudited)~~

	June 30,			December 31,			September 30,			December 31,
	2018			2017			2018			2017
Total Assets:
Control Devices	$	175,649		$	164,632		$	183,221		$	164,632
Electronics		268,619			252,324			265,908			252,324
PST		84,313			100,382			81,267			100,382
Corporate^(C)		350,203			377,657			346,842			377,657
Eliminations		(318,138	)		(335,958	)		(317,986	)		(335,958	)
Total assets	$	560,646		$	559,037		$	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				Six months ended				Three months ended				Nine months ended
	June 30,				June 30,				September 30,				September 30,
	2018		2017		2018		2017		2018		2017		2018		2017
Net Sales:
North America	$	120,885	$	121,487	$	245,314	$	244,873	$	119,475	$	113,402	$	364,789	$	358,275
South America		20,333		23,500		40,878		45,133		18,864		25,386		59,742		70,519
Europe and Other^(D)		79,384		64,124		160,340		123,416		70,514		64,794		230,854		188,210
Total net sales	$	220,602	$	209,111	$	446,532	$	413,422	$	208,853	$	203,582	$	655,385	$	617,004

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

	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.

(D)

The amount for the ~~six~~nine months ended ~~June~~September 30, 2017 includes ~~five~~eight months of activity from the acquisition date of January 31, 2017 related to Orlaco which is disclosed in Note 4.

2526

~~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 ~~$10,572~~$10,218 and $10,131 at ~~June~~September 30, 2018 and December 31, 2017, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was ~~$665~~$249 and ~~$555,~~$465, for the three months ended ~~June~~September 30, 2018 and 2017, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was ~~$1,186~~$1,435 and ~~$735,~~$1,200, for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, 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 $10,180 and was based on discounted cash flows utilizing forecasted EBITDA in 2020 and 2021. The Company’s statement of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2018 included ~~$513~~$501 and ~~$1,048,~~$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 ~~six~~nine months ended ~~June~~September 30, 2017 included ~~$244~~$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 in 2017:

	Three months ended			Six months ended			Three months ended		Nine months ended
	June 30,			June 30,			September 30,		September 30,
	2017			2017			2017		2017
Noncontrolling interest at beginning of period	$	14,489		$	13,762		$	-	$	13,762
Net loss		(100	)		(130	)		-		(130	)
Foreign currency translation		69			826			-		826
Comprehensive income (loss)		(31	)		696
Comprehensive income								-		696
Acquisition of noncontrolling interest		(14,458	)		(14,458	)		-		(14,458	)
Noncontrolling interest at end of period	$	-		$	-		$	-	$	-

PST has dividends payable to former noncontrolling interest holders of R$~~22,749~~23,096 Brazilian real ($~~5,868)~~5,706) and R$22,330 Brazilian real ($6,742) as of ~~June~~September 30, 2018 and December 31, 2017, respectively. The dividends payable balance at ~~June~~September 30, 2018 includes R$~~419~~766 Brazilian real ($~~108)~~189) in monetary correction for the year to date ~~June~~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.

2627

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 ~~June~~September 30, 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 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.

~~Second~~Third Quarter Overview

Net income attributable to Stoneridge, Inc. of ~~$15.1~~$13.3 million, or ~~$0.52~~$0.46 per diluted share, for the three months ended ~~June~~September 30, 2018, increased by ~~$6.1~~$5.3 million, or ~~$0.20~~$0.18 per diluted share, from ~~$9.0~~$8.0 million, or ~~$0.32~~$0.28 per diluted share, for the three months ended ~~June~~September 30, 2017. The Electronics segment’s higher sales for the three months ended September 30, 2018 resulted in increased operating income of ~~$5.5~~$4.1 million. In addition, income tax expense for the third quarter decreased by ~~$1.4~~$0.3 million as a result of the Tax Cuts and Jobs Act (“Tax Legislation”) enacted in the fourth quarter of 2017.

Net sales increased by ~~$11.5~~$5.3 million, or ~~5.5%~~2.6%, compared to the ~~second~~third quarter of 2017 due to higher sales in our Electronics ~~segment~~and Control Devices segments partially offset by a decrease in sales in our ~~Control Devices and~~ PST ~~segments.~~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 ~~decrease~~increase in sales in our Control Devices segment was primarily due to ~~certain program~~an increase in sales volume ~~reductions~~ in ~~the~~our commercial vehicle market partially offset by decreased sales volume in our North American automotive market. Also, PST sales decreased ~~slightly~~ due to lower sales of alarm and audio ~~product~~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 ~~June~~September 30, 2018 and December 31, 2017, we had cash and cash equivalents balances of ~~$59.0~~$60.7 million and $66.0 million, respectively. The decrease during the first ~~half~~nine months of 2018 was primarily due to the repayment of outstanding debt and capital expenditures being partially offset by cash flows from operations. At ~~June~~September 30, 2018 and December 31, 2017 we had ~~$110.0~~$101.0 million and $121.0 million, respectively, in borrowings outstanding on our $300.0 million Credit Facility. The decrease in the outstanding Credit Facility balance during the first ~~half~~nine months of 2018 was the result of voluntary principal repayments.

2728

Outlook

In the first ~~half~~nine months of 2018, the Company continued to drive financial performance through top-line growth in our Electronics segment, including the Orlaco business, which continues to contribute to the growth in our Electronics segment. The Company continued to implement operating efficiency improvements which contributed to higher, sustainable long-term margins in all our segments. The Company believes that focusing on products that address industry megatrends will have a positive impact on both our top-line growth and underlying margins.

The North American automotive market is expected to ~~increase 0.1 million production units to 17.2 million units in 2018, however, based~~remain consistent with 2017. Based on our product mix, the Company expects sales volumes in our Control Devices segment to be consistent with the prior year.

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 increase again in 2018. ~~We also expect the European commercial vehicle market to increase in 2018.~~

Our PST segment revenues and operating performance in the first ~~half~~nine months of 2018 ~~was consistent with~~decreased compared to the first ~~half~~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 ~~July~~October 2018, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow ~~1.8%~~1.4% in 2018 and ~~2.5%~~2.4% in 2019. As the Brazilian economy remains relatively stable, we expect our served market channels to remain consistent except for our alarm and audio products which have had lower demand in 2018 compared to the prior year. Our financial performance 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.~~economy which could adversely impact our results of operations.

Other Matters

As a result of the impact of the Tax Legislation enacted in the fourth quarter of 2017, our effective tax rate will be lower in 2018 as compared to 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 against the Swedish krona, euro and Brazilian real in 2017 favorably impacting our material costs and our reported results. The U.S. Dollar strengthened against the Swedish krona, euro, ~~and~~ Brazilian real and Argentinian peso in 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.

2829

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

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

													Dollar													Dollar
													increase /													increase /
Three months ended June 30				2018						2017			(decrease)
Three months ended September 30																2018					2017					(decrease)
Net sales	$	220,602			100.0	%	$	209,111			100.0	%	$	11,491		$	208,853		100.0	%	$	203,582		100.0	%	$	5,271
Costs and expenses:
Cost of goods sold		153,184			69.4			145,697			69.7			7,487			145,568		69.7			141,033		69.3			4,535
Selling, general and administrative		35,256			16.0			35,704			17.1			(448	)		32,589		15.6			37,277		18.3			(4,688	)
Design and development		12,981			5.9			12,034			5.8			947			12,384		5.9			11,976		5.9			408

Operating income		19,181			8.7			15,676			7.4			3,505			18,312		8.8			13,296		6.5			5,016
Interest expense, net		1,170			0.5			1,518			0.7			(348	)		1,155		0.6			1,508		0.7			(353	)
Equity in earnings of investee		(665	)		(0.3	)		(555	)		(0.3	)		(110	)		(249	)	(0.1	)		(465	)	(0.2	)		216
Other expense (income), net		(264	)		(0.1	)		605			0.3			(869	)
Other expense, net																	647		0.3			395		0.2			252
Income before income taxes		18,940			8.6			14,108			6.7			4,832			16,759		8.0			11,858		5.8			4,901

Provision for income taxes		3,820			1.7			5,189			2.5			(1,369	)		3,467		1.7			3,809		1.8			(342	)

Net income		15,120			6.9			8,919			4.2			6,201			13,292		6.4			8,049		4.0			5,243
Net loss attributable to
noncontrolling interest		-			-			(100	)		(0.1	)		100
Net loss attributable to noncontrolling interest																	-		-			-		-			-
Net income attributable to Stoneridge, Inc.	$	15,120			6.9	%	$	9,019			4.3	%	$	6,101		$	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											Dollar			Percent
											increase /			increase /											increase /			increase /
Three months ended June 30			2018					2017			(decrease)			(decrease)
Three months ended September 30																	2018				2017				(decrease)			(decrease)
Control Devices	$	109,956		49.9	%	$	114,001		54.5	%	$	(4,045	)		(3.5	)%	$	108,402	51.9	%	$	106,842	52.5	%	$	1,560			1.5	%
Electronics		90,313		40.9			71,610		34.3			18,703			26.1	%		81,587	39.1			71,354	35.0			10,233			14.3
PST		20,333		9.2			23,500		11.2			(3,167	)		(13.5	)%		18,864	9.0			25,386	12.5			(6,522	)		(25.7	)
Total net sales	$	220,602		100.0	%	$	209,111		100.0	%	$	11,491			5.5	%	$	208,853	100.0	%	$	203,582	100.0	%	$	5,271			2.6	%

Our Control Devices segment net sales ~~decreased~~increased primarily as a result of ~~decreased~~an increase in sales volume in ~~the~~our commercial vehicle market of $5.4 million partially offset by decreases in sales volume in our North American automotive market of ~~$8.3~~$2.5 million as a result of certain program volume reductions ~~partially offset by an increase~~and a decrease in sales volume in ~~commercial vehicle,~~our China automotive ~~and favorable foreign currency translation~~market of ~~$3.2 million, $0.9 million and $0.5 million, respectively.~~$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 ~~$7.4~~$7.6 million and ~~$5.7~~$4.1 million, respectively, and increased sales of European and North American off-highway vehicle products of ~~$3.0~~$1.4 million and ~~$0.7~~$1.2 million, ~~respectively, as well as favorable foreign currency translation of $2.4 million.~~respectively. This increase was partially offset by unfavorable foreign currency translation of $3.1 million and unfavorable pricing of ~~$0.9~~$0.8 million on products nearing the end of product life.

2930

Our PST segment net sales decreased primarily due to a lower volumes for our alarm and audio product and sales in our ~~audio product markets~~Argentina market as well as an unfavorable foreign currency translation that decreased sales by ~~$2.6~~$5.1 million, or ~~10.9%~~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 ~~product and service revenues.~~products.

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

											Dollar			Percent											Dollar			Percent
											increase /			increase /											increase /			increase /
Three months ended June 30			2018					2017			(decrease)			(decrease)
Three months ended September 30																	2018				2017				(decrease)			(decrease)
North America	$	120,885		54.8	%	$	121,487		58.1	%	$	(602	)		(0.5	)%	$	119,475	57.2	%	$	113,402	55.7	%	$	6,073			5.4	%
South America		20,333		9.2			23,500		11.2			(3,167	)		(13.5	)%		18,864	9.0			25,386	12.5			(6,522	)		(25.7	)
Europe and Other		79,384		36.0			64,124		30.7			15,260			23.8	%		70,514	33.8			64,794	31.8			5,720			8.8
Total net sales	$	220,602		100.0	%	$	209,111		100.0	%	$	11,491			5.5	%	$	208,853	100.0	%	$	203,582	100.0	%	$	5,271			2.6	%

The slight decrease in North American net sales was primarily attributable to ~~a decrease in sales volume in our North American automotive market of $8.4 million resulting from certain program volume reductions which were partially offset by~~ increased sales volume in our North American commercial vehicle and off-highway markets of ~~$7.0~~$7.2 million and ~~$0.7~~$1.2 million, ~~respectively.~~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 ~~$2.6~~$5.1 million, or ~~10.9%~~20.0%, partially offset by ~~a slight~~an increase of new products to factory authorized dealer installers and higher sales of monitoring ~~product and service revenues.~~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 ~~$9.4~~$9.5 million and ~~$3.0~~$1.4 million, respectively, ~~as well as an increase~~partially offset by a decrease in sales volume in our China automotive market of ~~$0.9~~$1.2 million. Additionally, Europe and Other sales were ~~favorably~~unfavorably impacted by foreign currency translation of ~~$2.9~~$3.3 million ~~offset by~~and unfavorable pricing of ~~$0.8~~$0.7 million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by ~~5.1%~~3.2% primarily related to an increase in net sales. Our gross margin ~~improved~~decreased by ~~0.3%~~0.4% to ~~30.6%~~30.3% for the ~~second~~third quarter of 2018 compared to ~~30.3%~~30.7% for the ~~second~~third quarter of 2017. Our material cost as a percentage of net sales increased by ~~0.6%~~0.8% to ~~51.3%~~50.9% for the ~~first~~third quarter of 2018 compared to ~~50.7%~~50.1% for the ~~second~~third quarter of 2017. The ~~lower~~higher direct material costs as a percentage of net sales in our Electronics ~~and PST segments resulted from favorable product mix. The higher direct material costs in our Control Devices~~ segment resulted from unfavorable product ~~mix.~~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 ~~0.9%~~0.2% to ~~13.2%~~14.0% for the ~~second~~third quarter of 2018 compared to ~~14.1%~~14.2% for the ~~second~~third quarter of 2017.

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

Our Electronics segment gross margin ~~increased primarily due to~~was consistent with the prior year as higher sales, lower ~~direct material,~~ labor and overhead costs as a percentage of sales ~~as well as higher 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 ~~improved~~decreased due to lower sales and the adverse impact of U.S. denominated material purchases partially offset by a favorable sales mix related to ~~higher monitoring service fees~~lower sales of alarm and ~~lower~~ audio ~~products which resulted in lower direct material costs as a percentage of sales.~~products.

Selling, General and Administrative (“SG&A”). SG&A expenses decreased by ~~$0.4~~$4.7 million compared to the ~~second~~third quarter of 2017 primarily due to a decrease in expense of the fair value adjustment for the Orlaco earn-out consideration of ~~$2.1~~$1.8 million ~~due to~~in the Electronics segment. The Orlaco earn-out consideration ~~being capped~~was fully recognized in the first quarter of 2018. ~~This was offset by higher wages and direct support charges for procurement support in our Control Devices segment as well as higher~~In addition, there were lower business realignment charges of ~~$0.3~~$0.1 million in ~~the~~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, ~~and~~ fringe benefit costs ~~partially offset by expense for the fair value of earn-out consideration of $0.5 million.~~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 which were partially offset by higher professional service costs.~~activities.

Design and Development (“D&D”).D&D costs increased by ~~$0.9~~$0.4 million primarily due to higher D&D costs in our ~~Control Devices~~Electronics segment related to ~~program launches.~~product launch and development activities.

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

							Dollar			Percent									Dollar			Percent
							increase /			increase /									increase /			increase /
Three months ended June 30	2018			2017			(decrease)			(decrease)
Three months ended September 30													2018			2017			(decrease)			(decrease)
Control Devices	$	17,160		$	19,924		$	(2,764	)		(13.9	)%	$	16,297		$	16,249		$	48			0.3	%
Electronics		8,276			2,814			5,462			194.1	%		8,951			4,896			4,055			82.8
PST		735			1,123			(388	)		(34.6	)%		668			1,018			(350	)		(34.4	)
Unallocated corporate		(6,990	)		(8,185	)		1,195			14.6	%		(7,604	)		(8,867	)		1,263			14.2
Operating income	$	19,181		$	15,676		$	3,505			22.4	%	$	18,312		$	13,296		$	5,016			37.7	%

Our Control Devices segment operating income ~~decreased~~increased slightly primarily due to ~~lower~~higher sales partially offset by higher SG&A expenses ~~related to direct support charges for procurement~~ and ~~manufacturing support and higher~~ D&D ~~costs partially related to program launches.~~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 ~~$2.1~~$1.8 million of expense in the ~~second~~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 which were offset by higher professional fees.~~activities.

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

					Dollar			Percent							Dollar			Percent
					increase /			increase /							increase /			increase /
Three months ended June 30	2018		2017		(decrease)			(decrease)
Three months ended September 30											2018		2017		(decrease)			(decrease)
North America	$	9,900	$	11,447	$	(1,547	)		(13.5	)%	$	9,158	$	7,110	$	2,048			28.8	%
South America		735		1,123		(388	)		(34.6	)%		668		1,018		(350	)		(34.4	)
Europe and Other		8,546		3,106		5,440			175.1	%		8,486		5,168		3,318			64.2
Operating income	$	19,181	$	15,676	$	3,505			22.4	%	$	18,312	$	13,296	$	5,016			37.7	%

Our North American operating results ~~decreased~~increased primarily due to ~~lower~~increased sales volume in ~~the~~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, which were partially offset by increased sales volume in the commercial vehicle and off-highway markets.~~costs. The decrease in operating income in South America was primarily due a decrease in ~~product~~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 or of ~~higher monitoring services and~~ new products sold to our factory authorized dealer ~~installers.~~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 ~~and labor~~ costs.

Interest Expense, net. Interest expense, net decreased by ~~$0.3~~$0.4 million compared to the prior year ~~second~~third quarter primarily due to lower unallocated corporate and PST interest expense as a result of the decrease in outstanding credit facility and debt ~~balance.~~balances, respectively and lower interest rates of PST debt.

Equity in Earnings of Investee. Equity earnings for Minda were ~~$0.7~~$0.2 million and ~~$0.6~~$0.5 million for the three months ended ~~June~~September 30, 2018 and 2017, respectively. The ~~increase~~decrease compared to the prior period ~~was~~is primarily due to ~~higher sales which was offset by an~~ unfavorable ~~change~~changes in foreign currency exchange ~~rates.~~rates with an offset of an increase in sales.

Other ~~(Income)~~ Expense, 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, net ~~decreased~~increased by ~~$0.9~~$0.2 million to ~~other income of $0.3~~$0.6 million in ~~second~~the third quarter of 2018 compared to other expense, net of ~~$0.6~~$0.4 million for the ~~second~~third quarter of 2017 primarily due to ~~a favorable change in foreign currency exchange rates in our PST and Electronics segments which was offset by~~ an unfavorable change in foreign currency exchange rates in our ~~unallocated corporate~~PST segment.

Provision for Income Taxes. We recognized income tax expense of ~~$3.8~~$3.5 million and ~~$5.2~~$3.8 million for federal, state and foreign income taxes for the ~~second~~third quarter of 2018 and 2017, respectively. The decrease in income tax expense for the three months ended ~~June~~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 ~~20.2%~~20.7% in the ~~second~~third quarter of 2018 from ~~36.8%~~32.1% in the ~~second~~third quarter of 2017 primarily due to the Tax Legislation.

~~Six~~Nine Months Ended ~~June~~September 30, 2018 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2017

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

Dollar
increase /
Six months ended June 30 2018 2017 (decrease)
Net sales $ 446,532 100.0 % $ 413,422 100.0 % $ 33,110
Costs and expenses:
Cost of goods sold 311,145 69.7 288,857 69.9 22,288
Selling, general and administrative 72,517 16.2 69,970 16.9 2,547
Design and development 26,842 6.0 23,755 5.7 3,087

Operating income 36,028 8.1 30,840 7.5 5,188
Interest expense, net 2,524 0.6 2,928 0.7 (404 )
Equity in earnings of investee (1,186 ) (0.3 ) (735 ) (0.2 ) (451 )
Other expense (income), net (863 ) (0.2 ) 795 0.2 (1,658 )
Income before income taxes 35,553 8.0 27,852 6.8 7,701
Provision for income taxes 7,053 1.6 9,760 2.4 (2,707 )
Net income 28,500 6.4 18,092 4.4 10,408

Net loss attributable to
noncontrolling interest - - (130 ) - 130
Net income attributable to Stoneridge, Inc. $ 28,500 6.4 % $ 18,222 4.4 % $ 10,278

												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
											increase /			increase /											increase /			increase /
Six months ended June 30			2018					2017			(decrease)			(decrease)
Nine months ended September 30																	2018				2017				(decrease)			(decrease)
Control Devices	$	225,313		50.4	%	$	232,874		56.3	%	$	(7,561	)		(3.2	)%	$	333,715	50.9	%	$	339,716	55.1	%	$	(6,001	)		(1.8	)%
Electronics		180,341		40.4			135,415		32.8			44,926			33.2	%		261,928	40.0			206,769	33.5			55,159			26.7	%
PST		40,878		9.2			45,133		10.9			(4,255	)		(9.4	)%		59,742	9.1			70,519	11.4			(10,777	)		(15.3	)%
Total net sales	$	446,532		100.0	%	$	413,422		100.0	%	$	33,110			8.0	%	$	655,385	100.0	%	$	617,004	100.0	%	$	38,381			6.2	%

Our Control Devices segment net sales decreased primarily as a result of decreased sales volume in the North American automotive market of ~~$16.6~~$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 ~~$6.5~~$11.9 million, ~~$1.9~~$0.7 million and ~~$1.1~~$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 ~~$12.6~~$20.2 million and ~~$10.6~~$14.7 million, respectively, and increased sales of European and North American off-highway vehicle products of ~~$11.2~~$12.6 million and ~~$2.9~~$4.1 million, respectively, as well as favorable foreign currency translation of ~~$8.5~~$5.4 million. This increase was partially offset by unfavorable pricing of ~~$1.8~~$2.6 million on products nearing the end of product life.

Our PST segment net sales decreased primarily due to lower volumes for our audio products and Argentina market as well as an unfavorable foreign currency translation that decreased sales by ~~$3.3~~$8.3 million, or ~~7.3%~~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 ~~product~~products and ~~service revenues.~~services.

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

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

North America $ 245,314 54.9 % $ 244,873 59.2 % $ 441 0.2 %
South America 40,878 9.2 45,133 10.9 (4,255 ) (9.4 )%
Europe and Other 160,340 35.9 123,416 29.9 36,924 29.9 %
Total net sales $ 446,532 100.0 % $ 413,422 100.0 % $ 33,110 8.0 %

									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 ~~slight~~ increase in North American net sales was primarily attributable to increased sales volume in our North American commercial vehicle and off-highway markets of ~~$13.9~~$21.1 million and ~~$2.9~~$4.1 million, respectively which was offset by a decrease in sales volume in our North American automotive of ~~$16.6~~$19.1 million resulting from certain program volume reductions. The decrease in net sales in South America was primarily due to a decrease in audio ~~product~~products and lower Argentina market sales volume as well as an unfavorable foreign currency translation that decreased sales by ~~$3.3~~$8.3 million, or ~~7.3%~~11.8%, partially offset by a slight increase in sales of new products to our factory authorized dealer installers and higher sales of monitoring ~~product~~products and ~~service revenues.~~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 markets of ~~$16.3~~$25.8 million and ~~$11.2~~$12.6 million, respectively, as well as an increase in sales volume in our China automotive market of ~~$1.9~~$0.7 million. Additionally, Europe and Other sales were favorably impacted by foreign currency translation of ~~$9.5~~$6.2 million offset by unfavorable pricing of ~~$1.8~~$2.6 million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by ~~7.7%~~6.2% and our gross margin ~~improved by 0.2% to 30.3% for~~remained consistent with the first ~~half~~nine months of ~~2018 compared to 30.1% for the first half of 2017.~~2017 at 30.3%. Our material cost as a percentage of net sales increased by 0.6% to ~~51.3%~~51.1% for the first ~~half~~nine months of 2018 compared to ~~50.7%~~50.5% for the first ~~half~~nine months of 2017. The higher direct material costs in our Control Devices segment resulted from unfavorable product ~~mix.~~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 segment resulted from favorable product mix. Overhead as a percentage of net sales decreased by ~~0.9%~~0.7% to ~~13.4%~~13.6% for the first ~~half~~nine months of 2018 compared to 14.3% for the first ~~half~~nine months of 2017.

Our Control Devices segment gross margin ~~remained consistent~~increased slightly despite lower sales primarily due to a decrease in ~~overhead.~~overhead from a reduction in warranty costs.

Our Electronics segment gross margin ~~increased primarily due to~~was consistent with the prior year as higher sales were offset by a proportional increase in higher labor and ~~lower direct material costs as a percentage of sales primarily related to a favorable mix of Orlaco product sales.~~overhead.

Our PST segment gross margin improved due to a favorable sales mix related to ~~higher monitoring service fees and~~ lower audio products which resulted in lower direct material costs as a percentage of sales.

Selling, General and Administrative. SG&A expenses ~~increased~~decreased by ~~$2.5~~$2.1 million compared to the first ~~half~~nine months of 2017 primarily due to higher costs in our Electronics segment due to higher wages and fringe benefits, professional service costs and direct support charges for procurement support. In addition, there were higher business realignment charges of $0.5 million in our Electronics and PST segments compared to the first half of 2017. These were partially offset by a decrease in expense for the fair value of the Orlaco earn-out consideration of ~~$1.7 million. Control Devices SG&A costs also increased due to~~$3.6 million in our Electronics segment, partially offset by higher wages and higher direct support charges for procurement ~~support.~~support in our Control Devices and Electronics segments. In addition, there were higher business realignment charges of $0.4 million in our operating segments compared to the first nine months of 2017. PST SG&A costs decreased ~~slightly~~ during the current period due to lower wages and professional service costs which were ~~mostly~~partially offset by expense for the fair value of earn-out consideration of ~~$1.0~~$0.8 million during the first ~~half~~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 manufacturing support due to the centralization of these activities ~~as well as lower incentive compensation costs~~ which were partially offset by higher professional service costs.

Design and Development.D&D costs increased by ~~$3.1~~$3.5 million primarily due to higher D&D costs in our Electronics and Control Devices segments related to program launches and investment in development ~~activities and lower customer reimbursements.~~activities.

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

							Dollar			Percent									Dollar			Percent
							increase /			increase /									increase /			increase /
Six months ended June 30	2018			2017			(decrease)			(decrease)
Nine months ended September 30													2018			2017			(decrease)			(decrease)
Control Devices	$	35,039		$	39,008		$	(3,969	)		(10.2	)%	$	51,336		$	55,257		$	(3,921	)		(7.1	)%
Electronics		16,156			8,371			7,785			93.0	%		25,107			13,267			11,840			89.2	%
PST		885			1,702			(817	)		(48.0	)%		1,553			2,720			(1,167	)		(42.9	)%
Unallocated corporate		(16,052	)		(18,241	)		2,189			12.0	%		(23,656	)		(27,108	)		3,452			12.7	%
Operating income	$	36,028		$	30,840		$	5,188			16.8	%	$	54,340		$	44,136		$	10,204			23.1	%

Our Control Devices segment operating income decreased primarily due to lower sales and higher SG&A and D&D costs partially related to program launches.

Our Electronics segment operating income increased primarily due to ~~the~~ higher sales offset by higher SG&A as well as higher D&D related to product launch and development activities.

Our PST segment operating income decreased primarily due to a decrease in sales as well as the additional expense for the fair value of earn-out consideration of ~~$1.0~~$0.8 million during the first ~~half~~nine months of 2018.

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 as well as lower incentive compensation costs which were offset by 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 /
Six months ended June 30	2018		2017		(decrease)			(decrease)
Nine months ended September 30											2018		2017		(decrease)			(decrease)
North America	$	18,193	$	20,897	$	(2,704	)		(12.9	)%	$	27,351	$	28,007	$	(656	)		(2.3	)%
South America		885		1,702		(817	)		(48.0	)%		1,553		2,720		(1,167	)		(42.9	)%
Europe and Other		16,950		8,241		8,709			105.7	%		25,436		13,409		12,027			89.7	%
Operating income	$	36,028	$	30,840	$	5,188			16.8	%	$	54,340	$	44,136	$	10,204			23.1	%

Our North American operating results slightly decreased primarily due to lower sales volume in the North American automotive market as well as higher ~~SG&A and~~ D&D costs, which were partially offset by increased sales volume in the commercial vehicle and off-highway markets. The decrease in operating income in South America was primarily due a 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 and ~~new~~ products sold to our factory authorized dealer installers. Our operating results in Europe and Other increased due to higher sales in our European commercial vehicle and off-highway markets which were partially offset by higher D&D costs.

Interest Expense, net. Interest expense, net decreased by ~~$0.4~~$0.8 million compared to the prior year ~~first half~~ primarily due to lower ~~PST~~ interest expense at our unallocated corporate and PST segments as a result of the decrease in outstanding credit facility and debt ~~balance.~~balances, respectively, from voluntary principal prepayments.

Equity in Earnings of Investee. Equity earnings for Minda were ~~$1.2~~$1.4 million and ~~$0.7~~$1.2 million for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, respectively. The increase compared to the prior period was due to higher sales which was offset by an unfavorable change in foreign currency exchange rates.

Other Expense (Income) ~~Expense,~~, 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 decreased by ~~$1.7~~$1.4 million to other income of ~~$0.9~~$0.2 million in first ~~half~~nine months of 2018 compared to other expense of ~~$0.8~~$1.2 million for the first ~~half~~nine months of 2017 primarily due to a favorable change in foreign currency exchange rates in our Electronics ~~segment.~~and PST segments.

Provision for Income Taxes. We recognized income tax expense of ~~$7.1~~$10.5 million and ~~$9.8~~$13.6 million for federal, state and foreign income taxes for the first ~~half~~nine months of 2018 and 2017, respectively. The decrease in income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2018 compared to the same period for 2017 was primarily due to Tax Legislation enacted in the fourth quarter of 2017. The effective tax rate decreased to ~~19.8%~~20.1% in the first ~~half~~nine months of 2018 from ~~35.0%~~34.2% in the first ~~half~~nine months of 2017 primarily due to the Tax Legislation.

Liquidity and Capital Resources

Summary of Cash Flows:

Six months ended June 30, (in thousands) 2018 2017
Net cash provided by (used for):
Operating activities $ 28,911 $ 27,021
Investing activities (15,401 ) (92,685 )
Financing activities (17,428 ) 56,663
Effect of exchange rate changes on cash and cash equivalents (3,120 ) 2,832
Net change in cash and cash equivalents $ (7,038 ) $ (6,169 )

Nine months ended September 30, (in thousands)	2018			2017
Net cash provided by (used for):
Operating activities	$	47,638		$	51,118
Investing activities		(21,369	)		(102,084	)
Financing activities		(28,209	)		47,119
Effect of exchange rate changes on cash and cash equivalents		(3,408	)		4,249
Net change in cash and cash equivalents	$	(5,348	)	$	402

Cash provided by operating activities ~~increased slightly~~decreased compared to the first ~~half~~nine months of 2017 primarily due to ~~an increase in net income being offset by~~ a higher use of cash to fund working capital ~~levels.~~levels offset by an increase in net income. Our receivable terms and collections rates have remained consistent between periods presented.

Net cash used for investing activities decreased primarily due to the business acquisition of Orlaco in the first ~~half~~nine months of 2017 ~~and~~as well as insurance proceeds received and lower capital expenditures in the first ~~half~~nine months of 2018. ~~This was partially offset by higher capital expenditures.~~

Net cash provided by (used for) financing activities decreased primarily due to the significant decrease in borrowing activity on our Credit Facility as we borrowed $77.3 million to fund the acquisition of the Orlaco business in the first quarter of 2017 ~~which was partially offset by~~and an increase in voluntary principal repayments of our Credit Facility and PST debt obligations in the first ~~half~~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 ~~$110.0~~$101.0 million at ~~June~~September 30, 2018. The Company was in compliance with all covenants at ~~June~~September 30, 2018. The covenants included in our Credit Facility to date have not and are not expected to limit our financing flexibility. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.

PST maintains several short-term and long-term loans used for working capital purposes. At ~~June~~September 30, 2018, there was ~~$5.0~~$3.0 million of PST debt outstanding. Scheduled principal repayments on PST debt at ~~June~~September 30, 2018 were as follows: ~~$3.2~~$1.8 million from ~~July~~October 2018 to ~~June~~September 2019, ~~$0.8~~$0.3 million from ~~July~~October 2019 to December 2019, $0.5 million in 2020 and ~~$0.5~~$0.4 million in both 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 ~~$2.2~~$2.3 million, at ~~June~~September 30, 2018. At ~~June~~September 30, 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.

At ~~June~~September 30, 2018, we had a cash and cash equivalents balance of approximately ~~$59.0~~$60.7 million, all of which was held in foreign locations. The decrease in cash from $66.0 million at December 31, 2017 was primarily due to the voluntary principal repayments of outstanding debt and capital expenditures partially offset by cash 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~~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~~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 ~~second~~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 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.

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~~Company’s 2017 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of ~~June~~September 30, 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 ~~June~~September 30, 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 ~~June~~September 30, 2018 that materially affected, or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

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 litigation regarding civil, labor, and other tax contingencies in our PST segment for which we believe the likelihood of loss is reasonably possible, but not probable, although 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~~Company’s 2017 Form 10-K.

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

The following table presents information with respect to repurchases of Common Shares made by us during the three months ended ~~June~~September 30, 2018. ~~These~~There were no shares ~~were~~ delivered to us by employees as payment for withholding taxes due upon vesting of 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
4/1/18-4/30/18 14,171 $ 27.32 N/A N/A
5/1/18-5/31/18 2,061 28.98 N/A N/A
6/1/18-6/30/18 1,361 33.94 N/A N/A
Total 17,593
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.

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.

3840

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

10.1 Amendment No. 5 to the Third Amended and Restated Credit Agreement dated September 11, 2018, ~~Directors’ Restricted Shares Plan of~~filed herewith.
10.2 First Amendment to the Stoneridge, Inc. ~~(incorporated by reference to Exhibit 99.1~~Deferred Compensation plan dated September 10, 2018, filed herewith.
10.3 Consent and Amendment No. 6 to the ~~Company’s Current Report on Form 8-K~~Third Amended and Restated Credit Agreement dated October 26, 2018, filed ~~on May 16, 2018).~~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 XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF XBRL Definition Linkbase Document
101.LAB XBRL Labels Linkbase Document
101.PRE XBRL Presentation Linkbase Document

3941

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

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

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

4042

							June 30, 2018		December 31, 2017
			Fair values estimated using
			Level 1		Level 2		Level 3
	Fair value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contracts	$	586	$	-	$	586	$	-	$	-
Total financial assets carried at fair value	$	586	$	-	$	586	$	-	$	-

Financial liabilities carried at fair value:
Forward currency contracts	$	6	$	-	$	6	$	-	$	269
Earn-out consideration		20,046		-		-		20,046		20,746
Total financial liabilities carried at fair value	$	20,052	$	-	$	6	$	20,046	$	21,015


Exhibit Number		Exhibit

10.1		Amendment No. 5 to the Third Amended and Restated Credit Agreement dated September 11, 2018, ~~Directors’ Restricted Shares Plan of~~filed herewith.

10.2		First Amendment to the Stoneridge, Inc. ~~(incorporated by reference to Exhibit 99.1~~Deferred Compensation plan dated September 10, 2018, filed herewith.

10.3		Consent and Amendment No. 6 to the ~~Company’s Current Report on Form 8-K~~Third Amended and Restated Credit Agreement dated October 26, 2018, filed ~~on May 16, 2018).~~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	XBRL Instance Document
	101.SCH	XBRL Schema Document
	101.CAL	XBRL Calculation Linkbase Document
	101.DEF	XBRL Definition Linkbase Document
	101.LAB	XBRL Labels Linkbase Document
	101.PRE	XBRL Presentation Linkbase Document

	STONERIDGE, INC.

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

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