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, 2019March 31, 2020
Commission file number: 001-13337
STONERIDGE INC
(Exact name of registrant as specified in its charter)
| ||
Ohio | | 34-1598949 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
|
| |
39675 MacKenzie Drive, Suite 400, Novi, Michigan | | 48377 |
(Address of principal executive offices) | | (Zip Code) |
(248) 489-9300 | ||
Registrant’s telephone number, including area code |
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, 2019April 30, 2020 was 27,381,333.26,993,184.
1
STONERIDGE, INC. AND SUBSIDIARIES
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | | 9 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
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”) |
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.
3
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.
4
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.
5
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 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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.
7
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.
8
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, 2019March 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 20182019 Form 10K10-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 JanuaryAugust 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.” ThisThe guidance gives entitiesin 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 itemsaccounting 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 issuedcloud 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 approach2020 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 standardit did not have a material impact on the Company’s condensed consolidated results of operations and cash flows upon adoption.
9
Table of Contentsfinancial 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 permitted2019. 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 2016-13has 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 adoptadopted this standard as of January 1, 2020 and it isdid not expected to have a material impact on itsthe Company’s condensed consolidated financial statements.
9
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, valvesswitches 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 EuropeanAsia 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.
10
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
PST.Electronics. Our PSTElectronics 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 automotivevehicle security alarms and motorcycle markets. PSTconvenience 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, 2019March 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 |
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.
11
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.
11
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 PSTStoneridge 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, 2019March 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, 2019March 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, 2019March 31, 2020 and December 31, 2018,2019, respectively.
12
(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.
12
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 subsidiariesMexican 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 deferredgains and reportedlosses 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-denominatedU.S. dollar-denominated Foreign Currency Forward ContractContracts – Cash Flow Hedges
At June 30, 2019 andDuring 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 no2019.
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-denominatedwith 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 gainevaluated the effectiveness of $62the 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 inconcluded that the condensed consolidated statements of operations as a component of other income, net related to the euro-denominated contract.hedges were effective.
13
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 ContractsInterest Rate Risk
Interest Rate Risk – Cash Flow HedgesHedge
TheOn 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 contractsfloating-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 effectivenessSwap was designated as a cash flow hedge of the Mexican peso-denominated foreign currency forward contracts held asvariable 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 Decemberpaid 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 | | $ | - | | $ | 66 | | $ | - | | $ | 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 areMarch 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 | | $ | 24 | | $ | 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 forCash 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 |
14
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
|
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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | 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 |
15
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 PSTStoneridge Brazil earn-out consideration, which is not capped, based on PST’sStoneridge Brazil’s financial performance in either 2020 or 2021. The fair value of the PSTStoneridge Brazil earn-out consideration is based on discounted cash flows utilizing forecasted EBITDAearnings 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 PSTStoneridge Brazil is recorded within other long-term liabilities in the condensed consolidated balance sheets as of June 30, 2019March 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 arewas recorded within selling, general and administrative (“SG&A”) expense in the condensed consolidated statements of operations for the three and six monthsyears 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 PSTpayout 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 statementsstatement 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 sixthree 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. ForThe expenses related to share-based compensation awards for the sixthree months ended June 30, 2019 total share-based compensationMarch 31, 2020 was $3,594 compared to $2,838 forlower than the sixthree months ended June 30, 2018. The threeMarch 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 | | | | |
16
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.
17
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, 2019March 31, 2020 and December 31, 2018,2019, respectively.
The Company was in compliance with all credit facility covenants at June 30, 2019March 31, 2020 and December 31, 2018.2019.
The Company also has outstanding letters of credit of $1,815$1,768 at both June 30, 2019March 31, 2020 and December 31, 2018.2019, respectively.
Debt
PSTStoneridge 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 PSTStoneridge Brazil at June 30, 2019March 31, 2020 was 6.0% and 7.0%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments on PSTStoneridge Brazil debt at June 30, 2019March 31, 2020 are as follows: $869$398 from July 2019 through June 2020, $258 from JulyApril 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.
17
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, 2019March 31, 2020 and December 31, 2018,2019, respectively. At June 30, 2019March 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 60,00040,000 Chinese yuan, or $8,740$5,649 and $5,746 at June 30, 2019. At June 30, 2019March 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 thesethe 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, 2019March 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.
18
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 |
| | |
19
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:
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Other information:
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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, | | June 30, | | | ||||||||
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| 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 |
20
There were 662,509789,027 and 614,670691,207 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 approximatelyapproximated 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) |
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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
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 sixthree 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) | |||||||||
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| 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)
19
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, 2019March 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 PSTStoneridge 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$19,10029,300 ($5,000)5,600) and R$29,70029,200 ($7,600)7,300) at June 30, 2019March 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.
22
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, 2019March 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
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Brazilian Indirect Tax
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’sStoneridge 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’sStoneridge 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, wethe Company recorded a pre-tax benefit of $6,473 as a reduction to SG&A expense which is inclusive of related interest income of $2,392, net of applicable professional fees of $990 in the three and six monthsyear ended June 30, 2019. Timing of realization of these recoveries is dependent upon the timing of administrative approvals and generation of federal tax liabilities eligible for offset.
(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 MarchDecember 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 expectsreceived administrative approval in January 2020 and is now able to incur approximately $760 of additional restructuring costs related tooffset 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.
24
(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 activitiesCanton Restructuring that relate to the ElectronicsControl Devices reportable segment include the following:
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| | 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 |
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| | 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 |
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 |
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| | 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
(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.
26
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSthousands, except per share data, unless otherwise stated)
(Unaudited)
A summaryIn the fourth quarter of financial information2018, 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 |
| | | | | | | | | | | | | | | |
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 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
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
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 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.
23
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 | |
24
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
28
(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, 2019March 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 PSTStoneridge 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’sStoneridge 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 hasStoneridge Brazil had dividends payable to former noncontrolling interest holders of R$23,783 Brazilian real24,154 ($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 includesincluded R$580 Brazilian real261 ($150) and R$419 Brazilian real ($108)68) in monetary correction for the sixthree 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 isStoneridge 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.
25
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 sixthree 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, 2019March 31, 2020 and December 31, 2018,2019, respectively.
29
(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 willwould 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 currentlywere manufactured in Juarez, Mexico and Canton, Massachusetts, and includeincluded 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, theThe Company received $675$21 for services provided pursuant to the transition services agreement which waswere 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 ProductsProduct net sales and operating income was $24,310were $11,230 and $3,373,$3,112, for the sixthree 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.
3026
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, monitorsconnectivity 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.
SecondFirst 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 $39.8decreased 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, 2018primarily 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 repurchaseRepurchase program (“ASR Agreement”), we purchasedrepurchased 1,349,528 outstanding Common Shares on May 8, 2019 whichand 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 2019the first quarter 2020 diluted weighted-average shares outstanding.outstanding compared to the first quarter of 2019.
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Net sales increaseddecreased by $1.6$35.3 million, or 0.7%16.2%, while our operating income increaseddecreased by $30.0$8.0 million, or 156.4%68.7%.
Our Control Devices segment net sales increaseddecreased by 3.7%12.0% primarily due to the one-time saleas 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 programthe 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, segmentplan 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 increaseddecreased by 1.4%21.2% primarily due to an increasea 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 higherlower sales, being offset by an unfavorable product mix, price downs on legacy products and higher materialadverse leverage of fixed costs for electronic components.from lower sales levels. Operating income for the segment decreased by 8.7% relative68.2% compared to the second quarter of 20182019 due to lower segment gross margin.
Our PSTStoneridge 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 installeralarm products. Segment gross margin declined due to the reduction in sales partially offset byvolume and adverse sales mix from lower overhead costs.sales of alarm products. Operating income increaseddecreased compared to the second quarter of 20182019 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 secondfirst quarter of 2019,2020, SG&A expenses decreased by $7.7$6.4 million mostly due to PST’s recoverylower 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 RestructuringFacility in the first quarter of $0.32020 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, 2019March 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 decreaseincrease in cash and cash equivalents in the first halfquarter of 20192020 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, 2019March 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
TheWhile 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 16.616.3 million units in 2019. Based on our product mix, the2019 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 withdecline from the prior year.
TheWe expect full year 2020 European and North American commercial vehicle market increased in 2018 and we expect itvolumes to increase slightly in 2019. We expect the European commercial vehicle market in 2019significantly decline compared to remain at approximately the same level with 2018.prior year volumes due to adverse economic conditions caused by COVID-19.
Our PST2019 Stoneridge Brazil segment revenues in the second quarter of 2019 decreaseddeclined compared to the second quarter of 2018, mostlyprior year due to the lower volumes in mostour Brazilian served markets as well asfor 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 improvementsdecline 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 PSTStoneridge 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 level28
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 PSTStoneridge 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 20192020 and 2018,2019, unfavorably impacting our material costs and reported results.
In January 2019, we committed to a restructuring plan that will resultresulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) by the endas of 2019March 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 includeincluded 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 provideprovided 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 currentlywere 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 sharesshares. 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 reductiondelivered to shareholder’ equity. The remaining $10.0 millionthe Company, 364,604 Common Shares representing the final settlement of the initial payment was recorded asCompany’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a reductionnew 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 ourtime 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 sharesShares to be ultimately purchased byrepurchased 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 priceto acquire any particular amount of ourits Common Shares, duringand it may be suspended or discontinued at any time. For the termsquarter 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 betweenimpact 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’sStoneridge 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’sStoneridge 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 threesecond quarter of 2019. The Company received administrative approval in January 2020 and six months ended June 30, 2019. Timingis now offsetting eligible federal taxes with these tax credits. The Brazilian tax authorities have sought clarification before the Supreme Court of realizationBrazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these recoveriescredits. The timing for a decision is dependent uponuncertain due to the timing of administrative approvals and generation of federalCOVID-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 realignmentrestructuring 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, weWe 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, 2019March 31, 2020 Compared to Three Months Ended June 30, 2018March 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 increaseddecreased primarily due toas a result of decreased sales volume of $11.1 million from the one-time saledisposal of Non-core Product inventoryProducts 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 slightlydecreased 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 productsmarket 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 nearingrespectively. In addition, the end of product life.
Our PSTElectronics 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 installersalarm products.
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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 increasedecrease in North American net sales was primarily attributable to a reduction of $11.1 million from the one-time saledisposal of Control Devices’ Non-core Product inventoryProducts in the second quarter of $4.22019. 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 marketsvolumes 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 increasedecrease 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 marketmarkets 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.
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Cost of Goods Sold and Gross Margin. Cost of goods sold increased fromdecreased compared to the secondfirst quarter of 20182019 and our gross margin decreased from 30.6%27.9% in the secondfirst quarter of 20182019 to 25.6%24.8% in the secondfirst 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 secondfirst quarter of 20192020 compared to 51.3%52.3% in the secondfirst quarter of 2018.2019. Direct material costs in our Control Devices segment waswere negatively impacted by adverseunfavorable product mix and purchase price variancesincluding 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 secondfirst 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 theadverse fixed cost leverage on lower sales levels including our Canton Restructuring costs of $2.4 million and higherfacility 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 costsas a percentage of $2.4 million, higher warranty costs and an increase in direct material costssales 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 materialoverhead costs for electronic components offsetting the impactas a percentage of slightly higher sales.sales due to adverse leverage of fixed costs.
Our PSTStoneridge 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 secondfirst quarter of 2018 primarily2019 due to PST’s recoverystaff reductions from the closure of Brazilian indirect taxesthe Canton Facility during the first quarter of $6.5 million2020 at Control Devices and lower sellingincentive compensation costs Control Devices transitionaland professional service cost reimbursementfees 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.
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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 increaseddecreased by $1.1$1.0 million primarily due to higher D&D costs in our Control Devices segment for Canton Restructuring relatedcapitalization of software development costs of $0.8 million and in our unallocated corporate segment forlower spending at Control Devices due to the establishmentpace of the chief technology office. Consolidated customer reimbursement for development projects increased $0.8 million duringrestoration 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 increaseddecreased 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 higherlower SG&A costs forfrom 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 andresulting in lower SG&A costs.gross margin.
Our PSTStoneridge Brazil segment operating income increased primarily due to the recoverya 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.
32
Our unallocated corporate operating loss increaseddecreased primarily from higher wagesincentive 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 increaseddecreased 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&Acommercial 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 costsa 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 lowerthe unfavorable foreign currency translation impact on sales in our European off-highway market and higher material costs offset by higheras well as lower sales in our commercial vehicle market.
36
Interest Expense, net. Interest expense, net decreased by $0.2 million compared toremained consistent with the prior year secondfirst 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 decreasedincreased by $0.2$1.2 million to $0.1$1.6 million in the secondfirst quarter of 20192020 compared to other income, net of $0.3$0.4 million for the secondfirst quarter of 20182019 primarily due to lowerhigher foreign currency transaction gains in our Electronics segment.
Provision for Income Taxes. We recognizedIn the three months ended March 31, 2020, income tax expense of $9.1$1.2 million and $3.8 millionwas 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 forwhich a valuation allowance is recorded.
In the three months ended June 30,March 31, 2019, comparedincome tax expense of $1.8 million was attributable to the same period for 2018 wasmix 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 saleannual 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) | % |
37
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.
38
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.
39
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
Cash provided byused for operating activities decreasedincreased compared to the first halfquarter of 20182019 primarily due to the lower net income excludingand the gain on disposal relatedpayment of dividends to Control Devices’ Non-core Products andformer noncontrolling interest holders of Stoneridge Brazil of $6.0 million offset by a higher use ofreduction 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 byused for investing activities increaseddecreased compared to 20182019 due to the cash proceeds received from the disposal of Control Devices’ Non-core products related offset bylower 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 forprovided 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 duringin the secondfirst 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 inMarch 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 notthe 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.
PSTStoneridge 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 PSTStoneridge Brazil debt outstanding. Scheduled principal repayments on PSTStoneridge Brazil debt at June 30, 2019March 31, 2020 were as follows: $0.9$0.4 million from July 2019April 2020 to June 2020, $0.2March 2021 and $0.3 million from July 2020April 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 60.040.0 million Chinese yuan, or $8.7$5.6 million and $5.7 million, at June 30, 2019. At June 30, 2019March 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.
4134
On October 26, 2018 the Company’sCompany announced a Board of Directors authorized the Companyapproved 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 Companyrepurchase an aggregate of $50.0 million of our Common Shares for aShares. 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 numberCompany’s repurchase program which became treasury shares.
On February 24, 2020, the Board of CompanyDirectors authorized the repurchase of $50.0 million of outstanding Common Shares expectedover 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 underthrough pre-determined criteria. The timing, volume and nature of common share repurchases will be at the ASR Agreement baseddiscretion 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 priceCompany 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 $10.0 millionimpact of the Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares.COVID-19 pandemic.
In January 2020, Stoneridge Brazil paid dividends to former noncontrolling interest holders of Brazilian real (“R$”) 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 fordid not contribute to the sixAutotech 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 decreaseincrease in cash and cash equivalents from $81.1$69.4 million at December 31, 20182019 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 PSTStoneridge 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 20182019 Form 10K10-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 20182019 Form 10K10-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 20182019 Form 10K10-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 20182019 Form 10K10-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, 2019March 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 PSTStoneridge 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 20182019 Form 10K10-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 9,12175,345 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, |
(2) | On February 24, 2020, the Board of Directors authorized the repurchase of $50.0 million of |
Item 3. Defaults Upon Senior Securities
None.
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Item 6. Exhibits
Exhibit |
| Exhibit | ||
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10.1 | | |||
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10.2 | | |||
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31.1 | | |||
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31.2 | | |||
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32.1 | | |||
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32.2 | | |||
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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: | /s/ Jonathan B. DeGaynor |
Jonathan B. DeGaynor | |
| President, Chief Executive Officer and Director |
(Principal Executive Officer) | |
Date: | /s/ Robert R. Krakowiak |
Robert R. Krakowiak | |
Executive Vice President, Chief Financial Officer and Treasurer | |
(Principal Financial Officer) |
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