UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended ~~September~~June 30, ~~2019~~2020

Commission file number: 001-13337

Stoneridge

STONERIDGE INC

(Exact name of registrant as specified in its charter)


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

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


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

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

Common Shares, without par value SRI New York Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

~~Table of Contents~~

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 ~~October 25, 2019~~July 24, 2020 was ~~27,403,031.~~27,003,157.

Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES


INDEX		Page
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 (Unaudited) and December 31, ~~2018~~2019	54
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	65
	Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	76
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	87
	Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	98
	Notes to Condensed Consolidated Financial Statements (Unaudited)	109
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3130
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4243
Item 4.	Controls and Procedures	4243

PART II–OTHER INFORMATION

Item 1.	Legal Proceedings	4344
Item 1A.	Risk Factors	4344
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4345
Item 3.	Defaults Upon Senior Securities	4345
Item 4.	Mine Safety Disclosures	4445
Item 5.	Other Information	4445
Item 6.	Exhibits	4546

Signatures		4647

Table of Contents

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 impact of COVID-19, or other future pandemics, on the global economy, and on our customers, suppliers, employees, business and cash flows;

●

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 outside our control;

●

the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis, including the impact of potential tariffs and trade considerations on their operations and output;

●

the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving credit facility;

●

capital availability or costs, including changes in interest rates or market perceptions;

●

the failure to achieve the successful integration of any acquired company or business;

●

risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber-attack and other similar disruptions; and

●

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

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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONERIDGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,		June 30,		December 31,
(in thousands)	2019		2018		2020		2019
		(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	55,263	$	81,092	$	72,412	$	69,403
Accounts receivable, less reserves of $1,752 and $1,243, respectively		143,628		139,076
Accounts receivable, less reserves of $676 and $1,289, respectively						97,404		138,564
Inventories, net		103,597		79,278		96,933		93,449
Prepaid expenses and other current assets		28,754		20,731		29,894		29,850
Total current assets		331,242		320,177		296,643		331,266
Long-term assets:
Property, plant and equipment, net		118,062		112,213		117,219		122,483
Intangible assets, net		56,926		62,032		50,968		58,122
Goodwill		34,867		36,717		35,942		35,874
Operating lease right-of-use asset		20,899		-		20,038		22,027
Investments and other long-term assets, net		32,008		28,380		36,409		32,437
Total long-term assets		262,762		239,342		260,576		270,943
Total assets	$	594,004	$	559,519	$	557,219	$	602,209

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt	$	2,752	$	1,533	$	4,831	$	2,672
Accounts payable		95,804		87,894		52,037		80,701
Accrued expenses and other current liabilities		62,092		57,880		47,101		55,223
Total current liabilities		160,648		147,307		103,969		138,596
Long-term liabilities:
Revolving credit facility		108,500		96,000		161,000		126,000
Long-term debt, net		559		983		152		454
Deferred income taxes		13,374		14,895		11,193		12,530
Operating lease long-term liability		17,059		-		16,200		17,971
Other long-term liabilities		17,284		17,068		15,443		16,754
Total long-term liabilities		156,776		128,946		203,988		173,709
Shareholders' equity:
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 27,402 and 28,488 shares outstanding at September 30, 2019 and December 31, 2018, respectively, with 0 stated value		-		-
Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 27,001 and 27,408 shares outstanding at June 30, 2020 and December 31, 2019, respectively, with 0 stated value						-		-
Additional paid-in capital		224,251		231,647		230,818		225,607
Common Shares held in treasury, 1,564 and 478 shares at September 30, 2019 and December 31, 2018, respectively, at cost		(50,836)		(8,880)
Common Shares held in treasury, 1,965 and 1,558 shares at June 30, 2020 and December 31, 2019, respectively, at cost						(60,639)		(50,773)
Retained earnings		202,333		146,251		188,298		206,542
Accumulated other comprehensive loss		(99,168)		(85,752)		(109,215)		(91,472)
Total shareholders' equity		276,580		283,266		249,262		289,904
Total liabilities and shareholders' equity	$	594,004	$	559,519	$	557,219	$	602,209

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

Table of Contents

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three months ended

Nine months ended

September 30,

September 30,
(in thousands, except per share data)

2019

2018

2019

2018

Net sales

$
203,386

$
208,853

$
643,924

$
655,385
Costs and expenses:

Cost of goods sold

151,531

145,568

474,389

456,713
Selling, general and administrative

30,978

32,589

94,088

105,106
Gain on disposal of non-core products, net

-

-

(33,599)

-
Design and development

11,554

12,384

38,838

39,226
Operating income

9,323

18,312

70,208

54,340
Interest expense, net

1,149

1,155

3,153

3,679
Equity in earnings of investee

(318)

(249)

(1,230)

(1,435)
Other income (loss), net

381

647

(148)

(216)
Income before income taxes

8,111

16,759

68,433

52,312
Provision for income taxes

1,450

3,467

12,351

10,520
Net income

$
6,661

$
13,292

$
56,082

$
41,792
Earnings per share:

Basic

$
0.24

$
0.47

$
2.01

$
1.47
Diluted

$
0.24

$
0.46

$
1.97

$
1.44
Weighted-average shares outstanding:

Basic

27,370

28,453

27,929

28,384
Diluted

27,796

29,065

28,425

29,073


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

Net sales	$	99,545	$	222,241	$	282,511	$	440,538
Costs and expenses:
Cost of goods sold		86,291		165,414		223,860		322,858
Selling, general and administrative		27,693		27,522		57,196		63,110
Gain on disposal of Non-core Products, net		-		(33,921)		-		(33,599)
Design and development		12,384		14,040		24,619		27,284
Operating (loss) income		(26,823)		49,186		(23,164)		60,885
Interest expense, net		1,410		1,001		2,440		2,004
Equity in loss (earnings) of investee		231		(548)		(226)		(912)
Other income, net		(9)		(97)		(1,626)		(529)
(Loss) income before income taxes		(28,455)		48,830		(23,752)		60,322
(Benefit) provision for income taxes		(6,721)		9,066		(5,508)		10,901
Net (loss) income	$	(21,734)	$	39,764	$	(18,244)	$	49,421

(Loss) earnings per share:
Basic	$	(0.81)	$	1.43	$	(0.67)	$	1.75
Diluted	$	(0.81)	$	1.41	$	(0.67)	$	1.72
Weighted-average shares outstanding:
Basic		26,952		27,887		27,092		28,208
Diluted		26,952		28,294		27,092		28,716

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

Table of Contents

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)


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

Net (loss) income	$	(21,734)	$	39,764	$	(18,244)	$	49,421

Other comprehensive income (loss), net of tax:
Foreign currency translation		1,821		2,311		(15,298)		(1,493)
Unrealized gain (loss) on derivatives ⁽¹⁾		1,210		(112)		(2,445)		(70)
Other comprehensive income (loss), net of tax		3,031		2,199		(17,743)		(1,563)

Comprehensive (loss) income	$	(18,703)	$	41,963	$	(35,987)	$	47,858

(1)	Net of tax expense (benefit) of $322 and $(30) for the three months ended June 30, 2020 and 2019, respectively. Net of tax benefit of $(650) and $(19) for the six months ended June 30, 2020 and 2019, respectively.

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

Table of Contents

~~STONERIDGE, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(Unaudited)~~

Three months ended

Nine months ended

September 30,

September 30,
(in thousands)

2019

2018

2019

2018

Net income

$
6,661

$
13,292

$
56,082

$
41,792

Other comprehensive (loss) income, net of tax:

Foreign currency translation

(11,727)

(3,339)

(13,220)

(16,866)
Unrealized (loss) gain on derivatives ⁽¹⁾

(126)

32

(196)

668
Other comprehensive loss, net of tax

(11,853)

(3,307)

(13,416)

(16,198)

Comprehensive income (loss)

$
(5,192)

$
9,985

$
42,666

$
25,594

~~(1)~~

Net of tax expense (benefit) of $(34) and $47 for the three months ended September 30, 2019 and 2018, respectively. Net of tax expense (benefit) of $(53) and $218 for the nine months ended September 30, 2019 and 2018, respectively.

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

~~Table of Contents~~

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Nine months ended September 30, (in thousands)

2019

2018


OPERATING ACTIVITIES:

Net income

$
56,082

$
41,792

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Depreciation

18,227

17,073

Amortization, including accretion and write-off of deferred financing costs

5,035

5,112

Deferred income taxes

4,374

2,399

Earnings of equity method investee

(1,230)

(1,435)

Gain on sale of fixed assets

(132)

(21)

Share-based compensation expense

4,699

4,214

Tax benefit related to share-based compensation expense

(655)

(879)

Gain on disposal of non-core products, net

(33,599)

-

Change in fair value of earn-out contingent consideration

1,862

1,918

Changes in operating assets and liabilities, net of effect of business combination:

Accounts receivable, net

(8,864)

(15,145)

Inventories, net

(27,333)

(18,041)

Prepaid expenses and other assets

(11,232)

(1,086)

Accounts payable

12,011

15,280

Accrued expenses and other liabilities

1,277

(3,543)

Net cash provided by operating activities

20,522

47,638

INVESTING ACTIVITIES:

Capital expenditures, including intangibles

(30,771)

(22,816)

Proceeds from sale of fixed assets

329

44

Insurance proceeds for fixed assets

-

1,403

Proceeds from disposal of non-core products

34,386

-

Investment in venture capital fund

(1,200)

-

Net cash provided by (used for) investing activities

2,744

(21,369)

FINANCING ACTIVITIES:

Revolving credit facility borrowings

81,500

27,500

Revolving credit facility payments

(69,000)

(47,500)

Proceeds from issuance of debt

2,195

369

Repayments of debt

(1,300)

(4,372)

Earn-out consideration cash payment

(3,394)

-

Other financing costs

(1,346)

-

Common Share repurchase program

(50,000)

-

Repurchase of Common Shares to satisfy employee tax withholding

(4,037)

(4,206)

Net cash used for financing activities

(45,382)

(28,209)

Effect of exchange rate changes on cash and cash equivalents

(3,713)

(3,408)

Net change in cash and cash equivalents

(25,829)

(5,348)

Cash and cash equivalents at beginning of period

81,092

66,003

Cash and cash equivalents at end of period

$
55,263

$
60,655

Supplemental disclosure of cash flow information:

Cash paid for interest

$
3,210

$
3,899

Cash paid for income taxes, net

$
11,858

$
14,899


Six months ended June 30 (in thousands)	2020		2019

OPERATING ACTIVITIES:
Net (loss) income	$	(18,244)	$	49,421
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		13,242		11,819
Amortization, including accretion and write-off of deferred financing costs		2,732		3,464
Deferred income taxes		(7,018)		3,804
Earnings of equity method investee		(226)		(912)
Loss (gain) on sale of fixed assets		131		(26)
Share-based compensation expense		2,110		3,594
Excess tax deficiency (benefit) related to share-based compensation expense		40		(752)
Gain on disposal of Non-core Products, net		-		(33,599)
Property, plant and equipment impairment charge		2,326		-
Change in fair value of earn-out contingent consideration		(233)		905
Change in fair value of venture capital fund		139		16
Changes in operating assets and liabilities, net of effect of business combination:
Accounts receivable, net		37,644		(13,440)
Inventories, net		(6,295)		(21,798)
Prepaid expenses and other assets		992		(9,678)
Accounts payable		(26,044)		13,604
Accrued expenses and other liabilities		(7,829)		242
Net cash (used for) provided by operating activities		(6,533)		6,664

INVESTING ACTIVITIES:
Capital expenditures, including intangibles		(17,194)		(17,479)
Proceeds from sale of fixed assets		19		49
Proceeds from disposal of Non-core Products		-		34,386
Investment in venture capital fund		(750)		(1,200)
Net cash (used for) provided by investing activities		(17,925)		15,756

FINANCING ACTIVITIES:
Revolving credit facility borrowings		71,500		55,000
Revolving credit facility payments		(36,500)		(47,500)
Proceeds from issuance of debt		17,345		55
Repayments of debt		(15,204)		(999)
Earn-out consideration cash payment		-		(3,394)
Other financing costs		(1,038)		(873)
Common Share repurchase program		(4,995)		(50,000)
Repurchase of Common Shares to satisfy employee tax withholding		(1,741)		(3,209)
Net cash provided by (used for) financing activities		29,367		(50,920)

Effect of exchange rate changes on cash and cash equivalents		(1,900)		(1,089)
Net change in cash and cash equivalents		3,009		(29,589)
Cash and cash equivalents at beginning of period		69,403		81,092

Cash and cash equivalents at end of period	$	72,412	$	51,503

Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,344	$	2,198
Cash paid for income taxes, net	$	636	$	7,100

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

Table of Contents

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, net	(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 loss on derivatives, net	—	—		—		—		—		(159)		(159)
Currency translation adjustments	—	—		—		—		—		(17,421)		(17,421)
Issuance of Common Shares	11	(11)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(18)	18		—		(406)		—		—		(406)
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 , JUNE 30, 2018	28,483	483	$	228,856	$	(8,911)	$	120,552	$	(82,451)	$	258,046
Net income	—	—		—		—		13,292		—		13,292
Unrealized gain on derivatives, net	—	—		—		—		—		32		32
Currency translation adjustments	—	—		—		—		—		(3,339)		(3,339)
Repurchased Common Shares for treasury, net	—	—		—		36		—		—		36
Share-based compensation	—	—		1,373		—		—		—		1,373
Cumulative effect of an accounting change	—	—		—		—		(41)		—		(41)
BALANCE SEPTEMBER 30, 2018	28,483	483	$	230,229	$	(8,875)	$	133,803	$	(85,758)	$	269,399



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, net	(98)	98		—		(1,883)		—		—		(1,883)	(98)	98		—		(1,883)		—		—		(1,883)
Share-based compensation	—	—		480		—		—		—		480
Tax benefit from share based compensation transactions													—	—		—		—		—		—		—
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
Net income	—	—		—		—		39,764		—		39,764	—	—		—		—		39,764		—		39,764
Unrealized loss on derivatives, net	—	—		—		—		—		(112)		(112)	—	—		—		—		—		(112)		(112)
Currency translation adjustments	—	—		—		—		—		2,311		2,311	—	—		—		—		—		2,311		2,311
Issuance of Common Shares	31	(31)		—		—		—		—		—	31	(31)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(9)	9		—		74		—		—		74	(9)	9		—		74		—		—		74
Common Share repurchase program	(1,350)	1,350		(10,000)		(40,000)		—		—		(50,000)	(1,350)	1,350		(10,000)		(40,000)		—		—		(50,000)
Share-based compensation	—	—		1,704		—		—		—		1,704
Share-based compensation, net													—	—		1,704		—		—		—		1,704
BALANCE JUNE 30, 2019	27,367	1,599	$	223,831	$	(50,689)	$	195,672	$	(87,315)	$	281,499	27,367	1,599	$	223,831	$	(50,689)	$	195,672	$	(87,315)	$	281,499
			��
BALANCE JUNE 30, 2019	27,367	1,599	$	223,831	$	(50,689)	$	195,672	$	(87,315)	$	281,499


BALANCE DECEMBER 31, 2019													27,408	1,558	$	225,607	$	(50,773)	$	206,542	$	(91,472)	$	289,904
Net income	—	—		—		—		6,661		—		6,661	—	—		—		—		3,490		—		3,490
Unrealized loss on derivatives, net	—	—		—		—		—		(126)		(126)	—	—		—		—		—		(3,655)		(3,655)
Currency translation adjustments	—	—		—		—		—		(11,727)		(11,727)	—	—		—		—		—		(17,119)		(17,119)
Issuance of Common Shares	62	(62)		—		—		—		—		—	267	(267)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(27)	27		—		(147)		—		—		(147)	(75)	75		—		4,769		—		—		4,769
Share-based compensation	—	—		420		—		—		—		420
BALANCE SEPTEMBER 30, 2019	27,402	1,564	$	224,251	$	(50,836)	$	202,333	$	(99,168)	$	276,580
Common Share repurchase program													(607)	607		10,000		(14,995)		—		—		(4,995)
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

Net loss													—	—		—		—		(21,734)		—		(21,734)
Unrealized gain on derivatives, net													—	—		—		—		—		1,210		1,210
Currency translation adjustments													—	—		—		—		—		1,821		1,821
Issuance of Common Shares													12	(12)		—		—		—		—		—
Repurchased Common Shares for treasury, net													(4)	4		—		360		—		—		360
Common Share repurchase program													—	—		—		—		—		—		—
Share-based compensation, net													—	—		312		—		—		—		312
BALANCE JUNE 30, 2020													27,001	1,965	$	230,818	$	(60,639)	$	188,298	$	(109,215)	$	249,262

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s ~~2018~~2019 Form 10-K.

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

(2) Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In ~~January~~August 2018, the Financial Accounting Standards Board (“(‘FASB”) issued Accounting Standards Update (“ASU”) ~~2018-02, “Income Statement~~ – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the enactment of Tax Cuts and Jobs Act related to items in accumulated other comprehensive income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance 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 the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued 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 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 using the modified retrospective approach 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. This standard did not have a material impact on the Company’s condensed consolidated results of operations and cash flows upon adoption.~~

~~Accounting Standards Not Yet Adopted~~

~~In August 2018, the FASB issued ASU~~ 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, ~~2019, and earlier adoption is permitted including adoption in any interim period.~~2019. The Company ~~is currently evaluating the impact of its pending adoption of ASU 2018-15. The Company will adopt~~adopted this standard prospectively as of January 1, 2020 and it isdid not ~~expected to~~ have a material impact on the Company’s condensed consolidated financial statements.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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, 2019, with early adoption permitted. The Company ~~is currently evaluating the impact of its pending adoption of ASU 2018-13. The Company will adopt~~adopted this standard as of January 1, 2020 and it isdid not ~~expected to~~ have a material impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, ~~2019, and early adoption is permitted~~2019. The guidance allows for ~~annual periods beginning after December 15, 2018.~~various methods for measuring expected credit losses. The Company ~~is currently evaluating the impact of its pending adoption of ASU 2016-13~~has elected to apply a historical loss rate based on ~~the consolidated financial statements.~~historical write-offs by region, adjusted for current economic conditions and forecasts about future economic conditions that are reasonable and supportable. The Company ~~will adopt~~adopted this standard as of January 1, 2020 and it isdid not ~~expected to~~ have a material impact on the Company’s condensed consolidated financial statements.

Table of Contents

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 will also allow companies to elect various optional expedients which would allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements.

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

(3) Revenue

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. The expected costs associated with our base warranties continue to be recognized as expense when the products are sold. Customer returns only occur if products do not meet the specifications of the contract and are not connected to any repurchase obligations of the Company.

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

Revenue by Reportable Segment

Control Devices. Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as actuators, sensors, ~~actuators, valves~~switches and ~~switches.~~connectors. We sell these products principally to the automotive market in the North American, European, and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in our North America, European and ~~European~~Asia Pacific regions. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“Tier 1 supplier”).

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

~~PST.~~Electronics. Our ~~PST~~Electronics segment designs and manufactures driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. These products are sold principally to the commercial vehicle market primarily through our OEM and aftermarket channels in the North American and European regions, and to a lesser extent, the Asia Pacific region. The camera-based vision systems and related products are sold principally to the off-highway vehicle market in the North American and European regions.

Stoneridge Brazil. Our Stoneridge Brazil segment (also referred to as “PST” in prior filings) primarily serves the South American region and specializes in the design, manufacture and sale of ~~in-vehicle audio and video devices, electronic vehicle security alarms, convenience accessories,~~ vehicle tracking devices and monitoring services, ~~primarily for the automotive~~vehicle security alarms and ~~motorcycle markets. PST~~convenience accessories, in-vehicle audio and infotainment devices and telematics solutions. Stoneridge Brazil sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers. In addition, monitoring services and tracking devices are sold directly to corporate customers and individual consumers.

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


	Control Devices				Electronics				PST				Consolidated				Control Devices				Electronics				Stoneridge Brazil				Consolidated
Three months ended September 30	2019		2018		2019		2018		2019		2018		2019		2018
Three months ended June 30,																	2020		2019		2020		2019		2020		2019		2020		2019
Net Sales:
North America	$	92,743	$	97,017	$	23,073	$	22,458	$	-	$	-	$	115,816	$	119,475	$	31,373	$	98,066	$	11,749	$	25,227	$	-	$	-	$	43,122	$	123,293
South America		-		-		-		-		16,542		18,864		16,542		18,864		-		-		-		-		7,010		16,614		7,010		16,614
Europe		6,046		4,174		53,588		58,315		-		-		59,634		62,489		4,434		5,456		32,585		64,798		-		-		37,019		70,254
Asia Pacific		9,901		7,211		1,493		814		-		-		11,394		8,025		11,198		10,545		1,196		1,535		-		-		12,394		12,080
Total net sales	$	108,690	$	108,402	$	78,154	$	81,587	$	16,542	$	18,864	$	203,386	$	208,853	$	47,005	$	114,067	$	45,530	$	91,560	$	7,010	$	16,614	$	99,545	$	222,241


	Control Devices				Electronics				PST				Consolidated				Control Devices				Electronics				Stoneridge Brazil				Consolidated
Nine months ended September 30	2019		2018		2019		2018		2019		2018		2019		2018
Six months ended June 30																	2020		2019		2020		2019		2020		2019		2020		2019
Net Sales:
North America	$	287,529	$	300,024	$	70,947	$	64,765	$	-	$	-	$	358,476	$	364,789	$	111,783	$	194,786	$	31,190	$	47,874	$	-	$	-	$	142,973	$	242,660
South America		-		-		-		-		50,488		59,742		50,488		59,742		-		-		-		-		21,580		33,946		21,580		33,946
Europe		15,914		10,734		185,328		194,270		-		-		201,242		205,004		11,822		9,868		83,891		131,740		-		-		95,713		141,608
Asia Pacific		29,433		22,957		4,285		2,893		-		-		33,718		25,850		20,250		19,532		1,995		2,792		-		-		22,245		22,324
Total net sales	$	332,876	$	333,715	$	260,560	$	261,928	$	50,488	$	59,742	$	643,924	$	655,385	$	143,855	$	224,186	$	117,076	$	182,406	$	21,580	$	33,946	$	282,511	$	440,538

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

Performance Obligations

For OEM and Tier 1 supplier customers, the Company typically enters into contracts ~~with its customers~~ to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts. The majority of the parts sold to OEM and Tier 1 supplier customers are 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.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

A small portion of the Company’s sales are comprised of monitoring services that include both monitoring devices and fees to individual, corporate, fleet and cargo customers in our ~~PST~~Stoneridge Brazil segment. These monitoring service contracts are generally not capable of being distinct and are accounted for as a single performance obligation. We recognize revenue for our monitoring products and services contracts over the life of the contract. There is no variable consideration associated with these contracts. The Company has the right to consideration from a customer in the amount that corresponds directly with the value to the customer of the Company’s performance to date. Therefore, the Company recognizes revenue over time using the practical expedient ASC 606-10-55-18 in the amount the Company has a “right to invoice” rather than selecting an output or input method.

Contract Balances

The Company had 0 material contract assets, contract liabilities or capitalized contract acquisition costs as of ~~September~~June 30, ~~2019~~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:


	September 30,		December 31,		June 30,		December 31,
	2019		2018		2020		2019
Raw materials	$	61,387	$	54,382	$	72,316	$	66,357
Work-in-progress		6,674		4,710		6,410		5,582
Finished goods		35,536		20,186		18,207		21,510
Total inventories, net	$	103,597	$	79,278	$	96,933	$	93,449

Inventory valued using the FIFO method was ~~$90,359~~$86,694 and ~~$64,745~~$82,910 at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Inventory valued using the average cost method was ~~$13,238~~$10,239 and ~~$14,533~~$10,539 at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

(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.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Derivative Instruments and Hedging Activities

On ~~September~~June 30, ~~2019,~~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.

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

These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow ~~hedges with the exception of the euro-denominated foreign currency forward contract.~~hedges. As such, ~~the effective portion of the unrealized gain or loss was deferred~~gains and ~~reported~~losses on derivatives qualifying as cash flow hedges are recorded in ~~the Company’s condensed consolidated balance sheets as a component of~~ accumulated other comprehensive ~~loss.~~income, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive income will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the currency.

In certain instances, the foreign currency forward contracts domay not qualify for hedge accounting or are not designated as hedges, and therefore are marked-to-market with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other income (loss), net. At June 30, 2020, all of the Company’s foreign currency forward contracts were designated as cash flow hedges.

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

~~Euro-denominated Foreign Currency Forward Contract~~

~~At September 30, 2019 and December~~ 31, 2018, there were no foreign currency forward contracts entered into as the prior year contract was settled in December 2018. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of $10 and $52, respectively, for the three and nine months ended September 30, 2018 in the condensed consolidated statements of operations as a component of other income, net related to the euro-denominated contract.

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

The Company entered into ~~on behalf of one of its European Electronics subsidiaries, whose functional currency is the Swedish krona,~~ U.S. dollar-denominated currency contracts ~~which expired ratably on a monthly basis from February 2018 through December 2018. There were 0 such contracts at September 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~~with a notional amount at June 30, 2020 of $1,400 which ~~expired~~expire ratably on a monthly basis from ~~February 2018~~July 2020 through December ~~2018.~~2020. There were 0 such contracts at ~~September 30, 2019 or~~ December 31, ~~2018.~~2019.

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

The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at ~~September~~June 30, ~~2019~~2020 of ~~$1,489~~$15,402 which expire ratably on a monthly basis from ~~October 2019 through December 2019, compared~~July 2020 to ~~a notional amount of $9,017~~March 2021. There were 0 open Mexican peso-denominated foreign currency forward contracts at December 31, ~~2018.~~2019.

The Company evaluated the effectiveness of the Mexican peso and euro-denominated forward contracts held as of June 30, 2020 and 2019, and for the six months then ended, and concluded that the hedges were effective.

1413

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~(Unaudited)~~

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of September 30, 2019 and December 31, 2018 and concluded that the hedges were highly effective.

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

Prepaid expenses

Accrued expenses and

Notional amounts ^(A)

and other current assets

other current liabilities

September 30,

December 31,

September 30,

December 31,

September 30,

December 31,


2019

2018

2019

2018

2019

2018
Derivatives designated as hedging instruments:

Cash flow hedges:

Forward currency contracts

$
1,489

$
9,017

$
121

$
370

$
-

$
-

~~(A)~~

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

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

Gain reclassified from

Gain (loss) 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

$
(29)

$
637

$
131

$
558

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

Gains reclassified from

Gain recorded in other

other comprehensive income

comprehensive income

into net income ^(A)


2019

2018

2019

2018
Derivatives designated as cash flow hedges:

Forward currency contracts

$
397

$
1,819

$
646

$
933

~~(A) Gains reclassified from other comprehensive income (loss) into net income recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were~~ $131 and $521 for the three and nine months ended September 31, 2019, respectively. Gains reclassified from other comprehensive income (loss) into net income recognized in design and development (“D&D”) in the Company’s condensed consolidated statements of operations were $0 and $125 for the three and nine months ended September 30, 2019. Gains reclassified from other comprehensive income (loss) into net income recognized in COGS in the Company’s condensed consolidated statements of operations were $495 and $834 for the three and nine months ended September 30, 2018, respectively. Gains reclassified from other comprehensive income (loss) into net income recognized in D&D in the Company’s condensed consolidated statements of operations were $63 and $99 for the three and nine months ended September 30, 2018, respectively.

The net deferred gain of $121 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2019.

~~Table of Contents~~

~~STONERIDGE, INC.~~

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

(Unaudited)

Interest Rate Risk

Interest Rate Risk – Cash Flow Hedge

On February 18, 2020, the Company entered into a floating-to-fixed interest rate swap agreement (the “Swap”) with a notional amount of $50,000 to hedge its exposure to interest payment fluctuations on a portion of its 2019 Credit Facility. The Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's 2019 Credit Facility that has a current balance of $161,000 at June 30, 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 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 paid under the Swap is recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Swap increased interest expense by $114 and $118 for the three and six months ended June 30, 2020, respectively.

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


					Prepaid expenses				Accrued expenses and
	Notional amounts ^(A)				and other current assets				other current liabilities
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2020		2019		2020		2019		2020		2019
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$	16,802	$	-	$	16	$	-	$	1,517	$	-
Interest rate swap contract	$	50,000	$	-	$	-	$	-	$	1,594	$	-

(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 (loss) income and in net (loss) income for the three months ended June 30 were as follows:


					Gain (loss) reclassified from
	Gain (loss) recorded in other				other comprehensive income
	comprehensive income (loss)				(loss) into net income ^(A)
	2020		2019		2020		2019
Derivatives designated as cash flow hedges:
Forward currency contracts	$	716	$	157	$	(947)	$	299
Interest rate swap	$	(245)	$	-	$	(114)	$	-

(A)

Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $(235) and $0 for the three months ended June 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $(712) and $217 for the three months ended June 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in design and development (“D&D“) in the Company’s condensed consolidated statements of operations were $0 and $82 for the three months ended June 30, 2020 and 2019, respectively. Losses reclassified from other comprehensive (loss) income into net (loss) income recognized in interest expense in the Company’s condensed consolidated statements of operations was $114 for the three months ended June 30, 2020.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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


					Gain (loss) reclassified from
	Gain (loss) recorded in other				other comprehensive income
	comprehensive income (loss)				(loss) into net income ^(A)
	2020		2019		2020		2019
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(2,604)	$	426	$	(1,103)	$	515
Interest rate swap	$	(1,712)	$	-	$	(118)	$	-

(A)

Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in SG&A in the Company’s condensed consolidated statements of operations were $(235) and $0 for the six months ended June 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in COGS in the Company’s condensed consolidated statements of operations were $(839) and $390 for the six months ended June 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in D&D in the Company’s condensed consolidated statements of operations were $(29) and $125 for the six months ended June 30, 2020 and 2019, respectively. Losses reclassified from other comprehensive (loss) income into net (loss) income recognized in interest expense in the Company’s condensed consolidated statements of operations was $118 for the six months ended June 30, 2020.

For the six months ended June 30, 2020, the total net losses on the foreign currency contract cash flow hedges of $1,501 are expected to be included in SG&A, COGS and D&D within the next 12 months. Of the total net losses on the interest rate swap cash flow hedges, $594 of losses are expected to be included in interest expense within the next 12 months and $1,000 of losses are expected to be included in interest expense in subsequent periods.

Cash flows from derivatives used to manage foreign exchange and interest rate risks are classified as operating activities within the condensed consolidated statements of cash flows.

Fair Value Measurements

~~The Company’s~~Certain assets and liabilities held by the Company 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.

September 30,

December 31,

2019

2018

Fair values estimated using

Level 1

Level 2

Level 3


Fair value

inputs

inputs

inputs

Fair value
Financial assets carried at fair value:

Forward currency contracts

$
121

$
-

$
121

$
-

$
370
Total financial assets carried at fair value

$
121

$
-

$
121

$
-

$
370

Financial liabilities carried at fair value:

Earn-out consideration

$
11,178

$
-

$
-

$
11,178

$
18,672
Total financial liabilities carried at fair value

$
11,178

$
-

$
-

$
11,178

$
18,672

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)


								June 30,		December 31,
			2020						2019
			Fair values estimated using
			Level 1		Level 2		Level 3
	Fair value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contract	$	16	$	-	$	16	$	-	$	-
Total financial assets carried at fair value	$	16	$	-	$	16	$	-	$	-

Financial liabilities carried at fair value:
Forward currency contracts	$	1,517	$	-	$	1,517	$	-	$	-
Interest rate swap		1,594		-		1,594		-		-
Earn-out consideration		8,571		-		-		8,571		12,011
Total financial liabilities carried at fair value	$	11,682	$	-	$	3,111	$	8,571	$	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		-		1,862		1,862		(233)		(233)
Foreign currency adjustments		(128)		(754)		(882)		(3,207)		(3,207)
Earn-out consideration cash payment		(8,474)		-		(8,474)
Balance at September 30, 2019	$	-	$	11,178	$	11,178
Balance at June 30, 2020							$	8,571	$	8,571


	Orlaco		PST		Total		Orlaco		Stoneridge Brazil		Total
Balance at December 31, 2017	$	8,637	$	12,109	$	20,746
Balance at December 31, 2018							$	8,602	$	10,070	$	18,672
Change in fair value		369		1,549		1,918		-		921		921
Foreign currency adjustments		(300)		(2,362)		(2,662)		(128)		66		(62)
Balance at September 30, 2018	$	8,706	$	11,296	$	20,002
Earn-out consideration cash payment								(8,474)		-		(8,474)
Balance at June 30, 2019							$	-	$	11,057	$	11,057

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

The change in fair value of the earn-out ~~considerations are~~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 change in fair value of the Stoneridge Brazil earn-out consideration was recorded ~~within selling, general~~in SG&A expense and ~~administrative (“SG&A”)~~the foreign currency impact was included in other (income) expense, net in the condensed consolidated statements of ~~operations for the three and nine months ended September 30, 2019 and 2018.~~operations.

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 nine months ended September 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 ~~change in fair value of the~~ earn-out consideration ~~for PST~~payout was due to the reduced time from the current period end to the payment date, offset by adverse foreign currency translation. The foreign currency impact for the PST earn-out considerations is included in other (income) expense, netrecorded in the condensed consolidated ~~statements~~statement of ~~operations.~~cash flows within operating and financing activities in the amounts of $5,080 and $3,394, respectively, for the six months ended June 30, 2019.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

There were 0 transfers in or out of Level 3 from other levels in the fair value hierarchy for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020.

Impairment of Long-Lived Assets or Finite-Lived Assets

The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired.

On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there are two asset groups comprised of PM fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $2,326 was recorded based on the difference between the fair value and the carrying value of the assets. The Company used the income approach to determine the fair value of the PM fixed assets at the Tallinn, Estonia facility. During the three and six months ended June 30, 2020, the impairment loss of $2,326 was recorded on the Company’s condensed consolidated statement of operations within selling, general and administrative expense. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."

(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 ~~$1,105~~$733 and ~~$1,376~~$2,046 for the three months ended ~~September~~June 30, 2020 and 2019, respectively. Compensation expense for share-based compensation arrangements was $2,110 and $3,594 for the six months ended June 30, 2020 and 2019, respectively. The expenses related to share-based compensation awards for the three and six months ended June 30, 2020 were lower than the three and six months ended June 30, 2019 ~~and 2018, respectively. For the nine months ended September 30, 2019 total share-based compensation was $4,699 compared~~due to ~~$4,214 for the nine months ended September 30, 2018. Total share-based compensation for the nine months ended September 30, 2019 included accelerated expense associated with the retirement~~a reduced attainment of ~~eligible employees~~performance-based awards.

Table of ~~$674 and the nine months ended September 30, 2018 included income for forfeiture of certain grants associated with employee resignations.~~Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(7) Debt

Debt consisted of the following at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30,

December 31,

Interest rates at

June 30,

December 31,

Interest rates at

2019

2018

September 30, 2019

Maturity

2020

2019

June 30, 2020

Maturity

Revolving Credit Facility

Credit Facility

108,500

96,000

3.07 - 3.12%

June 2024

161,000

126,000

2.85%

June 2024

Debt

PST short-term obligations

149

989

6.00%

December 2019

PST long-term notes

1,063

1,527

7.00%

November 2021

Stoneridge Brazil short-term obligations

918

5.64%

June 2021

Stoneridge Brazil long-term notes

527

972

8.80%

November 2021

Suzhou short-term credit line

2,099

4.70% - 5.00%

August 2020

3,538

2,154

4.35% - 5.00%

August 2020

Total debt

3,311

2,516

4,983

3,126

Less: current portion

(2,752)

(1,533)

(4,831)

(2,672)

Total long-term debt, net

559

983

152

454

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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 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 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 2019, the Company capitalized ~~$1,342~~$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 nine months ended September 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.

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.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts on the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provides for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021 in form and substance satisfactory to the administrative agent). During the Covenant Relief Period:

●

the maximum net leverage ratio is suspended;

●

the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021;

●

the minimum interest coverage ratio of 3.50 is reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively;

●

the Company’s liquidity may not be less than $150,000;

●

the Company’s aggregate amount of cash and cash equivalents cannot exceed $130,000;

●

there are certain restrictions on Restricted Payments (as defined); and

●

a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders.

Amendment No. 1 changes the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points. As of June 30, 2020, Specified Hedge Borrowings were $50,000.

The Company capitalized an additional $1,037 of deferred financing costs as a result of entering into Amendment No. 1.

Borrowings outstanding on the 2019 Credit Facility ~~and the Amended Agreement as applicable,~~ were ~~$108,500~~$161,000 and ~~$96,000~~$126,000 at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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

The Company also has outstanding letters of credit of ~~$1,815~~$1,720 and $1,768 at ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively.

Debt

~~PST~~Stoneridge Brazil maintains short-term ~~obligations~~ and long-term notes used for working capital purposes which have fixed or variable interest rates. The weighted-average interest rates of ~~short term~~short-term and long-term debt of ~~PST~~Stoneridge Brazil at ~~September~~June 30, ~~2019~~2020 was ~~6.0%~~5.64% and ~~7.0%.~~8.80%, respectively. Depending on the specific note, interest is payable either monthly or annually. Principal repayments on ~~PST~~Stoneridge Brazil debt at ~~September~~June 30, ~~2019~~2020 are as follows: ~~$653~~$1,293 from ~~October 2019 through September 2020, $120 from October~~July 2020 through June 2021 and $152 from July 2021 through December 2021.

In December 2019, Stoneridge Brazil, established an overdraft credit line which allowed overdrafts on Stoneridge Brazil’s bank account up to a maximum level of 5,000 Brazilian real (“R$”), or $1,244, at December 31, 2019. There was 0 balance outstanding on the overdraft credit line as of December 31, 2019. During the six months ended June 30, 2020, the subsidiary borrowed and ~~$439 in 2021.~~ repaid R$7,150, or $1,306, prior to terminating the overdraft credit line.

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 ~~$2,032~~$2,146 and ~~$2,259,~~$2,136, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there was 0 balance outstanding on this overdraft credit ~~line.~~

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~The Company’s wholly-owned~~line however, during the six months ended June 30, 2020, the subsidiary ~~located in Suzhou, China, has two credit lines (the “Suzhou credit line”) which allow up to a maximum borrowing level of 60,000 Chinese yuan,~~borrowed and repaid 126,652 Swedish krona, or ~~$8,394 at September 30, 2019. At September 30, 2019 there was $2,099 in borrowing outstanding on the Suzhou credit 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. At December 31, 2018, there was~~ ~~0 balance outstanding on these credit lines.~~

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

~~(8) Leases~~

The Company has various cancelable and noncancelable leased assets within all segments, 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.

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

Nine months ended

September 30, 2019

September 30, 2019
Operating lease cost
$
1,345
$
4,241
Short-term lease cost

114

415
Variable lease cost

99

279
Total lease cost
$
1,558
$
4,935

$13,629.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 50,000 Chinese yuan, or $7,077 at June 30, 2020 and 40,000 Chinese yuan, or $5,746 at December 31, 2019. At June 30, 2020 and December 31, 2019 there was $3,538 and $2,154, respectively, in borrowings outstanding on the Suzhou credit line with weighted-average interest rates of 4.62% and 4.80%, respectively. 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 $2,123 and $2,154, at June 30, 2020 and December 31, 2019, respectively. At June 30, 2020 there was no funding utilized on the Suzhou bank acceptance draft line and at December 31, 2019 there was approximately $150 utilized on the Suzhou bank acceptance draft line of credit.

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

As of September 30, 2019
Assets:

Operating lease right-of-use assets
$
20,899

Liabilities:

Operating lease current liability, included in other current liabilities

4,188
Operating lease long-term liability

17,059
Total leased liabilities
$
21,247

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

As of September 30, 2019
Year ending December 31,

2019 ⁽¹⁾
$
1,310
2020

4,680
2021

4,068
2022

3,115
2023

3,062
Thereafter

9,881
Total future minimum lease payments
$
26,116
Less: imputed interest

(4,869)
Total lease liabilities
$
21,247

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

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


	~~As of September 30, 2019~~
~~Weighted-average remaining lease term (in years)~~
~~Operating leases~~		~~6.93~~
~~Weighted-average discount rate~~
~~Operating leases~~		~~5.77~~	%

~~Other information:~~

Nine months ended

September 30, 2019
Operating cash flows:

Cash paid related to operating lease obligations

$
4,265
Non-cash activity:

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

$
5,327

~~(9)~~(8) (Loss) Earnings Per Share

Basic (loss) earnings per share was computed by dividing net (loss) income by the weighted-average number of Common Shares outstanding for each respective period. Diluted (loss) earnings per share was calculated by dividing net (loss) income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented.

~~Table~~However, for all periods in which the Company recognized a net loss, the Company did not recognize the effect of ~~Contents~~the potential dilutive securities as their inclusion would be anti-dilutive. Potential dilutive shares of 204,461 and 276,360 for the three and six months ended June 30, 2020, respectively, were excluded from diluted loss per share because the effect would have been anti-dilutive.

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

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

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

June 30,

2019

2018

2019

2018

2020

2019

2020

2019

Basic weighted-average Common Shares outstanding

27,369,824

28,452,807

27,928,760

28,383,843

26,952,336

27,887,157

27,092,186

28,208,229

Effect of dilutive shares

425,687

612,239

496,484

689,257

406,390

507,496

Diluted weighted-average Common Shares outstanding

27,795,511

29,065,046

28,425,244

29,073,100

26,952,336

28,293,547

27,092,186

28,715,725

There were ~~578,966~~771,854 and ~~626,500~~662,509 performance-based right to receive Common Shares outstanding at ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The right to receive Common Shares are included in the computation of diluted earnings per share based on the number of Common Shares that would be issuable if the end of the quarter were the end of the contingency period.

~~(10)~~(9) Equity and Accumulated Other Comprehensive Loss

Common Share Repurchase

On October 26, 2018, the Company’s Board of Directors authorized the Company to repurchase up to $50,000 of Common Shares. Thereafter, on May 7, 2019, the Company entered into a Master Confirmation (the “Master Confirmation”) and a Supplemental Confirmation, together with the Master Confirmation, the Accelerated Share Repurchase Agreement (“ASR Agreement”), with Citibank N.A. (the “Bank”) to purchase Company Common Shares for a payment of $50,000 (the “Prepayment Amount”). Under the terms of the ASR Agreement, on May 7, 2019, the Company paid the Prepayment Amount to the Bank and received on May 8, 2019 an initial delivery of 1,349,528 Company Common Shares, which ~~is approximately~~approximated 80% of the total number of Company Common Shares expected to be repurchased under the ASR Agreement based on the closing price of the Company’s Common Shares on May 7, 2019. These Common Shares became treasury shares and were recorded as a $40,000 reduction to shareholder’s equity. The remaining $10,000 of the Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares. The Company excluded the potential share impact of the remaining shares from the computation of diluted earnings per share as these Common Shares are anti-dilutive for both the three and nine months ended September 30, 2019.

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.

2120

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

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

On March 3, 2020, under the new repurchase program the Company entered into a 10b-18 Agreement Letter (the “10b-18 Agreement”), with 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 10b-18 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. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.

Accumulated Other Comprehensive Loss

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


		Foreign		Unrealized
		currency		gain (loss)
		translation		on derivatives	Total
Balance at April 1, 2020	$	(108,591)	$	(3,655)	$	(112,246)
Other comprehensive income before reclassifications		1,821		372		2,193
Amounts reclassified from accumulated other comprehensive loss		-		838		838
Net other comprehensive income, net of tax		1,821		1,210		3,031
Balance at June 30, 2020	$	(106,770)	$	(2,445)	$	(109,215)

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)

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

~~Accumulated Other Comprehensive Loss~~

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

Foreign

Unrealized

currency

gain (loss)

translation

on derivatives

Total
Balance at July 1, 2019

$
(87,537)

$
222

$
(87,315)
Other comprehensive loss before reclassifications

(11,727)

(23)

(11,750)
Amounts reclassified from accumulated other comprehensive loss

-

(103)

(103)
Net other comprehensive loss, net of tax

(11,727)

(126)

(11,853)
Balance at September 30, 2019

$
(99,264)

$
96

$
(99,168)

Balance at July 1, 2018

$
(82,944)

$
493

$
(82,451)
Other comprehensive (loss) income before reclassifications

(3,339)

258

(3,081)
Amounts reclassified from accumulated other comprehensive loss

-

(226)

(226)
Net other comprehensive (loss) income, net of tax

(3,339)

32

(3,307)
Balance at September 30, 2018

$
(86,283)

$
525

$
(85,758)

~~Changes in accumulated other comprehensive loss for the nine months ended September 30, 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) income before reclassifications								(15,298)		(3,410)		(18,708)
Amounts reclassified from accumulated other comprehensive loss								-		965		965
Net other comprehensive loss, net of tax								(15,298)		(2,445)		(17,743)
Balance at June 30, 2020							$	(106,770)	$	(2,445)	$	(109,215)
	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		(13,220)		313		(12,907)		(1,493)		336		(1,157)
Amounts reclassified from accumulated other comprehensive loss		-		(509)		(509)		-		(406)		(406)
Net other comprehensive loss, net of tax		(13,220)		(196)		(13,416)		(1,493)		(70)		(1,563)
Balance at September 30, 2019		(99,264)	$	96	$	(99,168)

Balance at January 1, 2018	$	(69,417)	$	(143)	$	(69,560)
Other comprehensive (loss) income before reclassifications		(16,866)		1,372		(15,494)
Amounts reclassified from accumulated other comprehensive loss		-		(704)		(704)
Net other comprehensive (loss) income, net of tax		(16,866)		668		(16,198)
Balance at September 30, 2018	$	(86,283)	$	525	$	(85,758)
Balance at June 30, 2019							$	(87,537)	$	222	$	(87,315)

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~(11)~~(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 ~~nine~~six months ended ~~September~~June 30, 2019, ~~and 2018,~~ environmental remediation costs incurred were immaterial. During the three and six months ended June 30, 2020, environmental remediation costs incurred were $103 and $105, respectively. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company accrued a remaining undiscounted liability of ~~$106~~$174 and ~~$111,~~$82, respectively, related to future remediation ~~costs which~~and monitoring and were recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets. Costs associated with the recorded liability will be incurred to complete the groundwater remediation ~~with the balance relating to monitoring costs to be incurred over multiple years.~~and monitoring. The recorded liability is based on assumptions in the remedial action plan. Although the Company sold the Sarasota facility and related property in December 2011, the liability to remediate the site contamination remains the responsibility of the Company. Due to the ongoing site remediation, the Company is currently required to maintain a $1,489 letter of credit for the benefit of the buyer.

The Company’s ~~PST~~Stoneridge Brazil subsidiary has civil, labor and other non-income tax contingencies for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$~~31,200~~30,800 ($~~7,500)~~5,600) and R$~~29,700~~29,200 ($~~7,600)~~7,300) at ~~September~~June 30, ~~2019~~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.

~~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 nine months ended September 30, 2019 and 2018, respectively. There were 0 loss recoveries and insurance gain contingencies recognized in the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018, were included in cash flows from investing activities. Cash proceeds received during the three and nine months ended September 30, 2019 were immaterial.

2322

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 ~~$3,071~~$3,156 and ~~$3,283~~$3,111 of a long-term liability at ~~September~~June 30, ~~2019~~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:


Nine months ended September 30,	2019		2018
Six months ended June 30,					2020		2019
Product warranty and recall at beginning of period	$	10,494	$	9,979	$	10,796	$	10,494
Accruals for warranties established during period		5,049		4,207		3,201		3,506
Aggregate changes in pre-existing liabilities due to claim developments		1,124		573		614		1,687
Settlements made during the period		(5,310)		(4,259)		(3,375)		(4,442)
Foreign currency translation		(515)		(562)		(173)		(189)
Product warranty and recall at end of period	$	10,842	$	9,938	$	11,063	$	11,056

Brazilian Indirect Tax

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, and~~credits. The timing for a ~~hearing~~decision is ~~scheduled for December 2019.~~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 ~~PST.~~Stoneridge Brazil.

~~(12)~~(11) Business Realignment and Restructuring

On ~~January 10, 2019,~~May 19, 2020, the Company committed to ~~a restructuring plan that will result~~the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. The decision to exit the PM sensor product line was made after consideration of the decline in the ~~closure~~market outlook for diesel passenger vehicles, the current and expected profitability of the ~~Canton, Massachusetts facility (“Canton Facility”) which is expected by March 31, 2020~~product line and the ~~consolidation~~Company’s strategic focus on aligning resources with the greatest opportunities. The Company expects the exit from the PM sensor product line to be completed in the third quarter 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.

2021.

2423

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The Company recognized expense of $3,607 and $9,275, respectively, for the three and nine months ended September 30, 2019 as a result of these actions for employee termination benefits and other restructuring related costs. For the three months ended September 30, 2019 severance and other restructuring related costs of $2,567, $287 and $753 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. For the nine months ended September 30, 2019 severance and other related restructuring costs of $6,173, $762 and $2,340 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 $1,900 and $3,000 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

September 30, 2019
Employee termination benefits

$
-

$
6,967

$
(1,371)

$
-

$
5,596
Other related costs

-

2,308

(2,226)

-

-
Total

$
-

$
9,275

$
(3,597)

$
-

$
5,596

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 $157 and $469, respectively, for the three and nine months ended September 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 nine months ended September 30, 2019. The Company expects to incur approximately $600 of additional restructuring costs related to these actions through 2020.

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

Accrual as of

2019 Charge to

Utilization

Accrual as of

January 1, 2019

Expense (Income)

Cash

Non-Cash

September 30, 2019
Employee termination benefits

$
520

$
(30)

$
(442)

$
3

$
51
Accelerated depreciation

-

289

-

(289)

-
Contract termination costs

17

24

(41)

-

-
Other related costs

119

186

(305)

-

-
Total

$
656

$
469

$
(788)

$
(286)

$
51

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.

~~Table of Contents~~

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

~~Business realignment~~As a result of the PM sensor restructuring actions, the Company recognized expense of $2,552 for the three and six months ended June 30, 2020 for non-cash fixed asset charges, byincluding impairment and accelerated depreciation of PM sensor related fixed assets and other related costs. For the three and six months ended June 30, 2020 restructuring related costs of $164 and $2,388 were recognized in COGS and SG&A, respectively. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $1,550 and $4,650 and is related to employee severance and termination costs, contract terminations costs, other related costs and non-cash fixed asset charges. We anticipate that these costs will be incurred through the third quarter of 2021.

The expenses for the exit of the PM sensor line that relate to the Control Devices reportable segment ~~were as follows:~~include the following:

Three months ended

Nine months ended

September 30,

September 30,


2019

2018

2019

2018
Control Devices ^(A)

$
(37)

$
32

$
512

$
160
Electronics ^(B)

-

(80)

-

215
PST ^(C)

-

35

-

354
Unallocated Corporate ^(D)

392

-

1,005

-
Total business realignment charges

$
355

$
(13)

$
1,517

$
729

~~(A)~~

Severance benefit for the three months ended September 30, 2019 related to COGS and D&D were $(27) and $(10), respectively. Severance costs for the nine months ended September 30, 2019 related to SG&A were $512. Severance costs for the nine months ended September 30, 2018 related to D&D were $128. Severance costs for the three and nine months ended September 30, 2018 related to SG&A were $32.

~~(B)~~

~~Severance costs (benefit) for the three and nine months ended September 30, 2018 related to SG&A were $(80) and $215, respectively.~~

~~(C)~~

Severance costs for the three and nine months ended September 30, 2018 related to SG&A were $19 and $312, respectively. Severance costs for the three and nine months ended September 30, 2018 related to COGS were $16 and $42, respectively.

~~(D)~~

~~Severance costs for the three and nine months ended September 30, 2019 related to SG&A were $392 and $1,005.~~

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


	Three months ended					Nine months ended			Accrual as of		2020 Charge			Utilization			Accrual as of
	September 30,					September 30,			January 1, 2020		to Expense		Cash		Non-Cash		June 30, 2020
Non-cash fixed asset charges									$	-	$	2,482	$	-	$	(2,482)	$	-
Other related costs										-		70		(70)		-		-
Total									$	-	$	2,552	$	(70)	$	(2,482)	$	-
	2019		2018			2019		2018
Cost of goods sold	$	(27)	$	16	$	-	$	42
Selling, general and administrative		392		(29)		1,517		559
Design and development		(10)		-		-		128
Total business realignment charges	$	355	$	(13)	$	1,517	$	729

~~(13) Income Taxes~~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 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~~As a result of the Canton Restructuring actions, the Company recognized ~~income tax~~ expense of ~~$1,450~~$461 and ~~$3,467 for U.S. federal, state and foreign income taxes~~$3,443 respectively, for the three months ended ~~September~~June 30, 2020 and 2019 for employee termination benefits and ~~2018, respectively. The decrease in income tax expense for~~other restructuring related costs. For the three months ended ~~September~~June 30, 2020 other restructuring related costs of $80, $235 and $146 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. For the three months ended June 30, 2019 ~~compared~~severance and other related restructuring costs of $2,354, $280 and $809 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. As a result of the Canton Restructuring actions, the Company recognized expense of $2,683 and $5,668, respectively, for the six months ended June 30, 2020 and 2019 for employee termination benefits and other restructuring related costs. For the six months ended June 30, 2020 severance and other restructuring related costs of $1,570, $549 and $564 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 this restructuring plan, that will impact the Control Devices segment, is approximately $600 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 Canton Restructuring that relate to the ~~same period for 2018 was primarily related to reduced pre-tax earnings from operations. The effective tax rate decreased to 17.9% in~~Control Devices reportable segment include the ~~third quarter of 2019 from 20.7% in the third quarter of 2018 primarily due to the impact of certain tax incentives, which did not impact the third quarter of 2018.~~following:

~~The Company recognized income tax expense of $12,351 and $10,520~~ for U.S. federal, state and foreign income taxes for the nine months ended September 30, 2019 and 2018, respectively. The increase in income tax expense for the nine months ended September 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 ~~18.0% in the first nine months of 2019 from 20.1% in the first nine months of 2018 due to the impact of certain tax incentives, which did not impact the first nine months 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.

Accrual as of

2020 Charge

Utilization

Accrual as of

January 1, 2020

to Expense

Cash

Non-Cash

June 30, 2020

Employee termination benefits

2,636

1,119

(3,755)

Other related costs

1,564

(1,564)

Total

2,636

2,683

(5,319)

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

2624

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~(Unaudited)~~

~~(14) Segment Reporting~~

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

The Company has 3 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 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 three reportable operating segments and includes adjustments for unallocated corporate costs and intercompany eliminations, where applicable. Such costs and eliminations do not meet the requirements for being classified as an operating segment. Corporate costs include various support functions, such as corporate accounting/finance, executive administration, human resources, information technology and legal.

~~Table of Contents~~

~~STONERIDGE, INC.~~

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

(Unaudited)

~~A summary~~In the fourth quarter of ~~financial information~~2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. As a result of these actions, the Company recognized expense of $1,621 and $96, respectively, for the three months ended June 30, 2020 and 2019 for employee severance and termination costs, contract termination costs, other related costs and non-cash fixed asset charges for accelerated depreciation of fixed assets and other related costs. Electronics segment restructuring costs recognized in SG&A and D&D in the condensed consolidated statement of operations for the three months ended June 30, 2020 were $1,244 and $377, respectively. As a result of these actions, the Company recognized expense of $1,628 and $312, respectively, for the six months ended June 30, 2020 and 2019 for severance, contract termination costs, other related costs and non-cash fixed asset charges for accelerated depreciation of fixed assets. Electronics segment restructuring costs recognized in SG&A and D&D in the condensed consolidated statement of operations for the six months ended June 30, 2020 were $1,251 and $377, respectively. Electronics segment restructuring costs were recognized in SG&A in the condensed consolidated statement of operations for the three and six months ended June 30, 2019. The Company expects to incur approximately $4,950 of additional restructuring costs related to these actions through the second quarter of 2021.

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		June 30, 2020
Employee termination benefits	$	52	$	863	$	(319)	$	-	$	596
Contract termination costs		-		452		(452)		-		-
Other related costs		-		313		(313)		-		-
Total	$	52	$	1,628	$	(1,084)	$	-	$	596


	Accrual as of		2019 Charge to			Utilization			Accrual as of
	January 1, 2019		Expense (Income)		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

Business realignment charges by reportable segment iswere as follows:

Three months ended

Nine months ended

September 30,

September 30,


2019

2018

2019

2018

Net Sales:

Control Devices

$
108,690

$
108,402

$
332,876

$
333,715

Inter-segment sales

1,185

1,556

5,124

6,218

Control Devices net sales

109,875

109,958

338,000

339,933

Electronics

78,154

81,587

260,560

261,928

Inter-segment sales

8,867

9,067

27,914

29,310

Electronics net sales

87,021

90,654

288,474

291,238

PST

16,542

18,864

50,488

59,742

Inter-segment sales

-

-

6

2

PST net sales

16,542

18,864

50,494

59,744

Eliminations

(10,052)

(10,623)

(33,044)

(35,530)

Total net sales

$
203,386

$
208,853

$
643,924

$
655,385

Operating Income (Loss):

Control Devices

$
9,767

$
16,297

$
66,082

$
51,336

Electronics

7,661

8,951

24,247

25,107

PST

(451)

668

6,633

1,553

Unallocated Corporate ^(A)

(7,654)

(7,604)

(26,754)

(23,656)

Total operating income

$
9,323

$
18,312

$
70,208

$
54,340

Depreciation and Amortization:

Control Devices

$
3,310

$
3,070

$
9,601

$
8,762

Electronics

2,708

2,213

7,615

6,756

PST

1,571

1,583

4,791

5,828

Unallocated Corporate

297

200

726

596

Total depreciation and amortization^(B)

$
7,886

$
7,066

$
22,733

$
21,942

Interest (Income) Expense, net:

Control Devices

$
189

$
19

$
566

$
56

Electronics

79

32

198

89

PST

69

230

118

762

Unallocated Corporate

812

874

2,271

2,772

Total interest expense, net

$
1,149

$
1,155

$
3,153

$
3,679

Capital Expenditures:

Control Devices

$
3,175

$
3,938

$
10,709

$
12,996

Electronics

5,473

725

12,567

4,892

PST

1,243

522

2,867

2,477

Unallocated Corporate^(C)

683

786

1,910

2,451

Total capital expenditures

$
10,574

$
5,971

$
28,053

$
22,816


		Three months ended				Six months ended
		June 30,				June 30,
	2020		2019		2020		2019
Control Devices ^(A)	$	1,042	$	27	$	1,419	$	549
Electronics ^(B)		1,305		-		1,305		-
Stoneridge Brazil ^(C)		-		-		153		-
Unallocated Corporate ^(D)		236		-		310		613
Total business realignment charges	$	2,583	$	27	$	3,187	$	1,162

September 30,

December 31,

2019

2018

Total Assets:

Control Devices

$
194,016

$
175,708

Electronics

276,763

265,838

PST

85,739

81,002

Corporate ^(C)

359,351

359,837

Eliminations

(321,865)

(322,866)

Total assets

$
594,004

$
559,519

(A)

Severance costs for the three months ended June 30, 2020 related to COGS, D&D and SG&A were $603, $249 and $190. Severance costs for the three months ended June 30, 2019 related to COGS were $27. Severance costs for the six months ended June 30, 2020 related to COGS, D&D and SG&A were $603, $249 and $567, respectively. Severance costs for the six months ended June 30, 2019 related to SG&A, D&D and COGS were $512, $10 and $27, respectively.

2825

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(B)	Severance costs for the three and six months ended June 30, 2020 related to COGS, D&D and SG&A were $323, $228 and $754 respectively.

(C)	Severance costs for the six months ended June 30, 2020 related to COGS and SG&A were $86 and $67, respectively.

(D)	Severance costs for the three months ended June 30, 2020 related to SG&A were $236. Severance costs for the six months ended June 30, 2020 and 2019 related to SG&A were $310 and $613, respectively.

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


		Three months ended				Six months ended
		June 30,				June 30,
	2020		2019		2020		2019
Cost of goods sold	$	926	$	27	$	1,012	$	27
Selling, general and administrative		1,180		-		1,698		1,125
Design and development		477		-		477		10
Total business realignment charges	$	2,583	$	27	$	3,187	$	1,162

(12) Income Taxes

For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date ordinary (loss) income. Tax jurisdictions with a projected or year to date loss for which a benefit cannot be realized are excluded.

For the three months ended June 30, 2020, income tax benefit of $(6,721) was attributable to the mix of earnings among tax jurisdictions as well as valuation allowances in certain jurisdictions. The effective tax rate of 23.6% is greater than the statutory rate primarily due to the impact of certain incentives.

For the six months ended June 30, 2020, income tax benefit of $(5,508) was attributable to the mix of earnings among tax jurisdictions partially offset by the establishment of a valuation allowance. The effective tax rate of 23.2% is greater than the statutory rate primarily due to the impact of certain incentives.

For the three months ended June 30, 2019, income tax expense of $9,066 was attributable to the sale of Non-core Products on April 2, 2019. The effective tax rate of 18.6% is lower than the statutory rate primarily due to the impact of certain incentives.

For the six months ended June 30, 2019, income tax expense of $10,901 was attributable to the sale of Non-core Products on April 2, 2019. The effective tax rate of 18.1% is lower than the statutory rate primarily due to the impact of certain incentives.

(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.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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.

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


	Three months ended				Six months ended
	June 30,				June 30,
	2020		2019		2020		2019
Net Sales:
Control Devices	$	47,005	$	114,067	$	143,855	$	224,186
Inter-segment sales		1,559		2,078		2,906		3,939
Control Devices net sales		48,564		116,145		146,761		228,125
Electronics		45,530		91,560		117,076		182,406
Inter-segment sales		2,042		10,325		10,310		19,047
Electronics net sales		47,572		101,885		127,386		201,453
Stoneridge Brazil		7,010		16,614		21,580		33,946
Inter-segment sales		-		-		-		6
Stoneridge Brazil net sales		7,010		16,614		21,580		33,952
Eliminations		(3,601)		(12,403)		(13,216)		(22,992)
Total net sales	$	99,545	$	222,241	$	282,511	$	440,538
Operating (Loss) Income:
Control Devices	$	(9,656)	$	44,367	$	(2,334)	$	56,315
Electronics		(11,042)		7,555		(8,170)		16,586
Stoneridge Brazil		(879)		6,414		(20)		7,084
Unallocated Corporate ^(A)		(5,246)		(9,150)		(12,640)		(19,100)
Total operating (loss) income	$	(26,823)	$	49,186	$	(23,164)	$	60,885
Depreciation and Amortization:
Control Devices	$	3,639	$	3,197	$	7,169	$	6,291
Electronics		2,393		2,510		4,874		4,907
Stoneridge Brazil		1,273		1,695		2,723		3,220
Unallocated Corporate		496		216		1,022		429
Total depreciation and amortization^(B)	$	7,801	$	7,618	$	15,788	$	14,847
Interest Expense (Income), net:
Control Devices	$	89	$	195	$	170	$	377
Electronics		313		63		400		119
Stoneridge Brazil		(7)		(59)		3		49
Unallocated Corporate		1,015		802		1,867		1,459
Total interest expense, net	$	1,410	$	1,001	$	2,440	$	2,004
Capital Expenditures:
Control Devices	$	3,349	$	4,042	$	5,663	$	7,534
Electronics		5,410		3,356		8,060		7,094
Stoneridge Brazil		281		805		1,414		1,624
Unallocated Corporate^(C)		105		592		677		1,227
Total capital expenditures	$	9,145	$	8,795	$	15,814	$	17,479

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

June 30,

December 31,

2020

2019

Total Assets:

Control Devices

167,585

191,491

Electronics

262,730

285,027

Stoneridge Brazil

62,060

89,393

Corporate ^(C)

388,879

358,766

Eliminations

(324,035)

(322,468)

Total assets

557,219

602,209

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


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Net Sales:
North America	$	115,816	$	119,475	$	358,476	$	364,789	$	43,122	$	123,293	$	142,973	$	242,660
South America		16,542		18,864		50,488		59,742		7,010		16,614		21,580		33,946
Europe and Other		71,028		70,514		234,960		230,854		49,413		82,334		117,958		163,932
Total net sales	$	203,386	$	208,853	$	643,924	$	655,385	$	99,545	$	222,241	$	282,511	$	440,538

September 30,

December 31,

2019

2018

Long-term Assets:

North America

$
92,575

$
86,763

South America

48,174

45,408

Europe and Other

122,013

107,171

Total long-term assets

$
262,762

$
239,342

June 30,

December 31,

2020

2019

Long-term Assets:

North America

95,351

87,430

South America

34,927

52,518

Europe and Other

130,298

130,995

Total long-term assets

260,576

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.

~~(15)~~(14) 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 ~~$12,351~~$12,113 and ~~$11,288~~$12,701 at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Equity in (loss) earnings of MSIL included in the condensed consolidated statements of operations was $(231) and $548, for the three months ended June 30, 2020 and 2019, respectively. Equity in earnings of MSIL included in the condensed consolidated statements of operations was ~~$318~~$226 and ~~$249,~~$912, for the ~~three~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018, respectively. Equity in earnings of MSIL included in the condensed consolidated statements of operations was $1,230 and $1,435, for the nine months ended September 30,~~ 2019, ~~and 2018,~~ respectively.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

PST Eletrônica Ltda.

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

~~PST has~~Stoneridge Brazil had dividends payable to former noncontrolling interest holders of ~~Brazilian real (“~~R$~~”) 23,871~~24,154 ($~~5,745) and R$23,204 ($5,980)~~6,010) as of ~~September 30, 2019 and~~ December 31, ~~2018, respectively.~~2019. The dividends payable balance ~~includes~~included R$~~668~~580 ($~~162) and R$766 ($189)~~150) in monetary correction for the ~~nine~~six months ended ~~September~~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”).~~index. The dividend payable related to ~~PST is~~Stoneridge Brazil was recorded within other current liabilities on the ~~condensed~~ consolidated balance ~~sheet.~~

~~Table~~sheet as of ~~Contents~~December 31, 2019. These dividends were paid in January 2020.

~~STONERIDGE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(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 $750 and $1,200 to the Autotech fund during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020 and 2019, respectively. The Company recognized $(100) and $16 in fair value and other adjustments during the three months ended June 30, 2020 and 2019, respectively. The Company recognized $(139) and $16 in fair value and other adjustments during the six months ended June 30, 2020 and 2019, respectively. The Autotech investment recorded in investments and other long-term assets in the condensed consolidated balance sheets was ~~$1,653~~$2,438 and ~~$437~~$1,827 as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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

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

~~On April 1,~~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~~$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.

The Company received ~~$675~~$21 and ~~$1,350~~$675 for services provided pursuant to the transition services agreement which were recognized as a reduction in SG&A for the ~~three and nine~~six months ended ~~September~~June 30, 2020 and 2019, respectively. Pursuant to the contract manufacturing agreement, the Company recognized sales and operating income for the production of Non-core Products of $10,770 and $1,072 for the three months ended September 30, 2019, respectively, and $19,824 and $1,072 for the nine months ended September 30, 2019, respectively. The Company also received $170 for reimbursement of retention costs from SMP pursuant to the contract manufacturing agreement which was recognized as a reduction to SG&A for both the three and nine months ended September 30, 2019.

There were 0 Non-core Product net sales for the three and ~~operating income,~~six months ended June 30, 2020. Non-core Product net sales, including sales to SMP pursuant to the contract manufacturing agreement, and operating income were ~~$10,770~~$13,214 and ~~$1,072~~$1,385, for the three months ended ~~September~~June 30, 2019, ~~respectively, and $11,071 and $2,334, for the three months ended September 30, 2018,~~ respectively. Non-core ~~Products~~Product net sales, ~~and operating income,~~ including sales to SMP pursuant to the contract manufacturing agreement, and operating income were ~~$35,080~~$24,310 and ~~$4,445~~$3,373, for the ~~nine~~six months ended ~~September~~June 30, 2019, ~~respectively, and $34,200 and $7,059~~ ~~for the nine months ended September 30, 2018,~~ respectively.

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

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

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

Impact of COVID-19 on Our Business

The coronavirus pandemic (“COVID-19”) 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 continues 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 half 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 have materially affected our ability to adequately staff and maintain our operations and supply chain and have significantly impacted our financial results in the second quarter of 2020 and may continue to impact our results through the end of 2020. The adverse conditions caused by COVID-19 have reduced demand for our products and increased operating costs, which has resulted in lower overall margins. Similar to our customers, we instituted several changes to our manufacturing operations to do our best to reduce the spread of COVID-19 and keep our employees safe including coordinated shift changes, social distancing throughout the facility, temperature and health checks for our employees and installation of equipment designed to limit the potential for airborne virus transmission.

Due to prolonged shut-downs or significant reductions in production by our global customers in response to COVID-19, revenue declined by 45.6% from the first to second quarter 2020. The impact was greatest in our Control Devices segment where sales fell by $50.5 million from the first to second quarter 2020 due to the abrupt shutdown of several North American production facilities. Commercial vehicle production in Europe started to ramp-up earlier than passenger car production in North America, however sales in our Electronics segment still declined by 40.4%, or $32.2 million from the first to second quarter of 2020. Stoneridge Brazil sales declined by 51.9%, or $7.0 million, from the first to second quarter of 2020 and the virus continues to have a significant impact in Brazil. While COVID-19 had a significant impact on the second quarter 2020, we started to see a return of the ramp up of production by the end of the second quarter and expect the global economic conditions to continue to strengthen through the end of the year.

As we continue to experience disruptions in our business, we continue to manage our cash and implement modifications to preserve adequate liquidity and ensure that our business can continue to operate during this uncertain time. Beginning in the first quarter and into the second quarter of 2020, we evaluated and took several 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. Due to the expected financial impact of COVID-19 resulting from significantly reduced production in the second quarter, during the second quarter we amended the existing credit facility to waive several financial covenants, including our net debt leverage compliance ratio, until the second quarter of 2021. At the end of the second quarter 2020, our liquidity remains strong with a cash balance of $72.4 million and $237.0 million of undrawn commitments resulting in over $309.0 million in available capital at the end of the second quarter.

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

Segments

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

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

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

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~~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.

~~Third~~Second Quarter Overview

~~The~~As a direct result of the COVID-19 slowdown, the Company had net ~~income~~loss of ~~$6.7~~$21.7 million, or ~~$0.24~~$(0.81) per diluted share, for the three months ended ~~September~~June 30, ~~2019.~~2020.

Net income decreased by ~~$6.6~~$61.5 million, or ~~$0.22~~$2.22 per diluted share, from ~~$13.3~~$39.8 million, or ~~$0.46~~$1.41 per diluted share, for the three months ended ~~September~~June 30, ~~2018~~2019 primarily due to a $122.7 million, or 55.2%, decrease in ~~net~~current quarter sales volume resulting from the COVID-19 pandemic. In the second quarter of 2019, we recognized a 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. In addition, we incurred higher business realignment expenses of $2.6 million, or $0.10 per diluted share, and an increase in restructuring costs of ~~$3.6~~$1.1 million, or ~~$0.13~~$0.04 per diluted share, ~~mostly related~~compared to ~~our previously announced closure of our Canton facility (“Canton Restructuring”).~~the prior year quarter. Pursuant to the Company’s Common Share ~~repurchase~~Repurchase program (“ASR Agreement”), we ~~purchased~~repurchased 1,349,528 outstanding Common Shares on May 8, 2019 ~~which~~and on February 27, 2020, we received an additional 364,604 Common Shares under that program. In early March 2020, under the new authorized 2020 Common Share repurchase program, we repurchased a total of 242,634 Common Shares. These transactions increased earnings per share by reducing ~~2019~~the second quarter 2020 diluted weighted-average shares ~~outstanding.~~outstanding compared to the second quarter of 2019.

Net sales decreased by ~~$5.5~~$122.7 million, or ~~2.6%~~55.2%, while our operating income decreased by ~~$9.0 million, or 49.1%.~~$76.0 million. Excluding China and Brazil, nearly all of the Company’s major customers were shut down in April due to the COVID-19 pandemic, with gradual restarts in May and June. Brazil was impacted by COVID-19 later in the quarter and production ramp up lagged North America and Europe as COVID-19 continued to significantly impact macroeconomic conditions locally in Brazil at the end of the quarter.

Our Control Devices segment net sales ~~increased~~decreased by ~~0.3%~~58.8% compared to the second quarter of 2019 primarily ~~due to higher~~as a result of COVID-19. Control Devices sales volume ~~in our China automotive market and North American and European commercial vehicle markets which were offset by~~ decreased sales volume in the North American automotive market, primarily due to certain program volume reductions related to the legacy Shift-by-Wire programs, and unfavorable pricing. Segment gross margin decreased due to Canton Restructuring costs, higher expediting costs and the impact of Non-core product sales pursuant to the contract manufacturing agreement at a fixed margin of 10.0%. Segment operating income decreased by 40.1% relative to the third quarter of 2018.

~~Our Electronics segment net sales decreased by 4.2% primarily due to unfavorable foreign currency translation offset by an increase in sales volume~~ in our North American automotive, North American commercial vehicle, ~~market.~~agriculture and other markets. Segment gross margin decreased due to lower sales and anadverse leverage of fixed costs from lower sales levels. Segment operating income decreased due to the 2019 gain on disposal of Control Devices’ Non-core Products and lower segment margin.

Our Electronics segment net sales decreased by 50.3% compared to the second quarter of 2019 primarily due to COVID-19, including a decrease in sales volume in our European, North American and China commercial vehicle markets and a decrease in sales of European and North American off-highway vehicle products as well as unfavorable ~~product mix~~foreign currency translation. Segment gross margin decreased due to lower sales and ~~higher material~~adverse leverage of fixed costs ~~for electronic components.~~from lower sales levels. Operating income for the segment decreased ~~by 14.4% relative~~compared to the ~~third~~second quarter of ~~2018~~2019 due to lower segment gross margin as cost reduction initiatives were offset by ~~lower design~~business realignment and ~~development (“D&D”) expenses from the capitalization of software development costs.~~restructuring expenses.

Our ~~PST~~Stoneridge Brazil segment net sales decreased by ~~12.3%~~57.8% compared to the second quarter of 2019 due to COVID-19 and 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.~~alarm products. Segment gross margin declined due to the reduction in sales volume however, gross margin percent increased due to favorable sales mix from a higher proportion of monitoring service fees. Operating income decreased compared to 2019 primarily due to the 2019 recovery of indirect taxes and ~~higher labor~~the impact of lower sales and ~~overhead costs. Operating loss~~gross margin.

In the second quarter of 2020, SG&A expenses increased by $0.2 million compared to the ~~third~~second quarter of ~~2018~~2019 mostly due to incurring business realignment and restructuring costs that were offset by lower incentive compensation expense and cost reduction actions initiated in the second quarter.

At June 30, 2020 and December 31, 2019, we had cash and cash equivalents balances of $72.4 million and $69.4 million, respectively. The increase in cash and cash equivalents in the first half of 2020 was primarily due to ~~lower gross margin.~~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 COVID-19. At June 30, 2020 and December 31, 2019, we had $161.0 million and $126.0 million, respectively, in borrowings outstanding on the 2019 Credit Facility.

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In the third quarter of 2019, SG&A expenses decreased by $1.6 million mostly due to our Control Devices segment receiving transition service fees and retention reimbursement of $0.9 million in connection with the disposal of Non-core Products as well as lower incentive compensation at unallocated corporate offset by an increase in restructuring costs for the Canton Restructuring of $0.3 million.

At September 30, 2019 and December 31, 2018, we had cash and cash equivalents balances of $55.3 million and $81.1 million, respectively. The decrease in cash and cash equivalents in the first nine months of 2019 was primarily due to the repurchase of our Common Shares and lower cash flows from operations as well as the cash payment of the Orlaco earn-out consideration which were offset by proceeds from the disposal of Non-core Products and net borrowings on the 2019 Credit Facility. At September 30, 2019 and December 31, 2018, we had $108.5 million and $96.0 million, respectively, in borrowings outstanding on the 2019 Credit Facility and the Amended Agreement, as applicable.

Outlook

~~The~~While the Company believes that focusing on products that address industry megatrends will have a positive impact on both our top-line growth and underlying ~~margins.~~margins, beginning in the first quarter of 2020 and continuing through the second quarter, COVID-19 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 16.7~~16.3 million units in ~~2019. Based on our product mix, the~~2019 to 12.6 million units in 2020 due to adverse economic conditions caused by COVID-19. The Company expects sales volumes in our Control Devices segment to ~~be consistent with~~decline from the prior year, ~~excluding~~however we expect higher sales volume in the ~~impact~~second half of 2020 compared to the ~~sale~~first half of ~~Non-core Products.~~2020.

~~The~~We expect full year 2020 European and North American commercial vehicle ~~market increased in 2018 and we expect it~~volumes to ~~increase slightly in 2019 for the full~~significantly decline compared to prior year volumes due to adverse economic conditions caused by COVID-19, however we expect higher sales volume in the second half of 2020 compared to the first half of 2020.

Our 2019 Stoneridge Brazil segment revenues declined compared to the prior year due to the adverse economic conditions caused by COVID-19 and lower volumes in ~~the fourth quarter of 2019. We expect full year European commercial vehicle volumes to increase slightly compared with 2018, however we expect lower volumes in the fourth quarter of 2019.~~

~~Our PST segment revenues in the third quarter of 2019 decreased compared to the third quarter of 2018, mostly due to the lower volumes in most~~our Brazilian served markets ~~as well as~~for our audio and alarm products. In addition, revenues were adversely affected by the continued decline in the ~~Argentinian~~Argentine economy. In ~~October 2019,~~June 2020, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to decline 9.1% in 2020 and grow ~~0.9%~~3.6% in ~~2019 and 2.0% in 2020.~~2021. We expect our served market channels to ~~improve with improvements~~decline due to the contraction in the Brazilian ~~economy.~~economy but expect higher OEM related revenues from new program launches occurring in 2020. Our financial performance in our ~~PST~~Stoneridge Brazil segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.

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

Other Matters

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

On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line (“PM Sensor Exit”). The decision to exit the PM sensor product line was made after the consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM Sensor production. We recognized $2.6 million of expense as a result of this initiative during the three months ended June 30, 2020. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $1.6 million and $4.7 million and is related to employee severance and termination costs, contract terminations costs, other related costs and non-cash fixed asset charges. The Company expects the exit from the PM sensor product line to be completed in the third quarter of 2021.

In January 2019, we committed to a restructuring plan that ~~will result~~resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) ~~which is expected by~~as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company ~~locations.~~locations (“Canton Restructuring”). The estimated costs for the Canton Restructuring ~~include~~included employee severance and termination costs, contract termination costs, professional fees 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 ~~$3.6~~$0.5 million and ~~$9.3~~$3.4 million of expense as a result of these actions during the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019, respectively. We expect to incur additional costs related to the Canton Restructuring of ~~$1.9 million~~up to ~~$3.0~~$0.6 million through December ~~2020.~~2020 primarily to restore the engineering function previously located at the Canton Facility.

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In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. For the three months ended June 30, 2020 and 2019, we recognized expense of $1.6 million and $0.1 million, respectively, as a result of these actions for related costs and non-cash fixed asset charges for accelerated depreciation. The Company expects to incur approximately $5.0 million of additional restructuring costs related to employee severance and termination costs and other related costs for these actions through the second quarter of 2021.

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

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

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

In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduced ~~PST’s~~Stoneridge Brazil’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on ~~PST’s~~Stoneridge Brazil’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $6.5 million as a reduction to SG&A expense which is inclusive of related interest income of $2.4 million, net of applicable professional fees of $1.0 million in the ~~nine months ended September 30,~~second quarter of 2019. ~~Timing of realization of~~The Company received administrative approval in January 2020 and is now offsetting eligible federal taxes with these ~~recoveries is dependent upon the timing of administrative approvals and generation of federal~~ tax ~~liabilities eligible for offset.~~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, and~~credits. The timing for a ~~hearing~~decision is ~~scheduled for December 2019.~~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 ~~PST.~~Stoneridge Brazil.

~~In the fourth quarter~~33

Table of 2018, we undertook restructuring actions for our Electronics segment affecting our European Aftermarket business and China operations. For the three months ended September 30, 2019, we recognized expense of $0.2 million as a result of these actions for related costs and non-cash accelerated depreciation. Contents

We ~~expect to incur additional costs related to the Electronics segment restructuring actions of $0.6 million through 2020.~~

~~In addition, we~~ regularly evaluate the performance of our businesses and their cost structures, including personnel, and make necessary changes thereto in order to optimize our results. We also evaluate the required skill sets of our personnel and periodically make strategic changes. As a consequence of these actions, we incur severance related costs which we refer to as business realignment charges. On May 4, 2020, the Company began business realignment actions that resulted in the reduction of our global salaried workforce by approximately 5.0%. These actions were made to better align our resources and cost structure with our current business opportunities and market outlook as well as respond to COVID-19. One-time separation costs of $2.6 million associated with these and other realignment actions were 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 ~~September~~June 30, ~~2019~~2020 Compared to Three Months Ended ~~September~~June 30, ~~2018~~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 September 30,	2019				2018				(decrease)
Three months ended June 30,											2020				2019				(decrease)
Net sales	$	203,386	100.0	%	$	208,853	100.0	%	$	(5,467)	$	99,545	100.0	%	$	222,241	100.0	%	$	(122,696)
Costs and expenses:
Cost of goods sold		151,531	74.5			145,568	69.7			5,963		86,291	86.7			165,414	74.4			(79,123)
Selling, general and administrative		30,978	15.2			32,589	15.6			(1,611)		27,693	27.8			27,522	12.4			171
Gain on disposal of non-core products, net												-	-			(33,921)	(15.3)			33,921
Design and development		11,554	5.7			12,384	5.9			(830)		12,384	12.4			14,040	6.2			(1,656)
Operating income		9,323	4.6			18,312	8.8			(8,989)
Operating (loss) income												(26,823)	(26.9)			49,186	22.3			(76,009)
Interest expense, net		1,149	0.6			1,155	0.6			(6)		1,410	1.4			1,001	0.5			409
Equity in earnings of investee		(318)	(0.2)			(249)	(0.1)			(69)
Equity in loss (earnings) of investee												231	0.2			(548)	(0.2)			(779)
Other income, net		381	0.2			647	0.3			266		(9)	-			(97)	-			(88)
Income before income taxes		8,111	4.0			16,759	8.0			(8,648)
Provision for income taxes		1,450	0.7			3,467	1.7			(2,017)
Net income	$	6,661	3.3	%	$	13,292	6.3	%	$	(6,631)
(Loss) income before income taxes												(28,455)	(28.6)			48,830	22.0			(77,285)
(Benefit) provision for income taxes												(6,721)	(6.8)			9,066	4.1			(15,787)
Net (loss) income											$	(21,734)	(21.8)	%	$	39,764	17.9	%	$	(61,498)

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


									Dollar		Percent										Dollar		Percent
									increase /		increase /
Three months ended September 30,	2019				2018				(decrease)		(decrease)
Three months ended June 30,													2020				2019				decrease		decrease
Control Devices	$	108,690	53.5	%	$	108,402	51.9	%	$	288	0.3	%	$	47,005	47.3	%	$	114,067	51.3	%	$	(67,062)	(58.8)	%
Electronics		78,154	38.4			81,587	39.1			(3,433)	(4.2)	%		45,530	45.7			91,560	41.2			(46,030)	(50.3)	%
PST		16,542	8.1			18,864	9.0			(2,322)	(12.3)	%
Stoneridge Brazil														7,010	7.0			16,614	7.5			(9,604)	(57.8)	%
Total net sales	$	203,386	100.0	%	$	208,853	100.0	%	$	(5,467)	(2.6)	%	$	99,545	100.0	%	$	222,241	100.0	%	$	(122,696)	(55.2)	%

Our Control Devices segment net sales ~~increased slightly~~decreased primarily ~~due to an increase in~~as a result of COVID-19. Control Devices sales volume decreased in our ~~China automotive market of $3.9 million and North American and European commercial vehicle markets of $1.5 million. This increase was partially offset by decreased sales volume in the~~ North American automotive, ~~market~~North American commercial vehicle, agriculture and other markets of ~~$4.3~~$42.5 million, ~~due to certain program volume reductions related to the legacy Shift-by-Wire programs,~~$15.7 million, $2.5 million and $6.5 million, respectively, as well as being impacted by unfavorable ~~pricing~~foreign currency translation of ~~$0.8~~$0.4 million.

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Our Electronics segment net sales decreased primarily ~~due to an unfavorable foreign currency translation~~as a result of ~~$6.6 million and lower sales volume in our automotive market of $0.2 million. This~~COVID-19 including a decrease ~~was partially offset by an increase~~ in sales volume in our European, North American and China commercial vehicle ~~market~~markets of ~~$1.5~~$25.0 million, $12.6 million and ~~increased sales of European off-highway vehicle products of $1.9~~$0.3 million, respectively.

~~Our PST~~ Foreign currency translation was unfavorable by $0.5 million compared to the prior year quarter. In addition, the Electronics segment net sales decreased due to lower in sales volumes in our European and North American off-highway vehicle products of $6.6 million and $0.9 million, respectively.

Our Stoneridge Brazil segment net sales decreased due to COVID-19 causing lower volumes for our Argentina aftermarket channel ~~alarm~~ and audio ~~products as well as lower monitoring~~and alarm products and ~~service revenues. This decrease was offset by favorable~~unfavorable foreign currency translation ~~that increased sales by $0.1~~of $4.4 million.

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


										Dollar	Percent											Dollar	Percent
										increase /	increase /
Three months ended September 30,	2019				2018					(decrease)	(decrease)
Three months ended June 30,													2020				2019					decrease	decrease
North America	$	115,816	57.0	%	$	119,475	57.2	%	$	(3,659)	(3.1)	%	$	43,122	43.3	%	$	123,293	55.5	%	$	(80,171)	(65.0)	%
South America		16,542	8.1			18,864	9.0			(2,322)	(12.3)	%		7,010	7.0			16,614	7.5			(9,604)	(57.8)	%
Europe and Other		71,028	34.9			70,514	33.8			514	0.7	%		49,413	49.7			82,334	37.0			(32,921)	(40.0)	%
Total net sales	$	203,386	100.0	%	$	208,853	100.0	%	$	(5,467)	(2.6)	%	$	99,545	100.0	%	$	222,241	100.0	%	$	(122,696)	(55.2)	%

The decrease in North American net sales was attributable COVID-19. Sales volume has decreased in our North American automotive, commercial vehicle and agricultural markets by $42.5 million, $28.4 million and $2.5 million, respectively, as well as a $0.9 million decrease of our Electronics segment off-highway products and other North American volumes of $6.5 million. The decrease in net sales in South America was primarily due to lower volumes for our Argentina aftermarket channel and alarm and audio products and unfavorable foreign currency translation of $4.4 million. The decrease in net sales in Europe and Other was primarily due to the adverse impact of COVID-19 the resulted in a decrease in our European commercial vehicle and off-highway markets of $25.0 million and $6.6 million, respectively. Additionally, Europe and Other sales were unfavorably impacted by foreign currency translation of $0.5 million. The decreases in Europe and Other sales were offset by an increase in China automotive sales of $1.0 million.

Cost of Goods Sold and Gross Margin. Cost of goods sold decreased compared to the second quarter of 2019 and our gross margin decreased from 25.6% in the second quarter of 2019 to 13.3% in the second quarter of 2020. Our material cost as a percentage of net sales remained consistent with the second quarter of 2019 at 53.0%. Overhead as a percentage of net sales increased by 11.8% to 27.0% for the second quarter of 2020 compared to 15.2% for the second quarter of 2019 primarily due to adverse fixed cost leverage on lower sales levels.

Our Control Devices segment gross margin decreased due to lower sales primarily related to the impact of COVID-19 and adverse leverage of fixed costs from lower sales levels.

Our Electronics segment gross margin decreased primarily due to lower sales as a result of COVID-19 and higher overhead costs as a percentage of sales due to adverse leverage of fixed costs.

Our Stoneridge Brazil segment gross margin increased due to favorable sales mix from a higher proportion of monitoring service fees.

Selling, General and Administrative (“SG&A”). SG&A expenses increased by $0.2 million compared to the second quarter of 2019 due to higher business realignment and restructuring costs of $4.7 million and the 2019 recovery of Brazilian indirect taxes of $6.5 million offset by lower incentive compensation costs, cost reduction actions including lower professional service fees and travel, lower wages from the business realignment actions and the closure of Control Device’s Canton Facility during 2020.

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 decreased by $1.7 million due to higher capitalization of software development costs of $0.6 million and lower spending at Control Devices due to the pace of the restoration of the engineering function previously located at the Canton facility.

Table of Contents

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


					Dollar		Percent
					increase /		increase /
Three months ended June 30,	2020		2019		(decrease)		decrease
Control Devices	$	(9,656)	$	44,367	$	(54,023)	NM
Electronics		(11,042)		7,555		(18,597)	NM
Stoneridge Brazil		(879)		6,414		(7,293)	NM
Unallocated corporate		(5,246)		(9,150)		3,904	42.7	%
Operating (loss) income	$	(26,823)	$	49,186	$	(76,009)	NM

NM – Not meaningful

Our Control Devices segment operating income decreased due to the 2019 gain on disposal of Control Devices’ Non-core Products and lower sales primarily due to the impact of COVID-19 that resulted in adverse leverage of fixed costs.

Our Electronics segment operating income decreased primarily due to the impact of lower sales and segment gross margin as cost reduction initiatives were offset by business realignment and restructuring expenses.

Our Stoneridge Brazil segment operating income decreased primarily due to the 2019 recovery of indirect taxes and the impact of lower sales and gross margin.

Our unallocated corporate operating loss decreased primarily from lower incentive compensation and professional fees.

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


					Dollar		Percent
Three months ended June 30,	2020		2019		decrease		decrease
North America	$	(19,859)	$	35,209	$	(55,068)	NM
South America		(879)		6,414		(7,293)	NM
Europe and Other		(6,085)		7,563		(13,648)	NM
Operating (loss) income	$	(26,823)	$	49,186	$	(76,009)	NM

Our North American operating results decreased due to lower sales in our automotive, commercial vehicle and off-highway markets. The decrease in operating income in South America was primarily due to lower sales volumes and adverse sales mix. Our operating results in Europe and Other decreased primarily due to the unfavorable foreign currency translation impact on sales as well as lower sales in our commercial vehicle market.

Interest Expense, net. Interest expense, net increased by $0.4 million for the three months ended June 30, 2020 due to 2019 due to an increase in borrowings under our 2019 Credit Facility.

Equity in Loss (Earnings) of Investee. Equity loss (earnings) for MSIL were $(0.2) million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in MSIL earnings was due to lower sales volume from COVID-19.

Other Income, net. We record certain foreign currency transaction (gains) losses as a component of other income, net on the condensed consolidated statement of operations. Other income, net decreased by $0.1 million in the second quarter of 2020 compared to other income, net of $0.1 million for the second quarter of 2019.

(Benefit) Provision for Income Taxes. In the three months ended June 30, 2020, income tax benefit of $(6.7) million was attributable to the mix of earnings among tax jurisdictions as well as valuation allowances in certain jurisdictions. The effective tax rate of 23.6% is greater than the statutory rate primarily due to the impact of certain incentives.

In the three months ended June 30, 2019, income tax expense of $9.1 million was attributable to the sale of Non-core Products on April 1, 2019. The effective tax rate of 18.6% is lower than the statutory rate primarily due to the impact of certain tax incentives.

3436

Table of Contents

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

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


									Dollar
									increase /
Six months ended June 30,	2020				2019				(decrease)
Net sales	$	282,511	100.0	%	$	440,538	100.0	%	$	(158,027)
Costs and expenses:
Cost of goods sold		223,860	79.2			322,858	73.3			(98,998)
Selling, general and administrative		57,196	20.2			63,110	14.3			(5,914)
Gain on disposal of non-core products, net		-	-			(33,599)	(7.6)			33,599
Design and development		24,619	8.7			27,284	6.2			(2,665)
Operating (loss) income		(23,164)	(8.1)			60,885	13.8			(84,049)
Interest expense, net		2,440	0.9			2,004	0.4			436
Equity in earnings of investee		(226)	(0.1)			(912)	(0.2)			(686)
Other income, net		(1,626)	(0.6)			(529)	(0.1)			1,097
(Loss) income before income taxes		(23,752)	(8.3)			60,322	13.7			(84,074)
(Benefit) provision for income taxes		(5,508)	(1.9)			10,901	2.5			(16,409)
Net (loss) income	$	(18,244)	(6.4)	%	$	49,421	11.2	%	$	(67,665)

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


									Dollar		Percent
Six months ended June 30,	2020				2019				decrease		decrease
Control Devices	$	143,855	50.9	%	$	224,186	50.9	%	$	(80,331)	(35.8)	%
Electronics		117,076	41.4			182,406	41.4			(65,330)	(35.8)	%
Stoneridge Brazil		21,580	7.7			33,946	7.7			(12,366)	(36.4)	%
Total net sales	$	282,511	100.0	%	$	440,538	100.0	%	$	(158,027)	(35.9)	%

Our Control Devices segment net sales decreased primarily as a result of COVID-19 and decreased sales volume of $24.3 million from the disposal of Non-core Products that occurred in the second quarter of 2019. Including the impact of COVID-19 and 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 $45.1 million, $20.0 million and $5.1 million, respectively, and a decrease in other markets sales volume of $10.8 million as well as unfavorable foreign currency translation of $0.5 million.

Our Electronics segment net sales decreased primarily as a result of COVID-19 including a decrease in sales volume in our European commercial vehicle market of $35.6 million and unfavorable foreign currency translation of $3.6 million as well as a decrease in sales volume in our North American and China commercial vehicle markets of $15.9 million and $0.8 million, respectively. In addition, the Electronics segment net sales decreased due to a decrease in sales volume in our European and North American off-highway vehicle products of $9.0 million and $1.1 million, respectively.

Our Stoneridge Brazil segment net sales decreased due to COVID-19 and unfavorable foreign currency translation of $6.6 million and lower volumes for our Argentina aftermarket channel and audio and alarm products.

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


									Dollar		Percent
Six months ended June 30,	2020				2019				decrease		decrease
North America	$	142,973	50.5	%	$	242,660	55.1	%	$	(99,687)	(41.1)	%
South America		21,580	7.7			33,946	7.7			(12,366)	(36.4)	%
Europe and Other		117,958	41.8			163,932	37.2			(45,974)	(28.0)	%
Total net sales	$	282,511	100.0	%	$	440,538	100.0	%	$	(158,027)	(35.9)	%

Table of Contents

The decrease in North American net sales was primarily attributable to the impact of COVID-19 and a ~~decrease~~reduction of $24.3 million from the disposal of Control Devices’ Non-core Products in the second quarter of 2019. Including the impact of COVID-19 and the disposal of Non-core Products, sales volume has decreased in our North American commercial vehicle, automotive ~~market~~and agricultural markets of ~~$4.3~~$36.2 million, ~~resulting from certain program volume reductions~~$44.6 million and ~~$0.6~~$5.1 million, respectively, as well as a $10.2 million decrease in our Electronics segment off-highway ~~market offset by increased sales volume in our Electronics segment North American commercial vehicle market of $0.9 million~~products and other North American volumes of ~~$0.5~~$10.8 million. The decrease in net sales in South America was primarily due to unfavorable foreign currency translation of $6.6 million and lower volumes for our Argentina aftermarket channel and alarm and audio ~~products as well as lower monitoring product and service revenues. This~~products. The decrease ~~was offset by favorable foreign currency translation that increased sales by $0.1 million. The increase~~ in net sales in Europe and Other was primarily due to ~~an increase in sales volume in our China automotive market of $3.9 million as well as an increase~~a decrease in our European commercial vehicle and off-highway markets of ~~$2.6~~$35.6 million and ~~$1.9~~$9.0 million, ~~respectively.~~respectively, primarily due to COVID-19. Additionally, Europe and Other sales were unfavorably impacted by foreign currency translation of ~~$6.4~~$3.6 million.

Cost of Goods Sold and Gross Margin. Cost of goods sold ~~increased from~~decreased compared to the ~~third~~second quarter of ~~2018~~2019 and our gross margin decreased from ~~30.3%~~26.7% in the ~~third quarter~~first half of ~~2018~~2019 to ~~25.5%~~20.8% in the ~~third quarter~~first half of ~~2019.~~2020. Our material cost as a percentage of net sales ~~increased by 2.1% to 53.0% in~~remained consistent with the ~~third quarter~~first half of 2019 compared to 50.9% in the third quarter of 2018. Direct material costs in our Control Devices segment was negatively impacted by unfavorable product mix including the impact of Non-core product sales pursuant to the contract manufacturing agreement at ~~a fixed margin of 10.0% and purchase price variances while our Electronics segment was negatively impacted by unfavorable product mix and higher material costs for electronic components.~~53.0%. Overhead as a percentage of net sales increased by ~~2.1%~~5.5% to ~~16.1%~~20.5% for the ~~third quarter~~first half of ~~2019~~2020 compared to ~~14.0%~~15.0% for the ~~third quarter~~first half of ~~2018~~2019 primarily due to ~~the Canton Restructuring costs of $2.6 million offset by lower warranty expenses in our Control Devices segment.~~

Our Control Devices segment gross margin decreased due to an increase in direct material costs due to an unfavorable product mix including the impact of Non-core Product sales pursuant to the contract manufacturing agreement at aadverse fixed ~~margin of 10.0% and adverse purchase price variances and higher expediting costs primarily from Canton Restructuring costs of $2.6 million.~~

~~Our Electronics segment gross margin decreased primarily due to~~cost leverage on lower sales ~~an unfavorable product mix and higher material costs for electronic component shortages and higher overhead costs primarily from higher warranty~~levels including COVID-19 related incremental operating costs.

Our ~~PST segment gross margin decreased due to lower sales and an increase~~Canton facility ceased production in ~~labor and overhead costs offset by lower material costs.~~

~~Selling, General and Administrative (“SG&A”).~~ SG&A expenses decreased by $1.6 million compared to the third quarter of 2018 primarily due to Control Devices receiving transition service fees and retention reimbursement of $0.9 million in connectionaccordance with ~~the disposal of Non-core Products and lower incentive compensation costs at unallocated corporate. This decrease was partially offset by an increase in restructuring costs related to the~~our Canton restructuring ~~of $0.3 million and unallocated corporate business realignment costs of $0.4 million during the current quarter.~~

~~Design and Development (“D&D”).~~ ~~D&D costs decreased by $0.8 million due to higher capitalization of software development costs of $1.6 million~~plan in ~~the Electronics segment during the third quarter of 2019 which included $0.8 million of costs previously expensed in prior quarters of~~December 2019. ~~The decrease was partially offset by expenses in unallocated corporate for the establishment of the chief technology office.~~

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

Dollar

Percent

Three months ended September 30,

2019

2018

decrease

decrease

Control Devices

$
9,767

$
16,297

$
(6,530)

(40.1)
%
Electronics

7,661

8,951

(1,290)

(14.4)
%
PST

(451)

668

(1,119)

(167.5)
%
Unallocated corporate

(7,654)

(7,604)

(50)

(0.7)
%
Operating income

$
9,323

$
18,312

$
(8,989)

(49.1)
%

Our Control Devices segment operating income decreased due to unfavorable product mix, adverse purchase price variances and higher Canton restructuring costs, offset by lower SG&A costs due to receiving transition service fees and retention reimbursement of $0.9 million in connection with the disposal of Non-core Products.

~~Table of Contents~~

~~Our Electronics segment operating income decreased primarily due to lower sales and higher overhead costs offset by lower D&D costs and slightly lower SG&A costs.~~

~~Our PST segment operating loss increased primarily due to lower sales volumes and higher labor costs.~~

~~Our unallocated corporate operating loss slightly increased primarily from higher wages and consulting costs offset by lower incentive compensation costs.~~

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

Dollar

Percent

Three months ended September 30,

2019

2018

decrease

decrease

North America

$
1,895

$
9,158

$
(7,263)

(79.3)
%
South America

(451)

668

(1,119)

(167.5)
%
Europe and Other

7,879

8,486

(607)

(7.2)
%
Operating income

$
9,323

$
18,312

$
(8,989)

(49.1)
%

Our North American operating results decreased due to lower sales in our automotive and off-highway markets as well as higher SG&A and D&D costs offset by higher sales volume in the North American commercial vehicle market. The increase in operating loss in South America was primarily due to lower sales volumes and higher labor costs. Our operating results in Europe and Other decreased primarily due to the unfavorable foreign currency translation impact on sales offset by higher sales in our commercial vehicle market.

~~Interest Expense, net.~~ ~~Interest expense, net remained consistent with 2018.~~

~~Equity in Earnings of Investee.~~ ~~Equity earnings for MSIL were $0.3 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively.~~

~~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 $0.2 million to $0.4 million in the third quarter of 2019 compared to other income, net of $0.6 million for the third quarter of 2018 primarily due to lower foreign currency transaction gains in our Electronics segment.

~~Provision for Income Taxes.~~ We recognized income tax expense of $1.5 million and $3.5 million for federal, state and foreign income taxes for the third quarter of 2019 and 2018, respectively. The decrease in income tax expense for the three months ended September 30, 2019 compared to the same period for 2018 was primarily due to reduced pre-tax earnings from operations. The effective tax rate decreased to 17.9% in the third quarter of 2019 from 20.7% in the third quarter of 2018 primarily due to the impact of certain tax incentives, which did not impact the third quarter of 2018.

~~Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018~~

Dollar

increase /
Nine months ended September 30,

2019

2018

(decrease)
Net sales

$
643,924


100.0
%
$
655,385

100.0
%
$
(11,461)
Costs and expenses:

Cost of goods sold

474,389

73.7

456,713

69.7

17,676
Selling, general and administrative

94,088

14.6

105,106

16.0

(11,018)
Gain on disposal of non-core products, net

(33,599)

(5.2)

-

-

(33,599)
Design and development

38,838

6.0

39,226

6.0

(388)
Operating income

70,208

10.9

54,340

8.3

15,868
Interest expense, net

3,153

0.5

3,679

0.5

(526)
Equity in earnings of investee

(1,230)

(0.2)

(1,435)

(0.2)

205
Other income, net

(148)

-

(216)

-

68
Income before income taxes

68,433

10.6

52,312

8.0

16,121
Provision for income taxes

12,351

1.9

10,520

1.6

1,831
Net income

$
56,082

8.7
%
$
41,792

6.4
%
$
14,290

~~Table of Contents~~

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

Dollar

Percent

Nine months ended September 30,

2019

2018

decrease

decrease

Control Devices

$
332,876


51.7
%
$
333,715

50.9
%
$
(839)

(0.3)
%
Electronics

260,560

40.5

261,928

40.0

(1,368)

(0.5)
%
PST

50,488

7.8

59,742

9.1

(9,254)

(15.5)
%
Total net sales

$
643,924

100.0
%
$
655,385

100.0
%
$
(11,461)

(1.7)
%

Our Control Devices segment net sales decreased primarily as a result of decreased sales volume in the North American automotive market of $15.1 million due to certain program volume reductions related to the legacy Shift-by-Wire programs, an unfavorable foreign currency translation of $0.8 million and decreased sales volume of $0.5 million in our agriculture market 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 $4.0 million and $8.2 million, respectively.

Our Electronics segment net sales decreased primarily due to an unfavorable foreign currency translation of $13.8 million, a decrease in sales volume in our European commercial vehicle market of $1.0 million and unfavorable pricing of $0.4 million on products nearing the end of product life. The decrease was offset by an increase in sales volume in our North American commercial vehicle products of $6.4 million, increased sales of European and North American off-highway vehicle products of $5.9 million and $0.4 million, respectively, and an increase in sales volume in our China commercial vehicle market of $1.5 million.

Our PST segment net sales decreased due to lower volumes for our Argentina aftermarket channel, audio and alarm products, monitoring products and service revenues. 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 /

Nine months ended September 30,

2019

2018

(decrease)

(decrease)

North America

$
358,476


55.7
%
$
364,789

55.7
%
$
(6,313)

(1.7)
%
South America

50,488

7.8

59,742

9.1

(9,254)

(15.5)
%
Europe and Other

234,960

36.5

230,854

35.2

4,106

1.8
%
Total net sales

$
643,924

100.0
%
$
655,385

100.0
%
$
(11,461)

(1.7)
%

The decrease in North American net sales was primarily attributable to a decrease in sales volume in our North American automotive market of $15.1 million resulting from certain program volume reductions as well as a decrease in sales volume in our North American agriculture market of $0.5 million 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 $4.6 million and $0.4 million, respectively. The decrease in net sales in South America was primarily due to lower volumes for our Argentina aftermarket channel, audio and alarm products, monitoring products and service revenues. 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 $5.9 million and $4.2 million, respectively, as well as an increase in sales volume in our China automotive and commercial vehicle markets of $8.2 million and $1.5 million, respectively. Additionally, Europe and Other sales were unfavorably impacted by a decrease in foreign currency translation of $14.6 million and a sales volume decrease in our European automotive market of $0.3 million.

~~Table of Contents~~

~~Cost of Goods Sold and Gross Margin.~~ Cost of goods sold increased compared to the first nine months of 2018 and our gross margin decreased to 26.3% in the first nine months of 2019 compared to 30.3% in the first nine months of 2018. Our material cost as a percentage of net sales increased by 1.9% to 53.0% in the first nine months of 2019 compared to 51.1% in the first nine months of 2018. Direct material costs in our Control Devices segment were negatively impacted by adverse product mix including the impact of Non-core Product sales pursuant to the contract manufacturing agreement at fixed margins of 0.0% and 10.0% in the second and third quarters of 2019, respectively, 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 1.7% to 15.3% for the first nine months of 2019 compared to 13.6% for the first nine months of 2018 primarily due to the Canton Restructuring costs of $6.2 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~~COVID-19, the adverse impact of ~~$6.2 million, higher warranty costs, adverse purchase price variances and expediting costs~~the disposal of Non-core Products in the second quarter of 2019, as well as ~~an increase~~adverse fixed cost leverage on lower sales levels including our Canton facility which ceased production in ~~direct material costs due to an unfavorable product mix including the impact of Non-core Product sales pursuant to the contract manufacturing agreement.~~accordance with our Canton restructuring plan in December 2019 and COVID-19 related incremental operating costs.

Our Electronics segment gross margin decreased primarily due to lower sales ~~unfavorable product mix~~as a result of the of COVID-19 pandemic and higher ~~material~~overhead costs ~~for electronic components offset by a reduction in~~from the adverse ~~effect~~leverage of ~~U.S denominated material purchases at non-U.S. based operations~~fixed costs and ~~lower warranty~~COVID-19 related incremental operating costs.

Our ~~PST~~Stoneridge Brazil segment gross margin decreased due to lower sales ~~volume and~~volumes, however gross margin as a percent of sales was consistent with the prior year due to favorable sales mix from a higher ~~direct labor costs partially offset by reductions in overhead costs.~~proportion of monitoring service fees.

Selling, General and Administrative. SG&A expenses decreased by ~~$11.0~~$5.9 million compared to the first ~~nine months~~half of ~~2018 primarily~~2019 due to lower incentive compensation costs and professional service fees at unallocated corporate, a ~~decrease in PST SG&A costs~~favorable fair value adjustment for earn-out consideration of $1.2 million at Stoneridge Brazil and staff reductions from the closure of the Canton Facility during 2020 at Control Devices offset by the 2019 recovery of Brazilian indirect taxes of $6.5 ~~million. 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~~higher business realignment and restructuring costs of $2.2 million during the first nine months of 2019. Control Devices SG&A costs decreased slightly primarily due to lower wages. Unallocated corporate SG&A costs increased primarily due to higher wages, higher consulting and legal fees, the accelerated share-based compensation expense associated with retirement of $0.7 million and business realignment costs of $1.0 million offset by lower incentive compensation.$4.0 million.

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

Design and Development. D&D costs decreased by ~~$0.4~~$2.7 million due to higher capitalization of software development costs of $1.4 million and lower ~~D&D costs in our Electronics segment~~spending at Control Devices due to reductions in consulting fees, higher capitalized software costs and higher customer reimbursement for development projects in 2019 compared to 2018. These decreases were partially offset by higher D&D costs in our Control Devices segment due to Canton Restructuring costs of $2.3 million and in our unallocated corporate segment for the ~~establishment~~pace of the ~~chief technology office.~~restoration of the engineering function previously located at the Canton facility.

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


					Dollar		Percent						Dollar		Percent
					increase /		increase /						increase /		increase /
Nine months ended September 30,	2019		2018		(decrease)		(decrease)
Six months ended June 30,									2020		2019		(decrease)		(decrease)
Control Devices	$	66,082	$	51,336	$	14,746	28.7	%	$	(2,334)	$	56,315	$	(58,649)	NM
Electronics		24,247		25,107		(860)	(3.4)	%		(8,170)		16,586		(24,756)	NM
PST		6,633		1,553		5,080	327.1	%
Stoneridge Brazil										(20)		7,084		(7,104)	NM
Unallocated corporate		(26,754)		(23,656)		(3,098)	(13.1)	%		(12,640)		(19,100)		6,460	33.8	%
Operating income	$	70,208	$	54,340	$	15,868	29.2	%
Operating (loss) income									$	(23,164)	$	60,885	$	(84,049)	NM

Our Control Devices segment operating income ~~increased primarily~~decreased due to the 2019 gain on disposal of Non-Core Products, lower sales primarily related to COVID-19 and unfavorable product mix from the disposal of Non-core Products ~~offset by higher restructuring~~that occurred in the second quarter of 2019. Adverse leverage of fixed costs ~~due to the Canton Restructuring of $9.3 million, higher warranty~~from lower sales volumes and COVID-19 related incremental operating costs ~~and higher D&D costs.~~also reduced operating income.

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Our Electronics segment operating income decreased primarily due to lower sales ~~higher direct material costs and higher restructuring and~~as a result of COVID-19 resulting in lower gross margin. Electronics SG&A cost reductions were offset by business realignment ~~costs of $0.3 million partially offset by lower SG&A~~ and ~~D&D costs.~~restructuring expenses.

Our ~~PST~~Stoneridge Brazil segment operating income ~~increased~~decreased primarily ~~due to~~from the 2019 recovery of Brazilian indirect taxes of $6.5 million due lower ~~SG&A~~sales volumes and ~~lower overhead costs partially~~margin offset by a ~~decrease~~favorable fair value adjustment for earn-out consideration of $1.2 million recognized in ~~sales.~~the first quarter of 2020.

Our unallocated corporate operating loss ~~increased~~decreased primarily due to higher business realignment costs of $1.0 million, accelerated share-based compensation expense associated with a retirement of $0.7 million, higher wages, consulting and legal fees as well as higher D&D expenses for the establishment of the chief technology office offset byfrom lower incentive ~~compensation.~~

compensation and professional fees. Operating (loss) income by geographic location is summarized in the following table (in thousands):


					Dollar		Percent						Dollar		Percent
					increase /		increase /
Nine months ended September 30,	2019		2018		(decrease)		(decrease)
Six months ended June 30,									2020		2019		decrease		decrease
North America	$	38,678	$	27,351	$	11,327	41.4	%	$	(20,356)	$	36,782	$	(57,138)	NM
South America		6,633		1,553		5,080	327.1	%		(20)		7,084		(7,104)	NM
Europe and Other		24,897		25,436		(539)	(2.1)	%		(2,788)		17,019		(19,807)	NM
Operating income	$	70,208	$	54,340	$	15,868	29.2	%
Operating (loss) income									$	(23,164)	$	60,885	$	(84,049)	NM

Our North American operating results ~~increased primarily~~decreased due to ~~the gain on disposal of Non-core Products and higher~~lower sales ~~volume~~ in ~~the North American~~our automotive, commercial vehicle and off-highway markets, ~~offset by lower sales in our automotive market, Canton Restructuring~~adverse leverage of fixed costs ~~as well as higher SG&A~~ and ~~D&D~~COIVD-19 related incremental operating costs. The increase in operating income in South America was primarily due to the 2019 recovery of indirect Brazilian ~~indirect~~ taxes ~~lower SG&A~~ and lower ~~overhead costs offsetting lower sales.~~sales volumes offset by the favorable fair value adjustment for earn-out consideration. Our operating results in Europe and Other decreased ~~slightly~~ primarily due to ~~higher material costs offset by~~ lower ~~SG&A~~sales in our commercial vehicle and ~~D&D~~off-highway markets, adverse leverage of fixed costs and ~~slightly higher sales.~~COIVD-19 related incremental operating costs.

Interest Expense, net. Interest expense, net ~~decreased~~increased by ~~$0.5~~0.4 million compared to the ~~prior year~~ first ~~nine months primarily~~half of 2019 due to ~~lower interest expense on~~an increase in borrowings under 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 ~~$1.2~~$0.2 million and ~~$1.4~~$0.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The decrease ~~compared to the prior period is primarily~~in MSIL earnings was due to lower ~~gross margin~~sales volume from ~~lower sales volumes~~the COVID-19 pandemic in ~~served markets as well as unfavorable changes in foreign currency exchange rates.~~the second quarter.

Other Income, net. We record certain foreign currency transaction ~~and forward currency hedge contract~~ (gains) losses as a component of other income, net on the condensed consolidated statement of operations. Other income, net ~~decreased~~increased by ~~$0.1~~$1.1 million to ~~$0.1~~$1.6 million in the first ~~nine months~~half of ~~2019~~2020 compared to other income, net of ~~$0.2~~$0.5 million for the first ~~nine months~~half of ~~2018~~2019 primarily due to ~~lower~~higher foreign currency transaction gains in our Electronics segment.

~~Provision~~(Benefit) provision for Income Taxes. ~~We recognized~~In the six months ended June 30, 2020, income tax ~~expense~~benefit of ~~$12.4~~$(5.5) million and $10.5 million for federal, state and foreign income taxes for the first nine months of 2019 and 2018, respectively. The increase in income tax expense for the nine months ended September 30, 2019 comparedwas attributable to the ~~same period for 2018 was primarily due to the sale~~mix of ~~Non-core Products on April 1, 2019~~earnings among tax jurisdictions partially offset by ~~reduced pre-tax earnings from operations.~~the establishment of a valuation allowance. The effective tax rate ~~decreased to 18.0% in~~of 23.2% is greater than the ~~first nine months of 2019 from 20.1% in the first nine months of 2018~~statutory rate primarily due to the impact of certain ~~tax incentives, which did not impact the first nine months of 2018.~~incentives.

In the six months ended June 30, 2019, income tax expense of $10.9 million was attributable to the sale of Non-core-Products on April 1, 2019. The effective tax rate of 18.1% is lower than the statutory rate primarily due to certain tax incentives.

Liquidity and Capital Resources

Summary of Cash Flows:


Six months ended June 30,	2020		2019
Net cash provided by (used for):
Operating activities	$	(6,533)	$	6,664
Investing activities		(17,925)		15,756
Financing activities		29,367		(50,920)
Effect of exchange rate changes on cash and cash equivalents		(1,900)		(1,089)
Net change in cash and cash equivalents	$	3,009	$	(29,589)

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~~Liquidity and Capital Resources~~

~~Summary of~~ Cash ~~Flows:~~

Nine months ended September 30

2019

2018

Net cash provided by (used for):

Operating activities

$
20,522

$
47,638

Investing activities

2,744

(21,369)

Financing activities

(45,382)

(28,209)

Effect of exchange rate changes on cash and cash equivalents

(3,713)

(3,408)

Net change in cash and cash equivalents

$
(25,829)

$
(5,348)

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

Net cash ~~provided by~~used for investing activities increased compared to ~~2018~~2019 due to ~~the cash~~ proceeds ~~received~~ from the ~~disposal~~2019 sale of Control ~~Devices’~~Devices Non-core ~~Products~~Switch and Connector products and the capitalization of $1.4 million of software development cost offset by ~~higher~~lower capital expenditures ~~2019~~and lower investments in the Autotech venture capital ~~fund and insurance proceeds received in 2018.~~fund.

Net cash ~~used for~~provided by financing activities increased compared to the prior year primarily due to higher net 2019 Credit Facility borrowings of $35.0 million partially offset by the repurchase of $5.0 million of Common Shares ~~during~~in the ~~second~~first quarter of 2020. In 2019 ~~as well as the~~we repurchased $50.0 million of our Common Shares and made a cash payment offor Orlaco earn-out ~~consideration offset by higher net~~consideration. The current year increase in borrowings under the 2019 Credit Facility ~~borrowings.~~were to maintain a high level of liquidity due to adverse economic conditions caused by COVID-19.

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.~~million. 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 ~~$108.5~~$161.0 million at ~~September~~June 30, ~~2019.~~ 2020.

●

the maximum net leverage ratio is suspended;

●

the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021;

●

the minimum interest coverage ratio of 3.50 is reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively;

●

the Company’s liquidity may not be less than $150,000;

●

the Company’s aggregate amount of cash and cash equivalents cannot exceed $130,000;

●

there are certain restrictions on Restricted Payments (as defined); and

●

a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders.

Amendment No. 1 increases the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points.

The Company was in compliance with all covenants at ~~September~~June 30, ~~2019.~~2020. The ~~covenants included in~~Company has not experienced a violation which would limit the Company’s ability to borrow under the 2019 Credit Facility ~~to date have~~(as amended) and does not ~~and are not expected to limit our~~expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the 2019 Credit Facility may be limited as a result of lower than expected financial performance due to the adverse impact of COVID-19 on the Company’s markets and general global demand.The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.

~~PST~~Stoneridge Brazil maintains ~~several~~ short-term and long-term loans used for working capital purposes. At ~~September~~June 30, ~~2019,~~2020, there was ~~$1.2~~$1.5 million of ~~PST~~Stoneridge Brazil debt outstanding. Scheduled principal repayments on ~~PST~~Stoneridge Brazil debt at ~~September~~June 30, ~~2019~~2020 were as follows: ~~$0.7~~$1.3 million from ~~October 2019~~July 2020 to ~~September 2020, $0.1~~June 2021 and $0.2 million from ~~October 2020~~July 2021 to December ~~2020~~2021.

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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 $1.2 million, at December 31, 2019. There was no balance outstanding on the overdraft credit line as of December 31, 2019, and ~~$0.4 million in 2021.~~the overdraft credit line was terminated as of June 30, 2020.

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 ~~$2.0~~$2.1 million, at ~~September~~both June 30, ~~2019.~~2020 and December 31, 2019, respectively. At ~~September~~June 30, 2020 and December 31, 2019, there was no balance outstanding on this overdraft credit ~~line.~~line however, during the six months ended June 30, 2020, the subsidiary borrowed and repaid 126.7 Swedish krona, or $13.1 million.

The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of ~~60.0~~50.0 million Chinese yuan, or ~~$8.4~~$7.1 million at ~~September~~June 30, 2020 and 40.0 million Chinese yuan, or $5.7 million at December 31, 2019. At ~~September~~June 30, 2020 and December 31, 2019 there was ~~$2.1~~$3.5 million and $2.2 million, respectively, in borrowings outstanding recorded within current portion of debt. AtIn 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 June 30, 2020 and December 31, ~~2018,~~2019, respectively. At June 30, 2020 there was no ~~balance outstanding~~funding utilized on ~~these credit lines.~~the Suzhou bank acceptance draft line and at December 31, 2019 there was approximately $150 utilized on the Suzhou bank acceptance draft line of credit.

~~Although the Company’s notes and credit facilities contain various covenants,~~On May 19, 2020, the Company ~~has not experienced~~committed to the strategic exit of its Control Devices PM sensor product line. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM Sensor production. We recognized $2.6 million of expense as a ~~violation which would limit or preclude their use or accelerate~~result of this initiative during the ~~maturity~~three months ended June 30, 2020. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $1.6 million to $4.7 million and ~~does not expect these covenants~~is related to ~~restrict our financing flexibility.~~ employee severance and termination costs, contract terminations costs, other related costs and non-cash fixed asset charges. The Company ~~has been~~expects the exit from the PM sensor product line to be completed in the third quarter of 2021.

In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. For the three months ended June 30, 2020 and 2019, we recognized expense of $1.6 million and $0.1 million, respectively, as a result of these actions for related costs and non-cash fixed asset charges for accelerated depreciation fixed assets. The Company expects to ~~continue~~incur approximately $5.0 million of additional restructuring costs related to ~~remain in compliance with~~employee severance and termination costs and other related costs for these ~~covenants during~~actions through the ~~term~~second quarter of ~~the credit facilities and loans.~~2021.

~~Table of Contents~~

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

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On February 24, 2020, the Board of Directors authorized a ~~$40.0 million reduction to shareholder’ equity. The remaining $10.0~~new repurchase program for $50.0 million of ~~the initial payment was recorded as a reduction~~outstanding Common Shares over an 18 month period. The repurchases may be made from time to ~~shareholders’ equity as an unsettled forward contract indexed to our~~time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common ~~Shares. The number of shares~~Shares to be ~~ultimately purchased by~~repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company ~~will~~to acquire any particular amount of its Common Shares, and it may be ~~determined~~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. In April 2020, the Company announced that was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.

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 dividends payable balance included R$0.6 ($0.2) in monetary correction for the six months ended June 30, 2019 based on the ~~volume weighted-average price~~Brazilian National Extended Consumer Price inflation index. The dividend payable related to Stoneridge Brazil was recorded within other current liabilities on the consolidated balance sheet as of ~~our Common Shares during~~December 31, 2019. See Note 14 to the ~~terms of the transaction, minus an agreed upon discount between the parties. The program is expected to be completed by May 8, 2020.~~

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 June 30, 2020, the Company’s cumulative investment in the Autotech fund was $2.9 million. The Company ~~has~~ contributed $0.8 million and $1.2 million to the Autotech fund during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~

PST has dividends payable to former noncontrolling interest holders of Brazilian real (“R$”) 23.9 million ($5.7 million) and R$23.2 million ($6.0 million) as of September 30, 2019 and December 31, 2018, respectively. The dividends payable balance includes R$0.7 million ($0.2 million) and R$0.8 million ($0.2 million) in monetary correction for the nine months ended September 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”).~~

2019, respectively.

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 ~~September~~June 30, ~~2019,~~2020, we had a cash and cash equivalents balance of approximately ~~$55.3~~$72.4 million, ~~all~~ of which 76.5% was held in foreign locations. The ~~decrease~~increase in cash and cash equivalents from ~~$81.1~~$69.4 million at December 31, ~~2018~~2019 was primarily due to the repurchase of our Common Shares and lower cash flows from operations as well as the cash payment of the Orlaco earn-out consideration which were offset by proceeds from the disposal of Non-core Products and net borrowings on the 2019 Credit Facility. The Company has approximately $237.0 million of undrawn commitments under the 2019 Credit Facility as of June 30, 2020, which results in total undrawn commitments and cash balances of more than $309.0 million. However, despite the ~~Amended Agreement,~~June 26, 2020 amendment, it is possible that future borrowing flexibility under our 2019 Credit Facility may be limited as ~~applicable.~~a result of our financial performance due the adverse impact of COVID-19 on the Company’s markets and general global demand.

Commitments and Contingencies

See Note 1110 to the condensed consolidated financial statements for disclosures of the Company’s commitments and contingencies.

Seasonality

Our Control Devices and Electronics segments are not typically affected by seasonality, however the demand for our ~~PST~~Stoneridge Brazil segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.

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Critical Accounting Policies and Estimates

The Company’s critical accounting policies, which include management’s best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company’s ~~2018~~2019 Form 10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of the Company’s ~~2018~~2019 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no material changes in our significant accounting policies or critical accounting estimates during the ~~third~~second quarter of ~~2019, with the exception of the Company’s policies on lease accounting and the capitalization of software development costs.~~

~~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.~~

~~Table of Contents~~

The Company designs and develops software that will be embedded into certain products and sold to customers. Software development costs are capitalized after the software product development reaches technological feasibility and until the software product becomes available for general release to customers. These intangible assets will be amortized using the straight-line method over estimated useful lives generally ranging from 3 to 5 years. Software development costs of $2.8 million were capitalized in the nine months ended September 30, 2019.2020.

Information regarding other significant accounting policies is included in Note 2 to our consolidated financial statements in Item 8 of Part II of the Company’s ~~2018~~2019 Form 10-K.

Inflation and International Presence

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk presented within Part II, Item 7A of the Company’s ~~2018~~2019 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of ~~September~~June 30, ~~2019,~~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 ~~September~~June 30, ~~2019.~~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 ~~September~~June 30, ~~2019~~2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in certain legal actions and claims primarily arising in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these matters, we do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. We are subject to litigation regarding civil, labor, and other tax contingencies in our ~~PST~~Stoneridge Brazil segment for which we believe the likelihood of loss is reasonably possible, but not probable, although these claims might take years to resolve. In addition, we are subject to litigation regarding patent infringement. We are also subject to the risk of exposure to product liability claims in the event that the failure of any of our products causes personal injury or death to users of our products as well as product warranty and recall claims. There can be no assurance that we will not experience any material losses related to product liability, warranty or recall claims. In addition, if any of our products prove to be defective, we may be required to participate in a government-imposed or customer OEM-instituted recall involving such products. See additional details of these matters in Note 1110 to the condensed consolidated financial statements.

Item 1A. Risk Factors

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

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

In December 2019, a novel strain of the coronavirus (COVID-19) was reported to have been detected in Wuhan, China and on March 11, 2020 it was declared by the World Health Organization to be a global pandemic. The ~~Company’s Estimated Sourced Future Sales from Awarded Programs~~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 producing at a limited capacity 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.

~~The Company typically enters into customer agreements at the beginning~~

Table of a vehicle life cycle with the intent to fulfill customer-purchasing requirements for the entire vehicle production life cycle. The vehicle life cycle typically included the two to four year pre-production period and production for a term covering the life of such vehicle model or platform, generally between three to five years, although there is no guarantee that this will occur. The Company’s customers make no firm commitments regarding volume and may terminate these agreements or orders at any time. Therefore, these arrangements do not represent firm orders. The Company’s estimated sourced future sales from awarded programs, also referred to as backlog, is the estimated remaining cumulative awarded life-of-program sales. Several factors may change forecasted revenue from awarded programs; namely, new business wins, vehicle production volume changes, customer price reductions, foreign currency exchange rates, component take rates by customers and short cycled or cancelled models or platforms.Contents

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

The following table presents information with respect to repurchases of Common Shares made by us during the three months ended ~~September~~June 30, ~~2019.~~2020. There were ~~26,683~~3,753 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 ~~September~~June 30, ~~2019.~~2020.

Total number of

Maximum number

Total number of

Maximum number

shares purchased as

of shares that may

shares purchased as

of shares that may

part of publicly

yet be purchased

part of publicly

yet be purchased

Total number of

Average price

announced plans

under the plans

Total number of

Average price

announced plans

under the plans

Period

shares purchased

paid per share

or programs

shares purchased

paid per share

or programs

7/1/19-7/31/19

11,477

31.76

N/A

8/1/19-8/31/19

15,009

30.49

N/A

9/1/19-9/30/19

197

29.95

N/A

4/1/20-4/30/20

2,600

18.34

N/A

5/1/20-5/31/20

909

18.44

N/A

6/1/20-6/30/20

244

19.42

N/A

Total

26,683

3,753

Item 3. Defaults Upon Senior Securities

None.

~~Table of Contents~~

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number	Exhibit

10.1	Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 1, 2020).

10.2	First Amendment to the Stoneridge, Inc. 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on May 20, 2020).

31.1	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.


	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 ~~104~~	XBRL Taxonomy Extension Label Linkbase Document
	104	The cover page from our Quarterly Report on Form 10-Q for the period ended ~~September~~June 30, ~~2019,~~2020, filed with the Securities and Exchange Commission on ~~October 30, 2019,~~July 29, 2020, is formatted in Inline Extensible Business Reporting Language (“iXBRL”)

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Table of Contents

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: ~~October 30, 2019~~July 29, 2020	/s/ Jonathan B. DeGaynor
	Jonathan B. DeGaynor
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

Date: ~~October 30, 2019~~July 29, 2020	/s/ Robert R. Krakowiak
	Robert R. Krakowiak
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)

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		As of September 30, 2019
Assets:
Operating lease right-of-use assets	$	20,899

Liabilities:
Operating lease current liability, included in other current liabilities		4,188
Operating lease long-term liability		17,059
Total leased liabilities	$	21,247


		As of September 30, 2019
Year ending December 31,
2019 ⁽¹⁾	$	1,310
2020		4,680
2021		4,068
2022		3,115
2023		3,062
Thereafter		9,881
Total future minimum lease payments	$	26,116
Less: imputed interest		(4,869)
Total lease liabilities	$	21,247


Nine months ended		September 30, 2019
Operating cash flows:
Cash paid related to operating lease obligations	$	4,265
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations	$	5,327