UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2021
Commission file number: 001-13337
STONERIDGE INC
(Exact name of registrant as specified in its charter)
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Ohio |
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34-1598949 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
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39675 MacKenzie Drive, Suite 400, Novi, Michigan |
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48377 |
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(Address of principal executive offices) |
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(Zip Code) |
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(248) 489-9300 |
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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.
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Large accelerated filer ☐ |
Accelerated filer ☒ |
Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
Emerging growth company ☐ |
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If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐Yes ☒No
The number of Common Shares, without par value, outstanding as of July 30, 2021 was 27,163,551.
STONERIDGE, INC. AND SUBSIDIARIES
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INDEX |
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Page |
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Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020 |
4 |
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5 |
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6 |
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7 |
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8 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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9 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 |
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45 |
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45 |
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46 |
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48 |
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2
Forward-Looking Statements
Portions of this report on Form 10-Q contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and may include statements regarding the intent, belief or current expectations of the Company, with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) operational expectations. Forward-looking statements may be identified by the words “will,” “may,” “should,” “designed to,” “believes,” “plans,” “projects,” “intends,” “expects,” “estimates,” “anticipates,” “continue,” and similar words and expressions. The forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
| ● | the 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; |
| ● | our ability to manage foreign currency fluctuations; |
| ● | 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; |
| ● | fluctuations in the cost and availability of key materials (including semiconductors, printed circuit boards, resin, aluminum, steel and copper) and components and our ability to offset cost increases; |
| ● | 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 |
| ● | the items described in Part I, Item IA (“Risk Factors”) in the Company’s 2020 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.
3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
STONERIDGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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(in thousands) |
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2021 |
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2020 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
55,587 |
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$ |
73,919 |
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Accounts receivable, less reserves of $1,603 and $817, respectively |
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153,204 |
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136,745 |
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Inventories, net |
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114,810 |
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90,548 |
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Prepaid expenses and other current assets |
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38,808 |
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33,452 |
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Total current assets |
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362,409 |
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334,664 |
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Long-term assets: |
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Property, plant and equipment, net |
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112,055 |
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119,324 |
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Intangible assets, net |
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55,349 |
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55,394 |
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Goodwill |
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37,954 |
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39,104 |
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Operating lease right-of-use asset |
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16,780 |
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18,944 |
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Investments and other long-term assets, net |
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51,385 |
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53,978 |
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Total long-term assets |
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273,523 |
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286,744 |
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Total assets |
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$ |
635,932 |
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$ |
621,408 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of debt |
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$ |
4,455 |
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$ |
7,673 |
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Accounts payable |
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97,088 |
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86,103 |
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Accrued expenses and other current liabilities |
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61,937 |
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52,272 |
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Total current liabilities |
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163,480 |
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146,048 |
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Long-term liabilities: |
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Revolving credit facility |
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126,000 |
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136,000 |
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Deferred income taxes |
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11,854 |
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12,935 |
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Operating lease long-term liability |
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13,716 |
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15,434 |
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Other long-term liabilities |
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7,252 |
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14,357 |
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Total long-term liabilities |
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158,822 |
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178,726 |
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Shareholders' equity: |
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Preferred Shares, without par value, 5,000 shares authorized, none issued |
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- |
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- |
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Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 27,164 and 27,006 shares outstanding at June 30, 2021 and December 31, 2020, respectively, with no stated value |
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- |
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- |
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Additional paid-in capital |
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230,430 |
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234,409 |
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Common Shares held in treasury, 1,802 and 1,960 shares at June 30, 2021 and December 31, 2020, respectively, at cost |
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(56,086) |
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(60,482) |
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Retained earnings |
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232,270 |
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212,342 |
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Accumulated other comprehensive loss |
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(92,984) |
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(89,635) |
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Total shareholders' equity |
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313,630 |
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296,634 |
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Total liabilities and shareholders' equity |
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$ |
635,932 |
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$ |
621,408 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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(in thousands, except per share data) |
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2021 |
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2020 |
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2021 |
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2020 |
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Net sales |
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$ |
191,334 |
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$ |
99,545 |
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$ |
385,129 |
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$ |
282,511 |
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Costs and expenses: |
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Cost of goods sold |
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148,493 |
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86,291 |
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296,202 |
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223,860 |
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Selling, general and administrative |
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31,380 |
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27,693 |
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60,756 |
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57,196 |
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Gain on sale of Canton Facility, net |
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(30,718) |
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- |
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(30,718) |
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- |
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Design and development |
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15,495 |
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12,384 |
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30,146 |
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24,619 |
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Operating income (loss) |
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26,684 |
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(26,823) |
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28,743 |
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(23,164) |
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Interest expense, net |
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1,860 |
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1,410 |
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3,626 |
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2,440 |
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Equity in (earnings) loss of investee |
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(496) |
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231 |
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(1,110) |
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(226) |
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Other (income) expense, net |
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(272) |
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(9) |
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86 |
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(1,626) |
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Income (loss) before income taxes |
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25,592 |
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(28,455) |
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26,141 |
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(23,752) |
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Provision (benefit) for income taxes |
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5,794 |
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(6,721) |
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6,213 |
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(5,508) |
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Net income (loss) |
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$ |
19,798 |
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$ |
(21,734) |
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$ |
19,928 |
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$ |
(18,244) |
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Earnings (loss) per share: |
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Basic |
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$ |
0.73 |
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$ |
(0.81) |
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$ |
0.74 |
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$ |
(0.67) |
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Diluted |
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$ |
0.72 |
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$ |
(0.81) |
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$ |
0.73 |
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$ |
(0.67) |
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Weighted-average shares outstanding: |
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Basic |
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27,137 |
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26,952 |
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27,077 |
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27,092 |
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Diluted |
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27,432 |
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26,952 |
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27,442 |
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27,092 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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(in thousands) |
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2021 |
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2020 |
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2021 |
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2020 |
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Net income (loss) |
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$ |
19,798 |
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$ |
(21,734) |
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$ |
19,928 |
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$ |
(18,244) |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation |
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7,172 |
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1,821 |
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(3,606) |
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(15,298) |
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Unrealized gain (loss) on derivatives (1) |
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386 |
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1,210 |
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257 |
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(2,445) |
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Other comprehensive income (loss), net of tax |
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7,558 |
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3,031 |
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(3,349) |
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(17,743) |
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Comprehensive income (loss) |
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$ |
27,356 |
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$ |
(18,703) |
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$ |
16,579 |
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$ |
(35,987) |
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| (1) | Net of tax expense of $103 and $322 for the three months ended June 30, 2021 and 2020, respectively. Net of tax expense (benefit) of $68 and $(650) for the six months ended June 30, 2021 and 2020, respectively. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six months ended June 30 (in thousands) |
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2021 |
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2020 |
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OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
19,928 |
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$ |
(18,244) |
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Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
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Depreciation |
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14,099 |
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13,242 |
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Amortization, including accretion and write-off of deferred financing costs |
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3,126 |
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2,732 |
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Deferred income taxes |
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1,658 |
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(7,018) |
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Earnings of equity method investee |
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(1,110) |
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(87) |
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(Gain) loss on sale of fixed assets |
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(139) |
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131 |
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Share-based compensation expense |
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2,761 |
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2,110 |
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Excess tax (benefit) deficiency related to share-based compensation expense |
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(289) |
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40 |
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Gain on sale of Canton Facility, net |
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(30,718) |
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- |
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Gain on disposal of business, net |
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(740) |
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- |
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Property, plant and equipment impairment charge |
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- |
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2,326 |
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Change in fair value of earn-out contingent consideration |
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1,215 |
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(233) |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(17,175) |
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|
37,644 |
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Inventories, net |
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(24,750) |
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(6,295) |
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Prepaid expenses and other assets |
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(3,084) |
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|
992 |
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Accounts payable |
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13,610 |
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(26,044) |
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Accrued expenses and other liabilities |
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(1,033) |
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(7,829) |
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Net cash used for operating activities |
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(22,641) |
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(6,533) |
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INVESTING ACTIVITIES: |
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Capital expenditures, including intangibles |
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(14,043) |
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(17,194) |
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Proceeds from sale of fixed assets |
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|
474 |
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|
19 |
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Proceeds from disposal of business, net |
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1,050 |
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|
- |
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Proceeds from sale of Canton Facility, net |
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|
35,167 |
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|
- |
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Investment in venture capital fund, net |
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(1,599) |
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|
(750) |
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Net cash provided by (used for) investing activities |
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|
21,049 |
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(17,925) |
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FINANCING ACTIVITIES: |
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Revolving credit facility borrowings |
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30,000 |
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|
71,500 |
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Revolving credit facility payments |
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(40,000) |
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(36,500) |
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Proceeds from issuance of debt |
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|
21,888 |
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|
17,345 |
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Repayments of debt |
|
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(25,082) |
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(16,242) |
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Common Share repurchase program |
|
|
- |
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|
(4,995) |
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Repurchase of Common Shares to satisfy employee tax withholding |
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|
(2,349) |
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|
(1,741) |
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Net cash (used for) provided by financing activities |
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|
(15,543) |
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|
29,367 |
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|
|
|
|
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Effect of exchange rate changes on cash and cash equivalents |
|
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(1,197) |
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|
(1,900) |
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Net change in cash and cash equivalents |
|
|
(18,332) |
|
|
3,009 |
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Cash and cash equivalents at beginning of period |
|
|
73,919 |
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|
69,403 |
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Cash and cash equivalents at end of period |
|
$ |
55,587 |
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$ |
72,412 |
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|
|
|
|
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|
Supplemental disclosure of cash flow information: |
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|
Cash paid for interest |
|
$ |
3,468 |
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$ |
2,344 |
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|
Cash paid for income taxes, net |
|
$ |
6,645 |
|
$ |
636 |
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|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
||
|
|
|
Common |
|
Number of |
|
Additional |
|
Common |
|
|
|
other |
|
Total |
|||||
|
|
|
Shares |
|
treasury |
|
paid-in |
|
Shares held |
|
Retained |
|
comprehensive |
|
shareholders' |
|||||
|
(in thousands) |
|
outstanding |
|
shares |
|
capital |
|
in treasury |
|
earnings |
|
loss |
|
equity |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2019 |
|
27,408 |
|
1,558 |
|
$ |
225,607 |
|
$ |
(50,773) |
|
$ |
206,542 |
|
$ |
(91,472) |
|
$ |
289,904 |
|
Net income |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
3,490 |
|
|
— |
|
|
3,490 |
|
Unrealized loss on derivatives, net |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,655) |
|
|
(3,655) |
|
Currency translation adjustments |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(17,119) |
|
|
(17,119) |
|
Issuance of Common Shares |
|
267 |
|
(267) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Repurchased Common Shares for treasury, net |
|
(75) |
|
75 |
|
|
— |
|
|
4,769 |
|
|
— |
|
|
— |
|
|
4,769 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2020 |
|
27,006 |
|
1,960 |
|
$ |
234,409 |
|
$ |
(60,482) |
|
$ |
212,342 |
|
$ |
(89,635) |
|
$ |
296,634 |
|
Net income |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
130 |
|
|
— |
|
|
130 |
|
Unrealized loss on derivatives, net |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(129) |
|
|
(129) |
|
Currency translation adjustments |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,778) |
|
|
(10,778) |
|
Issuance of Common Shares |
|
224 |
|
(224) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Repurchased Common Shares for treasury, net |
|
(68) |
|
68 |
|
|
— |
|
|
4,392 |
|
|
— |
|
|
— |
|
|
4,392 |
|
Share-based compensation, net |
|
— |
|
— |
|
|
(5,577) |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,577) |
|
BALANCE MARCH 31, 2021 |
|
27,162 |
|
1,804 |
|
$ |
228,832 |
|
$ |
(56,090) |
|
$ |
212,472 |
|
$ |
(100,542) |
|
$ |
284,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
19,798 |
|
|
— |
|
|
19,798 |
|
Unrealized gain on derivatives, net |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
386 |
|
|
386 |
|
Currency translation adjustments |
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
7,172 |
|
|
7,172 |
|
Issuance of Common Shares |
|
2 |
|
(2) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Repurchased Common Shares for treasury, net |
|
— |
|
— |
|
|
— |
|
|
4 |
|
|
— |
|
|
— |
|
|
4 |
|
Share-based compensation, net |
|
— |
|
— |
|
|
1,598 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,598 |
|
BALANCE JUNE 30, 2021 |
|
27,164 |
|
1,802 |
|
$ |
230,430 |
|
$ |
(56,086) |
|
$ |
232,270 |
|
$ |
(92,984) |
|
$ |
313,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three and six months ended June 30, 2021 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 2020 Form 10-K.
The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the three and six months ended June 30, 2021 and 2020 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 December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted this standard prospectively as of January 1, 2020 using the modified retrospective basis. The impact of the adoption was a reduction to deferred tax liabilities and an increase to retained earnings of $13,750 on the condensed consolidated balance sheet as of December 31, 2020. The adoption of this standard did not have an impact on the Company’s condensed consolidated results of operations and cash flows.
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. The Company adopted this standard prospectively as of January 1, 2020 and it did not have a material impact on the Company’s condensed consolidated financial statements.
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 adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s condensed consolidated financial statements.
9
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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. The guidance allows for various methods for measuring expected credit losses. The Company has elected to apply a historical loss rate based on historical write-offs by region, adjusted for current economic conditions and forecasts about future economic conditions that are reasonable and supportable. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s condensed consolidated financial statements.
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. As of June 30, 2021, the Company has not yet had contracts modified due to rate reform.
(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, switches and 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 the North American, European and 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”).
10
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Electronics. Our 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 European and North American 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 and commercial vehicle markets in the European and North American regions.
Stoneridge Brazil. Our Stoneridge Brazil segment primarily serves the South American region and specializes in the design, manufacture and sale of vehicle tracking devices and monitoring services, vehicle security alarms and 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, directly 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 three months ended June 30, 2021 and 2020:
The following tables disaggregate our revenue by reportable segment and geographical location(1) for the six months ended June 30, 2021 and 2020:
| (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 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 camera-based vision systems that are common across all customers (CMS for OEMS are customized but sales are not yet material). 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.
11
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 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 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 no material contract assets, contract liabilities or capitalized contract acquisition costs as of June 30, 2021 and December 31, 2020.
(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:
Inventory valued using the FIFO method was $102,433 and $82,308 at June 30, 2021 and December 31, 2020, respectively. Inventory valued using the average cost method was $12,377 and $8,240 at June 30, 2021 and December 31, 2020, respectively.
12
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
(5) Financial Instruments and Fair Value Measurements
Financial Instruments
A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair value of debt approximates the carrying value of debt.
Derivative Instruments and Hedging Activities
On June 30, 2021, the Company had open Mexican peso-denominated foreign currency forward contracts. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2021 and 2020. 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 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 euro and Mexican peso currencies during 2020 and the Mexican peso in 2021.
These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated other comprehensive income (loss), 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 may 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 expense (income), net. At June 30, 2021, 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:
U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedges
The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, with a notional amount at June 30, 2020 of $1,400 which expired ratably on a monthly basis from July 2020 through December 2020. There were no such contracts at June 30, 2021 or December 31, 2020.
Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedges
The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at June 30, 2021 of $10,880 which expire ratably on a monthly basis from July 2021 to December 2021. The notional amount at December 31, 2020 related to Mexican peso-denominated foreign currency forward contracts was $1,242.
13
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The Company evaluated the effectiveness of the Mexican peso and U.S. dollar-denominated forward contracts held as of June 30, 2021 and concluded that the hedges were effective.
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 Credit Facility. The Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's Credit Facility that has a current balance of $126,000 at June 30, 2021. Accordingly, the change in fair value of the Swap is recognized in accumulated other comprehensive income (loss). The Swap agreement requires monthly settlements on the same days that the Credit Facility interest payments are due and has a maturity date of March 10, 2023, which is prior to the 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 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 settlements increased interest expense by $163 and $114 for the three months ended June 30, 2021 and 2020, respectively. The Swap settlements increased interest expense by $321 and $118 for the six months ended June 30, 2021 and 2020, respectively.
The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
| (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 income (loss) for the three months ended June 30 were as follows:
| (A) | Gains (losses) reclassified from other comprehensive loss into net income (loss) recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $9 and $(235) for the three months ended June 30, 2021 and 2020, respectively. Gains (losses) reclassified from other comprehensive loss into net income (loss) recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $86 and $(712) for the three months ended June 30, 2021 and 2020, respectively. Losses reclassified from other comprehensive loss into net income (loss) recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $(163) and $(114) for the three months ended June 30, 2021 and 2020, respectively. |
14
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 income (loss) for the six months ended June 30 were as follows:
| (A) | Gains (losses) reclassified from other comprehensive loss into net income (loss) recognized in SG&A in the Company’s condensed consolidated statements of operations were $89 and $(235) for the six months ended June 30, 2021 and 2020, respectively. Gains (losses) reclassified from other comprehensive loss into net income (loss) recognized in COGS in the Company’s condensed consolidated statements of operations were $213 and $(839) for the six months ended June 30, 2021 and 2020, respectively. Gains (losses) reclassified from other comprehensive loss income into net income (loss) recognized in design and development (“D&D”) in the Company’s condensed consolidated statements of operations were $0 and $(29) for the six months ended June 30, 2021 and 2020, respectively. Losses reclassified from other comprehensive loss into net income (loss) recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $(321) and $(118) for the six months ended June 30, 2021 and 2020, respectively. |
For the six months ended June 30, 2021, the total net gains on the foreign currency contract cash flow hedges of $257 are expected to be included in COGS, SG&A and D&D within the next 12 months. Of the total net losses on the interest rate swap cash flow hedges, $596 of losses are expected to be included in interest expense, net within the next 12 months and $399 of losses are expected to be included in interest expense, net 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
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.
15
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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.
The Company will be required to pay the Stoneridge Brazil earn-out consideration, which is not capped, based on Stoneridge Brazil’s financial performance in 2021. The fair value of the Stoneridge Brazil earn-out consideration is based on discounted cash flows utilizing forecasted earnings before interest, depreciation and amortization (“EBITDA”) in 2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The earn-out consideration obligation related to Stoneridge Brazil is recorded within accrued expenses and other current liabilities in the condensed consolidated balance sheets as of June 30, 2021 and other long-term liabilities in the consolidated balance sheets as of December 31, 2020.
The change in fair value of the earn-out consideration for Stoneridge Brazil was due to updated financial performance projections and unfavorable foreign currency translation 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 in SG&A expense and the foreign currency impact was included in other expense (income), net in the condensed consolidated statements of operations.
There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the six months ended June 30, 2021.
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.
16
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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 $1,599 and $733 for the three months ended June 30, 2021 and 2020, respectively. Compensation expense for share-based compensation arrangements, which is recognized in the condensed consolidated statements of operations as a component of SG&A expenses, was $2,761 and $2,110 for the six months ended June 30, 2021 and 2020, respectively. The expenses related to share-based compensation awards for the three and six months ended June 30, 2021 were higher than the three and six months ended June 30, 2020 due to the recognition of reduced attainment of performance-based awards during the second quarter of 2020.
(7) Debt
Debt consisted of the following at June 30, 2021 and December 31, 2020:
Revolving Credit Facility
On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility provides for a $400,000 senior secured revolving credit facility and it replaced and superseded the Third Amended and Restated Credit Agreement that provided for a $300,000 revolving credit facility. The 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 Credit Facility has a termination date of June 5, 2024. Borrowings under the 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 Credit Facility. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio.
17
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The Credit Facility contains customary affirmative covenants and representations. The 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 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.
Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts to 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, 2021, Specified Hedge Borrowings were $50,000.
The Company capitalized an additional $1,086 of deferred financing costs as a result of entering into Amendment No. 1.
Borrowings outstanding on the Credit Facility were $126,000 and $136,000 at June 30, 2021 and December 31, 2020, respectively.
The Company was in compliance with all credit facility covenants at June 30, 2021 and December 31, 2020.
The Company also has outstanding letters of credit of $1,703 and $1,720 at June 30, 2021 and December 31, 2020, respectively.
Debt
Stoneridge Brazil maintains short-term notes used for working capital purposes which have fixed or variable interest rates. The weighted-average interest rates of short-term debt of Stoneridge Brazil at June 30, 2021 was 8.8%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments of $269 on Stoneridge Brazil debt at June 30, 2021 are due in 2021.
18
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 Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20,000 Swedish krona, or $2,339 and $2,435, at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021 there was 36 Swedish krona, or $4, outstanding on this overdraft credit line. At December 31, 2020 there was 13,072 Swedish krona, or $1,591, outstanding on this overdraft credit line. During the six months ended June 30, 2021, the subsidiary borrowed 170,613 Swedish krona, or $19,950, and repaid 183,649 Swedish krona, or $21,474.
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 $7,744 and $7,663 at June 30, 2021, and December 31, 2020. At June 30, 2021 and December 31, 2020 there was $4,182 and $4,521, respectively, in borrowings outstanding on the Suzhou credit line with weighted-average interest rates of 4.24% and 4.32%, 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 by 180 days. This bank acceptance draft line of credit allows up to a maximum borrowing level of 15,000 Chinese yuan, or $2,323 and $2,299, at June 30, 2021 and December 31, 2020, respectively. There was $594 and $414 utilized on the Suzhou bank acceptance draft line of credit at June 30, 2021 and December 31, 2020, respectively.
(8) Leases
The Company, as lessor, entered into a lease with a third-party lessee effective July 1, 2020, for our Canton, Massachusetts facility. In conjunction with the Canton restructuring plan outlined in Note 12, the Company ceased operations at this facility in March 2020. As discussed in Note 16, the Company sold the Canton facility and assigned the lease to the buyer on June 17, 2021. The Company recognized lease income on a straight-line basis over the lease term until the time of the sale. The Company recognized, in its Control Devices segment, operating and variable lease income from the lease in our condensed consolidated statements of operations of $282 and $100, respectively, for the three months ended June 30, 2021. The Company recognized operating and variable lease income from the lease in our condensed consolidated statements of operations of $602 and $199, respectively, for the six months ended June 30, 2021.
(9) Earnings Per Share
Basic earnings per share was computed by dividing net income by the weighted-average number of Common Shares outstanding for each respective period. Diluted earnings per share was calculated by dividing net income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented. However, for all periods in which the Company recognized a net loss, the Company did not recognize the effect of 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 be anti-dilutive.
Weighted-average Common Shares outstanding used in calculating basic and diluted earnings per share were as follows:
There were 747,545 and 771,854 performance-based right to receive Common Shares outstanding at June 30, 2021 and 2020, 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.
19
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
(10) 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 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.
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. As of June 30, 2021, the new repurchase program remains suspended.
20
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 months ended June 30, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Unrealized |
|
|
|
|
|
|
|
currency |
|
|
gain (loss) |
|
|
|
|
|
|
|
translation |
|
|
on derivatives |
|
Total |
|
|
Balance at April 1, 2021 |
|
$ |
(99,573) |
|
$ |
(969) |
|
$ |
(100,542) |
|
Other comprehensive income before reclassifications |
|
|
7,172 |
|
|
332 |
|
|
7,504 |
|
Amounts reclassified from accumulated other comprehensive loss |
|
|
- |
|
|
54 |
|
|
54 |
|
Net other comprehensive income, net of tax |
|
|
7,172 |
|
|
386 |
|
|
7,558 |
|
Balance at June 30, 2021 |
|
$ |
(92,401) |
|
$ |
(583) |
|
$ |
(92,984) |
|
|
|
|
|
|
|
|
|
|
|
|
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) |
Changes in accumulated other comprehensive loss for the six months ended June 30, 2021 and 2020 were as follows:
(11) 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.
21
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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 months ended June 30, 2021 and 2020, the Company recognized expense of $0 and $103, respectively, related to groundwater remediation. During the six months ended June 30, 2021 and 2020, the Company recognized expense of $407 and $105, respectively, related to groundwater remediation. At June 30, 2021 and December 31, 2020, the Company accrued $529 and $180, respectively, related to expected future remediation costs. At June 30, 2021 and December 31, 2020, $353 and $180, respectively, were recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets while the remaining amount as of June 30, 2021 was recorded as a component of other long-term liabilities. Costs associated with the recorded liability will be incurred to complete the groundwater remediation and monitoring. The recorded liability is based on assumptions in the remedial action plan as well as estimates for future remediation activities. 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 Stoneridge Brazil subsidiary has civil, labor and other tax contingencies (excluding income tax) 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$46,583 ($9,313) and R$43,736 ($8,416) at June 30, 2021 and December 31, 2020, respectively. An unfavorable outcome on these contingencies could result in significant cost to the Company and adversely affect its results of operations.
On August 12, 2020, the Brazilian Administrative Counsel for Economic Defense (“CADE”) issued a ruling against Stoneridge Brazil for abuse of dominance and market foreclosure through its prior use of exclusivity provisions in agreements with its distributors. The CADE tribunal imposed a R$7,995 ($1,598) fine which is included in the reasonably possible contingencies noted above. The Company is challenging this ruling in Brazilian federal court to reverse this decision by the CADE tribunal.
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. 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. 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 $3,186 and $3,647 of a long-term liability at June 30, 2021 and December 31, 2020, respectively, which is included as a component of other long-term liabilities in the condensed consolidated balance sheets.
22
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The following provides a reconciliation of changes in product warranty and recall liability:
|
|
|
|
|
|
|
|
|
Six months ended June 30 |
|
2021 |
|
2020 |
||
|
Product warranty and recall at beginning of period |
|
$ |
12,691 |
|
$ |
10,796 |
|
Accruals for warranties established during period |
|
|
3,092 |
|
|
3,201 |
|
Aggregate changes in pre-existing liabilities due to claim developments |
|
|
223 |
|
|
614 |
|
Settlements made during the period |
|
|
(5,889) |
|
|
(3,375) |
|
Foreign currency translation |
|
|
(169) |
|
|
(173) |
|
Product warranty and recall at end of period |
|
$ |
9,948 |
|
$ |
11,063 |
Brazilian Indirect Tax
In 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on 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. As a result, the Company recorded a pre-tax benefit of $6,473 in the year ended December 31, 2019.
The Brazilian tax authorities have sought clarification before the Supreme Court of Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these credits. The leading case was decided on May 13, 2021. The Company does not expect any impact to amounts previously recognized as a result of the Supreme Court decision.
(12) Business Realignment and Restructuring
On May 19, 2020, the Company committed to 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 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. In conjunction with the strategic exit of the PM sensor product line, the Company entered into an asset purchase agreement related to the sale of the PM sensor product line during the first quarter of 2021. Refer to Note 16 of the condensed consolidated financial statements for additional details regarding the sale.
As a result of the PM sensor restructuring actions, the Company recognized expense of $285 and $2,552 for the three months ended June 30, 2021 and 2020, respectively, for non-cash fixed asset charges, including impairment and accelerated depreciation of PM sensor related fixed assets and other related costs. For the three months ended June 30, 2021 restructuring related costs of $250 and $35 were recognized in COGS and SG&A, respectively. For the three months ended June 30, 2020 restructuring related costs of $164 and $2,388 were recognized in COGS and SG&A, respectively. The Company recognized expense of $1,654 and $2,552 for the six months ended June 30, 2021 and 2020, respectively, for non-cash fixed asset charges, including impairment and accelerated depreciation of PM sensor related fixed assets and other related costs. For the six months ended June 30, 2021 restructuring related costs of $900, $673 and $81 were recognized in COGS, SG&A and D&D, respectively. For the 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 $1,700 to $4,900 and is related to employee severance and termination costs, contract terminations costs and other related costs such as potential commercial and supplier settlements. We anticipate that these costs will be incurred through the fourth quarter of 2021.
23
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The expenses for the exit of the PM sensor line that relate to the Control Devices reportable segment include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of |
|
2021 Charge |
|
|
Utilization |
|
Accrual as of |
||||||
|
|
|
January 1, 2021 |
|
to Expense |
|
Cash |
|
Non-Cash |
|
June 30, 2021 |
|||||
|
Fixed asset impairment and
|
|
$ |
- |
|
$ |
185 |
|
$ |
- |
|
$ |
(185) |
|
$ |
- |
|
Employee termination benefits |
|
|
- |
|
|
76 |
|
|
(76) |
|
|
- |
|
|
- |
|
Other related costs |
|
|
- |
|
|
1,393 |
|
|
(1,393) |
|
|
- |
|
|
- |
|
Total |
|
$ |
- |
|
$ |
1,654 |
|
$ |
(1,469) |
|
$ |
(185) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 included 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.
As a result of the Canton Restructuring actions, the Company recognized expense of $0 and $461 respectively, for the three months ended June 30, 2021 and 2020 for employee termination benefits and other restructuring related costs. For the three months ended June 30, 2020 severance and other related restructuring costs of $80, $235 and $146 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. The Company recognized expense of $13 and $2,683 respectively, for the six months ended June 30, 2021 and 2020 for employee termination benefits and other restructuring related costs. For the six months ended June 30, 2021 other restructuring related costs of $13 were recognized in D&D in the condensed consolidated statement of operations. For the six months ended June 30, 2020 severance and other related restructuring costs of $1,570, $549 and $564 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. We do not expect to incur additional costs related to the Canton Restructuring. Refer to Note 8 and Note 16 to the condensed consolidated financial statements for additional details regarding the third-party lease and sale, respectively, of the Canton facility.
The expenses for the Canton Restructuring that relate to the Control Devices reportable segment include the following:
24
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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 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 $21 and $1,621, respectively, for the three months ended June 30, 2021 and 2020 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 (benefit) recognized in COGS, SG&A, and D&D in the condensed consolidated statement of operations for the three months ended June 30, 2021 were $5, $19 and $(3), respectively. Electronics segment restructuring costs recognized in SG&A and D&D in the condensed consolidated statement of operations were $1,244 and $377 for the three months ended June 30, 2020, respectively. The Company recognized expense of $220 and $1,628, respectively, for the six months ended June 30, 2021 and 2020 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 COGS, SG&A, and D&D in the condensed consolidated statement of operations for the three months ended June 30, 2021 were $3, $174 and $43, respectively. Electronics segment restructuring costs recognized in SG&A and D&D in the condensed consolidated statement of operations were $1,251 and $377 for the six months ended June 30, 2020, respectively. The Company expects to incur up to $19 of additional restructuring costs related to these actions through the fourth quarter of 2021.
The expenses for the restructuring activities that relate to the Electronics reportable segment include the following:
In addition to the specific restructuring activities, the Company regularly evaluates the performance of its businesses and cost structures, including personnel, and makes necessary changes thereto in order to optimize its results. The Company also evaluates the required skill sets of its personnel and periodically makes strategic changes. As a consequence of these actions, the Company incurs severance related costs which are referred to as business realignment charges.
Business realignment charges by reportable segment were as follows:
| (A) | Severance costs for the three months ended June 30, 2020 related to COGS, D&D and SG&A were $603, $249 and $190, respectively. Severance costs for the six months ended June 30, 2021 related to SG&A were $192. Severance costs for the six months ended June 30, 2020 related to COGS, D&D and SG&A were $603, $249 and $567, respectively. |
25
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
| (B) | Severance costs for the three months ended June 30, 2021 related to D&D were $1, respectively. Severance costs for the six months ended June 30, 2021 related to SG&A and D&D were $(22) and $35, respectively. 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 three and six months ended June 30, 2021 related to COGS and SG&A were $7 and $52, respectively. 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 2020 related to SG&A were $236. Severance costs for the six months ended June 30, 2021 and 2020 related to SG&A were $42 and $310, respectively. |
Business realignment charges classified by statement of operations line item were as follows:
(13) Income Taxes
For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date ordinary 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, 2021, income tax expense of $5,794 was attributable to the gain on the sale of the Canton facility, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 22.6% is greater than the statutory rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well at U.S. taxes on foreign earnings, partially offset by tax incentives.
For the six months ended June 30, 2021, income tax expense of $6,213 was attributable to the gain on the sale of the Canton facility, mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 23.8% is greater than the statutory rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as U.S. taxes on foreign earnings, partially offset by tax incentives.
For the three months ended June 30, 2020, income tax benefit of $(6,721) was primarily related 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 primarily related 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.
26
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(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 three reportable segments, Control Devices, Electronics and Stoneridge Brazil, which also represent its operating segments. The Control Devices reportable segment produces actuators, sensors, switches and connectors. The Electronics reportable segment produces driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. The Stoneridge Brazil reportable segment designs and manufactures electronic vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.
The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s 2020 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.
27
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
A summary of financial information by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Devices |
|
$ |
86,345 |
|
$ |
47,005 |
|
$ |
185,963 |
|
$ |
143,855 |
|
|
Inter-segment sales |
|
|
374 |
|
|
1,559 |
|
|
2,354 |
|
|
2,906 |
|
|
Control Devices net sales |
|
|
86,719 |
|
|
48,564 |
|
|
188,317 |
|
|
146,761 |
|
|
Electronics |
|
|
90,085 |
|
|
45,530 |
|
|
172,855 |
|
|
117,076 |
|
|
Inter-segment sales |
|
|
7,229 |
|
|
2,042 |
|
|
13,208 |
|
|
10,310 |
|
|
Electronics net sales |
|
|
97,314 |
|
|
47,572 |
|
|
186,063 |
|
|
127,386 |
|
|
Stoneridge Brazil |
|
|
14,904 |
|
|
7,010 |
|
|
26,311 |
|
|
21,580 |
|
|
Inter-segment sales |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Stoneridge Brazil net sales |
|
|
14,904 |
|
|
7,010 |
|
|
26,311 |
|
|
21,580 |
|
|
Eliminations |
|
|
(7,603) |
|
|
(3,601) |
|
|
(15,562) |
|
|
(13,216) |
|
|
Total net sales |
|
$ |
191,334 |
|
$ |
99,545 |
|
$ |
385,129 |
|
$ |
282,511 |
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Devices |
|
$ |
37,065 |
|
$ |
(9,656) |
|
$ |
47,230 |
|
$ |
(2,334) |
|
|
Electronics |
|
|
(1,807) |
|
|
(11,042) |
|
|
(2,680) |
|
|
(8,170) |
|
|
Stoneridge Brazil |
|
|
(749) |
|
|
(879) |
|
|
(797) |
|
|
(20) |
|
|
Unallocated Corporate (A) |
|
|
(7,825) |
|
|
(5,246) |
|
|
(15,010) |
|
|
(12,640) |
|
|
Total operating income (loss) |
|
$ |
26,684 |
|
$ |
(26,823) |
|
$ |
28,743 |
|
$ |
(23,164) |
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Devices |
|
$ |
3,858 |
|
$ |
3,639 |
|
$ |
7,937 |
|
$ |
7,169 |
|
|
Electronics |
|
|
3,059 |
|
|
2,393 |
|
|
5,868 |
|
|
4,874 |
|
|
Stoneridge Brazil |
|
|
1,041 |
|
|
1,273 |
|
|
2,045 |
|
|
2,723 |
|
|
Unallocated Corporate |
|
|
685 |
|
|
496 |
|
|
1,374 |
|
|
1,022 |
|
|
Total depreciation and amortization (B) |
|
$ |
8,643 |
|
$ |
7,801 |
|
$ |
17,224 |
|
$ |
15,788 |
|
|
Interest Expense (Income), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Devices |
|
$ |
108 |
|
$ |
89 |
|
$ |
240 |
|
$ |
170 |
|
|
Electronics |
|
|
164 |
|
|
313 |
|
|
295 |
|
|
400 |
|
|
Stoneridge Brazil |
|
|
(67) |
|
|
(7) |
|
|
(97) |
|
|
3 |
|
|
Unallocated Corporate |
|
|
1,655 |
|
|
1,015 |
|
|
3,188 |
|
|
1,867 |
|
|
Total interest expense, net |
|
$ |
1,860 |
|
$ |
1,410 |
|
$ |
3,626 |
|
$ |
2,440 |
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control Devices |
|
$ |
3,380 |
|
$ |
3,349 |
|
$ |
4,741 |
|
$ |
5,663 |
|
|
Electronics |
|
|
461 |
|
|
5,410 |
|
|
3,911 |
|
|
8,060 |
|
|
Stoneridge Brazil |
|
|
757 |
|
|
281 |
|
|
1,419 |
|
|
1,414 |
|
|
Unallocated Corporate(C) |
|
|
197 |
|
|
105 |
|
|
698 |
|
|
677 |
|
|
Total capital expenditures |
|
$ |
4,795 |
|
$ |
9,145 |
|
$ |
10,769 |
|
$ |
15,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The following tables present net sales and long-term assets for each of the geographic areas in which the Company operates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six months ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
96,700 |
|
$ |
43,122 |
|
$ |
193,234 |
|
$ |
142,973 |
|
|
South America |
|
|
14,904 |
|
|
7,010 |
|
|
26,311 |
|
|
21,580 |
|
|
Europe and Other |
|
|
79,730 |
|
|
49,413 |
|
|
165,584 |
|
|
117,958 |
|
|
Total net sales |
|
$ |
191,334 |
|
$ |
99,545 |
|
$ |
385,129 |
|
$ |
282,511 |
|
| (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) 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 $14,414 and $13,547 at June 30, 2021 and December 31, 2020, respectively. Equity in earnings (loss) of MSIL included in the condensed consolidated statements of operations was $482 and $(231), for the three months ended June 30, 2021 and 2020, respectively. Equity in earnings of MSIL included in the condensed consolidated statements of operations was $912 and $226, for the six months ended June 30, 2021 and 2020, respectively.
PST Eletrônica Ltda.
The Company had a 74% controlling interest in Stoneridge Brazil from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26% noncontrolling interest in 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 Stoneridge Brazil’s financial performance in 2021. See Note 5 for the fair value and foreign currency adjustments of the earn-out consideration for the current and prior periods.
29
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Stoneridge Brazil had dividends payable to former noncontrolling interest holders of R$24,154 ($6,010) as of December 31, 2019. The dividend payable related to Stoneridge Brazil was recorded within other current liabilities on the consolidated balance sheet as of December 31, 2019. These dividends were paid in January 2020.
Other Investments
In December 2018, the Company entered into an agreement to make a $10,000 investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology which is accounted for under the equity method of accounting. The Company’s $10,000 investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. The Company contributed $1,850 to and received $251 in distributions from the Autotech Fund II during the six months ended June 30, 2021. The Company contributed $750 to the Autotech Fund II during the six months ended June 30, 2020. The Company has a 6.6% interest in Autotech Fund II. The Company recognized earnings (loss) of $14 and $(100) during the three months ended June 30, 2021 and 2020, respectively. The Company recognized earnings (loss) of $198 and $(139) during the six months ended June 30, 2021 and 2020, respectively. The Autotech Fund II investment recorded in investments and other long-term assets in the condensed consolidated balance sheets was $5,233 and $3,436 as of June 30, 2021 and December 31, 2020, respectively.
(16) Disposals
Disposal of Particulate Matter Sensor Business
On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers are not acquiring any of the Company’s locations or employees. The purchase price for the sale of the PM sensor assets was $4,000 (subject to a post-closing inventory adjustment which was a payment to SMP of $1,133) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3,214 and $786, respectively. The sale of the Gen 2 assets will occur upon completion of the Company’s supply commitments to certain customers which are expected to be completed by December 31, 2021. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.
On March 8, 2021 the Company’s Control Devices segment recognized net sales and cost of goods sold of $971 and $898, respectively, for the one-time sale of Gen 1 inventory and a gain on disposal of $740 for the sale of Gen 1 fixed assets less transaction costs of $60 within SG&A during the three months ended March 31, 2021.
Pursuant to the contract manufacturing agreement, the Company produced and sold PM sensor Gen 1 finished goods inventory to SMP for net sales of $2,292 in the three months ended June 30, 2021. In addition, the Company received $261 for services provided pursuant to the transition services agreement which were recognized as a reduction in SG&A for the three months ended June 30, 2021. Pursuant to the contract manufacturing agreement, the Company produced and sold PM sensor Gen 1 finished goods inventory to SMP for net sales of $3,070 in the six months ended June 30, 2021. In addition, the Company received $330 for services provided pursuant to the transition services agreement which were recognized as a reduction in SG&A for the six months ended June 30, 2021.
30
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
PM sensor Gen 1 net sales to SMP pursuant to the contract manufacturing agreement were $2,292 and operating income was $416 for the three months ended June 30, 2021. PM sensor Gen 1 net sales and operating income were $1,382 and $114, respectively, for the three months ended June 30, 2020. PM sensor Gen 1 net sales, including sales of $3,070 to SMP pursuant to the contract manufacturing agreement and the one time sale of Gen 1 finished goods inventory of $971, and operating income were $6,307 and $867, respectively, for the six months ended June 30, 2021. PM sensor Gen 1 net sales and operating income were $3,763 and $70, respectively, for the six months ended June 30, 2020.
Sale of Canton Facility
On May 7, 2021, the Company, entered into a Real Estate Purchase and Sale Agreement (the “Agreement”) with Sun Life Assurance Company of Canada, a Canadian corporation (the “Buyer”), to sell the Canton Facility for $38,200 (subject to adjustment pursuant to the Agreement).
On June 17, 2021, pursuant to the Agreement, as amended after May 7, 2021, the Company closed the sale of the Canton Facility to the Buyer for an adjusted purchase price of $37,900. The Company recognized in the Control Devices segment, net proceeds of $35,167 and a gain, net of direct selling costs, of $30,718.
31
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 systems, components and modules, primarily for the automotive, commercial vehicle, motorcycle, agricultural and off-highway 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.
COVID-19 Impact and Supply Chain Uncertainties
The coronavirus pandemic (“COVID-19”) had a negative impact on the global economy in 2020 and lingering impacts remain in 2021, disrupting financial markets and increasing volatility, and have impeded global supply chains and restricted manufacturing operations. It has disrupted, and likely will continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway, motorcycle and agricultural vehicles by end-consumers. COVID-19 began to impact our operations in the first quarter of 2020, with the most significant impact in the second quarter of 2020. The adverse conditions caused by COVID-19 reduced demand for our products and increased operating costs, which resulted in lower overall margins in the first half of 2020. Although our end-markets have recovered from first half of 2020 lows, COVID-19 could adversely impact demand for our products and our financial condition and results of operations in the near term.
The adverse impacts of the COVID-19 pandemic led to a significant vehicle production slowdown in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules. This surge in demand led to a worldwide semiconductor supply shortage at the end of 2020 which has continued through the second quarter of 2021. In addition, we have experienced longer lead-times, higher costs and delays in procuring other component parts and raw materials due to shortages. As a result, we are currently experiencing incremental costs relating to these supply chain related disruptions. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise, due to this or any other issue. The magnitude of the adverse impact on our financial condition, results of operations and cash flows will depend on the evolution of the semiconductor supply shortage, vehicle production schedules and supply chain impacts.
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 and connectors.
Electronics. This segment includes results of operations from the production of driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units.
Stoneridge Brazil (“SRB”). This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.
32
Second Quarter Overview
The Company had net income of $19.8 million, or $0.72 per diluted share, for the three months ended June 30, 2021.
Net income for the quarter ended June 30, 2021 increased by $41.5 million, or $1.53 per diluted share, from net loss of $21.7 million, or $(0.81) per diluted share, for the three months ended June 30, 2020. Net income increased primarily due to the sale of our Canton Facility for a pretax net gain of $30.7 million, or $0.93 per diluted share. Net sales increased by $91.8 million, or 92%, from higher volumes in our served markets due to recovery in 2021 from adverse 2020 COVID-19 impacts. Our operating income increased by $53.5 million primarily due to the sale of our Canton Facility and higher gross margin from higher sales levels. Offsetting these increases were costs associated with supply chain disruptions, higher design and development (“D&D”) costs for new product launches and higher SG&A including an unfavorable $1.1 million adjustment to the fair value of SRB earn-out consideration due to forecasted improvement in SRB financial performance. Interest expense, net was higher in the second quarter of 2021 due to an increase in average outstanding borrowings and higher interest rates on our Credit Facility borrowings. Other income, net was higher than the prior year due to favorable 2021 foreign currency gains.
During the quarter we experienced significant volatility in OEM production schedules, primarily in our passenger vehicle end-market. In addition, we continued to experience the unfavorable impacts of component shortages, incremental material and logistics costs, labor volatility and an unfavorable product mix which adversely affected gross margin and operating income.
Our Control Devices segment net sales increased by 83.7% compared to the second quarter of 2020 primarily as a result of increased volumes from the recovery of adverse 2020 COVID-19 impacts in our North American automotive and North American and China commercial vehicle markets. Partially offsetting these increased volumes were decreases in Control Devices’ European automotive market. Segment gross margin increased due to higher sales volumes and favorable fixed cost leverage offset by costs associated with supply chain disruptions. Segment operating income increased due to the gain on sale of the Canton Facility, net and higher gross margin.
Our Electronics segment net sales increased by 97.9% compared to the second quarter of 2020 primarily due to increased sales volumes in our European, North American and China commercial vehicle markets as well as our European off-highway vehicle market as a result of increased volumes from the recovery of adverse 2020 COVID-19 impacts. Segment gross margin increased due to higher sales volumes and favorable fixed cost leverage offset by costs associated with supply chain disruptions. Operating income for the segment increased compared to the second quarter of 2020 due to higher segment gross margin offset by higher D&D expenses for new product launches.
Our Stoneridge Brazil segment net sales increased by 112.6% compared to the second quarter of 2020 primarily due to higher volumes for all of our product lines and our Argentina market channel as a result of the recovery from adverse 2020 COVID-19 impacts. Segment gross margin increased due to higher sales volumes. Operating income increased compared to 2020 due to higher gross margin offset by an unfavorable change in fair value of earn-out consideration adjustments.
In the second quarter of 2021, SG&A expenses increased by $3.7 million compared to the second quarter of 2020 due to higher incentive compensation, the $1.1 million unfavorable adjustment to the fair value of the SRB earn-out consideration due to forecasted improvement in SRB financial performance and the impairment of Brazilian indirect taxes of $0.6 million.
In the second quarter of 2021, D&D costs increased by $3.1 million due to an increase in our Electronics segment for ongoing development activities for awarded business programs and development of advanced technologies and systems for future growth opportunities.
At June 30, 2021 and December 31, 2020, we had cash and cash equivalents balances of $55.6 million and $73.9 million, respectively and we had $126.0 million and $136.0 million, respectively, in borrowings outstanding on the Credit Facility. The 2021 decrease in cash and cash equivalents was to support higher working capital levels, capital expenditures and the repayment of Credit Facility borrowings offset by net proceeds from the sale of the Canton Facility of $35.2 million.
33
Outlook
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, beginning in the first quarter of 2020 and continuing through the second quarter of 2021, COVID-19 caused worldwide adverse economic conditions and uncertainty in our served markets. In the first quarter of 2021, we began experiencing supply chain related disruptions because of a worldwide semiconductor shortage, which has resulted in longer lead-times, higher costs and delays in procuring other component parts and raw materials.
The North American automotive market is expected to increase from 13.0 million units in 2020 to 14.6 million units in 2021 as the market recovers from adverse economic conditions caused by COVID-19 in 2020. The Company expects sales volumes in our Control Devices segment to increase from 2020 based on current 2021 production forecasts and the ramp-up of certain program launches, however, global supply chain shortages, such as the global semiconductor supply shortage, have had an adverse impact on our sales volumes in the first half of 2021, and could potentially have an impact for the remainder of the year.
For 2021, we expect an increase in our Electronics’ segment sales in 2021 compared to 2020 primarily due to the increase in production volume forecasts in our European and North American commercial markets, strong demand in our off-highway markets and new program launches in 2021. For the fourth quarter of 2021 and 2022, we expect increased sales from the launch of our first two MirrorEye camera-based vision systems for OEM applications as well as the continued roll out of MirrorEye in the retrofit markets. We expect an incremental increase in D&D spend to support the launch of these programs in the second half of 2021 and first half of 2022.
Our year-to-date 2021 Stoneridge Brazil segment revenues increased compared to the prior year due to the recovery of the adverse economic conditions caused by COVID-19 in 2020 offset by unfavorable foreign currency translation. In April 2021, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow 3.7% in 2021 and 2.6% in 2022. We expect our served market channels to remain stable based on current market conditions. Our financial performance in our Stoneridge Brazil segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.
Global transportation production has been impacted by supply chain disruptions, in the first half of 2021, primarily in our automotive passenger vehicle end-market. Based on the current market conditions, we expect continued impact on production in the second half of the year. We expect incremental costs related to supply chain disruptions to adversely impact our gross margin in the second half of 2021.
In the first half of 2021, our effective tax rate increased due to atypical jurisdictional earnings mix as a result of increased supply chain costs and incremental engineering expenses to support future program launches. We expect our effective tax rate to remain higher than normal in the second half of 2021 and return to previous rates in 2022.
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 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 euro, Swedish krona, Argentine peso and Mexican peso in the first half of 2021 and the Brazilian real, Argentine peso and Mexican peso in the first half of 2020, unfavorably impacting our material costs and reported results.
34
On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers are not acquiring any of the Company’s locations or employees. The purchase price for the sale of the PM sensor business was $4.0 million (subject to a post-closing inventory adjustment which was a payment to SMP of $1.1 million) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3.2 million and $0.8 million, respectively. The sale of the Gen 2 assets will occur upon completion of the Company’s supply commitments to certain customers which are expected to be completed by December 31, 2021. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter 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 $0.3 million and $2.5 million of expense as a result of this initiative during the three months ended June 30, 2021 and June 30, 2020, 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 $1.7 million to $4.9 million and is related to employee severance and termination costs, contract terminations costs and other related costs such as commercial and supplier settlements. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.
In January 2019, we committed to a restructuring plan that resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The cost for the Canton Restructuring included employee severance and termination costs, contract termination 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. We did not recognize any expense as a result of these actions during the three months ended June 30, 2021 and $2.2 million of expense as a result of these actions during the three months ended June 30, 2020. We do not expect to incur additional costs related to the Canton Restructuring. During the third quarter of 2020, we leased the Canton facility to a third party. On June 17, 2021, we sold the Canton Facility for net proceeds of $35.2 million and a net gain of $30.7 million.
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, 2021 and 2020, we recognized expense of less than $0.1 million and $1.6 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 an immaterial amount of restructuring costs through the fourth quarter of 2021.
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. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
35
On February 24, 2020, the Board of Directors authorized a 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 time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased 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 to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, under the new 2020 repurchase program, the Company repurchased 242,634 Common Shares for $5.0 million, which became Treasury Shares, 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 impact of COVID-19. As of June 30, 2021, the new repurchase program remains suspended.
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. Business realignment costs of $0.1 million and $2.6 million were incurred in the three months ended June 30, 2021 and 2020, respectively.
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.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
increase / |
|
|
Three months ended June 30, |
|
2021 |
|
2020 |
|
(decrease) |
||||||||
|
Net sales |
|
$ |
191,334 |
|
|
100.0 |
% |
$ |
99,545 |
|
100.0 |
% |
$ |
91,789 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
148,493 |
|
|
77.6 |
|
|
86,291 |
|
86.7 |
|
|
62,202 |
|
Selling, general and administrative |
|
|
31,380 |
|
|
16.4 |
|
|
27,693 |
|
27.8 |
|
|
3,687 |
|
Gain on sale of canton facility, net |
|
|
(30,718) |
|
|
(16.1) |
|
|
- |
|
- |
|
|
(30,718) |
|
Design and development |
|
|
15,495 |
|
|
8.1 |
|
|
12,384 |
|
12.4 |
|
|
3,111 |
|
Operating income (loss) |
|
|
26,684 |
|
|
14.0 |
|
|
(26,823) |
|
(26.9) |
|
|
53,507 |
|
Interest expense, net |
|
|
1,860 |
|
|
1.0 |
|
|
1,410 |
|
1.4 |
|
|
450 |
|
Equity in (earnings) loss of investee |
|
|
(496) |
|
|
(0.2) |
|
|
231 |
|
0.2 |
|
|
(727) |
|
Other (income) expense, net |
|
|
(272) |
|
|
(0.1) |
|
|
(9) |
|
- |
|
|
(263) |
|
Income (loss) before income taxes |
|
|
25,592 |
|
|
13.3 |
|
|
(28,455) |
|
(28.6) |
|
|
54,047 |
|
Provision (benefit) for income taxes |
|
|
5,794 |
|
|
3.0 |
|
|
(6,721) |
|
(6.8) |
|
|
12,515 |
|
Net income (loss) |
|
$ |
19,798 |
|
|
10.3 |
% |
$ |
(21,734) |
|
(21.8) |
% |
$ |
41,532 |
Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):
36
Overall, net sales were higher for the three months ended June 30, 2021 as 2020 volumes were atypically low as a result of the impact of COVID-19 on our served markets.
Our Control Devices segment net sales increased $39.3 million due to increased volumes in our North American automotive market of $36.7 million and increases in our China commercial vehicle and North American commercial vehicle markets of $1.6 million and $1.2 million, respectively.
Our Electronics segment net sales increased due higher sales volumes in our European and North American commercial vehicle markets of $20.3 million and $12.9 million, respectively. In addition, segment net sales increased due to higher sales volumes in our European off-highway vehicle products of $7.0 million. Net sales increased $4.0 million due to favorable euro and Swedish krona foreign currency translation compared to the prior year quarter.
Our Stoneridge Brazil segment net sales increased due to higher sales volumes for all of our product lines and for our Argentina market channel.
Net sales by geographic location are summarized in the following table (in thousands):
The increase in North American net sales was attributable to sales volume increases in our North American automotive and North American commercial vehicle markets of $36.6 million and $14.1 million, respectively. The increase in net sales in South America was primarily due to higher sales volumes for all of our SRB product lines and for our Argentina market channel. The increase in net sales in Europe and Other was primarily due to increases in our European commercial vehicle and European off-highway markets of $19.9 million and $4.2 million, respectively and an increase in our China commercial vehicle market of $1.7 million. In addition, net sales increased $5.1 million due to favorable foreign currency translation. The increases in Europe and Other sales were offset by a decrease in European automotive sales of $1.1 million.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to the second quarter of 2020 and our gross margin increased from 13.3% in the second quarter of 2020 to 22.4% in the second quarter of 2021. Our material cost as a percentage of net sales increased from 53.0% in the second quarter of 2020 to 55.7% in the second quarter of 2021 from costs associated with supply chain disruptions and adverse product mix. Overhead as a percentage of net sales decreased to 16.1% for the second quarter of 2021 compared to 27.0% for the second quarter of 2020 due to leverage of fixed costs from higher sales levels.
Our Control Devices segment gross margin increased primarily due to the increase in sales volume, the decrease in restructuring costs of $2.7 million and favorable leverage of fixed costs from higher sales levels offset by costs associated with supply chain disruptions.
Our Electronics segment gross margin increased primarily due to the increase in sales volume and favorable leverage of fixed costs from higher sales levels which were partially offset by increased costs associated with supply chain disruptions.
Our Stoneridge Brazil segment gross margin increased due to the increase in sales volume.
Selling, General and Administrative (“SG&A”). SG&A expenses increased by $3.7 million compared to the second quarter of 2020 due to higher incentive compensation, the $1.1 million unfavorable adjustment to the fair value of the SRB earn-out consideration due to forecasted improvement in SRB financial performance and the impairment of Brazilian indirect taxes of $0.6 million.
Design and Development (“D&D”). D&D costs increased by $3.1 million due to an increase in our Electronics segment for ongoing development activities for awarded business programs and development of advanced technologies and systems for future growth opportunities.
37
Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
NM – Not meaningful
Our Control Devices segment operating income increased due to the impact of higher gross margin from higher sales volumes and the gain on sale of the Canton Facility of $30.7 million.
Our Electronics segment operating loss decreased primarily due to the impact of higher segment gross margin.
Our Stoneridge Brazil segment operating loss decreased primarily due to higher gross margin offset by an unfavorable adjustment in the fair value of earn-out consideration and the impairment of Brazilian indirect tax credits.
Our unallocated corporate operating loss increased primarily from higher incentive compensation costs, professional services and legal fees.
Operating income (loss) by geographic location is summarized in the following table (in thousands):
Our North American operating income increased due to the gain on sale of the Canton Facility and increased sales in our automotive and commercial vehicle markets. The decrease in operating loss in South America was primarily due higher gross margin. Our operating results in Europe and Other increased primarily due to higher sales in our commercial vehicle and off-highway markets as well as a favorable foreign currency translation impact.
Interest Expense, net. Interest expense, net increased by $0.5 million for the three months ended June 30, 2021 due to an increase in average outstanding Credit Facility borrowings and higher interest rates on our Credit Facility borrowings.
Equity in (Earnings) Loss of Investee. Equity (earnings) loss for MSIL were $(0.4) million and $0.2 million for the three months ended June 30, 2021 and 2020, respectively as MSIL revenues and net income were adversely affected by the impact of COVID-19.
Other (Income) Expense, net. We record certain foreign currency transaction losses (gains) as a component of other (income) expense, net on the condensed consolidated statement of operations. Other income, net of $0.3 million, increased by $0.3 million in the second quarter of 2021 compared to the second quarter of 2020 due to 2020 foreign currency transaction gains in our Electronics segment.
Provision (Benefit) for Income Taxes. In the three months ended June 30, 2021, income tax expense of $5.8 million was attributable to the gain on the sale of the Canton facility, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 22.6% is greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as U.S. taxes on foreign earnings, partially offset by tax incentives.
38
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% was greater than the statutory tax rate primarily due to losses in jurisdictions for which a valuation allowance is recorded.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
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, |
|
2021 |
|
2020 |
|
(decrease) |
||||||||
|
Net sales |
|
$ |
385,129 |
|
|
100.0 |
% |
$ |
282,511 |
|
100.0 |
% |
$ |
102,618 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
296,202 |
|
|
76.9 |
|
|
223,860 |
|
79.2 |
|
|
72,342 |
|
Selling, general and administrative |
|
|
60,756 |
|
|
15.8 |
|
|
57,196 |
|
20.2 |
|
|
3,560 |
|
Gain on sale of canton facility, net |
|
|
(30,718) |
|
|
(8.0) |
|
|
- |
|
- |
|
|
(30,718) |
|
Design and development |
|
|
30,146 |
|
|
7.8 |
|
|
24,619 |
|
8.7 |
|
|
5,527 |
|
Operating income (loss) |
|
|
28,743 |
|
|
7.5 |
|
|
(23,164) |
|
(8.1) |
|
|
51,907 |
|
Interest expense, net |
|
|
3,626 |
|
|
0.9 |
|
|
2,440 |
|
0.9 |
|
|
1,186 |
|
Equity in earnings of investee |
|
|
(1,110) |
|
|
(0.3) |
|
|
(226) |
|
(0.1) |
|
|
(884) |
|
Other (income) expense, net |
|
|
86 |
|
|
0.1 |
|
|
(1,626) |
|
(0.6) |
|
|
1,712 |
|
Income (loss) before income taxes |
|
|
26,141 |
|
|
6.8 |
|
|
(23,752) |
|
(8.3) |
|
|
49,893 |
|
Provision (benefit) for income taxes |
|
|
6,213 |
|
|
1.6 |
|
|
(5,508) |
|
(1.9) |
|
|
11,721 |
|
Net income (loss) |
|
$ |
19,928 |
|
|
5.2 |
% |
$ |
(18,244) |
|
(6.4) |
% |
$ |
38,172 |
Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):
Overall, net sales were higher for the six months ended June 30, 2021 as 2020 volumes were atypically low as a result of the impact of COVID-19 on our served markets.
Our Control Devices segment net sales increased $42.1 million due to increased volumes in our North American automotive, commercial vehicle and agricultural markets of $30.6 million, $2.1 million and $1.3 million, respectively, and an increase in our China commercial vehicle and automotive markets of $4.1 million and $3.8 million, respectively, as well as a favorable foreign currency translation of $1.8 million. These increases were partially offset by a decrease in volumes related to the PM Soot business exit in our European automotive market of $2.0 million.
Our Electronics segment net sales increased due to increased sales volumes in our European and North American commercial vehicle and European and North American off-highway vehicle markets of $23.5 million, $13.8 million, $3.9 million and $3.5 million, respectively, as well as favorable euro and Swedish krona foreign currency translation of $10.4 million compared to the prior year period.
Our Stoneridge Brazil segment net sales increased due to higher volumes for all of our product lines and for our Argentina market channel offset by unfavorable foreign currency translation of $2.9 million.
39
Net sales by geographic location are summarized in the following table (in thousands):
The increase in North American net sales was attributable to sales volume increases in our North American automotive, commercial vehicle and Electronics off-highway markets of $30.0 million, $15.9 million and $3.5 million, respectively. The increase in net sales in South America was due to higher volumes for all of our SRB product lines and for our Argentina market channel offset by unfavorable Brazilian real foreign currency translation of $2.9 million. The increase in net sales in Europe and Other was primarily due to increases in our European commercial vehicle and off-highway markets of $23.3 million and $3.9 million, respectively, and increases in our China commercial vehicle and automotive markets of $4.7 million and $3.8 million. Europe and Other net sales also increased due to favorable foreign currency translation of $12.2 million.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to the first half of 2020 and our gross margin increased from 20.8% in the first half of 2020 to 23.1% in the first half of 2021. Our material cost as a percentage of net sales increased from 53.0% in the first half of 2020 to 55.3% in the first half of 2021 from costs associated with supply chain disruptions and adverse product mix. Overhead as a percentage of net sales decreased to 15.9% for the first half of 2021 compared to 20.5% for the first half of 2020 due to leverage of fixed costs from higher sales levels.
Our Control Devices segment gross margin increased due to the increase in sales volume, the decrease in restructuring costs of $1.7 million and favorable leverage of fixed costs from higher sales levels offset by costs associated with supply chain disruptions.
Our Electronics segment gross margin increased primarily due to higher sales volumes and favorable fixed cost leverage offset by costs associated with supply chain disruptions.
Our Stoneridge Brazil segment gross margin increased due to the increase in sales volume.
Selling, General and Administrative (“SG&A”). SG&A expenses increased by $2.1 million compared to the first half of 2020 due to higher incentive compensation, unfavorable change in fair value of SRB earn-out consideration of $1.1 million due to forecasted improvement in SRB financial performance and the impairment of Brazilian indirect tax credits of $0.6 million which were offset by the 2021 gain on disposal of the PM sensor business of $0.7 million.
Design and Development (“D&D”). D&D costs increased by $5.5 million primarily due to an increase in our Electronics segment for ongoing development activities for awarded business programs and development of advanced technologies and systems for future growth opportunities.
Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
NM – Not meaningful
Our Control Devices segment operating income increased due to the gain on sale of the Canton Facility and impact of higher gross margin, the gain on sale of the Canton Facility of $30.7 million, the gain on disposal of the PM sensor business and a decrease in restructuring expense of $3.6 million offset by higher Sarasota environmental costs.
40
Our Electronics segment operating loss decreased primarily due to the impact of higher segment gross margin offset by higher D&D costs.
Our Stoneridge Brazil segment operating loss increased primarily due to an unfavorable change in fair value of earn-out consideration adjustments and the impairment of Brazilian indirect tax credits offset by lower selling and design and development costs.
Our unallocated corporate operating loss was higher due to an increase in incentive compensation costs.
Operating income (loss) by geographic location is summarized in the following table (in thousands):
Our North American operating income increased due to the gain on sale of the Canton Facility and higher sales in our automotive and commercial vehicle markets and lower restructuring costs. The increase in operating loss in South America was primarily due to an unfavorable change in fair value of earn-out consideration adjustments. Our operating results in Europe and Other increased primarily due to higher sales in our commercial vehicle and off-highway markets as well as a favorable foreign currency translation impact offset by higher D&D costs.
Interest Expense, net. Interest expense, net increased by $1.2 million for the six months ended June 30, 2021 due to an increase in average outstanding borrowings and higher interest rates on our Credit Facility borrowings and the adverse impact of our interest rate swap.
Equity in Earnings of Investee. Equity earnings for MSIL were $0.9 million and $0.2 million for the six months ended June 30, 2021 and 2020, respectively.
Other (Income) Expense, net. We record certain foreign currency transaction losses (gains) as a component of other income, net on the condensed consolidated statement of operations. Other expense, net of $0.1 million, decreased by $1.7 million in the first half of 2021 compared to other income, net of $1.6 million for the first half of 2020 due to 2020 foreign currency transaction gains in our Stoneridge Brazil and Electronics segments.
Provision (Benefit) for Income Taxes. In the six months ended June 30, 2021, income tax expense of $6.2 million was attributable to the gain on the sale of the Canton facility, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 23.8% is greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as U.S. taxes on foreign earnings, partially offset by tax incentives.
In the six months ended June 30, 2020, income tax benefit of $(5.5) million was attributable to the mix of earnings among tax jurisdictions partially offset by the establishment of a valuation allowance. The effective tax rate of 23.2% was greater than the statutory tax rate primarily due to the impact of certain incentives.
41
Liquidity and Capital Resources
Summary of Cash Flows:
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Six months ended June 30, |
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2021 |
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2020 |
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||
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Net cash provided by (used for): |
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Operating activities |
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$ |
(22,641) |
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$ |
(6,533) |
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Investing activities |
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21,049 |
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(17,925) |
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Financing activities |
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(15,543) |
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29,367 |
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Effect of exchange rate changes on cash and cash equivalents |
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(1,197) |
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(1,900) |
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Net change in cash and cash equivalents |
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$ |
(18,332) |
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$ |
3,009 |
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Cash used for operating activities increased compared to the first half of 2020 primarily due to an increase in cash used to fund working capital levels primarily for accounts receivable offset by higher net income. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash provided by investing activities increased compared to 2020 due to proceeds from the sales of the Canton Facility and the PM sensor business, and lower capital expenditures and capitalized software costs which were offset by higher investments in the Autotech Fund II.
Net cash used for financing activities increased compared to the prior year primarily due to net Credit Facility payments and repayments of debt of $13.2 million.
As outlined in Note 7 to our condensed consolidated financial statements, the Credit Facility permits borrowing up to a maximum level of $400.0 million. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The Credit Facility had an outstanding balance of $126.0 million at June 30, 2021.
Due to the 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). 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 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.
42
The Company was in compliance with all covenants at June 30, 2021. The Company has not experienced a violation which would limit the Company’s ability to borrow under the Credit Facility (as amended) and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the Credit Facility may be limited as a result of lower than expected financial performance due to any further 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 and to remain in compliance with all covenants.
Stoneridge Brazil maintains short-term loans used for working capital purposes. At June 30, 2021, there was $0.3 million of Stoneridge Brazil debt outstanding. Scheduled principal repayments of $0.3 million are due in 2021.
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 daily maximum level of 20.0 million Swedish krona, or $2.3 million and $2.4 million, at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021, there was 36,000 Swedish krona, or $4,000, outstanding on this overdraft credit line. At December 31, 2020, there was 13.1 million Swedish krona, or $1.6 million, outstanding on this overdraft credit line. During the six months ended June 30, 2021, the subsidiary borrowed 170.6 million Swedish krona, or $20.0 million, and repaid 183.6 million Swedish krona, or $21.5 million.
The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of 50.0 million Chinese yuan, or $7.7 million at both June 30, 2021 and December 31, 2020. At June 30, 2021 and December 31, 2020 there was $4.2 million and $4.5 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which allows up to a maximum borrowing level of 15.0 million Chinese yuan, or $2.3 million at both June 30, 2021 and December 31, 2020. There was $0.6 million and $0.4 million utilized on the Suzhou bank acceptance draft line of credit at June 30, 2021 and December 31, 2020, respectively.
On May 19, 2020, the Company committed to the 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 $0.3 million and $2.5 million of expense as a result of this initiative during the three months ended June 30, 2021 and June 30, 2020, 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 $1.7 million to $4.9 million and is related to employee severance and termination costs, contract terminations costs and other related costs such as commercial and supplier settlements. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.
In January 2019, we committed to a restructuring plan that resulted in the closure of our Canton Facility as of March 31, 2020 and the Canton Restructuring. The cost for the Canton Restructuring included employee severance and termination costs, contract termination 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. We did not recognize any expense as a result of these actions during the three months ended June 30, 2021 and recognized $2.2 million of expense as a result of these actions during the three months ended June 30, 2020. We do not expect to incur additional costs related to the Canton Restructuring. During the third quarter of 2020, we leased the Canton facility to a third party. On June 17, 2021, we sold the Canton Facility for net proceeds of $35.2 million and a net gain of $30.7 million.
43
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, 2021 and 2020, we recognized expense of less than $0.1 million and $1.6 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 an immaterial amount of restructuring costs through the fourth quarter of 2021.
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. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program for $50.0 million for the repurchase of outstanding Common Shares over an 18 month period. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased 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 to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, the Company repurchased 242,634 Common Shares for $5.0 million which became Treasury Shares, 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 impact of COVID-19. As of June 30, 2021, the new repurchase program remains suspended.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II) 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 II will be contributed over the expected ten-year life of the fund. As of June 30, 2021, the Company’s cumulative investment in the Autotech Fund II was $5.5 million. The Company contributed $1.9 million, net and $0.8 million, net to the Autotech Fund II during the six months ended June 30, 2021 and 2020, 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 June 30, 2021, we had a cash and cash equivalents balance of approximately $55.6 million, of which 88.5% was held in foreign locations. The Company has approximately $272.3 million of undrawn commitments under the Credit Facility as of June 30, 2021, which results in total undrawn commitments and cash balances of more than $327.9 million. However, despite the June 26, 2020 Credit Facility amendment, it is possible that future borrowing flexibility under our Credit Facility may be limited as a result of our financial performance.
Commitments and Contingencies
See Note 11 to the condensed consolidated financial statements for disclosures of the Company’s commitments and contingencies.
44
Seasonality
Our Control Devices and Electronics segments are not typically affected by seasonality, however the demand for our Stoneridge Brazil segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.
Critical Accounting Policies and Estimates
The Company’s 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 2020 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 2020 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 second quarter of 2021.
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 2020 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 foreign currency exchange rate and interest rate risks.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously presented within Part II, Item 7A of the Company’s 2020 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2021, an evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
45
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. We establish accruals for matters which we believe that losses are probable and can be reasonably estimated. 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, regulatory and other tax contingencies in our 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. We are also subject to product liability and product warranty 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. There can be no assurance that we will not experience any material losses related to product liability, warranty or recall claims. See additional details of these matters in Note 11 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 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases of Common Shares made by us during the three months ended June 30, 2021. There were 75 Common Shares delivered to us by employees as payment for withholding taxes due upon vesting of performance share awards and share unit awards during the three months ended June 30, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None
46
Item 6. Exhibits
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Exhibit
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Exhibit |
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10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101 |
XBRL Exhibits: |
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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 |
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101.SCH |
XBRL Taxonomy Extension Schema Document |
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101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
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104 |
The cover page from our Quarterly Report on Form 10-Q for the period ended June 30, 2021, filed with the Securities and Exchange Commission on August 4, 2021, is formatted in Inline Extensible Business Reporting Language (“iXBRL”) |
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47
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.
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STONERIDGE, INC. |
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Date: August 4, 2021 |
/s/ Jonathan B. DeGaynor |
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Jonathan B. DeGaynor |
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President, Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Date: August 4, 2021 |
/s/ Robert R. Krakowiak |
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Robert R. Krakowiak |
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Executive Vice President, Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
48