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 30,~~ ~~2019~~March 31, 2020

Commission file number: 001-13337

Stoneridge

STONERIDGE INC

(Exact name of registrant as specified in its charter)


Ohio		34-1598949
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

39675 MacKenzie Drive, Suite 400, Novi, Michigan		48377
(Address of principal executive offices)		(Zip Code)


	(248) 489-9300
	Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Common Shares, without par value SRI New York Stock Exchange

Title of each class Trading symbol(s) Name of each exchange on which registered

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.

☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

☒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 ☐	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth 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). ☐Yes ☒No

The number of Common Shares, without par value, outstanding as of ~~July 25, 2019~~April 30, 2020 was ~~27,381,333.~~26,993,184.

Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES


INDEX		Page
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of ~~June 30, 2019~~March 31, 2020 (Unaudited) and December 31, ~~2018~~2019	4
	Condensed Consolidated Statements of Operations (Unaudited) for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	5
	Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	7
	Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3127
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4336
Item 4.	Controls and Procedures	4336

PART II–OTHER INFORMATION		44

Item 1.	Legal Proceedings	4437
Item 1A.	Risk Factors	4437
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4438
Item 3.	Defaults Upon Senior Securities	4438
Item 4.	Mine Safety Disclosures	4538
Item 5.	Other Information	4538
Item 6.	Exhibits	4639

Signatures		4740

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Forward-Looking Statements

Portions of this 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, with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) operational expectations. 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 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;

●

business disruptions due to natural disasters or other disasters or other disasters outside our control, such as the COVID-19 pandemic;

●

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 II Item 1A (“Risk Factors”) of this Quarterly Report on Form 10-Q and Part I, Item IA (“Risk Factors”) ofin the Company’s ~~2018~~2019 Form 10-K.

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONERIDGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,		March 31,		December 31,
(in thousands)	2019		2018		2020		2019
		(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	51,503	$	81,092	$	81,305	$	69,403
Accounts receivable, less reserves of $1,592 and $1,243, respectively		151,687		139,076
Accounts receivable, less reserves of $813 and $1,289, respectively						138,438		138,564
Inventories, net		100,751		79,278		95,777		93,449
Prepaid expenses and other current assets		32,148		20,731		33,739		29,850
Total current assets		336,089		320,177		349,259		331,266
Long-term assets:
Property, plant and equipment, net		116,954		112,213		116,149		122,483
Intangible assets, net		58,890		62,032		51,463		58,122
Goodwill		36,377		36,717		35,279		35,874
Operating lease right-of-use asset		18,970		-		20,316		22,027
Investments and other long-term assets, net		28,767		28,380		28,024		32,437
Total long-term assets		259,958		239,342		251,231		270,943
Total assets	$	596,047	$	559,519	$	600,490	$	602,209

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt	$	869	$	1,533	$	2,516	$	2,672
Accounts payable		100,659		87,894		79,222		80,701
Accrued expenses and other current liabilities		61,987		57,880		48,731		55,223
Total current liabilities		163,515		147,307		130,469		138,596
Long-term liabilities:
Revolving credit facility		103,500		96,000		161,000		126,000
Long-term debt, net		732		983		255		454
Deferred income taxes		15,042		14,895		11,335		12,530
Operating lease long-term liability		14,565		-		16,569		17,971
Other long-term liabilities		17,194		17,068		13,569		16,754
Total long-term liabilities		151,033		128,946		202,728		173,709
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 27,367 and 28,488 shares outstanding at June 30, 2019 and December 31, 2018, respectively, with no stated value		-		-
Preferred Shares, without par value, 5,000 shares authorized, NaN issued						-		-
Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 26,993 and 27,408 shares outstanding at March 31, 2020 and December 31, 2019, respectively, with 0 stated value						-		-
Additional paid-in capital		223,831		231,647		230,506		225,607
Common Shares held in treasury, 1,599 and 478 shares at June 30, 2019 and December 31, 2018, respectively, at cost		(50,689)		(8,880)
Common Shares held in treasury, 1,973 and 1,558 shares at March 31, 2020 and December 31, 2019, respectively, at cost						(60,999)		(50,773)
Retained earnings		195,672		146,251		210,032		206,542
Accumulated other comprehensive loss		(87,315)		(85,752)		(112,246)		(91,472)
Total shareholders' equity		281,499		283,266		267,293		289,904
Total liabilities and shareholders' equity	$	596,047	$	559,519	$	600,490	$	602,209

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended				Six months ended
	June 30,				June 30,
(in thousands, except per share data)	2019		2018		2019		2018
Three months ended March 31 (in thousands, except per share data)									2020		2019

Net sales	$	222,241	$	220,602	$	440,538	$	446,532	$	182,966	$	218,297
Costs and expenses:
Cost of goods sold		165,414		153,184		322,858		311,145		137,569		157,444
Selling, general and administrative		27,522		35,256		63,110		72,517		29,503		35,910
Gain on disposal of non-core products, net		(33,921)		-		(33,599)		-
Design and development		14,040		12,981		27,284		26,842		12,235		13,244
Operating income		49,186		19,181		60,885		36,028		3,659		11,699
Interest expense, net		1,001		1,170		2,004		2,524		1,030		1,003
Equity in earnings of investee		(548)		(665)		(912)		(1,186)		(457)		(364)
Other income, net		(97)		(264)		(529)		(863)		(1,617)		(432)
Income before income taxes		48,830		18,940		60,322		35,553		4,703		11,492
Provision for income taxes		9,066		3,820		10,901		7,053		1,213		1,835
Net income	$	39,764	$	15,120	$	49,421	$	28,500	$	3,490	$	9,657

Earnings per share:
Basic	$	1.43	$	0.53	$	1.75	$	1.01	$	0.13	$	0.34
Diluted	$	1.41	$	0.52	$	1.72	$	0.99	$	0.13	$	0.33
Weighted-average shares outstanding:
Basic		27,887		28,449		28,208		28,349		27,232		28,529
Diluted		28,294		28,978		28,716		28,907		27,591		29,085

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)


		Three months ended				Six months ended
		June 30,				June 30,
(in thousands)		2019	2018		2019		2018
Three months ended March 31 (in thousands)										2020	2019

Net income	$	39,764	$	15,120	$	49,421	$	28,500	$	3,490	$	9,657

Other comprehensive (loss) income, net of tax:
Other comprehensive income (loss), net of tax:
Foreign currency translation		2,311		(17,421)		(1,493)		(13,527)		(17,119)		(3,804)
Unrealized (loss) gain on derivatives ⁽¹⁾		(112)		(159)		(70)		636		(3,655)		42
Other comprehensive (loss) income, net of tax		2,199		(17,580)		(1,563)		(12,891)
Other comprehensive loss, net of tax										(20,774)		(3,762)

Comprehensive income (loss)	$	41,963	$	(2,460)	$	47,858	$	15,609
Comprehensive (loss) income									$	(17,284)	$	5,895

(1)	Net of tax ~~benefit~~(benefit) expense of ~~$(30)~~$(972) and ~~$(41)~~$11 for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively. Net of tax expense (benefit) of $(19) and $171 for the six months ended June 30, 2019 and 2018,~~ respectively.

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


Six months ended June 30, (in thousands)	2019		2018
Three months ended March 31 (in thousands)					2020		2019

OPERATING ACTIVITIES:
Net income	$	49,421	$	28,500	$	3,490	$	9,657
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		11,819		11,535		6,650		5,697
Amortization, including accretion and write-off of deferred financing costs		3,464		3,503		1,429		1,613
Deferred income taxes		3,804		1,765		76		(2,979)
Earnings of equity method investee		(912)		(1,186)		(457)		(364)
Gain on sale of fixed assets		(26)		(18)
Loss (gain) on sale of fixed assets						131		(1)
Share-based compensation expense		3,594		2,838		1,372		1,548
Tax benefit related to share-based compensation expense		(752)		(879)
Gain on disposal of non-core products, net		(33,599)		-
Excess tax deficiency (benefit) related to share-based compensation expense						17		(656)
Change in fair value of earn-out contingent consideration		921		1,417		(633)		469
Change in fair value of venture capital fund						39		(16)
Changes in operating assets and liabilities, net of effect of business combination:
Accounts receivable, net		(13,440)		(11,594)		(3,730)		(17,821)
Inventories, net		(21,798)		(10,610)		(5,838)		(13,655)
Prepaid expenses and other assets		(9,678)		(8,417)		(3,702)		(660)
Accounts payable		13,604		8,678		2,327		16,395
Accrued expenses and other liabilities		242		3,379		(7,733)		(4,836)
Net cash provided by operating activities		6,664		28,911
Net cash used for operating activities						(6,562)		(5,609)

INVESTING ACTIVITIES:
Capital expenditures		(17,479)		(16,845)
Capital expenditures, including intangibles						(7,140)		(8,684)
Proceeds from sale of fixed assets		49		41		8		1
Insurance proceeds for fixed assets		-		1,403
Proceeds from disposal of non-core products		34,386		-
Investment in venture capital fund		(1,200)		-		-		(400)
Net cash provided by (used for) investing activities		15,756		(15,401)
Net cash used for investing activities						(7,132)		(9,083)

FINANCING ACTIVITIES:
Revolving credit facility borrowings		55,000		26,500		71,500		-
Revolving credit facility payments		(47,500)		(37,500)		(36,500)		(5,000)
Proceeds from issuance of debt		55		273		1,958		34
Repayments of debt		(999)		(2,459)		(2,076)		(690)
Earn-out consideration cash payment		(3,394)		-		-		(3,394)
Other financing costs		(873)		-		(1)		(2)
Common Share repurchase program		(50,000)		-		(4,995)		-
Repurchase of Common Shares to satisfy employee tax withholding		(3,209)		(4,242)		(1,687)		(2,945)
Net cash used for financing activities		(50,920)		(17,428)
Net cash provided by (used for) financing activities						28,199		(11,997)

Effect of exchange rate changes on cash and cash equivalents		(1,089)		(3,120)		(2,603)		(1,317)
Net change in cash and cash equivalents		(29,589)		(7,038)		11,902		(28,006)
Cash and cash equivalents at beginning of period		81,092		66,003		69,403		81,092

Cash and cash equivalents at end of period	$	51,503	$	58,965	$	81,305	$	53,086

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,198	$	2,679	$	1,150	$	1,109
Cash paid for income taxes, net	$	7,100	$	7,967	$	1,832	$	3,327

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Number of								Accumulated				Number of								Accumulated
	Common	Number of	Additional		Common				other		Total		Common	Number of	Additional		Common				other		Total
	Shares	treasury	paid-in		Shares held		Retained		comprehensive		shareholders'		Shares	treasury	paid-in		Shares held		Retained		comprehensive		shareholders'
(in thousands)	outstanding	shares	capital		in treasury		earnings		loss		equity		outstanding	shares	capital		in treasury		earnings		loss		equity

BALANCE DECEMBER 31, 2017	28,180	786	$	228,486	$	(7,118)	$	92,264	$	(69,560)	$	244,072
Net income	—	—		—		—		13,380		—		13,380
Unrealized gain on derivatives, net	—	—		—		—		—		795		795
Currency translation adjustments	—	—		—		—		—		3,894		3,894
Issuance of Common Shares	446	(446)		—		—		—		—		—
Repurchased Common Shares for treasury	(136)	136		—		(1,387)		—		—		(1,387)
Share-based compensation	—	—		(925)		—		—		—		(925)
Cumulative effect of an accounting change	—	—		—		—		(212)		—		(212)
BALANCE MARCH 31, 2018	28,490	476	$	227,561	$	(8,505)	$	105,432	$	(64,871)	$	259,617

BALANCE , MARCH 31, 2018	28,490	476	$	227,561	$	(8,505)	$	105,432	$	(64,871)	$	259,617
Net income	—	—		—		—		15,120		—		15,120
Unrealized gain on derivatives, net	—	—		—		—		—		(159)		(159)
Currency translation adjustments	—	—		—		—		—		(17,421)		(17,421)
Issuance of Common Shares	11	(11)		—		—		—		—		—
Repurchased Common Shares for treasury	(18)	18		—		(406)		—		—		(406)
Tax benefit from share based compensation transactions	—	—		—		—		—		—		—
Share-based compensation	—	—		1,295		—		—		—		1,295
BALANCE JUNE 30, 2018	28,483	483	$	228,856	$	(8,911)	$	120,552	$	(82,451)	$	258,046

BALANCE DECEMBER 31, 2018	28,488	478	$	231,647	$	(8,880)	$	146,251	$	(85,752)	$	283,266	28,488	478	$	231,647	$	(8,880)	$	146,251	$	(85,752)	$	283,266
Net income	—	—		—		—		9,657		—		9,657	—	—		—		—		9,657		—		9,657
Unrealized gain on derivatives, net	—	—		—		—		—		42		42	—	—		—		—		—		42		42
Currency translation adjustments	—	—		—		—		—		(3,804)		(3,804)	—	—		—		—		—		(3,804)		(3,804)
Issuance of Common Shares	305	(305)		—		—		—		—		—	305	(305)		—		—		—		—		—
Repurchased Common Shares for treasury	(98)	98		—		(1,883)		—		—		(1,883)
Share-based compensation	—	—		480		—		—		—		480
Repurchased Common Shares for treasury, net													(98)	98		—		(1,883)		—		—		(1,883)
Share-based compensation, net													—	—		480		—		—		—		480
BALANCE MARCH 31, 2019	28,695	271	$	232,127	$	(10,763)	$	155,908	$	(89,514)	$	287,758	28,695	271	$	232,127	$	(10,763)	$	155,908	$	(89,514)	$	287,758

BALANCE MARCH 31, 2019	28,695	271	$	232,127	$	(10,763)	$	155,908	$	(89,514)	$	287,758

BALANCE DECEMBER 31, 2019													27,408	1,558	$	225,607	$	(50,773)	$	206,542	$	(91,472)	$	289,904
Net income	—	—		—		—		39,764		—		39,764	—	—		—		—		3,490		—		3,490
Unrealized gain on derivatives, net	—	—		—		—		—		(112)		(112)
Unrealized loss on derivatives, net													—	—		—		—		—		(3,655)		(3,655)
Currency translation adjustments	—	—		—		—		—		2,311		2,311	—	—		—		—		—		(17,119)		(17,119)
Issuance of Common Shares	31	(31)		—		—		—		—		—	267	(267)		—		—		—		—		—
Repurchased Common Shares for treasury	(9)	9		—		74		—		—		74
Repurchased Common Shares for treasury, net													(75)	75		—		4,769		—		—		4,769
Common Share repurchase program	(1,350)	1,350		(10,000)		(40,000)		—		—		(50,000)	(607)	607		10,000		(14,995)		—		—		(4,995)
Share-based compensation	—	—		1,704		—		—		—		1,704
BALANCE JUNE 30, 2019	27,367	1,599	$	223,831	$	(50,689)	$	195,672	$	(87,315)	$	281,499
Share-based compensation, net													—	—		(5,101)		—		—		—		(5,101)
BALANCE MARCH 31, 2020													26,993	1,973	$	230,506	$	(60,999)	$	210,032	$	(112,246)	$	267,293

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 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 ~~2018~~2019 Form ~~10K~~10-K.

The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ has been determined to be an unconsolidated entity, and therefore is accounted for under the equity method of accounting based on the Company’s 49% ownership in MSIL.

(2) Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In ~~January~~August 2018, the Financial Accounting Standards Board (“(‘FASB”) issued Accounting Standards Update (“ASU”) ~~2018-02, “Income Statement~~ ~~– Reporting Comprehensive Income (Topic 220)~~2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): ~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ~~This~~The guidance ~~gives entities~~in ASU 2018-15 clarifies the ~~option to reclassify to retained earnings the tax effects resulting from the enactment of Tax Cuts and Jobs Act related to items~~accounting for implementation costs in accumulated other comprehensive income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance was effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company adopted this standard on January 1, 2019, which did not have a material impact on its condensed consolidated financial statements.

~~In February 2016, the FASB issued~~cloud computing arrangements. ASU 2016-02, “Leases (Topic 842)”, which requires that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new standard was2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this standard prospectively as of January 1, 2020 and the impact on the Company’s condensed consolidated financial statements will depend on the nature of our future cloud computing arrangements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The guidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years beginning after December 15, ~~2018.~~2019, with early adoption permitted. The Company adopted this standard as of January 1, ~~2019 using the modified retrospective approach~~2020 and elected the transition option to use the effective date January 1, 2019, as the date of initial application. The Company did 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 recognized its cumulative effect transition adjustment as of the effective date. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard. The impact of the adoption resulted in the recognition of right-of-use (“ROU”) assets and lease liabilities on the condensed consolidated balance sheet of $20,618 and $20,856~~, respectively, as of January 1, 2019. The standard~~it did not have a material impact on the Company’s condensed consolidated ~~results of operations and cash flows upon adoption.~~

~~Table of Contents~~financial statements.

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Accounting Standards Not Yet Adopted~~

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~~2019. The guidance allows for ~~annual periods beginning after December 15, 2018.~~various methods for measuring expected credit losses. The Company ~~is currently evaluating the impact of its pending adoption of ASU 2016-13~~has elected to apply a historical loss rate based on ~~the consolidated financial statements.~~historical write-offs by region, adjusted for current economic conditions and forecasts about future economic conditions that are reasonable and supportable. The Company ~~will adopt~~adopted this standard as of January 1, 2020 and it isdid not ~~expected to~~ have a material impact on ~~its~~the Company’s condensed consolidated financial statements.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance in ASU 2020-04 provides temporary optional expedient and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”) (also known as the “reference rate reform”). The guidance allows companies to elect not to apply certain modification accounting requirements to contracts affected by the reference rate reform, if certain criteria are met. The guidance also allows companies to elect various option expedients that allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements.

(3) Revenue

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 actuators, sensors, ~~actuators, valves~~switches and ~~switches.~~connectors. 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, European and ~~European~~Asia Pacific regions. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“Tier 1 supplier”).

~~Electronics.~~ Our Electronics segment designs and manufactures electronic instrument clusters, electronic control units, driver information systems, 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, monitors and related products are sold principally to the off-highway vehicle market in the North American and European regions.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

~~PST.~~Electronics. Our ~~PST~~Electronics segment designs and manufactures driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. 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.

Stoneridge Brazil. Our Stoneridge Brazil segment (also referred to as “PST” in prior filings) primarily serves the South American region and specializes in the design, manufacture and sale of ~~in-vehicle audio and video devices, electronic vehicle security alarms, convenience accessories,~~ vehicle tracking devices and monitoring services, ~~primarily for the automotive~~vehicle security alarms and ~~motorcycle markets. PST~~convenience accessories, in-vehicle audio and infotainment devices and telematics solutions. Stoneridge Brazil 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. In addition, monitoring services and tracking devices are sold directly to corporate and individual consumers.

The following tables disaggregate our revenue by reportable segment and geographical location⁽¹⁾for the periods ended ~~June 30, 2019~~March 31, 2020 and ~~2018:~~2019:

Control Devices

Electronics

PST

Consolidated
Three months ended June 30

2019

2018

2019

2018

2019

2018

2019

2018
Net Sales:
















North America

$
98,066

$
98,564

$
25,227

$
22,321

$
-

$
-

$
123,293

$
120,885
South America

-

-

-

-

16,614

20,333

16,614

20,333
Europe

5,456

3,669

64,798

67,411

-

-

70,254

71,080
Asia Pacific

10,545

7,723

1,535

581

-

-

12,080

8,304
Total net sales

$
114,067

$
109,956

$
91,560

$
90,313

$
16,614

$
20,333

$
222,241

$
220,602


	Control Devices				Electronics				PST				Consolidated				Control Devices				Electronics				Stoneridge Brazil				Consolidated
Six months ended June 30	2019		2018		2019		2018		2019		2018		2019		2018
Three months ended March 31,																	2020		2019		2020		2019		2020		2019		2020			2019
Net Sales:
North America	$	194,786	$	203,007	$	47,874	$	42,307	$	-	$	-	$	242,660	$	245,314	$	80,410	$	96,720	$	19,441	$	22,647	$	-	$	-	$	99,851		$	119,367
South America		-		-		-		-		33,946		40,878		33,946		40,878		-		-		-		-		14,570		17,332		14,570			17,332
Europe		9,868		6,560		131,740		135,955		-		-		141,608		142,515		7,388		4,412		51,306		66,942		-		-		58,694	��		71,354
Asia Pacific		19,532		15,746		2,792		2,079		-		-		22,324		17,825		9,052		8,987		799		1,257		-		-		9,851			10,244
Total net sales	$	224,186	$	225,313	$	182,406	$	180,341	$	33,946	$	40,878	$	440,538	$	446,532	$	96,850	$	110,119	$	71,546	$	90,846	$	14,570	$	17,332	$	182,966		$	218,297

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

Performance Obligations

For OEM and Tier 1 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 1 supplier customers 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.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(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~~Stoneridge Brazil 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 no0 material contract assets, contract liabilities or capitalized contract acquisition costs as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

(4) 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,		March 31,		December 31,
	2019		2018		2020		2019
Raw materials	$	60,951	$	54,382	$	69,316	$	66,357
Work-in-progress		5,447		4,710		6,875		5,582
Finished goods		34,353		20,186		19,586		21,510
Total inventories, net	$	100,751	$	79,278	$	95,777	$	93,449

Inventory valued using the FIFO method was ~~$85,263~~$86,807 and ~~$64,745~~$82,910 at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Inventory valued using the average cost method was ~~$15,488~~$8,970 and ~~$14,533~~$10,539 at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(5) 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. The fair value of debt approximates the carrying value of debt.

Derivative Instruments and Hedging Activities

On ~~June 30, 2019,~~March 31, 2020, the Company had open foreign currency forward contracts which are used solely for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 Company hedged the ~~Mexican peso currency during the first six months of 2019 and, during 2018, the Company hedged the~~ euro and Mexican peso ~~currencies. In addition,~~currencies during 2020 and the ~~Company hedged the U.S. dollar against the Swedish krona and euro on behalf of its European subsidiaries~~Mexican peso in ~~2018.~~2019.

These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, ~~the effective portion of the unrealized gain or loss was deferred~~gains and ~~reported~~losses on derivatives qualifying as cash flow hedges are recorded in ~~the Company’s condensed consolidated balance sheets as a component of~~ accumulated other comprehensive ~~loss.~~income, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive income will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. 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.

In certain instances, the foreign currency forward contracts domay not qualify for hedge accounting or are not designated as hedges, and therefore are marked-to-market with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other income (loss), net. At March 31, 2020, all of the Company’s foreign currency forward contracts were designated as cash flow hedges.

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

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

~~At June 30, 2019 and~~During the quarter, The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, with a notional amount at March 31, 2020 of $2,100 which expire ratably on a monthly basis from April 2020 through December 2020. There were 0 such contracts at December 31, ~~2018, there were no~~2019.

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

The Company holds Mexican peso-denominated foreign currency forward contracts ~~entered into as the contract was settled in December 2018. The euro-denominated~~with a notional amount at March 31, 2020 of $22,746 which expire ratably on a monthly basis from April 2020 to March 2021. There were 0 open Mexican peso-denominated foreign currency forward ~~contract was not designated as a hedging instrument.~~ contracts at December 31, 2019.

The Company ~~recognized a gain~~evaluated the effectiveness of ~~$62~~the Mexican peso and ~~$42, respectively,~~euro-denominated forward contracts held as of March 31, 2020 and 2019, and for the three months then ended, and ~~six months ended June 30, 2018 in~~concluded that the ~~condensed consolidated statements of operations as a component of other income, net related to the euro-denominated contract.~~hedges were effective.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

~~U.S. dollar-denominated Foreign Currency Forward Contracts~~Interest Rate Risk

Interest Rate Risk – Cash Flow ~~Hedges~~Hedge

~~The~~On February 18, 2020, 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 which expired ratably on~~ a ~~monthly basis from February 2018 through December 2018. There were no such contracts at June 30, 2019 or December 31, 2018.~~

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 which expired ratably on a monthly basis from February 2018 through December 2018. There were no such contracts at June 30, 2019 or December 31, 2018.

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

~~The Company holds Mexican peso-denominated foreign currency forward contracts~~floating-to-fixed interest rate swap agreement (the “Swap”) with ~~notional amounts at June 30, 2019 of $2,953 which expire ratably on a monthly basis from July 2019 through December 2019, compared to~~ a notional amount of ~~$9,017 at December 31, 2018.~~

$50,000 to hedge its exposure to interest payment fluctuations on a portion of its 2019 Credit Facility. The ~~Company evaluated the effectiveness~~Swap was designated as a cash flow hedge of the ~~Mexican peso-denominated foreign currency forward contracts held as~~variable interest rate obligation under the Company's 2019 Credit Facility that has a current balance of $161,000 at March 31, 2020. The Swap agreement settles each month on the same day that the 2019 Credit Facility interest payments are due and has a maturity date of March 10, 2023 which is prior to the 2019 Credit Facility maturity date of June ~~30,~~4, 2024. Under the Swap terms, the Company pays a fixed interest rate and receives a floating interest rate based on the one-month LIBOR, with a floor. The critical terms of the Swap are aligned with the terms of the 2019 Credit Facility, resulting in no hedge ineffectiveness. The difference between amounts to be received and ~~December~~paid under the Swap is recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Swap increased interest expense by $4 for the three months ended March 31, ~~2018 and concluded that the hedges were highly effective.~~2020.

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,

March 31,

December 31,

March 31,

December 31,

March 31,

December 31,

2019

2018

2019

2018

2019

2018

2020

2019

2020

2019

2020

2019

Derivatives designated as hedging instruments:

Cash flow hedges:

Forward currency contracts

2,953

9,017

281

370

24,846

3,230

Interest rate swap contract

50,000

1,463

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

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

Gain reclassified from

Gain (loss) reclassified from

Gain recorded in other

other comprehensive income

Gain (loss) recorded in other

other comprehensive income

comprehensive income (loss)

(loss) into net income ^(A)

comprehensive income (loss) ^(A)

(loss) into net income ^(B)

2019

2018

2019

2018

2020

2019

2020

2019

Derivatives designated as cash flow hedges:

Forward currency contracts

157

299

224

(3,320)

269

(156)

216

Interest rate swap

(1,467)

(4)

(A)

For the three months ended March 31, 2020, the total net losses on the foreign currency contract cash flow hedges of $3,164 are expected to be included in cost of goods sold (“COGS”) and design and development (“D&D”) within the next 12 months. Of the total net losses on the interest rate swap cash flow hedges, approximately $545 of losses are expected to be included in interest expense within the next 12 months and $918 of losses are expected to be included in interest expense in subsequent periods.

(B)

Gains (losses) reclassified from other comprehensive income (loss) into net income recognized in COGS in the Company’s condensed consolidated statements of operations were $(127) and $173 for the three months ended March 31, 2020 and 2019, respectively. Gains (losses) 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 $(29) and $43 for the three months ended March 31, 2020 and 2019, respectively. Losses reclassified from other comprehensive income (loss) into net income recognized in interest expense in the Company’s condensed consolidated statements of operations was $4 for the three months ended March 31, 2020.

~~Gross amounts recorded for~~Cash flows from derivatives used to manage foreign exchange and interest rate risks are classified as operating activities within the condensed consolidated statements of cash ~~flow hedges in other comprehensive income (loss) and in net income for the six months ended June 30 are as follows:~~flows.

Gains reclassified from

Gain recorded in other

other comprehensive income

comprehensive income (loss)

(loss) into net income ^(A)


2019

2018

2019

2018
Derivatives designated as cash flow hedges:

Forward currency contracts

$
426

$
1,182

$
515

$
375

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

~~(A)~~

~~Gains reclassified from other comprehensive income (loss) into net income were recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations.~~

The net deferred gain of $281 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2019.

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. For the interest rate swap, inputs include LIBOR. 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.



								June 30,		December 31,								March 31,		December 31,
			2019						2018				2020						2019
			Fair values estimated using										Fair values estimated using
			Level 1		Level 2		Level 3						Level 1		Level 2		Level 3
	Fair value		inputs		inputs		inputs		Fair value		Fair value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contracts	$	281	$	-	$	281	$	-	$	370
Forward currency contract											$	66	$	-	$	66	$	-	$	-
Total financial assets carried at fair value	$	281	$	-	$	281	$	-	$	370	$	66	$	-	$	66	$	-	$	-

Financial liabilities carried at fair value:
Forward currency contracts											$	3,230	$	-	$	3,230	$	-	$	-
Interest rate swap												1,463		-		1,463		-		-
Earn-out consideration	$	11,057	$	-	$	-	$	11,057	$	18,672		8,610		-		-		8,610		12,011
Total financial liabilities carried at fair value	$	11,057	$	-	$	-	$	11,057	$	18,672	$	13,303	$	-	$	4,693	$	8,610	$	12,011

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		Stoneridge Brazil		Total
Balance at December 31, 2018	$	8,602	$	10,070	$	18,672
Balance at December 31, 2019							$	12,011	$	12,011
Change in fair value		-		921		921		(633)		(633)
Foreign currency adjustments		(128)		66		(62)		(2,768)		(2,768)
Earn-out consideration cash payment		(8,474)		-		(8,474)
Balance at June 30, 2019	$	-	$	11,057	$	11,057
Balance at March 31, 2020							$	8,610	$	8,610


	Orlaco		Stoneridge Brazil		Total
Balance at December 31, 2018	$	8,602	$	10,070	$	18,672
Change in fair value		-		469		469
Foreign currency adjustments		(128)		(133)		(261)
Earn-out consideration cash payment		(8,474)		-		(8,474)
Balance at March 31, 2019	$	-	$	10,406	$	10,406

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Orlaco

PST

Total
Balance at December 31, 2017

$
8,637

$
12,109

$
20,746
Change in fair value

369

1,048

1,417
Foreign currency adjustments

(244)

(1,873)

(2,117)
Balance at June 30, 2018

$
8,762

$
11,284

$
20,046

The Company will be required to pay the ~~PST~~Stoneridge Brazil earn-out consideration, which is not capped, based on ~~PST’s~~Stoneridge Brazil’s financial performance in either 2020 or 2021. The fair value of the ~~PST~~Stoneridge Brazil earn-out consideration is based on discounted cash flows utilizing forecasted ~~EBITDA~~earnings before interest, depreciation and amortization (“EBITDA”) in 2020 and 2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The former Stoneridge Brazil owners may choose either the 2020 or 2021 financial performance period to be used to determine the earn-out consideration payment. The former Stoneridge Brazil owners must choose the 2020 financial performance period by March 31, 2021 otherwise the 2021 financial performance period will automatically be used. The earn-out consideration obligation related to ~~PST~~Stoneridge Brazil is recorded within other long-term liabilities in the ~~condensed~~ consolidated balance sheets as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~ 2019.

The change in fair value of the earn-out consideration for Stoneridge Brazil was primarily due to favorable foreign currency translation and updated forecast projections offset by the reduced time from the current period end to the payment date. The foreign currency impact for the Stoneridge Brazil earn-out considerations is included in other (income) expense, net in the condensed consolidated statements of operations.

The fair value of the Orlaco earn-out consideration was based on a Monte Carlo simulation utilizing forecasted ~~earnings before interest, taxes, depreciation and amortization (“EBITDA”)~~EBITDA for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return. The ~~earn-out consideration obligation related to Orlaco was recorded within other current liabilities in the consolidated balance sheet as of December 31, 2018. The~~ change in fair value of the earn-out considerations ~~are~~was recorded within selling, general and administrative (“SG&A”) expense in the ~~condensed~~ consolidated statements of operations for the ~~three and six months~~years ended ~~June 30,~~December 31, 2019 and 2018.

The earn-out consideration obligation related to Orlaco of $8,474 was paid in March 2019 and recorded in the condensed consolidated statement of cash flows within operating and financing activities in the amounts of $5,080 and $3,394, respectively, for the six months ended June 30, 2019.

The Orlaco earn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018 due to actual performance exceeding forecasted performance and remained at the capped amount until it was paid out in March ~~2019.~~2019 for $8,474. The ~~net increase in fair value of the~~ earn-out consideration ~~for PST~~payout was due to the reduced time from the current period end to the payment date, partially offset by foreign currency translation. The foreign currency impact for the PST earn-out considerations is included in other (income) expense, netrecorded in the condensed consolidated ~~statements~~statement of ~~operations.~~cash flows within operating and financing activities in the amounts of $5,080 and $3,394, respectively, for the three months ended March 31, 2019.

There were no0 transfers in or out of Level 3 from other levels in the fair value hierarchy for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

(6) 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 ~~$2,046~~$1,372 and ~~$1,434~~$1,548 for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~For~~The expenses related to share-based compensation awards for the ~~six~~three months ended ~~June 30, 2019 total share-based compensation~~March 31, 2020 was ~~$3,594 compared to $2,838 for~~lower than the ~~six~~three months ended ~~June 30, 2018. The three~~March 31, 2019 due to lower attainment of performance-based awards.

(7) Debt

Debt consisted of the following at March 31, 2020 and six months ended June 30, 2019 included accelerated expense associated with the retirement of eligible employees of $503, respectively. The three and six months ended June 30, 2018 also included income for forfeiture of certain grants associated with employee resignations.December 31, 2019:


	March 31,		December 31,		Interest rates at
	2020		2019		March 31, 2020	Maturity
Revolving Credit Facility
Credit Facility	$	161,000	$	126,000	1.67 - 2.04%	June 2024

Debt
Stoneridge Brazil long-term notes		653		972	7.00%	November 2021
Suzhou short-term credit line		2,118		2,154	4.70% - 5.00%	August 2020
Total debt		2,771		3,126
Less: current portion		(2,516)		(2,672)
Total long-term debt, net	$	255	$	454

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

~~(7) Debt~~

~~Debt consisted of the following at June 30, 2019 and December 31, 2018:~~

June 30,

December 31,

Interest rates at


2019

2018

June 30, 2019

Maturity
Revolving Credit Facility

Credit Facility

$
103,500

$
96,000

3.28% - 3.45%

June 2024

Debt

PST short-term obligations

322

989

6.00%

December 2019
PST long-term notes

1,279

1,527

7.00%

November 2021
Total debt

1,601

2,516

Less: current portion

(869)

(1,533)

Total long-term debt, net

$
732

$
983

Revolving Credit Facility

On September 12, 2014, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Agreement”). The Amended Agreement provided for a $300,000 revolving credit facility, which replaced the Company’s $100,000 asset-based credit facility and included a letter of credit subfacility, swing line subfacility and multicurrency subfacility.

On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the “2019 Credit Facility”). The 2019 Credit Facility provides for a ~~$400,000~~$400,000 senior secured revolving credit facility and it replaced and superseded the Amended Agreement. The 2019 Credit Facility has an accordion feature which allows the Company to increase the availability by up to ~~$150,000~~$150,000 upon the satisfaction of certain conditions and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The 2019 Credit Facility has a termination date of June 5, 2024. In ~~the second quarter of~~ 2019, the Company capitalized ~~$1,183~~$1,366 of deferred financing costs and wrote off previously recorded deferred financing costs of $275 as a result of entering into the 2019 Credit Facility. ~~In connection with the 2019 Credit Facility, the Company wrote off a portion of the previously recorded deferred financing costs of~~ ~~$275 in interest expense, net during the three months ended June 30, 2019.~~ Borrowings under the 2019 Credit Facility bear interest at either the Base Rate or the LIBOR rate, at the Company’s option, plus the applicable margin as set forth in the 2019 Credit Facility. The 2019 Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio of 3.50 to 1.00 and more than a minimum interest coverage ~~ratio.~~ratio of 3.50 to 1.00.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The 2019 Credit Facility contains customary affirmative covenants and representations. The 2019 Credit Facility also contains customary negative covenants, which, among other things, are subject to certain exceptions, including restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The 2019 Credit Facility contains customary events of default, subject to customary thresholds and exceptions, including, among other things, (i) non-payment of principal and non-payment of interest and fees, (ii) a material inaccuracy of a representation or warranty at the time made, (iii) a failure to comply with any covenant, subject to customary grace periods in the case of certain affirmative covenants, (iv) cross default of other debt, final judgments and other adverse orders in excess of $30,000, (v) any loan document shall cease to be a legal, valid and binding agreement, (vi) certain uninsured losses or proceedings against assets with a value in excess of $30,000, (vii) ERISA events, (viii) a change of control, or (ix) bankruptcy or insolvency proceedings.

Borrowings outstanding on the 2019 Credit Facility and the Amended Agreement as applicable, were ~~$103,500~~$161,000 and ~~$96,000~~$126,000 at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The Company was in compliance with all credit facility covenants at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

The Company also has outstanding letters of credit of ~~$1,815~~$1,768 at ~~both June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019, respectively.

Debt

~~PST~~Stoneridge Brazil maintains ~~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~~Stoneridge Brazil at ~~June 30, 2019~~March 31, 2020 was ~~6.0% and~~ 7.0%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments on ~~PST~~Stoneridge Brazil debt at ~~June 30, 2019~~March 31, 2020 are as follows: ~~$869~~$398 from ~~July 2019 through June 2020, $258 from July~~April 2020 through March 2021 and $255 from April 2021 through December 2021.

In December 2019, the Company’s wholly-owned subsidiary located in Brazil, established an overdraft credit line which allows overdrafts on Stoneridge Brazil’s bank account up to a maximum level of 5,000 Brazilian real (“R$”), or $962 and $1,244, at March 31, 2020 and ~~$474~~ December 31, 2019, respectively. There was 0 balance outstanding on the overdraft credit line as of March 31, 2020 and December 31, 2019.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in ~~2021.~~ thousands, except per share data, unless otherwise stated)

(Unaudited)

The Company’s wholly-owned subsidiary located in ~~Stockholm,~~ Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a maximum level of 20,000 Swedish krona, or ~~$2,155~~$2,025 and ~~$2,259,~~$2,136, at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there was no0 balance outstanding on this overdraft credit ~~line.~~line however, during the three months ended March 31, 2020, the subsidiary borrowed and repaid 19,155 Swedish krona, or $1,949.

The Company’s wholly-owned subsidiary located in Suzhou, China (the “Suzhou subsidiary”), has two credit lines (the “Suzhou credit line”) which allow up to a maximum borrowing level of ~~60,000~~40,000 Chinese yuan, or ~~$8,740~~$5,649 and $5,746 at ~~June 30, 2019. At June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. At March 31, 2020 and December 31, 2019 there was ~~no balance~~$2,118 and $2,154, respectively, in borrowings outstanding on ~~these~~the Suzhou credit ~~lines.~~line with a weighted-average interest rate of 4.80%. The Suzhou credit line is included on the condensed consolidated balance sheet within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which facilitates the extension of trade payable payment terms that have currently been extended by 180 days. This bank acceptance draft line of credit allows up to a maximum borrowing level of 15,000 Chinese yuan, or $2,118 and $2,154, at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019 there was approximately $150 utilized on the Suzhou bank acceptance draft line of credit.

The Company was in compliance with all debt covenants at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

~~(8) Leases~~

The Company has various cancelable and noncancelable leased assets within our three operating segments, including Control Devices, Electronics and PST, which include certain properties, vehicles and equipment of which are all classified as operating leases. Payments for these leases are generally fixed; however, several of our leases are composed of variable lease payments including index-based payments or inflation-based payments based on a Consumer Price Index (“CPI”) or other escalators. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Under Leases (Topic 842), the Company determines an arrangement is a lease when we have the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Other than the leases that we have already identified, we are not aware of any material leases that have not yet commenced. For leases that have a calculated lease term of 12 months or less and do not include an option to purchase the underlying asset which we are reasonably certain to exercise, the Company has made the policy election to not apply the recognition requirements in Leases (Topic 842). For these short-term leases, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

For the leases identified, ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company used the calculated incremental borrowing rate based on the information available at the implementation date, and going forward at the commencement date, in determining the present value of lease payments. The Company will use the implicit rate when readily determinable. The ROU asset includes the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The Company’s lease terms may include options to extend or terminate the lease and such options are included in the lease term when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease expenses are recognized within COGS, SG&A and design and development (“D&D”) costs in the condensed consolidated statements of operations. The Company has made the policy election to account for lease and non-lease components as a single lease component for all of its leases.

As a result of the Company’s election to apply the modified retrospective transition method at the effective date of the standard, information prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period (ASC Topic 840).

~~The components of lease expense are as follows:~~

Three months ended

June 30, 2019
Operating lease cost

$
1,433
Short-term lease cost

142
Variable lease cost

84
Total lease cost

$
1,659

~~Balance Sheet information related to leases is as follows:~~

As of June 30, 2019
Assets:

Operating lease right-of-use assets
$
18,970

Liabilities:

Operating lease current liability, included in other current liabilities

4,576
Operating lease long-term liability

14,565
Total leased liabilities
$
19,141

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Maturities of operating lease liabilities are as follows:~~

As of June 30, 2019
Year ending December 31,

2019 ⁽¹⁾
$
2,662
2020

4,767
2021

4,133
2022

3,178
2023

3,148
Thereafter

4,422
Total future minimum lease payments
$
22,310
Less: imputed interest

(3,169)
Total lease liabilities
$
19,141

~~(1) For the remaining six months~~

~~Weighted-average remaining lease term and discount rate is as follows:~~


	~~As of June 30, 2019~~
~~Weighted-average remaining lease term (in years)~~
~~Operating leases~~	~~5.16~~
~~Weighted-average discount rate~~
~~Operating leases~~	~~5.78~~	%

~~Other information:~~

Six months ended

June 30, 2019
Operating cash flows:

Cash paid related to operating lease obligations

$
2,212
Non-cash activity:

Right-of-use assets obtained in exchange for operating lease obligations

$
243

~~(9)~~(8) 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.

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

Three months ended

Six months ended

June 30,

2019

2018

2019

2018

Three months ended March 31,

2020

2019

Basic weighted-average Common Shares outstanding

27,887,157

28,449,303

28,208,229

28,349,362

27,232,036

28,529,301

Effect of dilutive shares

406,390

528,444

507,496

557,995

359,135

555,507

Diluted weighted-average Common Shares outstanding

28,293,547

28,977,747

28,715,725

28,907,357

27,591,171

29,084,808

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

There were ~~662,509~~789,027 and ~~614,670~~691,207 performance-based right to receive Common Shares outstanding at ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ 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)~~(9) Equity and Accumulated Other Comprehensive Loss

Common Share Repurchase

On October 26, 2018, the Company’s Board of Directors authorized the Company to repurchase up to $50,000 of Common Shares. Thereafter, on May 7, 2019, the Company entered into a Master Confirmation (the “Master Confirmation”) and a Supplemental Confirmation, together with the Master Confirmation, the Accelerated Share Repurchase Agreement (“ASR Agreement”), with Citibank N.A. (the “Bank”) to purchase Company Common Shares for a payment of $50,000 (the “Prepayment Amount”). Under the terms of the ASR Agreement, on May 7, 2019, the Company paid the Prepayment Amount to the Bank and received on May 8, 2019 an initial delivery of 1,349,528 Company Common Shares, which ~~is approximately~~approximated 80% of the total number of Company Common Shares expected to be repurchased under the ASR Agreement based on the closing price of the Company’s Common Shares on May 7, 2019. These Common Shares became treasury shares and were recorded as a $40,000 reduction to shareholder’s equity. The remaining $10,000 of the Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares. ~~The Company excluded the potential share impact of the remaining shares from the computation of diluted earnings per share as these Common Shares are anti-dilutive.~~

At final settlement, the Bank may be required to deliver additional Common Shares to the Company, or, under certain circumstances, the Company may be required to deliver Common Shares or may elect to make a cash payment to the Bank, based generally on the average of the daily volume-weighted average prices of the Company’s Common Shares during a term set forth in the ASR Agreement. The ASR Agreement contains provisions customary for agreements of this type, including provisions for adjustments to the transaction terms, the circumstances generally under which the ASR Agreement may be accelerated, extended or terminated early by the Bank and various acknowledgments, representations and warranties made by the parties to one another. The ASR Agreement expires on May 8, 2020.

~~Accumulated Other Comprehensive Loss~~

~~Changes in accumulated other comprehensive loss for the three months ended June 30, 2019 and 2018 were as follows:~~

Foreign

Unrealized

currency

gain (loss)

translation

on derivatives

Total
Balance at April 1, 2019

$
(89,848)

$
334

$
(89,514)
Other comprehensive income before reclassifications

2,311

123

2,434
Amounts reclassified from accumulated other comprehensive loss

-

(235)

(235)
Net other comprehensive (loss) income, net of tax

2,311

(112)

2,199
Balance at June 30, 2019

$
(87,537)

$
222

$
(87,315)

Balance at April 1, 2018

$
(65,523)

$
652

$
(64,871)
Other comprehensive (loss) income before reclassifications

(17,421)

19

(17,402)
Amounts reclassified from accumulated other comprehensive loss

-

(178)

(178)
Net other comprehensive (loss) income, net of tax

(17,421)

(159)

(17,580)
Balance at June 30, 2018

$
(82,944)

$
493

$
(82,451)

2118

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

On February 25, 2020, the Bank notified the Company that it terminated early its commitment pursuant the ASR Agreement and would deliver 364,604 Common Shares on February 27, 2020 based on the volume weighted average price of our Common Shares during the term set forth in the ASR Agreement. The Bank’s notice of early termination and the subsequent delivery of Common Shares represents the final settlement of the Company’s share repurchase program pursuant to the accelerated share repurchase agreement. These Common Shares became treasury shares and were recorded as a $10,000 reduction to shareholders’ equity as Common Shares held in treasury with the offset of $10,000 to additional paid-in capital.

On February 24, 2020, the Company’s Board of Directors authorized a new repurchase program of $50,000 for the repurchase of the Company’s outstanding Common Shares over the next 18 months. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under Rule 10b-18 plans, which permit Common Shares to be repurchased through pre-determined criteria.

On March 3, 2020, the Company entered into a 10b-18 Agreement Letter (the “10b-18 Agreement”), with Citibank N.A. (the “Bank”) to purchase Company Common Shares, under purchasing conditions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”), for up to $5,000. Under the terms of the 10b18 Agreement, commencing March 3, 2020 and ending March 6, 2020, the Company received delivery of a total of 242,634 Company Common Shares for the amount of $4,995. These Common Shares became treasury shares and were recorded as a $4,995 reduction to shareholders’ equity as Common Shares held in treasury.

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	Foreign		Unrealized						Foreign		Unrealized
	currency		gain (loss)						currency		gain (loss)
							��		translation		on derivatives	Total
Balance at January 1, 2020								$	(91,472)	$	-	$	(91,472)
Other comprehensive loss before reclassifications									(17,119)		(3,781)		(20,900)
Amounts reclassified from accumulated other comprehensive loss									-		126		126
Net other comprehensive loss, net of tax									(17,119)		(3,655)		(20,774)
Balance at March 31, 2020								$	(108,591)	$	(3,655)	$	(112,246)
	translation		on derivatives		Total
Balance at January 1, 2019	$	(86,044)	$	292	$	(85,752)		$	(86,044)	$	292	$	(85,752)
Other comprehensive (loss) income before reclassifications		(1,493)		336		(1,157)			(3,804)		213		(3,591)
Amounts reclassified from accumulated other comprehensive loss		-		(406)		(406)			-		(171)		(171)
Net other comprehensive (loss) income, net of tax		(1,493)		(70)		(1,563)			(3,804)		42		(3,762)
Balance at June 30, 2019		(87,537)	$	222	$	(87,315)

Balance at January 1, 2018	$	(69,417)	$	(143)	$	(69,560)
Other comprehensive (loss) income before reclassifications		(13,527)		933		(12,594)
Amounts reclassified from accumulated other comprehensive loss		-		(297)		(297)
Net other comprehensive (loss) income, net of tax		(13,527)		636		(12,891)
Balance at June 30, 2018	$	(82,944)	$	493	$	(82,451)
Balance at March 31, 2019								$	(89,848)	$	334	$	(89,514)

~~(11)~~

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(10) Commitments and Contingencies

From time to time we are subject to various legal actions and claims incidental to our business, including those arising out of breach of contracts, product warranties, product liability, patent infringement, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its consolidated results of operations or financial position.

As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at the site 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~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ environmental remediation costs incurred were immaterial. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company accrued a remaining undiscounted liability of ~~$85~~$235 and ~~$111,~~$82, respectively, related to future remediation costs which were recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets. 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.~~and monitoring. 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.

The Company’s ~~PST~~Stoneridge Brazil subsidiary has civil, labor and other non-income 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$~~19,100~~29,300 ($~~5,000)~~5,600) and R$~~29,700~~29,200 ($~~7,600)~~7,300) at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. An unfavorable outcome on these contingencies could result in significant cost to the Company and adversely affect its results of operations.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~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 pursued 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 months and six months ended June 30, 2019 and 2018, respectively. There were no loss recoveries and insurance gain contingencies recognized in the three and six months ended June 30, 2019 and 2018 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 for the six months ended June 30, 2018 and are included in cash flows from operating activities. Cash proceeds related to the damage of property, plant and equipment of $1,403 for the six months ended June 30, 2018, were included in cash flows from investing activities. There were no cash proceeds received during the six months ended June 30, 2019.

Product Warranty and Recall

Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other ~~considerations including insurance coverage.~~considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to hold the Company responsible for their product warranties. 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.~~accrued. 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 ~~$3,132~~$3,059 and ~~$3,283~~$3,111 of a long-term liability at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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,

2019

2018
Product warranty and recall at beginning of period

$
10,494

$
9,979
Accruals for warranties established during period

3,506

2,791
Aggregate changes in pre-existing liabilities due to claim developments

1,687

1,569
Settlements made during the period

(4,442)

(2,876)
Foreign currency translation

(189)

(525)
Product warranty and recall at end of period

$
11,056

$
10,938


Three months ended March 31,	2020		2019
Product warranty and recall at beginning of period	$	10,796	$	10,494
Accruals for warranties established during period		1,128		1,545
Aggregate changes in pre-existing liabilities due to claim developments		387		1,238
Settlements made during the period		(2,134)		(2,715)
Foreign currency translation		(385)		(215)
Product warranty and recall at end of period	$	9,792	$	10,347

2320

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Brazilian Indirect Tax

~~(12) Business Realignment and Restructuring~~

~~On January 10, 2019, the Company committed to a restructuring plan that will result in the closure of the Canton, Massachusetts facility (“Canton Facility”) which is expected by March~~December 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). Company management informed employees at the Canton Facility of this restructuring decision on January 11, 2019. This restructuring action will result in the closure of the Canton facility and the termination of the employment of Canton Facility employees. The estimated costs for the Canton Restructuring include employee severance and termination costs, contract terminations costs, professional fees, the non-cash write-off of impaired fixed assets and other related costs.

The Company recognized expense of $3,443 and $5,668, respectively, for the three and six months ended June 30, 2019 as a result of these actions for employee termination benefits and other restructuring related costs. For the three months ended June 30, 2019 severance and other restructuring related costs of $2,354, $280 and $809 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. For the six months ended June 30, 2019 severance and other related restructuring costs of $3,606, $475 and $1,587 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. The estimated additional cost of the Canton Facility restructuring plan, that will impact the Control Devices segment, is between $2,700 and $3,900 and will be incurred through 2020.

~~The expenses for the 2019 Canton Restructuring that relate to the Control Devices reportable segment include the following:~~

Accrual as of

2019 Charge

Utilization

Accrual as of

January 1, 2019

to Expense

Cash

Non-Cash

June 30, 2019
Employee termination benefits

$
-

$
4,603

$
(459)

$
-

$
4,144
Other related costs

-

1,065

(1,065)

-

-
Total

$
-

$
5,668

$
(1,524)

$
-

$
4,144

In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. The Company recognized expense of $96 and $312, respectively, for the three and six months ended June 30, 2019 as a result of these actions for severance, contract termination costs, accelerated depreciation of fixed assets and other related costs. Electronics segment restructuring costs were recognized in SG&A in the condensed consolidated statement of operations for the three and six months ended June 30, 2019. The Company ~~expects~~received administrative approval in January 2020 and is now able to ~~incur approximately $760 of additional restructuring costs related to~~offset eligible federal tax with these ~~actions through 2020.~~tax credits.

The Brazilian tax authorities have sought clarification before the Supreme Court of Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these credits. The timing for a decision is uncertain due to the COVID-19 pandemic. If the Brazilian tax authorities challenge our rights to these credits, we may become subject to new litigation that could impact the amount ultimately realized by Stoneridge Brazil.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(11) Business Realignment and Restructuring

On January 10, 2019, the Company committed to a restructuring plan that resulted in the closure of the Canton, Massachusetts facility (“Canton Facility”) on March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). Company management informed employees at the Canton Facility of this restructuring decision on January 11, 2019. The estimated costs for the Canton Restructuring include employee severance and termination costs, contract terminations costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton facility.

The Company recognized expense of $2,222 and $2,225, respectively, for the three months ended March 31, 2020 and 2019 as a result of these actions for employee termination benefits and other restructuring related costs. For the three months ended March 31, 2020 severance and other restructuring related costs of $1,490, $314 and $418 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. For the three months ended March 31, 2019 severance and other related restructuring costs of $1,252, $195 and $778 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. The estimated additional cost of this restructuring plan, that will impact the Control Devices segment, is approximately $700 and is related to additional costs to restore the engineering function previously located at the Canton Facility. These costs will be incurred throughout 2020.

The expenses for the ~~2019 restructuring activities~~Canton Restructuring that relate to the ~~Electronics~~Control Devices reportable segment include the following:

Accrual as of

2020 Charge

Utilization

Accrual as of

January 1, 2020

to Expense

Cash

Non-Cash

March 31, 2020

Employee termination benefits

2,636

1,118

(3,437)

317

Other related costs

1,104

(1,104)

Total

2,636

2,222

(4,541)

317

Accrual as of

2019 Charge

Utilization

Accrual as of

January 1, 2019

to Expense

Cash

Non-Cash

June 30, 2019
Employee termination benefits

$
520

$
(30)

$
(441)

$
3

$
52
Accelerated depreciation

-

195

-

(195)

-
Contract termination costs

17

27

(44)

-

-
Other related costs

119

120

(239)

-

-
Total

$
656

$
312

$
(724)

$
(192)

$
52

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

~~Business realignment charges by reportable segment were as follows:~~

Three months ended

Six months ended

June 30,

June 30,


2019

2018

2019

2018
Control Devices ^(A)

$
27

$
128

$
549

$
128
Electronics ^(B)

-

295

-

295
PST ^(C)

-

97

-

319
Unallocated Corporate ^(D)

-

-

613

-
Total business realignment charges

$
27

$
520

$
1,162

$
742

~~(A)~~

Severance costs for the three months ended June 30, 2019 related to COGS were $27. Severance costs for the six months ended June 30, 2019 related to SG&A, D&D and COGS were $512, $10 and $27, respectively. Severance costs for the three and six months ended June 30, 2018 related to D&D were $128.

~~(B)~~

~~Severance costs for the three and six months ended June 30, 2018 related to SG&A were $295.~~

~~(C)~~

Severance costs for the three and six months ended June 30, 2018 related to SG&A were $71 and $293, respectively. Severance costs for the three and six months ended June 30, 2018 related to COGS were $26.

~~(D)~~

~~Severance costs for the six months ended June 30, 2019 related to SG&A were $613.~~

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

Three months ended

Six months ended

June 30,

June 30,


2019

2018

2019


2018
Cost of goods sold

$
27

$
26

$
27

$
26
Selling, general and administrative

-

366

1,125

588
Design and development

-

128

10

128
Total business realignment charges

$
27

$
520

$
1,162

$
742


	Accrual as of		2019 Charge			Utilization			Accrual as of
	January 1, 2019		to Expense		Cash		Non-Cash		March 31, 2019
Employee termination benefits	$	-	$	1,980	$	-	$	-	$	1,980
Other related costs		-		245		(245)		-		-
Total	$	-	$	2,225	$	(245)	$	-	$	1,980

2521

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~(Unaudited)~~

~~(13) Income Taxes~~

~~The Company recognized income tax expense of $9,066 and $3,820 for U.S. federal, state and foreign income taxes for the three months ended June 30, 2019 and 2018, respectively. The increase~~ (in income tax expense for the three months ended June 30, 2019 compared to the same period for 2018 was primarily related to the sale of Non-core Products on April 1, 2019. The effective tax rate decreased to 18.6% in the second quarter of 2019 from 20.2% in the second quarter of 2018 primarily due to the impact of certain tax incentives, which did not impact the second quarter of 2018.

~~The Company recognized income tax expense of $10,901 and $7,053~~ for U.S. federal, state and foreign income taxes for the six months ended June 30, 2019 and 2018, respectively. The increase in income tax expense for the six months ended June 30, 2019 compared to the same period for 2018 was primarily related to the sale of Non-core Products on April 1, 2019. The effective tax rate decreased to ~~18.1% in the first half of 2019 from 19.8% in the first half of 2018 due to the impact of certain tax incentives, which did not impact the first half of 2018.~~

The Company has concluded that it is reasonably possible that its future provision for income taxes may be significantly impacted by changes to valuation allowance in certain countries within the following twelve months.

~~(14) Segment Reporting~~

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

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

~~The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s 2018~~ ~~Form 10K~~. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures 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 corporate accounting/finance, executive administration, human resources, information technology and legal.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~thousands, except per share data, unless otherwise stated)

(Unaudited)

~~A summary~~In the fourth quarter of ~~financial information~~2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. The Company recognized expense of $7 and $216, respectively, for the three months ended March 31, 2020 and 2019 as a result of these actions for severance, contract termination costs, accelerated depreciation of fixed assets and other related costs. Electronics segment restructuring costs were recognized in SG&A in the condensed consolidated statement of operations for the three months ended March 31, 2020 and 2019. The Company expects to incur approximately $750 of additional restructuring costs related to these actions through 2020.

The expenses for the restructuring activities that relate to the Electronics reportable segment include the following:


	Accrual as of		2020 Charge to			Utilization			Accrual as of
	January 1, 2020		Expense		Cash		Non-Cash		March 31, 2020
Employee termination benefits	$	52	$	-	$	-	$	-	$	52
Other related costs		-		7		(7)		-		-
Total	$	52	$	7	$	(7)	$	-	$	52


	Accrual as of		2019 Charge to			Utilization			Accrual as of
	January 1, 2019		Expense (Income)		Cash		Non-Cash		March 31, 2019
Employee termination benefits	$	520	$	(15)	$	(456)	$	-	$	49
Accelerated depreciation		-		98		-		(98)		-
Contract termination costs		17		16		(33)		-		-
Other related costs		119		117		(236)		-		-
Total	$	656	$	216	$	(725)	$	(98)	$	49

Business realignment charges by reportable segment iswere as follows:

Three months ended

Six months ended

June 30,

June 30,


2019

2018

2019

2018

Net Sales:

Control Devices

$
114,067

$
109,956

$
224,186

$
225,313

Inter-segment sales

2,078

2,481

3,939

4,662

Control Devices net sales

116,145

112,437

228,125

229,975

Electronics ^(D)

91,560

90,313

182,406

180,341

Inter-segment sales

10,325

9,771

19,047

20,243

Electronics net sales

101,885

100,084

201,453

200,584

PST

16,614

20,333

33,946

40,878

Inter-segment sales

-

-

6

2

PST net sales

16,614

20,333

33,952

40,880

Eliminations

(12,403)

(12,252)

(22,992)

(24,907)

Total net sales

$
222,241

$
220,602

$
440,538

$
446,532

Operating Income (Loss):

Control Devices

$
44,367

$
17,160

$
56,315

$
35,039

Electronics

7,555

8,276

16,586

16,156

PST

6,414

735

7,084

885

Unallocated Corporate ^(A)

(9,150)

(6,990)

(19,100)

(16,052)

Total operating income

$
49,186

$
19,181

$
60,885

$
36,028

Depreciation and Amortization:

Control Devices

$
3,197

$
2,897

$
6,291

$
5,692

Electronics

2,510

2,252

4,907

4,543

PST

1,695

1,740

3,220

4,245

Unallocated Corporate

216

199

429

396

Total depreciation and amortization^(B)

$
7,618

$
7,088

$
14,847

$
14,876

Interest (Income) Expense, net:

Control Devices

$
195

$
18

$
377

$
37

Electronics

63

23

119

57

PST

(59)

194

49

532

Unallocated Corporate

802

935

1,459

1,898

Total interest expense, net

$
1,001

$
1,170

$
2,004

$
2,524

Capital Expenditures:

Control Devices

$
4,042

$
3,312

$
7,534

$
9,058

Electronics

3,356

1,394

7,094

4,167

PST

805

696

1,624

1,955

Unallocated Corporate^(C)

592

938

1,227

1,665

Total capital expenditures

$
8,795

$
6,340

$
17,479

$
16,845


Three months ended March 31,	2020		2019
Control Devices ^(A)	$	377	$	522
Stoneridge Brazil ^(B)		153		-
Unallocated Corporate ^(C)		74		613
Total business realignment charges	$	604	$	1,135

(A)	Severance costs for the three months ended March 31, 2020 related to SG&A were $377. Severance costs for the three months ended March 31, 2019 related to SG&A and D&D were $512 and $10, respectively.

(B)	Severance costs for the three months ended March 31, 2020 related to COGS and SG&A were $86 and $67, respectively.

(C)	Severance costs for the three months ended March 31, 2020 and 2019 related to SG&A were $74 and $613, respectively.

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


Three months ended March 31,	2020		2019
Cost of goods sold	$	86	$	-
Selling, general and administrative		518		1,125
Design and development		-		10
Total business realignment charges	$	604	$	1,135

2722

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(12) Income Taxes

In the three months ended March 31, 2020, income tax expense of $1,213 was attributable to the mix of earnings among tax jurisdictions as well as valuation allowances in certain jurisdictions. The effective tax rate of 25.8% is greater than the statutory rate primarily due to losses incurred in jurisdictions for which a valuation allowance is recorded.

In the three months ended March 31, 2019, income tax expense of $1,835 was attributable to the mix of earnings among tax jurisdictions as well as the favorable benefit related to the annual vesting of share-based compensation. The effective tax rate of 16.0% is lower than the statutory rate primarily due to the annual vesting of share-based compensation.

(13) Segment Reporting

The Company has 3 reportable segments, Control Devices, Electronics and Stoneridge Brazil, which also represent its operating segments. The Control Devices reportable segment produces actuators, sensors, switches and connectors. The Electronics reportable segment produces driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. The Stoneridge Brazil reportable segment designs and manufactures electronic vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.

The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s 2019 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures 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 3 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 corporate accounting/finance, executive administration, human resources, information technology and legal.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

June 30,

December 31,

2019

2018

Total Assets:

Control Devices

$
189,725

$
175,708

Electronics

277,961

265,838

PST

90,707

81,002

Corporate ^(C)

360,870

359,837

Eliminations

(323,216)

(322,866)

Total assets

$
596,047

$
559,519

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



Three months ended March 31,	2020		2019
Net Sales:
Control Devices	$	96,850	$	110,119
Inter-segment sales		1,347		1,861
Control Devices net sales		98,197		111,980
Electronics		71,546		90,846
Inter-segment sales		8,268		8,722
Electronics net sales		79,814		99,568
Stoneridge Brazil		14,570		17,332
Inter-segment sales		-		6
Stoneridge Brazil net sales		14,570		17,338
Eliminations		(9,615)		(10,589)
Total net sales	$	182,966	$	218,297
Operating Income (Loss):
Control Devices	$	7,322	$	11,948
Electronics		2,872		9,031
Stoneridge Brazil		859		670
Unallocated Corporate ^(A)		(7,394)		(9,950)
Total operating income	$	3,659	$	11,699
Depreciation and Amortization:
Control Devices	$	3,530	$	3,094
Electronics		2,481		2,397
Stoneridge Brazil		1,450		1,525
Unallocated Corporate		526		213
Total depreciation and amortization^(B)	$	7,987	$	7,229
Interest Expense, net:
Control Devices	$	81	$	182
Electronics		87		56
Stoneridge Brazil		10		108
Unallocated Corporate		852		657
Total interest expense, net	$	1,030	$	1,003
Capital Expenditures:
Control Devices	$	2,314	$	3,492
Electronics		2,650		3,738
Stoneridge Brazil		1,133		819
Unallocated Corporate^(C)		572		635
Total capital expenditures	$	6,669	$	8,684


	March 31,		December 31,
	2020		2019
Total Assets:
Control Devices	$	189,348	$	191,491
Electronics		271,750		285,027
Stoneridge Brazil		65,258		89,393
Corporate ^(C)		390,475		358,766
Eliminations		(316,341)		(322,468)
Total assets	$	600,490	$	602,209

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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


	Three months ended				Six months ended
	June 30,				June 30,
	2019		2018		2019		2018
Three months ended March 31,									2020		2019
Net Sales:
North America	$	123,293	$	120,885	$	242,660	$	245,314	$	99,851	$	119,367
South America		16,614		20,333		33,946		40,878		14,570		17,332
Europe and Other		82,334		79,384		163,932		160,340		68,545		81,598
Total net sales	$	222,241	$	220,602	$	440,538	$	446,532	$	182,966	$	218,297

June 30,

December 31,

2019

2018

Long-term Assets:

North America

$
92,596

$
86,763

South America

44,220

45,408

Europe and Other

123,142

107,171

Total long-term assets

$
259,958

$
239,342


	March 31,		December 31,
	2020		2019
Long-term Assets:
North America	$	87,375	$	87,430
South America		37,446		52,518
Europe and Other		126,410		130,995
Total long-term assets	$	251,231	$	270,943

(A)	Unallocated Corporate expenses include, among other items, accounting/finance, human resources, information technology and legal costs as well as share-based compensation.

(B)	These amounts represent depreciation and amortization on property, plant and equipment and certain intangible assets.

(C)	Assets located at Corporate consist primarily of cash, intercompany loan receivables, fixed assets for the corporate headquarter building, leased assets, information technology assets, equity investments and investments in subsidiaries.

(14) Investments

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(15) Investments~~

Minda Stoneridge Instruments Ltd.

The Company has a 49% equity interest in Minda Stoneridge Instruments Ltd. (“MSIL”), a company based in India that manufactures electronics, instrumentation equipment and sensors primarily for the motorcycle, commercial vehicle and automotive markets. The investment is accounted for under the equity method of accounting. The Company’s investment in MSIL, recorded as a component of investments and other long-term assets, net on the condensed consolidated balance sheets, was ~~$12,396~~$12,346 and ~~$11,288~~$12,701 at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Equity in earnings of MSIL included in the condensed consolidated statements of operations was ~~$548~~$457 and ~~$665,~~$364, for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively. Equity in earnings of MSIL included in the condensed consolidated statements of operations was $912 and $1,186, for the six months ended June 30, 2019 and 2018,~~ respectively.

PST Eletrônica Ltda.

The Company had a 74% controlling interest in ~~PST~~Stoneridge Brazil from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26% noncontrolling interest in ~~PST.~~Stoneridge Brazil. As part of the acquisition agreement, the Company will be required to pay additional earn-out consideration, which is not capped, based on ~~PST’s~~Stoneridge Brazil’s financial performance in either 2020 or 2021. See Note 5 for the fair value and foreign currency adjustments of the earn-out consideration for the current and prior periods.

~~PST has~~Stoneridge Brazil had dividends payable to former noncontrolling interest holders of R$~~23,783 Brazilian real~~24,154 ($~~6,175) and R$23,204 Brazilian real ($5,980)~~6,010) as of ~~June 30, 2019 and~~ December 31, ~~2018, respectively.~~2019. The dividends payable balance ~~includes~~included R$~~580 Brazilian real~~261 ($~~150) and R$419 Brazilian real ($108)~~68) in monetary correction for the ~~six~~three months ended ~~June 30,~~March 31, 2019 ~~and 2018, respectively. The dividend is payable on or before January 1, 2020, and is subject to monetary correction~~ based on the Brazilian National Extended Consumer Price inflation ~~index (“IPCA”).~~index. The dividend payable related to ~~PST is~~Stoneridge Brazil was recorded within other current liabilities on the ~~condensed~~ consolidated balance ~~sheet.~~sheet as of December 31, 2019. These dividends were paid in January 2020.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Other Investments

In December 2018, the Company entered into an agreement to make a $10,000 investment in a fund managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology which is accounted for in accordance with ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)”. This investment does not have a readily determinable fair value and is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company’s $10,000 investment in the Autotech fund will be contributed over the expected ten-year life of the fund. The Company contributed ~~$1,200~~$400 to the Autotech fund as of March 31, 2019 and did not contribute to the Autotech fund during the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020. The Company recognized $39 and $16 in fair value and other adjustments during the three months ended March 31, 2020 and 2019, respectively. The Autotech investment recorded in investments and other long-term assets in the condensed consolidated balance sheets was ~~$1,653~~$1,788 and ~~$437~~$1,827 as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

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~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(16)~~(15) Disposal of Non-Core Products

On April 1, 2019, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40,000 (subject to a post-closing inventory adjustment) and the assumption of certain liabilities, the Company and SCD sold to SMP, product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company ~~will~~would provide and be compensated for certain manufacturing, transitional, and administrative and support services to SMP on a short-term basis. The products related to the Non-core Products ~~are currently~~were manufactured in Juarez, Mexico and Canton, Massachusetts, and ~~include~~included ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components.

During the three months ended June 30, 2019 the Company’s Control Devices segment recognized net sales and costs of goods sold of $4,160 and $2,775, respectively, for the one-time sale of Non-core Product finished goods inventory and a gain on disposal of $33,921 ~~for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs. During the three months ended~~ March 31, 2019, the Company recognized transaction costs associated with the disposal of Control Devices’ Non-core Products of ~~$322.~~$322 within SG&A.

~~During the three months ended June 30, 2019, the~~The Company received ~~$675~~$21 for services provided pursuant to the transition services agreement which ~~was~~were recognized as a reduction in SG&A. The Company produced and sold Non-core finished goods inventory at cost to SMP of $9,054 pursuant to the contract manufacturing agreement which was recognized as both net sales and cost of goods sold.

~~Non-core Products net sales, including sales of $9,054 to SMP pursuant to the contract manufacturing agreement, and operating income was $13,214 and $3,373,~~&A for the three months ended ~~June 30, 2019, respectively, and $11,249 and $2,317,~~March 31, 2020.

There were 0 Non-core Product net sales for the three months ended ~~June 30, 2018, respectively.~~March 31, 2020. Non-core ~~Products~~Product net sales and operating income ~~was $24,310~~were $11,230 and ~~$3,373,~~$3,112, for the ~~six~~three months ended ~~June 30,~~March 31, 2019, ~~respectively, and $23,129 and $4,725, for the six months ended June 30, 2018,~~ respectively.

(16) Subsequent Events

On May 4, 2020, the Company undertook business realignment actions that resulted in the reduction of our global salaried workforce by approximately 5.0

%. These actions were made to better align our resources and cost structure with our current business opportunities and market outlook as well as respond to the COVID-19 pandemic. One-time separation costs of $1,500 to $2,000 associated with these realignment actions are expected to be incurred in the second quarter of 2020.

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

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

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.

Impact of COVID-19 on Our Business

The coronavirus (“COVID-19”) pandemic has resulted, and is likely to continue to result, in significant economic disruption globally. The COVID-19 pandemic has had a negative impact on the global economy, disrupting financial markets and increasing volatility, and has impeded global supply chains, restricted manufacturing operations and resulted in significantly reduced economic activity and higher unemployment rates. It has disrupted, and may continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway, motorcycle and agricultural vehicles by end-consumers. COVID-19 began to impact our operations in the first quarter of 2020 and is likely to continue to affect our business as government authorities impose mandatory closures, work-from-home orders, social distancing protocols, and other restrictions. These actions could materially affect our ability to adequately staff and maintain our operations and supply chain and impact our financial results. The adverse conditions caused by COVID-19 have reduced demand for our products and increased operating costs, which we anticipate will result in lower overall margins until the impact of COVID-19 begins to moderate.

We are experiencing disruptions in our business as we implement modifications to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time. Beginning in the first quarter of 2020, certain states and countries issued executive orders requiring all workers to remain at home, unless their work is critical, essential, or life-sustaining. With respect to liquidity, we are evaluating and taking actions to reduce costs and spending across our organization. This includes reducing hiring activities, temporarily reducing workforce in facilities impacted by volume reductions or shutdowns and limiting discretionary spending. In some instances, the Company has delayed anticipated spending on capital investment projects.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

Segments

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

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

Electronics. This segment includes results of operations from the production of ~~electronic instrument clusters, electronic control units,~~ driver information systems, camera-based vision systems, ~~monitors~~connectivity and ~~related products.~~compliance products and electronic control units.

~~PST.~~Stoneridge Brazil (formerly referred to as “PST”). This segment includes results of operations that design and manufacture ~~electronic vehicle alarms, convenience accessories,~~ vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and ~~video devices.~~infotainment devices and telematics solutions.

~~Second~~First Quarter Overview

The Company had net income of ~~$39.8~~$3.5 million, or ~~$1.41~~$0.13 per diluted share, for the three months ended ~~June 30, 2019.~~March 31, 2020.

Net income ~~of $39.8~~decreased by $6.2 million, or ~~$1.41~~$0.20 per diluted share, from $9.7 million, or $0.33 per diluted share, for the three months ended ~~June 30,~~March 31, 2019 ~~increased by $24.7 million, or $0.89 per diluted share, from $15.1 million, or $0.52 per diluted share, for the three months ended June 30, 2018~~primarily due to the gain on disposal of Control Devices’ Non-core Products of $33.9 million, or $0.95 per diluted share, and the recovery of Brazilian indirect taxes of $6.5 million, or $0.20 per diluted share, offset by an increasea decrease in ~~restructuring costs of $3.0 million, or $0.10 per diluted share, mostly related to our previously announced closure of our Canton facility (“Canton Restructuring”).~~net sales. Pursuant to the Company’s Common Share ~~repurchase~~Repurchase program (“ASR Agreement”), we ~~purchased~~repurchased 1,349,528 outstanding Common Shares on May 8, 2019 ~~which~~and on February 27, 2020, we received an additional 364,604 Common Shares under that program. In early March 2020, under the new authorized 2020 Common Share repurchase program, we repurchased a total of 242,634 Common Shares. These transactions increased earnings per share by reducing ~~2019~~the first quarter 2020 diluted weighted-average shares ~~outstanding.~~outstanding compared to the first quarter of 2019.

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Net sales ~~increased~~decreased by ~~$1.6~~$35.3 million, or ~~0.7%~~16.2%, while our operating income ~~increased~~decreased by ~~$30.0~~$8.0 million, or ~~156.4%~~68.7%.

Our Control Devices segment net sales ~~increased~~decreased by ~~3.7%~~12.0% primarily ~~due to the one-time sale~~as a result of ~~Non-core Products and higher sales volume in our China automotive market which was offset by~~ decreased sales volume in the North American automotive market due to ~~certain program~~the disposal of Non-core Products in the second quarter of 2019. In addition, we experienced decreased sales volume ~~reductions.~~in our North American commercial vehicle and agricultural markets. These decreases were partially offset by sales volume increases in our China automotive, European automotive and European commercial vehicle markets. Segment gross margin decreased due to lower sales and higher direct material costs as a percentage of sales including fixed costs associated with our Canton Facility which ceased production in conjunction with our Canton Restructuring ~~costs and higher material and warranty costs. Excluding the gain on disposal of Non-core Products, segment~~plan in December 2019. Segment operating income decreased ~~by 39.1%~~38.7% relative to ~~the second quarter of 2018.~~2019 due to lower segment margin.

Our Electronics segment net sales ~~increased~~decreased by ~~1.4%~~21.2% primarily due to ~~an increase~~a decrease in sales volume in our European, North American and China commercial vehicle markets, unfavorable foreign currency translation and a decrease in sales of European and North American off-highway ~~product sales.~~vehicle products. Segment gross margin decreased due to ~~higher~~lower sales, ~~being offset by an~~ unfavorable product mix, price downs on legacy products and ~~higher material~~adverse leverage of fixed costs ~~for electronic components.~~from lower sales levels. Operating income for the segment decreased ~~by 8.7% relative~~68.2% compared to ~~the second quarter of 2018~~2019 due to lower segment gross margin.

Our ~~PST~~Stoneridge Brazil segment net sales decreased by ~~18.3%~~15.9% due to unfavorable foreign currency translation and lower volumes for our Argentina aftermarket channel ~~alarm~~ and audio ~~products as well as lower monitoring products~~ and ~~service revenues. This decrease was offset by favorable foreign currency translation and higher volumes for our OEM and factory authorized dealer installer~~alarm products. Segment gross margin declined due to the reduction in sales ~~partially offset by~~volume and adverse sales mix from lower ~~overhead costs.~~sales of alarm products. Operating income ~~increased~~decreased compared to ~~the second quarter of 2018~~2019 primarily due to the impact of lower ~~SG&A expenses from the recovery of Brazilian indirect taxes of $6.5 million.~~sales and gross margin.

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In the ~~second~~first quarter of ~~2019,~~2020, SG&A expenses decreased by ~~$7.7~~$6.4 million mostly due to ~~PST’s recovery~~lower incentive compensation and professional service fees at unallocated corporate, staff reductions from the closure of Brazilian indirect taxes of $6.5 million and Control Devices transitional service cost reimbursement of $0.7 million associated with the disposal of its Non-core Products offset by an increase in restructuring and business realignment costs for the Canton ~~Restructuring~~Facility in the first quarter of ~~$0.3~~2020 and favorable a fair value adjustment for earn-out consideration of $1.1 million ~~and accelerated share-based compensation expense associated with a retirement of $0.5 million.~~at Stoneridge Brazil.

At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, we had cash and cash equivalents balances of ~~$51.5~~$81.3 million and ~~$81.1~~$69.4 million, respectively. The ~~decrease~~increase in cash and cash equivalents in the first ~~half~~quarter of ~~2019~~2020 was primarily due to the repurchase of our Common Shares and lower cash flows from operations as well as the cash payment of the Orlaco earn-out consideration which were offset by proceeds from the disposal of Non-core Products and net borrowings on the 2019 Credit Facility. The increase in borrowings under the 2019 Credit Facility were to maintain a high level of liquidity to ensure adequate available capital across our global locations due to adverse economic conditions caused by the COVID-19 pandemic. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, we had ~~$103.5~~$161.0 million and ~~$96.0~~$126.0 million, respectively, in borrowings outstanding on the 2019 Credit Facility and the Amended Agreement, as applicable.

Outlook

~~The~~While 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.~~margins, beginning in the first quarter of 2020, the COVID-19 pandemic has caused worldwide adverse economic conditions and uncertainty in our served markets.

The North American automotive market is expected to decrease ~~slightly~~ from ~~2018 to 16.6~~16.3 million units in ~~2019. Based on our product mix, the~~2019 to 12.2 million units in 2020 due to adverse economic conditions caused by COVID-19. The Company expects sales volumes in our Control Devices segment to ~~be consistent with~~decline from the prior year.

~~The~~We expect full year 2020 European and North American commercial vehicle ~~market increased in 2018 and we expect it~~volumes to ~~increase slightly in 2019. We expect the European commercial vehicle market in 2019~~significantly decline compared to ~~remain at approximately the same level with 2018.~~prior year volumes due to adverse economic conditions caused by COVID-19.

Our ~~PST~~2019 Stoneridge Brazil segment revenues ~~in the second quarter of 2019 decreased~~declined compared to the ~~second quarter of 2018, mostly~~prior year due to ~~the~~ lower volumes in ~~most~~our Brazilian served markets ~~as well as~~for our audio and alarm products, monitoring products and service revenues. In addition, revenues were adversely affected by the continued decline in the Argentinian economy. In ~~July 2019,~~April 2020, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to decline 5.3% in 2020 and grow ~~0.8%~~2.9% in ~~2019 and 2.2% in 2020.~~2021. We expect our served market channels to ~~improve with improvements~~decline due to the contraction in the Brazilian ~~economy.~~economy but expect higher OEM related revenues from new program launches occurring in 2020. Our financial performance in our ~~PST~~Stoneridge Brazil segment is also 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~~28

Table of uncertainty to the global economic environment. These and other actions are likely to impact trade polices with other countries and the overall global economy which could adversely impact our results of operations.Contents

Other Matters

A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and ~~PST~~Stoneridge Brazil segments are denominated in U.S. dollars, and therefore movements in foreign currency exchange rates can also have a significant effect on our results of operations. The U.S. Dollar strengthened against the Swedish krona, euro, Brazilian real and Argentinian peso in ~~2019~~2020 and ~~2018,~~2019, unfavorably impacting our material costs and reported results.

In January 2019, we committed to a restructuring plan that ~~will result~~resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) ~~by the end~~as of ~~2019~~March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). ~~This restructuring action will result in the closure of the Canton facility and the termination of the employment of Canton Facility employees.~~ The estimated costs for the Canton Restructuring ~~include~~included employee severance and termination costs, contract termination costs, professional fees ~~the non-cash write-off of impaired fixed assets~~ and other related ~~costs.~~costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized ~~$3.4~~$2.2 million of expense as a result of these actions during both the three months ended ~~June 30,~~March 31, 2020 and 2019. We expect to incur additional costs related to the Canton Restructuring of ~~$2.7 million to $3.9~~$0.7 million through December ~~2020.~~2020 primarily to restore the engineering function previously located at the Canton Facility.

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On April 1, 2019, the Company entered into an Asset Purchase Agreement ~~(the “APA”)~~ by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40.0 million (subject to a post-closing inventory ~~adjustment)~~adjustment which was a payment to SMP of $1.6 million) and the assumption of certain liabilities, the Company and SCD sold to SMP product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company ~~will provide~~provided and bewas compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis. The products related to the Non-core Products ~~are currently~~were manufactured in Juarez, Mexico and Canton, Massachusetts, and include ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components. During the three months ended June 30, 2019 the Company’s Control Devices segment recognized net sales and costs of goods sold of $4.2 million and $2.8 million, respectively, for the one-time sale of finished goods inventory and a gain on disposal of $33.9 million for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs.

On October 26, 2018 the Company announced a Board of Directors approved share repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury ~~shares~~shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and ~~were recorded as a $40.0 million reduction~~delivered to ~~shareholder’ equity. The remaining $10.0 million~~the Company, 364,604 Common Shares representing the final settlement of the ~~initial payment was recorded as~~Company’s repurchase program which became treasury shares.

On February 24, 2020, the Board of Directors authorized a ~~reduction~~new repurchase program of $50.0 million for the repurchase of outstanding Common Shares over an 18 month period. The repurchases may be made from time to ~~shareholders’ equity as an unsettled forward contract indexed to our~~time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common ~~Shares. The number of shares~~Shares to be ~~ultimately purchased by~~repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company ~~will be determined based on the volume weighted-average price~~to acquire any particular amount of ~~our~~its Common Shares, ~~during~~and it may be suspended or discontinued at any time. For the ~~terms~~quarter ended March 31, 2020, under the new 2020 repurchase program in early March 2020, the Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program authorization. The Company is temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the ~~transaction, minus an agreed upon discount between~~impact of the ~~parties. The program is expected to be completed by May 8, 2020.~~COVID-19 pandemic.

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In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduced ~~PST’s~~Stoneridge Brazil’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on ~~PST’s~~Stoneridge Brazil’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $6.5 million as a reduction to SG&A expense which is inclusive of related interest income of $2.4 million, net of applicable professional fees of $1.0 million in the ~~three~~second quarter of 2019. The Company received administrative approval in January 2020 and ~~six months ended June 30, 2019. Timing~~is now offsetting eligible federal taxes with these tax credits. The Brazilian tax authorities have sought clarification before the Supreme Court of ~~realization~~Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these ~~recoveries~~credits. The timing for a decision is ~~dependent upon~~uncertain due to the ~~timing of administrative approvals and generation of federal~~COVID-19 pandemic. If the Brazilian tax ~~liabilities eligible for offset.~~authorities challenge our rights to these credits, we may become subject to new litigation that could impact the amount ultimately realized by Stoneridge Brazil.

In the fourth quarter of 2018, we undertook ~~business realignment~~restructuring actions for our Electronics segment affecting our European Aftermarket business and China operations. For the three months ended ~~June 30,~~March 31, 2020 and 2019, we recognized expense of less than $0.1 and $0.2 million, respectively, as a result of these actions for related costs and non-cash accelerated depreciation. We expect to incur additional costs related to the Electronics segment restructuring actions of $0.8 million through 2020.

~~In addition, we~~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. On May 4, 2020, the Company began business realignment actions that resulted in the reduction of our global salaried workforce by approximately 5.0%. These actions were made to better align our resources and cost structure with our current business opportunities and market outlook as well as respond to the COVID-19 pandemic. One-time separation costs of $1.5 million to $2.0 million associated with these realignment actions are expected to be incurred in the second quarter of 2020.

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

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Three Months Ended ~~June 30, 2019~~March 31, 2020 Compared to Three Months Ended ~~June 30, 2018~~March 31, 2019

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,	2019				2018				(decrease)
Three months ended March 31,											2020				2019				(decrease)
Net sales	$	222,241	100.0	%	$	220,602	100.0	%	$	1,639	$	182,966	100.0	%	$	218,297	100.0	%	$	(35,331)
Costs and expenses:
Cost of goods sold		165,414	74.4			153,184	69.4			12,230		137,569	75.2			157,444	72.1			(19,875)
Selling, general and administrative		27,522	12.4			35,256	16.0			(7,734)		29,503	16.1			35,910	16.5			(6,407)
Gain on disposal of non-core products, net		(33,921)	(15.3)			-	-			(33,921)
Design and development		14,040	6.2			12,981	5.9			1,059		12,235	6.7			13,244	6.1			(1,009)
Operating income		49,186	22.3			19,181	8.7			30,005		3,659	2.0			11,699	5.3			(8,040)
Interest expense, net		1,001	0.5			1,170	0.5			(169)		1,030	0.5			1,003	0.5			27
Equity in earnings of investee		(548)	(0.2)			(665)	(0.3)			117		(457)	(0.2)			(364)	(0.2)			(93)
Other income, net		(97)	-			(264)	(0.1)			(167)		(1,617)	(0.9)			(432)	(0.2)			1,185
Income before income taxes		48,830	22.0			18,940	8.6			29,890		4,703	2.6			11,492	5.2			(6,789)
Provision for income taxes		9,066	4.1			3,820	1.7			5,246		1,213	0.7			1,835	0.8			(622)
Net income	$	39,764	17.9	%	$	15,120	6.9	%	$	24,644	$	3,490	1.9	%	$	9,657	4.4	%	$	(6,167)

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


									Dollar												Dollar		Percent
									increase /		Percent										increase /		increase /
Three months ended June 30,	2019				2018				(decrease)		increase
Three months ended March 31,													2020				2019				(decrease)		(decrease)
Control Devices	$	114,067	51.3	%	$	109,956	49.9	%	$	4,111	3.7	%	$	96,850	52.9	%	$	110,119	50.5	%	$	(13,269)	(12.0)	%
Electronics		91,560	41.2			90,313	40.9			1,247	1.4			71,546	39.1			90,846	41.6			(19,300)	(21.2)	%
PST		16,614	7.5			20,333	9.2			(3,719)	(18.3)
Stoneridge Brazil														14,570	8.0			17,332	7.9			(2,762)	(15.9)	%
Total net sales	$	222,241	100.0	%	$	220,602	100.0	%	$	1,639	0.7	%	$	182,966	100.0	%	$	218,297	100.0	%	$	(35,331)	(16.2)	%

Our Control Devices segment net sales ~~increased~~decreased primarily ~~due to~~as a result of decreased sales volume of $11.1 million from the ~~one-time sale~~disposal of Non-core ~~Product inventory~~Products that occurred in the second quarter of 2019. Including the impact of the disposal of Non-core Products, Control Devices experienced decreased sales volume in our North American automotive, North American commercial vehicle and agriculture markets of $5.1 million, $4.3 million and $2.7 million, respectively, and a decrease in other markets sales volume of $4.2 million as well as an increase in sales volume in our China automotive of $3.1 million and European and North American commercial vehicle markets of $3.1 million and $0.6 million, respectively. This increase was partially offset by decreased sales volume in the North American automotive market of $3.3 million due to certain program volume reductions and unfavorable foreign currency translation of ~~$0.5~~$0.4 million. These decreases were partially offset by sales volume increases in our European automotive, European commercial vehicle and China automotive markets of $2.3 million, $0.7 million and $0.3 million, respectively.

Our Electronics segment net sales ~~increased slightly~~decreased primarily due to an increase in sales volume in our North American commercial vehicle market of $2.4 million and increased sales of North American off-highway vehicle products of $0.7 million, respectively. This increase was mostly offset by a decrease in sales volume in our European commercial vehicle ~~products~~market of ~~$1.7~~$10.6 million anand unfavorable foreign currency translation of ~~$0.1~~$3.2 million as well as a decrease in sales volume in our North American and China commercial vehicle markets of $3.3 million and ~~unfavorable pricing of $0.2~~$0.4 million, ~~on products nearing~~respectively. In addition, the ~~end of product life.~~

~~Our PST~~Electronics segment net sales decreased due to a decrease in sales volume in our European and North American off-highway vehicle products of $1.8 million and $0.2 million, respectively.

Our Stoneridge Brazil segment net sales decreased due to unfavorable foreign currency translation of $2.2 million and lower volumes for our Argentina aftermarket channel ~~alarm~~ and audio ~~products as well as lower monitoring products~~ and ~~service revenues. This decrease was offset by favorable foreign currency translation that increased sales by $2.7 million and higher volumes for our OEM and factory authorized dealer installers~~alarm products.

~~Table of Contents~~

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


										Dollar												Dollar	Percent
										increase /	Percent											increase /	increase /
Three months ended June 30,	2019				2018					(decrease)	increase
Three months ended March 31,													2020				2019					(decrease)	(decrease)
North America	$	123,293	55.5	%	$	120,885	54.8	%	$	2,408	2.0	%	$	99,851	54.5	%	$	119,367	54.7	%	$	(19,516)	(16.3)	%
South America		16,614	7.5			20,333	9.2			(3,719)	(18.3)			14,570	8.0			17,332	7.9			(2,762)	(15.9)	%
Europe and Other		82,334	37.0			79,384	36.0			2,950	3.7			68,545	37.5			81,598	37.4			(13,053)	(16.0)	%
Total net sales	$	222,241	100.0	%	$	220,602	100.0	%	$	1,639	0.7	%	$	182,966	100.0	%	$	218,297	100.0	%	$	(35,331)	(16.2)	%

The ~~increase~~decrease in North American net sales was primarily attributable to a reduction of $11.1 million from the ~~one-time sale~~disposal of Control Devices’ Non-core ~~Product inventory~~Products in the second quarter of ~~$4.2~~2019. Including the impact of the disposal of Non-core Products, sales volume has decreased in our North American commercial vehicle, automotive and agricultural markets of $7.8 million, $5.1 million and ~~increased sales volume~~$2.6 million, respectively, as well as a decrease of $0.2 million in our Electronics segment off-highway market and other North American ~~commercial vehicle and off-highway markets~~volumes of ~~$2.4 million and $0.7 million, respectively, offset by a decrease in sales volume in our North American automotive market of $3.3 million resulting from certain program volume reductions.~~$4.2 million. The decrease in net sales in South America was primarily due to unfavorable foreign currency translation of $2.2 million and lower volumes for our Argentina aftermarket channel and alarm and audio products as well as lower monitoring service revenues. This decrease was offset by favorable foreign currency translation that increased sales by $2.7 million and higher volumes for our OEM and factory authorized dealer installer products. The ~~increase~~decrease in net sales in Europe and Other was primarily due to ~~an increase in sales volume in our China automotive market of $3.1 million as well as an increase in our commercial vehicle market of $1.1 million. This increase was partially offset by~~ a decrease in ~~sales volume in~~ our European commercial vehicle and off-highway ~~vehicle market~~markets of ~~$0.8 million.~~$9.9 million and $1.8 million, respectively. Additionally, Europe and Other sales were unfavorably impacted by foreign currency translation of ~~$0.1~~$3.2 million. The decreases in Europe and Other sales were offset by an increase in European and China automotive sales of $2.2 million and ~~unfavorable pricing~~$0.3 million.

Table of ~~$0.2 million on products nearing the end of product life.~~Contents

Cost of Goods Sold and Gross Margin. Cost of goods sold ~~increased from~~decreased compared to the ~~second~~first quarter of ~~2018~~2019 and our gross margin decreased from ~~30.6%~~27.9% in the ~~second~~first quarter of ~~2018~~2019 to ~~25.6%~~24.8% in the ~~second~~first quarter of ~~2019.~~2020. Our material cost as a percentage of net sales increased by ~~2.4%~~0.5% to ~~53.7%~~52.8% in the ~~second~~first quarter of ~~2019~~2020 compared to ~~51.3%~~52.3% in the ~~second~~first quarter of ~~2018.~~2019. Direct material costs in our Control Devices segment ~~was~~were negatively impacted by ~~adverse~~unfavorable product mix ~~and purchase price variances~~including the impact of the disposal of Non-core Products while our Electronics segment was negatively impacted by unfavorable product mix and ~~higher material costs for electronic components offset by a lower adverse impact of U.S. denominated material purchases at non-U.S. based operations.~~price downs on legacy products. Overhead as a percentage of net sales increased by ~~2.0%~~2.2% to ~~15.2%~~16.9% for the ~~second~~first quarter of 2020 compared to 14.7% for the first quarter of 2019 ~~compared to 13.2% for the second quarter of 2018~~ primarily due to ~~the~~adverse fixed cost leverage on lower sales levels including our Canton ~~Restructuring costs of $2.4 million and higher~~facility which ceased production in accordance with our Canton restructuring plan in December 2019 offset by lower warranty expenses in our Control Devices segment.

Our Control Devices segment gross margin decreased due to lower sales and higher direct material costs as a percentage of sales, the adverse impact of the disposal of Non-core Products in the second quarter of 2019, as well as higher overhead costs ~~primarily from Canton Restructuring costs~~as a percentage of ~~$2.4 million, higher warranty costs and an increase in direct material costs~~sales due to ~~an unfavorable product mix and~~ adverse ~~purchase price variances.~~fixed cost leverage on lower sales levels including our Canton facility which ceased production in accordance with our Canton restructuring plan in December 2019 offset by lower warranty expenses.

Our Electronics segment gross margin decreased primarily due to lower sales, an unfavorable product mix and price downs on legacy products and higher ~~material~~overhead costs ~~for electronic components offsetting the impact~~as a percentage of ~~slightly higher sales.~~sales due to adverse leverage of fixed costs.

Our ~~PST~~Stoneridge Brazil segment gross margin decreased due to lower sales ~~offset by reductions in overhead costs.~~and unfavorable sales mix of lower alarm sales.

Selling, General and Administrative (“SG&A”). SG&A expenses decreased by ~~$7.7~~$6.4 million compared to the ~~second~~first quarter of ~~2018 primarily~~2019 due to ~~PST’s recovery~~staff reductions from the closure of ~~Brazilian indirect taxes~~the Canton Facility during the first quarter of ~~$6.5 million~~2020 at Control Devices and lower ~~selling~~incentive compensation costs ~~Control Devices transitional~~and professional service ~~cost reimbursement~~fees at unallocated corporate and a favorable fair value adjustment for earn-out consideration of $0.7 million associated with the disposal of its Non-core Products and decreases in Electronics wages offset by higher wages and accelerated share-based compensation expense associated with a retirement of $0.5$1.1 million at ~~Unallocated corporate. This decrease was also partially offset by an increase in restructuring and business realignment costs for Canton Restructuring costs of $0.4 million during the current quarter.~~Stoneridge Brazil.

~~Table of Contents~~

~~Gain on Disposal of Non-core Products, net.~~ ~~The gain on disposal for the three months ended June 30, 2019 relates to the disposal of Control Devices’ Non-core Products.~~

Design and Development (“D&D”). D&D costs ~~increased~~decreased by ~~$1.1~~$1.0 million ~~primarily~~ due to higher ~~D&D costs in our Control Devices segment for Canton Restructuring related~~capitalization of software development costs of $0.8 million and ~~in our unallocated corporate segment for~~lower spending at Control Devices due to the ~~establishment~~pace of the ~~chief technology office. Consolidated customer reimbursement for development projects increased $0.8 million during~~restoration of the ~~second quarter of 2019.~~engineering function previously located at the Canton facility.

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,	2019		2018		(decrease)		(decrease)
Three months ended March 31,									2020		2019		(decrease)		decrease
Control Devices	$	44,367	$	17,160	$	27,207	158.5	%	$	7,322	$	11,948	$	(4,626)	(38.7)	%
Electronics		7,555		8,276		(721)	(8.7)			2,872		9,031		(6,159)	(68.2)	%
PST		6,414		735		5,679	772.7
Stoneridge Brazil										859		670		189	28.2	%
Unallocated corporate		(9,150)		(6,990)		(2,160)	(30.9)			(7,394)		(9,950)		2,556	25.7	%
Operating income	$	49,186	$	19,181	$	30,005	156.4	%	$	3,659	$	11,699	$	(8,040)	(68.7)	%

Our Control Devices segment operating income ~~increased~~decreased due to lower sales and unfavorable product mix from the ~~one-time gain on~~ disposal of Non-core Products that occurred in the second quarter of 2019 offset by ~~higher~~lower SG&A costs ~~for~~from staff reductions due to the closure of the Canton ~~Restructuring as well as higher material and warranty costs.~~Facility in the first quarter of 2020.

Our Electronics segment operating income decreased primarily due to lower sales and higher ~~direct~~ material costs ~~offset by higher sales and~~resulting in lower ~~SG&A costs.~~gross margin.

Our ~~PST~~Stoneridge Brazil segment operating income increased primarily due to ~~the recovery~~a favorable fair value adjustment for earn-out consideration of ~~Brazilian indirect taxes of $6.5~~$1.1 million ~~and lower SGA expenses~~ offset by lower sales ~~volumes.~~volumes and unfavorable sales mix from lower sales of alarm products.

Table of Contents

Our unallocated corporate operating loss ~~increased~~decreased primarily from ~~higher wages~~incentive compensation and ~~accelerated share-based compensation expense associated with a retirement of $0.5 million during the current quarter.~~professional costs.

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


					Dollar		Percent						Dollar		Percent
					increase /		increase /
Three months ended June 30,	2019		2018		(decrease)		(decrease)
Three months ended March 31,									2020		2019		decrease		decrease
North America	$	35,209	$	9,900	$	25,309	255.6	%	$	(483)	$	1,573	$	(2,056)	NM
South America		6,414		735		5,679	772.7			859		670		189	28.2	%
Europe and Other		7,563		8,546		(983)	(11.5)			3,283		9,456		(6,173)	(65.3)	%
Operating income	$	49,186	$	19,181	$	30,005	156.4	%	$	3,659	$	11,699	$	(8,040)	(68.7)	%

NM – Not meaningful

Our North American operating results ~~increased~~decreased due to ~~the gain on disposal related to Non-core Products and higher sales volume in the North American commercial vehicle and off-highway markets offset by~~ lower sales in our automotive, ~~market as well as higher SG&A~~commercial vehicle and ~~D&D costs.~~off-highway markets. The increase in operating income in South America was primarily due to ~~the recovery of Brazilian indirect taxes, lower SG&A, overhead and material costs~~a favorable fair value adjustment for earn-out consideration offset by lower sales ~~volumes.~~volumes and adverse sales mix. Our operating results in Europe and Other decreased primarily due to ~~lower~~the unfavorable foreign currency translation impact on sales ~~in our European off-highway market and higher material costs offset by higher~~as well as lower sales in our commercial vehicle market.

~~Table of Contents~~

Interest Expense, net. Interest expense, net ~~decreased by $0.2 million compared to~~remained consistent with the ~~prior year second~~first quarter ~~primarily due to lower interest expense on our revolving credit facilities offset by the write-off of deferred financing fees as a result of refinancing the 2019 Credit Facility.~~or 2019.

Equity in Earnings of Investee. Equity earnings for MSIL were $0.5 million and ~~$0.7~~$0.4 million for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~The decrease compared to the prior period is primarily due to lower gross margin from lower sales volume in served markets as well as unfavorable changes in foreign currency exchange rates.~~

Other Income, net. We record certain foreign currency transaction ~~and forward currency hedge contract~~ (gains) losses as a component of other income, net on the condensed consolidated statement of operations. Other income, net ~~decreased~~increased by ~~$0.2~~$1.2 million to ~~$0.1~~$1.6 million in the ~~second~~first quarter of ~~2019~~2020 compared to other income, net of ~~$0.3~~$0.4 million for the ~~second~~first quarter of ~~2018~~2019 primarily due to ~~lower~~higher foreign currency transaction gains in our Electronics segment.

Provision for Income Taxes. ~~We recognized~~In the three months ended March 31, 2020, income tax expense of ~~$9.1~~$1.2 million ~~and $3.8 million~~was attributable to the mix of earnings among tax jurisdictions as well as valuation allowances in certain jurisdictions. The effective tax rate of 25.8% is greater than the statutory rate primarily due to losses incurred in jurisdictions for ~~federal, state and foreign income taxes for the second quarter of 2019 and 2018, respectively. The increase in income tax expense for~~which a valuation allowance is recorded.

In the three months ended ~~June 30,~~March 31, 2019, ~~compared~~income tax expense of $1.8 million was attributable to the ~~same period for 2018 was~~mix of earnings among tax jurisdictions as well as the favorable benefit related to the annual vesting of share-based compensation. The effective tax rate of 16.0% is lower than the statutory rate primarily due to the ~~sale~~annual vesting of Non-core Products on April 1, 2019. The effective tax rate decreased to 18.6% in the second quarter of 2019 from 20.2% in the second quarter of 2018 primarily due to the impact of certain tax incentives, which did not impact the second quarter of 2018.

~~Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018~~

Dollar

increase /
Six months ended June 30,

2019

2018

(decrease)
Net sales

$
440,538


100.0
%
$
446,532

100.0
%
$
(5,994)
Costs and expenses:

Cost of goods sold

322,858

73.3

311,145

69.7

11,713
Selling, general and administrative

63,110

14.3

72,517

16.2

(9,407)
Gain on disposal of non-core products, net

(33,599)

(7.6)

-

-

(33,599)
Design and development

27,284

6.2

26,842

6.0

442
Operating income

60,885

13.8

36,028

8.1

24,857
Interest expense, net

2,004

0.4

2,524

0.6

(520)
Equity in earnings of investee

(912)

(0.2)

(1,186)

(0.3)

274
Other income, net

(529)

(0.1)

(863)

(0.2)

334
Income before income taxes

60,322

13.7

35,553

8.0

24,769
Provision for income taxes

10,901

2.5

7,053

1.6

3,848
Net income

$
49,421

11.2
%
$
28,500

6.4
%
$
20,921

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

Dollar

Percent

increase /

increase /

Six months ended June 30,

2019

2018

(decrease)

(decrease)

Control Devices

$
224,186


50.9
%
$
225,313

50.4
%
$
(1,127)

(0.5)
%
Electronics

182,406

41.4

180,341

40.4

2,065

1.1
%
PST

33,946

7.7

40,878

9.2

(6,932)

(17.0)
%
Total net sales

$
440,538

100.0
%
$
446,532

100.0
%
$
(5,994)

(1.3)
%

~~Table of Contents~~

Our Control Devices segment net sales decreased primarily as a result of decreased sales volume in the North American automotive market of $10.8 million due to certain program volume reductions and unfavorable foreign currency translation of $1.0 million partially offset by the one-time sale of Non-core Product inventory of $4.2 million as well as sales volume increases in our European and North American commercial vehicle and China automotive markets of $2.5 million and $4.3 million, respectively.

Our Electronics segment net sales increased primarily due to an increase in sales volume in our North American commercial vehicle products of $4.9 million and increased sales of European and North American off-highway vehicle products of $4.0 million and $1.0 million, respectively. This increase was offset by an unfavorable foreign currency translation of $7.2 million and unfavorable pricing of $0.4 million on products nearing the end of product life.

Our PST segment net sales decreased due to lower volumes for our Argentina aftermarket channel, alarm products, monitoring products and service revenues and unfavorable foreign currency translation that decreased sales by $0.1 million. This decrease was offset by higher volumes for our OEM and factory authorized dealer installer products.

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

Dollar

Percent

increase /

increase /

Six months ended June 30,

2019

2018

(decrease)

(decrease)

North America

$
242,660


55.1
%
$
245,314

54.9
%
$
(2,654)

(1.1)
%
South America

33,946

7.7

40,878

9.2

(6,932)

(17.0)
%
Europe and Other

163,932

37.2

160,340

35.9

3,592

2.2
%
Total net sales

$
440,538

100.0
%
$
446,532

100.0
%
$
(5,994)

(1.3)
%

The decrease in North American net sales was primarily attributable to a decrease in sales volume in our North American automotive market of $10.7 million resulting from certain program volume reductions partially offset by the one-time sale of Non-core Product inventory of $4.2 million as well as increased sales volume in our North American commercial vehicle and off-highway markets of $3.7 million and $1.0 million, respectively. The decrease in net sales in South America was primarily due to lower volumes for our Argentina aftermarket channel, alarm products, monitoring products and service revenues and unfavorable foreign currency translation that decreased sales by $0.1 million. This decrease was offset by higher volumes for our OEM and factory authorized dealer installer products. The increase in net sales in Europe and Other was primarily due to the increase in our European off-highway and commercial vehicle markets of $4.0 million and $3.1 million, respectively, as well as an increase in sales volume in our China automotive market of $4.3 million. Additionally, Europe and Other sales were unfavorably impacted by foreign currency translation of $7.2 million and unfavorable pricing of $0.4 million on products nearing the end of product life.

~~Cost of Goods Sold and Gross Margin.~~ Cost of goods sold increased compared to the first half of 2018 and our gross margin decreased from 30.3% in the first half of 2018 to 26.7% in the first half of 2019. Our material cost as a percentage of net sales increased by 1.7% to 53.0% in the first half of 2019 compared to 51.3% in the first half of 2018. Direct material costs in our Control Devices segment was negatively impacted by adverse product mix and purchase price variances while our Electronics segment was negatively impacted by adverse product mix and higher material costs for electronic components offset by a lower adverse impact of U.S. denominated material purchases at non-U.S. based operations. Overhead as a percentage of net sales increased by 1.6% to 15.0% for the first half of 2019 compared to 13.4% for the second quarter of 2018 primarily due to the Canton Restructuring costs of $3.6 million and higher warranty expenses in our Control Devices segment.

Our Control Devices segment gross margin decreased due to lower sales, higher overhead costs primarily from Canton Restructuring costs of $3.6 million and higher warranty costs as well as an increase in direct material costs due to an unfavorable product mix and adverse purchase price variances.

~~Table of Contents~~

Our Electronics segment gross margin decreased primarily due to unfavorable product mix and higher material costs for electronic components offsetting higher sales, a reduction in the adverse effect of U.S denominated material purchases at non-U.S. based operations and lower warranty costs.

~~Our PST segment gross margin increased as reductions in overhead costs offset lower sales volume.~~

~~Selling, General and Administrative (“SG&A”).~~ SG&A expenses decreased by $9.4 million compared to the first half of 2018 primarily due to a decrease in PST SG&A costs from the recovery of Brazilian indirect taxes of $6.5 million and lower wages and lower professional services. Electronics SG&A expense decreased due to a reduction in expense of the fair value adjustment for the Orlaco earn-out consideration of $0.4 million and lower wages. These decreases were partially offset by an increase in consolidated restructuring and business realignment costs of $1.3 million during the first half of 2019. Control Devices SG&A costs increased primarily due to Canton Restructuring related costs. Unallocated corporate SG&A costs increased primarily due to accelerated share-based ~~compensation expense associated with retirement of $0.5 million, business realignment costs of $0.6 million and higher wages.~~

~~Gain on Disposal of Non-core Products, net.~~ ~~The gain on disposal for the six months ended June 30, 2019 relates to the disposal of Control Devices’ Non-core Products.~~

~~Design and Development (“D&D”).~~ D&D costs increased by $0.4 million due to higher D&D costs in our Control Devices segment for Canton Restructuring severance expense of $1.6 million and in our unallocated corporate segment for the establishment of the chief technology office partially offset by lower D&D costs in our Electronics segment from reductions in consulting fees and higher customer reimbursements. Consolidated customer reimbursement for development projects increased $0.6 million in 2019.

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

Dollar

Percent

increase /

increase /

Six months ended June 30,

2019

2018

(decrease)

(decrease)

Control Devices

$
56,315

$
35,039

$
21,276

60.7
%
Electronics

16,586

16,156

430

2.7
%
PST

7,084

885

6,199

700.5
%
Unallocated corporate

(19,100)

(16,052)

(3,048)

(19.0)
%
Operating income

$
60,885

$
36,028

$
24,857

69.0
%

compensation.

Our Control Devices segment operating income increased due to the gain on disposal of Non-core Products offset by higher restructuring costs due to the Canton Restructuring, higher warranty costs and higher D&D costs

~~Our Electronics segment operating income increased primarily due to higher sales, lower SG&A and D&D costs offsetting higher direct material costs.~~

~~Our PST segment operating income increased primarily due to the recovery of Brazilian indirect taxes, lower SG&A and overhead costs partially offset by a decrease in sales.~~

Our unallocated corporate operating loss increased primarily due to offset by higher business realignment costs of $0.6 million, accelerated share-based compensation expense associated with a retirement of $0.5 million and higher wages.

~~Table of Contents~~

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

Dollar

Percent

Six months ended June 30,

2019

2018

increase

increase

North America

$
36,782

$
18,193

$
18,589

102.2
%
South America

7,084

885

6,199

700.5
%
Europe and Other

17,019

16,950

69

0.4
%
Operating income

$
60,885

$
36,028

$
24,857

69.0
%

Our North American operating results increased primarily due to the gain on disposal of Non-core Products and higher sales volume in the North American commercial vehicle and off-highway markets. This increase was offset by lower sales in our automotive market, Canton Restructuring costs as well as higher SG&A and D&D costs. The increase in operating income in South America was primarily due to the recovery of Brazilian indirect taxes, lower SG&A and overhead costs offsetting lower sales. Our operating results in Europe and Other increased due to higher sales in our European off-highway and commercial vehicle markets which were offset by higher material costs.

~~Interest Expense, net.~~ Interest expense, net decreased by $0.5 million compared to the prior year first half primarily due to lower interest expense on our revolving credit facilities offset by the write-off of deferred financing fees as a result of refinancing the 2019 Credit Facility.

~~Equity in Earnings of Investee.~~ Equity earnings for MSIL were $0.9 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively. The decrease compared to the prior period is primarily due to lower gross margin from lower sales volumes in served markets as well as unfavorable changes in foreign currency exchange rates.

~~Other Income, net~~. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other income, net on the condensed consolidated statement of operations. Other income, net decreased by $0.4 million to $0.5 million in the first half of 2019 compared to other income, net of $0.9 million for the first half of 2018 primarily due to lower foreign currency transaction gains in our Electronics segment.

~~Provision for Income Taxes.~~ We recognized income tax expense of $10.9 million and $7.1 million for federal, state and foreign income taxes for the first half of 2019 and 2018, respectively. The increase in income tax expense for the six months ended June 30, 2019 compared to the same period for 2018 was primarily due to the sale of Non-core Products on April 1, 2019. The effective tax rate decreased to 18.1% in the first half of 2019 from 19.8% in the first half of 2018 primarily due to the impact of certain tax incentives, which did not impact the first half of 2018.

Liquidity and Capital Resources

Summary of Cash Flows:

Summary of Cash Flows:

Six months ended June 30

2019

2018

Net cash provided by (used for):

Operating activities

$
6,664

$
28,911

Investing activities

15,756

(15,401)

Financing activities

(50,920)

(17,428)

Effect of exchange rate changes on cash and cash equivalents

(1,089)

(3,120)

Net change in cash and cash equivalents

$
(29,589)

$
(7,038)


Three months ended March 31,	2020		2019
Net cash provided by (used for):
Operating activities	$	(6,562)	$	(5,609)
Investing activities		(7,132)		(9,083)
Financing activities		28,199		(11,997)
Effect of exchange rate changes on cash and cash equivalents		(2,603)		(1,317)
Net change in cash and cash equivalents	$	11,902	$	(28,006)

4033

Table of Contents

Cash ~~provided by~~used for operating activities ~~decreased~~increased compared to the first ~~half~~quarter of ~~2018~~2019 primarily due to ~~the~~ lower net income ~~excluding~~and the ~~gain on disposal related~~payment of dividends to ~~Control Devices’ Non-core Products and~~former noncontrolling interest holders of Stoneridge Brazil of $6.0 million offset by a ~~higher use of~~reduction in cash used to fund working capital levels. This decrease includes a portion of the cash payment of the Orlaco earn-out consideration obligation of $5.0 million during the first half of 2019. The higher working capital levels mostly relate to higher inventory levels for bank builds attributable to the Canton Restructuring activities and the disposal of Non-core Products. Our receivable terms and collections rates have remained consistent between periods presented.

Net cash ~~provided by~~used for investing activities ~~increased~~decreased compared to ~~2018~~2019 due to ~~the cash proceeds received from the disposal of Control Devices’ Non-core products related offset by~~lower capital expenditures and 2019 investments in the Autotech venture capital fund ~~and insurance proceeds received in 2018.~~offset by the capitalization of $0.8 million of software development costs.

Net cash ~~used for~~provided by financing activities increased primarily due to higher net 2019 Credit Facility borrowings of $35.0 million and offset by the repurchase of $5.0 million of Common Shares ~~during~~in the ~~second~~first quarter of 2020. The increase in borrowings under the 2019 ~~offset by higher net~~ Credit Facility ~~borrowings.~~were to maintain a high level of liquidity due to adverse economic conditions caused by the COVID-19 pandemic.

As outlined in Note 7 to our condensed consolidated financial statements, the 2019 Credit Facility increased our borrowing capacity by $100.0 million and permits borrowing up to a maximum level of $400.0 million which includes an accordion feature which allows the Company to increase the availability by up to $150.0 million upon the satisfaction of certain conditions. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The 2019 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 2019 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 2019 Credit Facility had an outstanding balance of ~~$103.5~~$161.0 million at ~~June 30, 2019.~~March 31, 2020. The Company was in compliance with all covenants at ~~June 30, 2019. The covenants included in~~March 31, 2020. However, it is possible that future borrowing capacity under the 2019 Credit Facility may be limited as a result of financial performance due to ~~date have not~~the adverse impact of COVID-19 on the Company’s markets and ~~are not expected to limit our financing flexibility.~~ general global demand.The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.

~~PST~~Stoneridge Brazil maintains several short-term and long-term loans used for working capital purposes. At ~~June 30, 2019,~~March 31, 2020, there was ~~$1.6~~$0.7 million of ~~PST~~Stoneridge Brazil debt outstanding. Scheduled principal repayments on ~~PST~~Stoneridge Brazil debt at ~~June 30, 2019~~March 31, 2020 were as follows: ~~$0.9~~$0.4 million from ~~July 2019~~April 2020 to ~~June 2020, $0.2~~March 2021 and $0.3 million from ~~July 2020~~April 2021 to December 2021.

In December 2019, Stoneridge Brazil established an overdraft credit line which allows overdrafts on Stoneridge Brazil’s bank account up to a maximum level of Brazilian real 5.0 million, or $1.0 million and $1.2 million, at March 31, 2020 and ~~$0.5 million in 2021.~~December 31, 2019, respectively. There was no balance outstanding on the overdraft credit line as of March 31, 2020 or December 31, 2019.

The Company’s wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a maximum level of 20.0 million Swedish krona, or ~~$2.2~~$2.0 million and $2.1 million, at ~~June 30, 2019.~~March 31, 2020 and December 31, 2019, respectively. At ~~June 30,~~March 31, 2020 and December 31, 2019, there was no balance outstanding on this overdraft credit line.

The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of ~~60.0~~40.0 million Chinese yuan, or ~~$8.7~~$5.6 million and $5.7 million, at ~~June 30, 2019. At June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. At March 31, 2020 and December 31, 2019 there was ~~no balance~~$2.1 million and $2.2 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which allows up to a maximum borrowing level of 15.0 million Chinese yuan, or $2.1 million and $2.2 million at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019 there was $0.2 million, in borrowing outstanding on ~~these credit lines.~~the Suzhou bank acceptance draft line.

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

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On October 26, 2018 the ~~Company’s~~Company announced a Board of Directors ~~authorized the Company~~approved repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into ~~a Master Confirmation (the “Master Confirmation”) and a Supplemental Confirmation, together with the Master Confirmation, the Accelerated Share Repurchase Agreement (“ASR Agreement”),~~an accelerated share repurchase agreement with Citibank N.A. ~~(the “Bank”)~~ to ~~purchase Company~~repurchase an aggregate of $50.0 million of our Common ~~Shares for a~~Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million ~~(the “Prepayment Amount”). Under the terms of the ASR Agreement, on May 7, 2019, the Company paid the Prepayment Amount to the Bank~~ and received ~~on May 8, 2019~~ an initial delivery of 1,349,528 ~~Company~~ Common Shares which ~~is approximately 80%~~became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the ~~total number~~Company’s repurchase program which became treasury shares.

On February 24, 2020, the Board of ~~Company~~Directors authorized the repurchase of $50.0 million of outstanding Common Shares ~~expected~~over an 18 month period. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased ~~under~~through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the ~~ASR Agreement based~~discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the ~~closing price~~Company to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, the Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program authorization. The Company is temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the ~~Company’s Common Shares on May 7, 2019. These Common Shares received became treasury shares and were recorded as a $40.0 million reduction to shareholder’s equity. The remaining $10.0 million~~impact of the ~~Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares.~~COVID-19 pandemic.

In January 2020, Stoneridge Brazil paid dividends to former noncontrolling interest holders of Brazilian real (“R$”) 24,154 ($6,010) as of December 31, 2019. The dividend payable related to Stoneridge Brazil was recorded within other current liabilities on the consolidated balance sheet as of December 31, 2019. See Note 14 to the condensed consolidated financial statements for additional details.

In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech fund will be contributed over the expected ten-year life of the fund. As of March 31, 2020, the Company’s cumulative investment in the Autotech fund was $2.1 million. The Company contributed ~~$1.7~~$0.4 million to the Autotech fund ~~through June 30, 2019.~~

~~PST has dividends payable to former noncontrolling interest holders of R$23.8 million Brazilian real ($6.2 million) and R$23.2 million Brazilian real ($6.0 million) as of June 30,~~during the three months ended March 31, 2019 and ~~December 31, 2018, respectively. The dividends payable balance includes R$0.6 million Brazilian real ($0.2 million) and R$0.4 million Brazilian real ($0.1 million) in monetary correction for~~did not contribute to the ~~six~~Autotech fund during the three months ended June 30, 2019 and 2018, respectively. The dividend is payable on or before January 1, 2020, and is subject to monetary correction based on the Brazilian National Extended Consumer Price inflation index (“IPCA”).

March 31, 2020.

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 5 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 30, 2019,~~March 31, 2020, we had a cash and cash equivalents balance of approximately ~~$51.5~~$81.3 million, ~~all~~ of which 66.8% was held in foreign locations. The ~~decrease~~increase in cash and cash equivalents from ~~$81.1~~$69.4 million at December 31, ~~2018~~2019 was primarily due to the repurchase of our Common Shares and lower cash flows from operations as well as the cash payment of the Orlaco earn-out consideration which were offset by proceeds from the disposal of Non-core Products and net borrowings on the 2019 Credit ~~Facility.~~Facility and the Amended Agreement, as applicable. The Company has approximately $239 million of undrawn commitments under the 2019 Credit Facility as of March 31, 2020, which results in total undrawn commitments and cash balances of more than $320 million. However, it is possible that future borrowing capacity under our 2019 Credit Facility may be limited as a result of our financial performance due the adverse impact of COVID-19 on the Company’s markets and general global demand.

Commitments and Contingencies

See Note 1110 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~~Stoneridge Brazil segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.

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Critical Accounting Policies and Estimates

The Company’s critical accounting policies, which include management’s best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company’s ~~2018~~2019 Form ~~10K~~10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of the Company’s ~~2018~~2019 Form ~~10K~~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 material changes in our significant accounting policies or critical accounting estimates during the second quarter of 2019, with the exception of lease accounting. See Note 8, “Leases,” to the condensed consolidated financial statements in this Form 10-Q for the updated lease accounting policy adopted in the first quarter of ~~2019.~~2020.

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 ~~2018~~2019 Form ~~10K~~10-K.

Inflation and International Presence

By operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Furthermore, given the current economic climate and fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 5 to the condensed consolidated financial statements for additional details on the Company’s ~~commodity price and~~ foreign currency exchange rate and interest rate risks.

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 ~~2018~~2019 Form ~~10K~~10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of ~~June 30, 2019,~~March 31, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of ~~June 30, 2019.~~March 31, 2020.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended ~~June 30, 2019~~March 31, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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~~Stoneridge Brazil 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 1110 to the condensed consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes with respect to risk factors previously disclosed in the Company’s ~~2018~~2019 Form ~~10K~~10-K. with the exception of adding the following risk factor:

We face risks related to the novel coronavirus (COVID-19) pandemic that could adversely affect our business, results of operation and financial condition.

In December 2019, a novel strain of the coronavirus (COVID-19) was reported to have been detected in Wuhan, China and on March 11, 2020 it was declared by the World Health Organization to be a global pandemic. The COVID-19 pandemic has had a negative impact on the global economy, disrupting the financial markets and increasing volatility, and has impeded global supply chains, restricted manufacturing operations and resulted in significantly reduced economic activity and higher unemployment rates. It has disrupted, and may continue to disrupt for an indefinite period of time, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway, motorcycle and agricultural vehicles by end-consumers. The COVID-19 pandemic began to impact our operations in the first quarter of 2020 and is likely to continue to adversely affect our business as government authorities continue to impose mandatory closures, work-from-home orders, social distancing protocols, and other restrictions to combat the spread of the virus. As a result, we have modified our production schedules and have experienced, and may continue to experience, delays in the production and distribution of our products and the loss or delay of customers’ sales. If the global economic effects caused by COVID-19 continue or increase, overall customer demand may continue to decrease, which could have an adverse effect on our business, results of operation and financial condition. In addition, if a significant portion of our workforce or our customers’ workforce are affected by COVID-19, either directly or due to government closures or otherwise, associated work stoppages or facility closures could halt or further delay production in our facilities, including our manufacturing facility in Juarez, Mexico which is currently expected to be shut-down until at least May 30, 2020 due to a Mexican governmental decree. Moreover, concerns over the economic impact of the COVID-19 pandemic have also caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access the capital markets. The full extent of the effect of COVID-19 on our customers, our supply chain and our business, in either scope or duration, cannot be assessed at this time although we expect our full year 2020 results of operations and financial condition to be adversely affected by COVID-19.

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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 30, 2019.~~March 31, 2020. There were ~~9,121~~75,345 Common Shares delivered to us by employees as payment for withholding taxes due upon vesting of performance share awards and share unit awards during the three months ended ~~June 30, 2019.~~March 31, 2020.

Total number of

Maximum number

shares purchased as

of shares that may

part of publicly

yet be purchased

Total number of

Average price

announced plans

under the plans
Period

shares purchased

paid per share

or programs (1)

or programs
4/1/19-4/30/19

1,652

$
31.43

N/A

(1)
5/1/19-5/31/19

1,356,924

29.63

1,349,528

(1)
6/1/19-6/30/19

73

29.39

N/A

(1)
Total

1,358,649


				Total number of	Maximum number
				shares purchased as	of shares that may
				part of publicly	yet be purchased
	Total number of	Average price		announced plans	under the plans
Period	shares purchased	paid per share		or programs	or programs
1/1/20-1/31/20	-	$	-	N/A	(1)
2/1/20-2/29/20	364,833		29.17	364,604	(1)(2)
3/1/20-3/31/20	317,750		20.36	242,634	(2)
Total	682,583

(1)

On October 26, 2018 we announced a Board of Directors approved repurchase program authorizing the Company to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, ~~the Company~~we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury ~~shares~~shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and ~~were recorded as a $40.0 million reduction~~delivered to ~~shareholders’ equity. The remaining $10.0~~the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.

(2)

On February 24, 2020, the Board of Directors authorized the repurchase of $50.0 million of ~~the initial payment was recorded as a reduction~~outstanding Common Shares over an 18 month period. The repurchases may for made from time to ~~shareholders’ equity as an unsettled forward contract indexed to our~~time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b5-1, which permit Common ~~Shares. The number of shares~~Shares to be ~~ultimately purchased by~~repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company ~~will be determined based on the volume weighted average price~~to acquire any particular amount of ~~our~~its Common Shares, ~~during~~and it may be suspended or discontinued at any time. For the ~~terms of~~quarter ended March 31, 2020, the ~~transaction, minus an agreed upon discount between the parties. The~~Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program ~~is expected to be completed by May 8, 2020.~~authorization.

Item 3. Defaults Upon Senior Securities

None.

~~Table of Contents~~

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number	Exhibit

~~2.1~~	~~Asset Purchase Agreement, dated April 1, 2019 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on April 5, 2019).~~

10.1	~~Accelerated Share Repurchase~~Employment Agreement, dated ~~May 7, 2019,~~January 3, 2020, by and between ~~Stoneridge, Inc.~~the Company and ~~Citibank (incorporated by reference to the Company’s Current Report on Form 8-K~~Kevin Heigel, filed ~~on May 8, 2019).~~herewith.

10.2	~~Fourth Amended~~Separation Agreement and ~~Restated Credit Agreement,~~Release of Claim, dated ~~June 5, 2019 (incorporated~~March 31, 2020, by and between the Company and Robert Willig, incorporated by reference to Exhibit ~~10.1 to~~99.1 on the Company’s Current Report on Form 8-K filed on ~~June 7, 2019).~~March 9, 2020.

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.

104	Cover page Interactive Data File (the Cover Page Interactive Data File is embedded within the Inline XBRL document)

	101	XBRL Exhibits:

	101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	104	The cover page from our Quarterly Report on Form 10-Q for the period ended March 31, 2020, filed with the Securities and Exchange Commission on May 6, 2020, is formatted in Inline Extensible Business Reporting Language (“iXBRL”)

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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: ~~July 31, 2019~~May 6, 2020	/s/ Jonathan B. DeGaynor
	Jonathan B. DeGaynor
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

Date: ~~July 31, 2019~~May 6, 2020	/s/ Robert R. Krakowiak
	Robert R. Krakowiak
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)

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Three months ended		June 30, 2019
Operating lease cost	$	1,433
Short-term lease cost		142
Variable lease cost		84
Total lease cost	$	1,659


		As of June 30, 2019
Assets:
Operating lease right-of-use assets	$	18,970

Liabilities:
Operating lease current liability, included in other current liabilities		4,576
Operating lease long-term liability		14,565
Total leased liabilities	$	19,141


		As of June 30, 2019
Year ending December 31,
2019 ⁽¹⁾	$	2,662
2020		4,767
2021		4,133
2022		3,178
2023		3,148
Thereafter		4,422
Total future minimum lease payments	$	22,310
Less: imputed interest		(3,169)
Total lease liabilities	$	19,141


Six months ended		June 30, 2019
Operating cash flows:
Cash paid related to operating lease obligations	$	2,212
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations	$	243


Six months ended June 30,	2019		2018
Product warranty and recall at beginning of period	$	10,494	$	9,979
Accruals for warranties established during period		3,506		2,791
Aggregate changes in pre-existing liabilities due to claim developments		1,687		1,569
Settlements made during the period		(4,442)		(2,876)
Foreign currency translation		(189)		(525)
Product warranty and recall at end of period	$	11,056	$	10,938

Summary of Cash Flows:

Six months ended June 30	2019		2018
Net cash provided by (used for):
Operating activities	$	6,664	$	28,911
Investing activities		15,756		(15,401)
Financing activities		(50,920)		(17,428)
Effect of exchange rate changes on cash and cash equivalents		(1,089)		(3,120)
Net change in cash and cash equivalents	$	(29,589)	$	(7,038)