UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 2003 Commission file number 001-13337
STONERIDGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
(330) 856-2443
Registrant’s Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act: None
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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x
The aggregate market value of the Common Shares held by non-affiliates of the registrant based on the closing price as of June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was $218.7 million.
The number of Common Shares, without par value, outstanding as of March 9, 2004 was 22,591,919.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2004, into Part III, Items 10, 11, 12, 13 and 14.
INDEX
STONERIDGE, INC. – FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
Part I.
Item 1.
Business
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Part II.
Item 5.
Market for Registrant’s Common Equity and Related Shareholder Matters
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Part III.
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accounting Fees and Services
Part IV.
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
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Forward-Looking Statements
Portions of this report may 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 include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company’s (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
PART I.
ITEM 1. BUSINESS
The Company
Founded in 1965, the Company is a leading, technology driven, independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Our custom-engineered products are predominantly sold on a sole-source basis and consist of application-specific control devices, sensors, vehicle management electronics and power and signal distribution systems. These products comprise the elements of every vehicle’s electrical system, and individually interface with a vehicle’s mechanical and electrical systems to (i) activate equipment and accessories, (ii) display and monitor vehicle performance and (iii) control and distribute electrical power and signals. Our products improve the performance, safety, convenience and environmental monitoring capabilities of our customers’ vehicles. As such, the growth in many of the product areas in which we compete is driven by the increasing consumer desire for safety, security and convenience coupled with the need for original equipment manufacturers (“OEM”) to meet safety requirements in addition to the general trend of increased electrical and electronic content per vehicle. Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and be a leader in the transition from mechanical-based components and systems to electrical and electronic components, modules and systems.
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Products
The Company conducts its business in two operating segments: Vehicle Management & Power Distribution and Control Devices. The core products of the Vehicle Management & Power Distribution operating segment include vehicle electrical power and distribution systems and electronic instrumentation and information display products. The core products of the Control Devices operating segment include electronic and electrical switch products, actuator products and sensor products. The Company designs and manufactures the following vehicle parts:
Vehicle Management & Power Distribution. The Vehicle Management & Power Distribution operating segment produces electronic instrument clusters, electronic control units, driver information systems, and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled and driver messages related to vehicle performance. In addition, power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle compartment. These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
Control Devices. The Control Devices operating segment produces products that monitor, measure or activate a specific function within the vehicle. Product lines included within the Control Devices segment are sensors, switches, actuators as well as other electronic products. Sensor products are employed in most major vehicle systems, including the emissions, safety, powertrain, braking, climate control, steering and suspension systems. Switches transmit a signal that activates specific functions. Hidden switches are not typically seen by vehicle passengers, but are used to activate or deactivate selected functions. Customer activated switches are used by a vehicle’s operator or passengers to manually activate headlights, rear defrosters and other accessories. In addition, the Company designs and manufactures electromechanical actuator products that enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. The Company sells these products principally to the automotive market.
The following table presents the Company’s core product lines, as a percentage of net sales:
Vehicle Management & Power Distribution:
Vehicle electrical power and distribution systems
Electronic instrumentation and information display products
Control Devices:
Electronic and electrical switch and actuator products
Sensor products
See Note 11 to the Company’s consolidated financial statements for more information on the Company’s operating segments and financial information about geographic areas.
Production Materials
The principal production materials used in both operating segments of the Company’s manufacturing processes include: wire, cable, plastics, printed circuit boards, metal stamping and certain electrical components such as microprocessors, memories, resistors, capacitors, fuses, relays and connectors. The Company typically purchases such materials pursuant to annual contracts. Such materials are readily available from multiple sources, but the Company generally establishes collaborative relationships with a qualified supplier for each of its key production materials in order to lower costs and enhance service and quality.
Patents and Intellectual Property
Both of the Company’s operating segments maintain and have pending various U.S. and foreign patents and other rights to intellectual property relating to its business, which the Company believes are appropriate to protect the Company’s interests in existing products, new inventions, manufacturing processes and product developments. The Company does not believe any single patent is material to its business, nor would the expiration or invalidity of any patent have a material adverse effect on its business or its ability to compete. The Company is not currently engaged in any material infringement litigation, nor are there any material infringement claims pending by or against the Company.
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Industry Cyclicality and Seasonality
The markets for both operating segments of the Company’s products have historically been cyclical. Because the Company’s products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets, its sales, and therefore its results of operations, are significantly dependent on the general state of the economy and other factors, which affect these markets. A decline in automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle production of the Company’s principal customers could adversely impact the Company. Approximately 53%, 57% and 58% of the Company’s net sales in 2003, 2002 and 2001, respectively, were made to the automotive market. Approximately 47%, 43% and 42% of the Company’s net sales in 2003, 2002 and 2001, respectively, were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
The Company typically experiences decreased sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is similarly impacted by plant shutdowns for the holidays.
Reliance on Major Customers
The Company is dependent on a small number of principal customers for a significant percentage of its sales. The loss of any significant portion of its sales to these customers or the loss of a significant customer would have a material adverse impact on the financial condition and results of operations of the Company. The Company supplies numerous different parts to each of its principal customers. The contracts the Company has entered into with many of its customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of the Company’s major customers could have a material adverse impact on the Company. The Company may also enter into contracts to supply parts, the introduction of which may then be delayed or not used at all. The Company also competes to supply products for successor models and is subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on the financial condition and results of operations of the Company.
The following table presents the Company’s major customers, as a percentage of net sales:
Customer:
Navistar
DaimlerChrysler
Ford
General Motors
Volvo
Deere
Other
Total
Backlog
The majority of the Company’s products are not on a backlog status. They are produced from readily available materials and have a relatively short manufacturing cycle. Each production facility of the Company maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and will be expanded to handle increased growth when needed.
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Competition
Markets for the Company’s products in both operating segments are highly competitive. The Company competes on the basis of quality, service, price, timely delivery and technological innovation. The Company competes for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM usually will continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns.
Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. The Company competes successfully based on its strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price.
Product Development
Research and development within the Company is largely product development oriented and consists primarily of applying known technologies to customer generated problems and situations. The Company works closely with its customers to creatively solve problems using innovative technologies. The vast majority of the Company’s development expenses are related to customer-sponsored programs where the Company is involved in designing custom-engineered solutions for specific applications or for next generation technology. To further the Company’s vehicle platform penetration, it has also developed collaborative relationships with the design and engineering departments of its key customers. These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.
Development work at the Company is largely performed on a decentralized basis. The Company has engineering and product development departments located at a majority of its manufacturing facilities. To ensure knowledge sharing among decentralized development efforts, the Company has instituted a number of mechanisms and practices whereby innovation and best practices are shared. The decentralized product development operations are complimented by larger technology groups in Canton, Massachusetts and Stockholm, Sweden.
The Company uses efficient and quality oriented work processes to address its customers’ high standards. The Company’s product development technical resources include a full compliment of computer-aided design and engineering (“CAD/CAE”) software systems, including (i) virtual three-dimensional modeling, (ii) functional simulation and analyses capabilities and (iii) data links for rapid prototyping. These CAD/CAE systems enable the Company to expedite product design and the manufacturing process to shorten the development time and ultimately time to market.
The Company is further strengthening its electrical engineering competencies through investment in equipment such as (i) automotive Electro-Magnetic Compliance test chambers, (ii) programmable automotive and commercial vehicle transient generators, (iii) circuit simulators and (iv) other environmental test equipment. Additional investment in product machining equipment has allowed the Company to fabricate new product samples in a fraction of the time required historically. The Company’s product development and validation efforts are supported by full service, on-site test labs at most manufacturing facilities, thus enabling its cross-functional engineering teams to optimize the product, process and system performance before tooling initiation.
The Company has invested, and will continue to invest in technology to develop new products for its customers. Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses, as incurred. Such costs amounted to approximately $28.7 million, $25.3 million and $27.0 million for 2003, 2002 and 2001, respectively, or 4.7%, 4.0% and 4.6% of net sales for these periods.
Environmental and Other Regulations
The Company’s operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment
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and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
Employees
As of December 31, 2003, the Company had approximately 5,300 employees, approximately 1,600 of whom were salaried and the balance of whom were paid on an hourly basis. The Company’s employees are not represented by a union except for certain employees located in Mexico, Sweden, and Scotland. The Company believes that its relations with its employees are good.
Available Information
The Company makes available, free of charge through its web site (www.stoneridge.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. On or before the Company’s 2004 Annual Meeting of Shareholders, the Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers and the charters of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees will be posted on the Company’s website. Written copies of these documents will be available to any shareholder upon request. Requests should be directed to Investor Relations.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name
Position
D.M. Draime
Kevin P. Bagby
Gerald V. Pisani
Thomas A. Beaver
Michael J. Bagby
Avery S. Cohen
D.M. Draime, Interim President and Chief Executive Officer, Chairman of the Board of Directors and Assistant Secretary. Mr. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965. Mr. Draime has been serving as the Company’s Interim President and Chief Executive Officer since the resignation of Cloyd J. Abruzzo on December 31, 2003.
Kevin P. Bagby, Vice President, Chief Financial Officer and Treasurer. Mr. Bagby has served as Vice President of the Company, Chief Financial Officer and Treasurer since joining the Company in July 1995.
Gerald V. Pisani, Vice President and Chief Operating Officer. Mr. Pisani has served as Vice President of the Company since 1989 and President of the Stoneridge Engineered Products Group since 1985. Mr. Pisani became the Company’s Chief Operating Officer in December 2003.
Thomas A. Beaver, Vice President of Sales and Marketing. Mr. Beaver has served as Vice President of Sales and Systems Engineering of the Stoneridge Engineered Products Group from February 1995 to December 1999 and Vice President of Sales and Marketing since January 2000.
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Michael J. Bagby, Vice President and General Manager of Alphabet Group. Mr. Bagby has served as Vice President of the Alphabet Group since March 1990 and Vice President and General Manager of the Alphabet Group since January 2000.
Avery S. Cohen, Secretary and Director. Mr. Cohen has served as Secretary and a Director of the Company since 1988. Mr. Cohen is a partner in Baker & Hostetler LLP, a law firm, which has served as general outside counsel for the Company since 1993 and is expected to continue to do so in the future.
ITEM 2. PROPERTIES
The Company currently owns or leases 16 manufacturing facilities, which together contain approximately 1.6 million square feet of manufacturing space. Of these manufacturing facilities, nine are owned or leased by the Company’s Vehicle Management & Power Distribution operating segment and seven are owned or leased by the Company’s Control Devices operating segment. The following table provides information regarding the Company’s facilities:
Location
Use
Owned/
Leased Status
Square
Footage
Boston, Massachusetts
Canton, Massachusetts
El Paso, Texas
Lexington, Ohio
Novi, Michigan
Fabrication Facility
Sales / Engineering Office
Orwell, Ohio
Portland, Indiana
Sarasota, Florida
Warren, Ohio
Cheltenham, England
Dundee, Scotland
Frankfurt, Germany
Madrid, Spain
Munich, Germany
Northampton, England
Orebro, Sweden
Paris, France
Stockholm, Sweden
Stuttgart, Germany
Tallinn, Estonia
Chihuahua, Mexico
Juarez, Mexico
Monclova, Mexico
Sao Paulo, Brazil
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company, however, does not believe that any of the litigation in which it is currently engaged, either individually or in the aggregate, will have a material adverse effect on its business, consolidated financial position or results of operations. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company’s products and there can be no assurance that the
7
Company will not experience any material product liability losses in the future. In addition, if any of the Company’s products prove to be defective, the Company may be required to participate in a government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims.
On January 15, 2004, a judgment was entered against the Company in the District Court (365th Judicial District) in Maverick County, Texas. The plaintiffs alleged in their complaint that a Stoneridge fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The plaintiffs are the parents of the decedent. The final judgment entered against the Company was approximately $36.5 million. The Company denies its fuel valve contributed to the fire. A motion for a new trial and other relief is pending before the trial court. A vigorous appeal of this judgment will be undertaken if the court denies relief. The Company believes that there are valid grounds to reverse the judgment on appeal. If successful, the appeal may alter or eliminate the amount of the existing judgment. While legal proceedings are subject to inherent uncertainty, the Company believes that it is reasonably possible that this award will be substantially altered or eliminated by the appellate court. Consequently, in the opinion of management and counsel, it is not possible to estimate the outcome of such uncertainty at this time. The Company will record a provision for any liability in this case, if and at the time that management and counsel conclude a loss is probable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2003.
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PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On March 9, 2004, the Company had 22,593,919 Common Shares without par value, issued and outstanding, which were owned by approximately 130 shareholders of record, including Common Shares held in “streetname” by nominees who are record holders and approximately 1,200 beneficial owners.
The Company has not historically paid or declared dividends, which are restricted under both the senior notes and the credit agreement, on its Common Shares. The Company may only pay cash dividends in the future if immediately prior to and immediately after the payment is made no event of default has occurred, the Company remains in compliance with certain leverage ratio requirements, and the amount paid does not exceed 5% of the Company’s excess cash flow for the preceding fiscal year. The Company currently intends to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness. Accordingly, the Company does not expect to pay cash dividends in the foreseeable future.
High and low sales prices (as reported on the New York Stock Exchange “NYSE” composite tape) for the Company’s Common Shares for each quarter during 2003 and 2002 are as follows:
Quarter Ended
2003
March 31
June 30
September 30
December 31
2002
The Company’s Common Shares are traded on the NYSE under the symbol SRI.
In October 1997, the Company adopted a Long-Term Incentive Plan for its employees and in May 2002, the Company adopted a Director Share Option Plan for its directors. Both plans were approved by the Company’s shareholders. Equity compensation plan information, as of December 31, 2003, is as follows:
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the Company and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data was derived from the Company’s consolidated financial statements.
Statement of Operations Data:
Net sales:
Vehicle Management & Power Distribution
Control Devices
Eliminations
Consolidated
Gross profit (A)
Operating income
Income before income taxes and cumulative effect of accounting change
Income before cumulative effect of accounting change
Net income (loss): (B)
Basic income before cumulative effect of accounting change per share
Diluted income before cumulative effect of accounting change per share
Basic net income (loss) per share
Diluted net income (loss) per share
Other Data:
Product development expenses
Capital expenditures
Depreciation and amortization (C)
Balance Sheet Data:
Working capital
Total assets
Long-term debt, less current portion
Shareholders’ equity
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, the Company evaluates estimates and assumptions used in its financial statements. The Company bases its estimates used on historical experience and on various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
The Company believes the following are its “critical accounting policies” – those most important to the financial presentation and those that require the most difficult, subjective or complex judgments.
Revenue Recognition and Sales Commitments – The Company recognizes revenues from the sale of products, net of actual and estimated returns of products sold based on authorized returns and historical trends in sales returns, at the point of passage of title, which is generally at the time of shipment. The Company often enters into agreements with its customers at the beginning of a given vehicle’s life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements generally may be terminated by our customers at any time, but usually are not.
Warranty Reserves – The Company’s warranty reserve is established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. This estimate is based on historical trends of units sold and payment amounts, combined with the Company’s current understanding of the status of existing claims. Estimating the warranty reserve requires the Company to forecast the resolution of existing claims as well as expected future claims on products previously sold. While the Company believes that its warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. The Company’s customers are increasingly seeking to hold suppliers responsible for product warranties, which could impact the Company’s exposure to these costs.
Bad Debts – The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectibility in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount.
Inventory – Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for U.S. inventories and by the first-in, first-out (FIFO) method for non-U.S. inventories. Where appropriate, standard cost systems are utilized for purposes of determining cost and the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of the lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.
Goodwill – In connection with the adoption of SFAS 142, “Goodwill and Other Intangible Assets,” the Company discontinued its amortization of goodwill on January 1, 2002. In lieu of amortization, this standard requires that goodwill be tested for impairment as of the date of adoption, at least annually thereafter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. See Note 2 to the Company’s consolidated financial statements for more information on the Company’s application of this accounting standard, including the valuation techniques used to determine the fair value of goodwill.
Share-Based Compensation – Effective January 1, 2003, the Company adopted the fair value recognition provision of SFAS 123, “Accounting for Stock-Based Compensation” and adopted the disclosure requirements of SFAS
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148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In accordance with SFAS 148, the Company has adopted the fair value recognition provisions on a prospective basis for awards granted, modified and settled subsequent to January 1, 2003. The option awards cliff-vest at the end of the vesting period, and compensation expense is recognized ratably over the vesting period on a straight-line basis. See Note 2 to the Company’s consolidated financial statements for assumptions used to determine fair value.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net Sales. Net sales for the year ended December 31, 2003 decreased $29.8 million, or 4.7%, to $606.7 million from $636.5 million in 2002. The reduction in sales was primarily the result of reduced sales from an exited product line and lower North American light vehicle production, offset by favorable foreign exchange rates.
Sales for the year ended December 31, 2003 for North America decreased by $42.2 million to $492.6 million from $534.8 million in 2002. North American sales accounted for 81.2% of total sales in 2003 compared with 84.0% in 2002. The decrease in North American sales was primarily due to the exited product line and lower North American light vehicle production. Sales in 2003 outside North America increased by $12.4 million to $114.1 million from $101.7 million in 2002. Sales outside North America accounted for 18.8% of total sales in 2003 compared with 16.0% in 2002. Favorable foreign exchange accounted for the increase in sales outside of North America in 2003.
Net sales for the Vehicle Management & Power Distribution operating segment were $289.7 million for the year ended December 31, 2003 as compared to $273.8 million for the corresponding period in 2002. This increase was predominately due to favorable currency exchange rates and increased content within the commercial vehicle market. Net sales for the Control Devices operating segment were $333.2 million for the year ended December 31, 2003 as compared to $376.9 million for the corresponding period in 2002. This decrease was primarily attributable to reduced sales from an exited product line and lower North American light vehicle production.
Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2003 decreased by $20.6 million, or 4.4%, to $450.6 million from $471.2 million in 2002. As a percentage of sales, cost of goods sold increased slightly to 74.3% in 2003 from 74.0% in 2002. The increase in cost of goods sold as a percentage of sales was primarily the result of reduced volumes, partially offset by ongoing cost reduction initiatives.
The Company maintains a strong focus on ensuring its cost competitiveness in the marketplace. In light of this focus, the Company established a new manufacturing facility in Mexico. The Company will continue to evaluate its cost structure on a product-by-product basis to determine the most competitive manufacturing locations for its products. In addition, the Company continues to pursue cost reduction initiatives, including Six Sigma, lean manufacturing and improved productivity. These initiatives are partially offset by a reduction in product selling prices.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses, including product development, increased by $6.7 million to $97.7 million for the year ended December 31, 2003 from $91.0 million in 2002. As a percentage of sales, SG&A expenses increased to 16.1% in 2003 from 14.3 % in 2002.
This increase reflects increased investment in the Company’s design and development activities and increased sales and marketing efforts for solid state sensing, seat track position sensing, remote electronic displays and various other products. The increase is also attributable to the Company’s decision to adopt the fair value method of accounting for stock options. Under SFAS 123, “Accounting for Stock-Based Compensation,” compensation expense is measured at the date the option is granted using the Black-Scholes option-pricing model, and is then recognized ratably over the option’s vesting period on a straight-line basis. As a result of the adoption of the fair value method, the Company recognized $1.3 million of pre-tax, non-cash compensation expense for the year ended December 31, 2003. This adoption was the result of the Company’s desire to increase financial reporting transparency to its shareholders as well as to pursue best practices for corporate governance.
Interest Expense, net. Net interest expense for the year ended December 31, 2003 decreased by $7.0 million to $27.7 million from $34.6 million for the same period in 2002. The decrease was primarily attributable to lower debt levels. Average outstanding indebtedness was $230.8 million and $286.1 million for the years ended December 31, 2003 and 2002, respectively.
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Other (Income) Expense. Other income, which consisted of equity earnings of unconsolidated subsidiaries and other non-operating expenses, was $0.3 million for the year ended December 31, 2003. Other expense, which consisted of equity losses of unconsolidated subsidiaries and other non-operating expenses, was $1.6 million for the year ended December 31, 2002.
Income Before Income Taxes and Cumulative Effect of Accounting Change. As a result of the foregoing, income before income taxes and cumulative effect of accounting change decreased by $1.3 million for the year ended December 31, 2003 to $31.0 million from $32.3 million in 2002.
Provision for Income Taxes. The Company recognized provisions for income taxes of $9.6 million, or 31.1% of pre-tax income, and $11.3 million, or 34.8% of pre-tax income, for federal, state and foreign income taxes for the years ended December 31, 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to tax refunds related to the completion of several strategic tax initiatives and to the higher proportion of non-U.S. pre-tax income, which is taxed at a lower rate than U.S. pre-tax income. The effective tax rate is expected to increase in future years pending certain proposed tax legislation.
Income Before Cumulative Effect of Accounting Change. As a result of the foregoing, income before cumulative effect of accounting change increased by $0.3 million to $21.4 million for the year ended December 31, 2003 from $21.1 million in 2002.
Cumulative Effect of Accounting Change, net of tax. In accordance with the transition provisions of SFAS 142, the Company completed the two-step transitional goodwill impairment analysis in 2002. As a result, the Company recorded as a cumulative effect of accounting change, a non-cash, after-tax charge of $69.8 million, to write off a portion of the carrying value of goodwill. The Company performed an annual impairment test on goodwill during 2003 and no additional impairment was recognized. See Note 2 to the Company’s consolidated financial statements for more information on the Company’s application of this accounting standard.
Net Income (Loss). As a result of the foregoing, the Company recognized net income of $21.4 million for the year ended December 31, 2003, and a net loss of $48.8 million for the corresponding period in 2002.
Net income for the Vehicle Management & Power Distribution operating segment was $5.4 million for the year ended December 31, 2003 as compared to a net loss of $29.5 million for the corresponding period in 2002. Net income for the Control Devices operating segment was $16.0 million for the year ended December 31, 2003 as compared to a net loss of $19.3 million for the corresponding period in 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales. Net sales for the year ended December 31, 2002 increased $52.0 million, or 8.9%, to $636.5 million from $584.5 million in 2001. Sales revenues in 2002 were favorably impacted by increased North American light and commercial vehicle builds as well as new product launches.
Sales for the year ended December 31, 2002 for North America increased by $36.8 million to $534.8 million from $498.0 million in 2001. North American sales accounted for 84.0% of total sales in 2002 compared with 85.2% in 2001. Sales in 2002 outside North America increased by $15.2 million to $101.7 million from $86.5 million in 2001. Sales outside North America accounted for 16.0% of total sales in 2002 compared with 14.8% in 2001.
Net sales for the Vehicle Management & Power Distribution operating segment were $273.8 million for the year ended December 31, 2002 as compared to $245.9 million for the corresponding period in 2001. Increased production volumes on existing programs and increased content per vehicle accounted for the change in sales. Net sales for the Control Devices operating segment were $376.9 million for the year ended December 31, 2002 as compared to $349.5 million for the corresponding period in 2001, reflecting higher production volumes in the Company’s end markets and an incremental increase in revenue due to new product launches.
13
Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2002 increased by $21.8 million, or 4.9%, to $471.2 million from $449.4 million in 2001. As a percentage of sales, cost of goods sold decreased to 74.0% in 2002 from 76.9% in 2001. The improvement as a percent of sales was primarily attributable to increased production volumes and improved operating leverage as a result of cost reduction initiatives, including Six Sigma, lean manufacturing and improved productivity, partially offset by pricing pressures.
Selling, General and Administrative Expenses. SG&A expenses, including product development, decreased by $8.4 million to $91.0 million for the year ended December 31, 2002 from $99.4 million in 2001. As a percentage of sales, SG&A expenses decreased to 14.3% in 2002 from 17.0% in 2001. The decrease was primarily attributable to the Company’s adoption of the non-amortization of goodwill provisions of SFAS 142 on January 1, 2002. Goodwill amortization expense for the year ended December 31, 2001 was $9.8 million. Excluding the impact of goodwill amortization expense, SG&A increased $1.4 million, or 1.6%, in 2002 compared to the corresponding period in 2001. As a percentage of sales, SG&A expenses declined to 14.3% from 15.3%, excluding the impact of goodwill amortization expense.
Interest Expense, net. Net interest expense for the year ended December 31, 2002 increased by $3.3 million to $34.6 million from $31.3 million for the same period in 2001. The increase was primarily attributable to the termination of existing interest rate swap agreements as a result of the Company’s debt refinancing, offset by lower interest rates. These swaps, which are being amortized to interest expense, were fully amortized by the end of 2003. Average outstanding indebtedness was $286.1 million and $317.9 million for the years ended December 31, 2002 and 2001, respectively.
Loss on Extinguishment of Debt. The Company recognized a loss of $5.8 million during 2002 in connection with the early extinguishment of debt related to the Company’s debt refinancing. See Note 4 to the Company’s consolidated financial statements for more information on the Company’s debt refinancing.
Other Expense. Other expense, which primarily consisted of equity losses of unconsolidated subsidiaries and other non-operating expenses, was $1.6 million and $0.5 million for the years ended December 31, 2002 and 2001, respectively.
Income Before Income Taxes and Cumulative Effect of Accounting Change. As a result of the foregoing, income before income taxes and cumulative effect of accounting change increased by $28.4 million for the year ended December 31, 2002 to $32.3 million from $3.9 million in 2001.
Provision for Income Taxes. The Company recognized provisions for income taxes of $11.3 million and $1.0 million for federal, state and foreign income taxes for the years ended December 31, 2002 and 2001, respectively. The increase in the effective tax rate to 34.8% in 2002 from 24.4% in 2001 was a result of non-recurring tax refunds in 2001, coupled with the fact that tax initiatives resulted in less of a relative benefit on higher 2002 operating income, compared to lower operating income in 2001. The effective tax rate is expected to increase in future years pending certain proposed tax legislation.
Income Before Cumulative Effect of Accounting Change. As a result of the foregoing, income before cumulative effect of accounting change increased by $18.1 million to $21.1 million for the year ended December 31, 2002 from $2.9 million in 2001.
Cumulative Effect of Accounting Change, net of tax. In accordance with the transition provisions of SFAS 142, the Company completed the two-step transitional goodwill impairment analysis in 2002. As a result, the Company recorded as a cumulative effect of accounting change, a non-cash, after-tax charge of $69.8 million, to write off a portion of the carrying value of goodwill. The Company performed an annual impairment test on goodwill and no additional impairment was recognized. See Note 2 to the Company’s consolidated financial statements for more information on the Company’s application of this accounting standard.
Net (Loss) Income. As a result of the foregoing, the Company recognized a net loss of $48.8 million for the year ended December 31, 2002, and net income of $2.9 million for the corresponding period in 2001.
Net loss for the Vehicle Management & Power Distribution operating segment was $29.5 million for the year ended December 31, 2002 as compared to $11.9 million for the corresponding period in 2001. Net loss for the Control Devices operating segment was $19.3 million for the year ended December 31, 2002 as compared to net income of $14.8 million for the corresponding period in 2001.
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Liquidity and Capital Resources
Net cash provided by operating activities was $72.4 million and $95.6 million for the years ended December 31, 2003 and 2002, respectively. The decrease in net cash from operating activities of $23.2 million was primarily attributable to a reduction in contribution from lower levels of operating assets and liabilities, the loss on extinguishment of debt in 2002, and a lower contribution from deferred income tax. These items represented $12.3 million, $5.8 million, and $3.6 million, respectively. The decrease in deferred income taxes was primarily attributable to tax credits recognized in 2003 as assets to be used in future periods.
Net cash used by investing activities was $25.2 million and $14.3 million for the years ended December 31, 2003 and 2002, respectively. This increase primarily related to an increase in capital expenditures. Capital expenditures for 2003 included, among other things, expenditures for solid state sensing, seat track position sensing, instrument clusters and investments in lower cost manufacturing locations.
Net cash used by financing activities was $51.7 million and $59.2 million for the years ended December 31, 2003 and 2002, respectively, and primarily related to the reduction of the Company’s debt obligations in both periods. See Note 4 to the Company’s consolidated financial statements for information on the Company’s senior notes and credit agreement, including availability on the Company’s revolving facility.
The Company has entered into foreign currency forward purchase contracts with a notional value of 22.6 million of Swedish krona to reduce exposure related to the Company’s krona denominated debt obligations. The estimated fair value of these forward contracts at December 31, 2003, per quoted market sources, was $(0.3) million. These forward contracts are marked to market, with gains and losses recognized in the Consolidated Statement of Operations. The Company’s foreign exchange contracts substantially offset losses and gains on the underlying foreign denominated debt obligations and receivables. The Company does not use derivatives for speculative or profit-motivated purposes.
The following table summarizes the Company’s future cash outflows resulting from financial contracts and commitments, as of December 31, 2003:
Contractual Obligations:
Less than
1 year
4 – 5
years
Long-term debt
Operating leases
Total contractual obligations
Future capital expenditures are expected to be consistent with recent levels and future organic growth is expected to be funded through cash flows from operations. Management will continue to focus on reducing its weighted average cost of capital and believes that cash flows from operations and the availability of funds from the Company’s credit facilities will provide sufficient liquidity to meet the Company’s future growth and operating needs.
Recently Issued Accounting Standards
See Note 2 to the Company’s consolidated financial statements.
Inflation and International Presence
Management believes that the Company’s operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes the Company is not significantly exposed to adverse economic conditions.
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
From time to time, the Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. To reduce exposures to market risks resulting from fluctuations in interest rates, the Company uses a combination of variable and fixed rate debt. During 2003 the Company repaid the entire remaining balance of its variable term debt. This, coupled with the fact that the Company’s revolving facility remains undrawn, resulted in all of the Company’s debt at December 31, 2003 being fixed rate debt.
The Company’s risks related to commodity price and foreign currency exchange risks have historically not been material. The Company does not expect the effects of these risks to be material in the future based on current operating and economic conditions in the countries and markets in which it operates. Therefore, a 10.0% change in the value of the U.S. dollar would not significantly affect the Company’s results of operations, financial position or cash flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Report of Independent Public Accountants for the Year Ended December 31, 2001
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Report of Independent Public Accountants for the Years Ended December 31, 2001 and 2000
Schedule II—Valuation and Qualifying Accounts
17
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Stoneridge, Inc.
We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. (an Ohio Corporation) and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2003. Our audit also included the financial statement schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements and schedule of Stoneridge, Inc. and Subsidiaries as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations and whose report dated January 22, 2002, expressed an unqualified opinion on those consolidated financial statements and schedule before the restatement adjustments and disclosures described below and in Notes 2, 8 and 12.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stoneridge, Inc. and Subsidiaries at December 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As explained in Note 2 to the consolidated financial statements, effective January 1, 2003, the Company adopted Statement No. 123, “Accounting for Stock-Based Compensation,” under the prospective transition method in Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure; an Amendment to Statement No. 123.” Also explained in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (Statement) No. 142, “Goodwill and Other Intangible Assets.”
As discussed above, the consolidated financial statements of Stoneridge, Inc. and Subsidiaries for the year ended December 31, 2001 were audited by other auditors who have ceased operations. However, the Company made certain adjustments to and disclosures in the prior years’ financial statements to conform to the current year’s presentation or to comply with adoption requirements of new accounting pronouncements, as follows:
(i) As described in Note 2, the 2001 consolidated financial statements have been revised to include the transitional disclosures required by Statement No. 142, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the 2001 disclosures in Note 2 included (a) agreeing the previously reported net income (in total and the related net income per share amounts) to the previously issued consolidated financial statements and the adjustments to reported amounts representing amortization expense (including any related tax effects) recognized in those periods related to goodwill as a result of initially applying Statement No. 142 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related net income per share amounts.
(ii) In Note 8, the Company added 2001 disclosures relating to its defined benefit pension plan to conform to the 2002 presentation. We audited the information added for the 2001 disclosures. Our procedures included (a) agreeing the 2001 defined benefit pension plan amounts and information contained in Note 8 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliations of 2001 defined benefit pension plan amounts to the consolidated financial statements.
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(iii) As presented in Note 12, the Company changed the composition of its reportable segments in 2002 from one reportable segment to two reportable segments, and the amounts in the 2001 consolidated financial statements relating to reportable segments have been restated to conform to the 2002 composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2001 consolidated financial statements. Our procedures included (a) agreeing the adjusted amounts of 2001 reportable segment information contained in Note 12 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliations of 2001 reportable segment amounts to the consolidated financial statements.
In our opinion, the adjustments and disclosures described in (i), (ii) and (iii) above are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
January 21, 2004
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THIS REPORT IS A COPY AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
THIS REPORT REFERENCES THE COMPANY’S BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000 AND ITS RELATED CONSOLIDATED STATEMENTS OF INCOME, SHAREHOLDER’S EQUITY AND CASH FLOWS FOR THE PERIODS ENDED DECEMBER 31, 2000 AND 1999, WHICH ARE NOT PRESENTED HEREIN.
Stoneridge, Inc.:
We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. (an Ohio corporation) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stoneridge, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for derivative instruments.
/s/ ARTHURANDERSEN LLP
Cleveland, Ohio,
January 22, 2002.
20
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $2,904 and $3,020, for 2003 and 2002, respectively
Inventories, net
Prepaid expenses and other
Deferred income taxes
Total current assets
Property, Plant and Equipment, net
Other Assets:
Goodwill
Investments and other, net
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt
Accounts payable
Accrued expenses and other
Total current liabilities
Long-Term Liabilities:
Long-term debt, net of current portion
Other liabilities
Total long-term liabilities
Shareholders’ Equity:
Preferred shares, without par value, 5,000 authorized, none issued
Common shares, without par value, 60,000 authorized, 22,459 and 22,399 issued and outstanding at December 31, 2003 and 2002, respectively, with no stated value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net Sales
Costs and Expenses:
Cost of goods sold
Selling, general and administrative
Operating Income
Interest expense, net
Loss on extinguishment of debt
Other (income) expense, net
Income Before Income Taxes and Cumulative Effect of Accounting Change
Provision for income taxes
Income Before Cumulative Effect of Accounting Change
Cumulative effect of accounting change, net of tax
Net Income (Loss)
Basic Net Income (Loss) per Share:
Diluted Net Income (Loss) per Share:
Basic Weighted Average Shares Outstanding
Diluted Weighted Average Shares Outstanding
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities —
Depreciation and amortization
Loss (gain) on sale of fixed assets
Equity in (earnings) losses of unconsolidated subsidiaries
Share based compensation
Changes in operating assets and liabilities —
Accounts receivable, net
Inventories
Other assets
Net cash provided by operating activities
INVESTING ACTIVITIES:
Proceeds from sale of fixed assets
Net cash used by investing activities
FINANCING ACTIVITIES:
Proceeds from issuance of senior notes
Extinguishment of revolving facility
Extinguishment of term debt
Net (repayments) borrowings under revolving credit facilities
Proceeds from long-term debt
Repayments of long-term debt
Proceeds from exercise of share options
Debt issuance costs
Interest rate swap termination costs
Net cash used by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash received for income taxes
23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
BALANCE, JANUARY 1, 2001
Net income
Other comprehensive loss:
Cumulative effect of change in accounting for derivatives
Change in fair value of derivatives
Currency translation adjustments
Comprehensive loss
BALANCE, DECEMBER 31, 2001
Net loss
Exercise of share options
Minimum pension liability adjustments
Unrealized loss on marketable securities
Amortization of terminated derivatives
BALANCE, DECEMBER 31, 2002
Share based compensation expense
Other comprehensive income:
Unrealized gain on marketable securities
Comprehensive income
BALANCE, DECEMBER 31, 2003
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
1. Organization and Nature of Business
Stoneridge, Inc. (Stoneridge) and its subsidiaries are independent designers and manufacturers of engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Stoneridge and its wholly-owned and majority-owned subsidiaries (collectively, the Company). Intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
Accounts Receivable Concentrations
Revenues are principally generated from the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Due to the nature of these industries, a significant portion of sales and related accounts receivable are concentrated in a relatively small number of customers. In 2003, the Company’s top four customers individually accounted for approximately 17%, 11%, 9% and 9% of net sales, while the top five customers accounted for 53% of net sales. In 2002, the Company’s top four customers individually accounted for approximately 13%, 13%, 10% and 10% of net sales, while the top five customers accounted for approximately 52% of net sales. In 2001, the Company’s top four customers individually accounted for 14%, 13%, 12% and 12% of net sales, while the top five customers accounted for 57% of net sales. Accounts receivable from the Company’s five largest customers aggregated approximately $51,240 and $30,363 at December 31, 2003 and 2002, respectively.
Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for approximately 68% and 73% of the Company’s inventories at December 31, 2003 and 2002, respectively, and by the first-in, first-out (FIFO) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following at December 31:
Raw materials
Work in progress
Finished goods
Less: LIFO reserve
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the following at December 31:
Land and land improvements
Buildings and improvements
Machinery and equipment
Office furniture and fixtures
Tooling
Vehicles
Leasehold improvements
Less: Accumulated depreciation
Depreciation is provided by both the straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was $21,904, $21,083 and $18,664, respectively. Depreciable lives within each property classification are as follows:
Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of property are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income.
Goodwill and Other Intangibles
Under Statement of Financial Accounting Standard (SFAS) 142, “Goodwill and Other Intangible Assets,” goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. In accordance with the transition provisions of SFAS 142, the Company completed the two-step transitional goodwill impairment analysis for both reporting units of the Company as of January 1, 2002. The initial impairment test indicated that the carrying values of the reporting units exceeded the corresponding fair values of the reporting units, which were determined based on a combination of valuation techniques including the guideline company method, the transaction method and the discounted cash flow method. The implied fair value of goodwill in these reporting units was then determined through the allocation of the fair values to the underlying assets and liabilities. The January 1, 2002 carrying value of the goodwill in these reporting units exceeded their implied fair value by $90.1 million. The $69.8 million write-down of goodwill to its fair value, which is net of $20.3 million of related tax benefits, was reported as a cumulative effect of accounting change in the accompanying consolidated financial statements as of January 1, 2002. The Company performed an annual impairment test of goodwill as of October 1, 2002 and 2003 and no additional impairment was recognized.
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The change in the carrying value of goodwill by reportable operating segment during 2002 was as follows:
Balance at January 1, 2002
Cumulative effect of accounting change
Balance at December 31, 2002
There was no change in the carrying value of goodwill by reportable operating segment during 2003.
The pro forma consolidated net income (loss) as if SFAS 142 had been in effect at the beginning of fiscal 2001 is as follows:
Reported income before cumulative effect of accounting change
Add back: Goodwill amortization, net of tax
Pro forma income before cumulative effect of accounting change
Pro forma net income (loss)
Basic net income (loss) per share:
Pro forma net income (loss) per share
Diluted net income (loss) per share:
The Company had the following intangible assets subject to amortization at December 31:
Patents:
Gross carrying amount
Less: Accumulated amortization
Net carrying amount
Aggregate amortization expense on patents was $279 and $817 for the years ended December 31, 2003 and 2002, respectively. Estimated annual amortization expense is $279 for 2004-2006 and $210 for 2007-2008.
27
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31:
Compensation-related obligations
Insurance-related obligations
Income tax-related obligations
Warranty-related obligations
Income Taxes
The Company accounts for income taxes using the provisions of SFAS 109, “Accounting for Income Taxes.” Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
Currency Translation
The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive income (loss). Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction, with the resulting adjustments included in the results of operations.
Revenue Recognition and Sales Commitments
The Company recognizes revenues from the sale of products, net of actual and estimated returns of products sold based on authorized returns and historical trends in sales returns, at the point of passage of title, which is generally at the time of shipment. The Company often enters into agreements with its customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements generally may be terminated by the Company’s customers at any time, but usually are not.
Bad Debts
The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectibility in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount.
Warranty Reserves
The Company’s warranty reserve is established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While the Company believes that its warranty reserve is adequate and that the judgments applied are appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
28
The Company’s warranty reserve at December 31, 2003 and 2002 was $5,515 and $4,248, respectively. These warranty reserve balances included payments made of $3,388 and $3,474, costs recognized for warranties issued during the period of $4,644 and $4,443 and changes in estimates for preexisting warranties of $11 and $104, for the periods ended December 31, 2003 and 2002, respectively.
Product Development Expenses
Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. These costs amounted to $28,714, $25,332 and $26,996 in 2003, 2002 and 2001, respectively.
Share-Based Compensation
At December 31, 2003, the Company had two share-based employee compensation plans, which are described more fully in Note 7. Prior to 2003, the Company accounted for employee share options granted under these plans using the intrinsic value method provisions of Accounting Principles Board Opinion No. (APB) 25, “Accounting for Stock Issued to Employees,” and related interpretations. No share-based employee compensation cost was recognized in 2002 and 2001, as all options granted under these plans had an exercise price equal to the market value of the underlying common shares on the date of grant. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified or settled after January 1, 2003, under the disclosure provisions of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” Awards under the Company’s plans cliff-vest over periods ranging from one to five years, and compensation expense is recognized on a straight-line basis. Therefore, the cost related to share-based employee compensation recognized in 2003 is less than that which would have been recognized if the fair value based method had been applied to all awards granted since the original effective date of SFAS 123. The following table illustrates the effect on net income (loss) and net income (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
Net income (loss), as reported
Add: Share-based employee compensation expense included in reported net income, net of related tax effects
Deduct: Total share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects
Net income (loss) per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
29
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Risk-free interest rate
Expected dividend yield
Expected lives
Expected volatility
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including expected share price volatility and expected option lives.
Financial Instruments and Derivative Financial Instruments
Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and forward currency contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. The carrying value of the Company’s variable rate debt approximates its fair value. Refer to Note 9 of the Company’s consolidated financial statements for fair value disclosures of the Company’s fixed rate debt, and foreign currency forward contracts.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
Net Income (Loss) Per Share
Net income (loss) per share amounts for all periods are presented in accordance with SFAS 128, “Earnings per Share,” which requires the presentation of basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) per share was computed by dividing net income (loss) by the weighted-average number of common shares outstanding for each respective period. Diluted net income (loss) per share was calculated by dividing net income (loss) by the weighted-average of all potentially dilutive common shares that were outstanding during the periods presented. Actual weighted-average shares outstanding used in calculating basic and diluted net income (loss) per share were as follows:
Basic weighted average shares outstanding
Effect of dilutive securities
Diluted weighted average shares outstanding
Comprehensive Income (Loss)
SFAS 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income. Other comprehensive income includes foreign currency translation adjustments and gains and losses from certain foreign currency transactions, the effective portion of gains and losses on certain hedging activities, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities.
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Balances of each after-tax component of accumulated other comprehensive income (loss), as reported in the Statement of Consolidated Shareholders’ Equity as of December 31, are as follows:
Impairment of Assets
The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No significant impairment charges were recorded in 2003, 2002 and 2001. Impairment would be recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. Measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset.
Accounting Standards
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other things, SFAS 145 requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4, “Reporting Gains and Losses from Extinguishment of Debt – an amendment of APB Opinion No. 30.” Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for classification as an extraordinary item, shall be reclassified. The Company adopted this Statement effective January 1, 2003, and accordingly, the extraordinary loss of $3.6 million, net of tax, recorded in the second quarter of 2002 as a result of the early extinguishment of debt was reclassified as a component of income from continuing operations in 2003. Therefore, income before income taxes and cumulative effect of accounting change as well as the income tax provision for the year ended December 31, 2002 were restated as follows:
Income before income taxes and cumulative effect of accounting change, as originally reported
Loss on extinguishment of debt, pre-tax
Income before income taxes and cumulative effect of accounting change, as restated
Provision for income taxes, as originally reported
Tax benefit from loss on extinguishment of debt
Provision for income taxes, as restated
In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 addresses financial accounting and reporting for costs associated with exit and disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material impact on the Company’s consolidated financial statements.
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In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how public companies classify and measure in their statement of financial position certain financial instruments with characteristics of both liabilities and equity. This Statement became effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not impact the Company’s consolidated financial statements.
In January 2003, the FASB issued interpretation (FIN) 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51.” FIN 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks and rewards of ownership among their owners and other parties involved. The provisions of FIN 46 were applicable immediately to all variable interest entities created after January 31, 2003. In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51 (revised December 2003),” which includes significant amendments to previously issued FIN 46. Among other things, FIN 46R includes revised transition dates for public entities. The Company is now required to adopt the provisions of FIN 46R no later than the end of the first reporting period that ends after March 15, 2004. The adoption of this interpretation is not expected to have a material effect on the Company’s financial statements or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to their 2003 presentation in the consolidated financial statements.
3. Investments
The Company has a 50% interest in PST Industria Eletronica da Amazonia Ltda. (PST), a Brazilian electronic components business that specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $13,309 and $11,814 at December 31, 2003 and 2002, respectively. The Company has loaned PST $5,843, which includes accrued interest.
4. Long-Term Debt
On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes. The $200.0 million notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. Interest is payable on May 1 and November 1 of each year. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.
In conjunction with the issuance of the senior notes, the Company also entered into a new $200.0 million credit agreement with a bank group. The credit agreement has two components: a $100.0 million revolving facility (of which $95.9 million was available at December 31, 2003), which includes a $10.0 million swing line facility, and a $100.0 million term facility. The revolving facility expires on April 30, 2007 and requires a commitment fee of 0.375% to 0.500% on the unused balance as well as a utilization fee of 0.125% to 0.250% when the unutilized balance equals or exceeds 50.0% of the total revolving commitment. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.50% to 1.50% or (ii) LIBOR plus a margin of 2.00% to 3.00%, depending upon the Company’s ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined. Interest on the swing line facility is payable monthly at the quoted overnight borrowing rate plus a margin of 2.00% to 3.00%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA. The term facility was due to expire on April 30, 2008 and had interest payable quarterly at either (i) the prime rate plus 1.75% or (ii) LIBOR plus 3.25%. The Company has the right to prepay any of the above-mentioned loans in whole or in part, without premium or penalty. During the first quarter of 2003, the Company prepaid $20.0 million of the term facility and during the fourth quarter of 2003, prepaid the entire remaining balance outstanding under the term facility of $28.5 million.
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The weighted average interest rate in effect for the years ended December 31, 2003, 2002 and 2001 was approximately 10.24%, 9.53% and 9.39%, respectively, including the effects of the interest rate swap agreements.
Long-term debt consisted of the following at December 31:
11 1/2% Senior notes, due 2012
Borrowings under credit agreement
Borrowings payable to foreign banks
Less: Current portion
The credit agreement contains various covenants that require, among other things, the maintenance of certain minimum amounts of consolidated net worth and consolidated EBITDA and certain specified ratios of consolidated total debt to consolidated EBITDA, interest coverage and fixed charge coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The Company was in compliance with all covenants at December 31, 2003.
Future maturities of long-term debt at December 31, 2003 are as follows:
2004
2005
2006
2007
2008
Thereafter
5. Income Taxes
The provisions for income taxes on income before cumulative effect of accounting change included in the accompanying financial statements represent federal, state and foreign income taxes. The components of income (loss) before income taxes and the provision for income taxes before cumulative effect of accounting change consists of the following:
Income (loss) before income taxes and cumulative effect of accounting change
Domestic
Foreign
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Income tax provision (benefit)
Current:
Federal
State and foreign
Deferred:
A reconciliation of the Company’s effective income tax rate to the statutory federal tax rate for is as follows:
Statutory U.S. federal income tax rate
State income taxes, net of federal tax benefit
Tax credits
Goodwill amortization
Tax benefit for export sales
Foreign rate differential
Effective income tax rate
Unremitted earnings of foreign subsidiaries were $11,062, $12,046 and $10,978 as of December 31, 2003, 2002 and 2001, respectively. Because these earnings have been indefinitely reinvested in foreign operations, no provision has been made for U.S. income taxes. It is impracticable to determine the amount of unrecognized deferred taxes with respect to these earnings; however, foreign tax credits should be available to reduce U.S. income taxes in the event of a distribution.
Deferred tax assets and liabilities consisted of the following at December 31:
Deferred tax assets:
Employee benefits
Insurance
Other nondeductible reserves
Gross deferred tax assets
Deferred tax liabilities:
Gross deferred tax liabilities
Net deferred tax liability
6. Operating Lease Commitments
The Company leases equipment, vehicles and buildings from third parties under operating lease agreements.
D.M. Draime, Chairman of the Company, is a 50% owner of Hunters Square, Inc. (“HSI”), an Ohio corporation, which owns Hunters Square, an office complex and shopping mall located in Warren, Ohio. The Company leases office space
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in Hunters Square. The Company pays all maintenance, tax and insurance costs related to the operation of the office. Lease payments made by the Company to HSI were $301 in 2003 and $357 in 2002 and 2001, respectively. The lease terminates in December 2009. The Company believes the terms of the lease are no less favorable to it than would be the terms of a third-party lease.
Earl Linehan, a director of the Company, and D.M. Draime, Chairman of the Company, as limited partners, own 11.81% and 10.00%, respectively, of Industrial Development Associates (“IDA”), a Maryland limited partnership real estate development company in which the Company is a 30% general partner. The Company has a lease agreement with IDA pursuant to which the Company leases a facility located in Mebane, North Carolina. The lease expires on March 31, 2004. The Company is responsible for all maintenance, taxes and insurance costs related to the operations of the facility. The Company made lease payments to IDA of $115, $152 and $181 for 2003, 2002 and 2001, respectively. The Company believes the terms of the lease are no less favorable to it than would be the terms of a third-party lease.
For the years ended December 31, 2003, 2002 and 2001, lease expense totaled $6,278, $6,604 and $5,713, including related party lease expense of $451, $509 and $538, respectively.
Future minimum operating lease commitments at December 31, 2003 are as follows:
7. Share Option Plans
In October 1997, the Company adopted a Long-Term Incentive Plan (Incentive Plan). The Company has reserved 2,500,000 Common Shares for issuance under the Incentive Plan. Under the Incentive Plan, the Company has granted cumulative options to purchase 1,594,500 Common Shares to management with exercise prices equal to the fair market value of the Company’s Common Shares on the date of grant. The options cliff-vest from one to five years after the date of grant.
In May 2002, the Company adopted a Director Share Option Plan (Director Plan). The Company has reserved 500,000 Common Shares for issuance under the Director Plan. Under the Director Plan, the Company has granted cumulative options to purchase 86,000 Common Shares to directors of the Company with exercise prices equal to the fair market value of the Company’s Common Shares on the date of grant. The options cliff-vest one year after the date of grant.
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Information relating to the Company’s outstanding options is as follows:
Outstanding at December 31, 2000
Granted in 2001
Forfeited in 2001
Outstanding at December 31, 2001
Granted in 2002
Forfeited in 2002
Exercised in 2002
Outstanding at December 31, 2002
Granted in 2003
Forfeited in 2003
Exercised in 2003
Outstanding at December 31, 2003
Of the options issued and outstanding under both the Incentive Plan and the Director Plan, 813,100, 587,000, and 488,000 were exercisable as of December 31, 2003, 2002 and 2001, respectively. The weighted-average exercise price of options exercisable at the end of the year was $12.24, $15.40 and $17.14 per share at December 31, 2003, 2002 and 2001, respectively. The weighted-average fair value of options granted during the year was $3.51, $5.17 and $3.06 per share at December 31, 2003, 2002 and 2001, respectively.
Range of Exercise Prices
Share Options
Outstanding
Weighted-Average
Exercise Price
$5.13
$7.82 - $8.40
$10.39 - $11.64
$14.72
$16.44 - $17.50
8. Employee Benefit Plans
The Company has certain defined contribution profit sharing and 401(k) plans covering substantially all of its employees. Company contributions are generally discretionary; however, a portion of these contributions is based upon a percentage of employee compensation, as defined in the plans. The Company’s policy is to fund all benefit costs accrued. For the years ended December 31, 2003, 2002 and 2001, expenses related to these plans amounted to $3,757, $345 and $3,301, respectively.
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The Company has a single defined benefit pension plan that covers certain employees in Europe. The following table sets forth the benefit obligation, fair value of plan assets, and the funded status of the Company’s plan; amounts recognized in the Company’s financial statements; and the principal weighted average assumptions used:
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Participant contributions
Curtailment
Actuarial gain
Benefits paid
Translation adjustments
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Fair value of plan assets at end of year
Funded status
Unrecognized actuarial loss
Net amount recognized
Amounts recognized in the balance sheet consist of:
Accrued (liability) benefit
Other comprehensive income
Weighted average assumptions as of December 31:
Discount rate
Expected return on plan assets
Rate of increase to compensation levels
Rate of increase to pensions in payments
Rate of future price inflation
Components of net periodic pension cost are as follows:
Amortization of actuarial loss
Net periodic pension cost
The provisions of SFAS 87, “Employers’ Accounting for Pensions,” required the Company to record an additional minimum liability of $738 with a corresponding charge recorded as a component of accumulated other comprehensive income of $443, net of tax of $295, at December 31, 2003. The additional minimum pension liability was $1,368 with a corresponding charge recorded as a component of accumulated other comprehensive loss of $821, net of tax of $547, at December 31, 2002. This liability represents the amount by which the accumulated benefit obligation exceeds the sum of the fair market value of plan assets and accrued amounts previously recorded.
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On December 31, 2003 the Company amended the defined benefit plan to eliminate the linkage between future service and salary derived plan benefits. The defined benefit plan will continue to provide certain life insurance and disability benefits to participants. Affected members of the plan, which number 159, have been offered membership in the Company’s defined contribution plan. As a result of the curtailment, the projected benefit obligation of the plan was reduced by $1,945.
The Company does not provide any other significant retirement, post-retirement or post-employment benefits to its employees.
9. Fair Value of 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 estimated fair value of the Company’s variable rate debt approximates book value, as under the terms of the borrowing arrangements, a portion of the obligations are subject to fluctuating market rates of interest. The estimated fair value of the Company’s fixed rate debt at December 31, 2003, per quoted market sources, was $235.8 million and the carrying value was $200.0 million.
The Company uses derivative financial instruments to reduce exposure to market risks resulting from fluctuations in interest rates (swaps) and currency rates (forward contracts). The Company does not enter into financial instruments for speculative or profit motivated purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest.
In order to manage the interest rate risk associated with the Company’s previous debt portfolio, the Company entered into interest rate swap agreements. These agreements required the Company to pay a fixed interest rate to counterparties while receiving a floating interest rate based on LIBOR. The counterparties to each of the interest rate swap agreements were major commercial banks. These agreements were due to mature on or before December 31, 2003 and qualified as cash flow hedges; however, as a result of the Company’s debt refinancing, these agreements were terminated on May 1, 2002. Hedging activities recorded in accumulated other comprehensive income (loss) are as follows:
For the years ended
December 31,
Amortization of terminated swap agreements, pre-tax
Tax effect
Amortization of terminated swap agreements, net of tax
Change in fair value of swap agreements, pre-tax
Change in fair value of swap agreements, net of tax
Cumulative effect of change in accounting for swap agreements, pre-tax
Cumulative effect of change in accounting for swap agreements, net of tax
As of December 31, 2003 these terminated swap agreements were fully amortized into income.
The Company has entered into foreign currency forward purchase contracts with a notional value of 22.6 million of Swedish krona to reduce exposure related to the Company’s krona denominated debt obligations. The estimated fair value of these forward contracts at December 31, 2003, per quoted market sources, was $(0.3) million. These forward contracts are marked to market, with gains and losses recognized in the Consolidated Statement of Operations. The Company’s foreign currency forward purchase contracts substantially offset losses and gains on the underlying foreign denominated debt obligations and receivables.
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10. Commitments and Contingencies
In the ordinary course of business, the Company is involved in various legal proceedings, workers’ compensation and product liability disputes. Management is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, cash flows or the financial position of the Company.
On January 15, 2004, a judgment was entered against the Company in the District Court (365th Judicial District) in Maverick County, Texas. The plaintiffs alleged in their complaint that a Stoneridge fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The plaintiffs are the parents of the decedent. The final judgment entered against the Company was approximately $36.5 million. The Company denies its fuel valve contributed to the fire. A motion for a new trial and other relief is pending before the trial court. A vigorous appeal of this judgment will be undertaken if the trial court denies relief. The Company believes that there are valid grounds to reverse the judgment on appeal. If successful, the appeal may alter or eliminate the amount of the existing judgment. While legal proceedings are subject to inherent uncertainty, the Company believes that it is reasonably possible that this award will be substantially altered or eliminated by the appellate court. Consequently, in the opinion of management and counsel, it is not possible to estimate the outcome of such uncertainty at this time. The Company will record a provision for any liability in this case, if and at the time that management and counsel conclude a loss is probable.
11. Related Party Transactions
Avery Cohen, a director of the Company, is a partner in Baker & Hostetler LLP, a law firm, which has served as general outside counsel for the Company since 1993 and is expected to continue to do so in the future. The Company paid $940, $1,082 and $721 in legal fees to Baker & Hostetler during 2003, 2002 and 2001, respectively.
See Note 6 to the Company’s consolidated financial statements for information on the Company’s related party transactions involving operating leases.
12. Segment Reporting
SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the 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 two reportable operating segments: Vehicle Management & Power Distribution and Control Devices. These reportable operating segments were determined based on the differences in the nature of the products offered. The Vehicle Management & Power Distribution operating segment produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices operating segment produces electronic and electromechanical switches, control actuation devices and sensors.
The accounting policies of the Company’s operating segments are the same as those described in Note 2, “Summary of Significant Accounting Policies.” The Company evaluates the performance of its operating segments based primarily on revenues from external customers, net income and capital expenditures. Intersegment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.
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A summary of financial information by reportable operating segment is as follows:
Sales from external customers
Intersegment sales
Total net sales
40
Net (loss) income
(Benefit) provision for income taxes
The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:
Net Sales:
North America
Europe and other
Non-Current Assets:
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13. Guarantor Financial Information
The senior notes and the credit facility are fully and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future domestic wholly owned subsidiaries (Guarantor Subsidiaries). The Company’s non-U.S. subsidiaries did not guarantee the senior notes and the credit facility (Non-Guarantor Subsidiaries).
Presented below are summarized condensed consolidating financial statements of the Parent (which include certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis, as of December 31, 2003, 2002, and 2001 and for the years then ended.
These summarized condensed consolidating financial statements are prepared on the equity method. Separate financial statements for the Guarantor Subsidiaries are not presented based on management’s determination that they do not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below.
Non-Guarantor
Subsidiaries
Prepaid expenses, intercompany and other
Investment in subsidiaries
Shareholders’ Equity
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Supplemental condensed consolidating financial statements (continued):
43
Equity earnings from subsidiaries
Income Before Income Taxes
Net Income
(Loss) Income Before Income Taxes and Cumulative Effect of Accounting Change
(Benefit) Provision for income taxes
Net (Loss) Income
44
Operating Income (Loss)
(Loss) Income Before Income Taxes
Net cash used for investing activities
Net cash used for financing activities
45
Net repayments under revolving facilities
Net borrowings (repayments) under revolving facilities
46
14. Unaudited Quarterly Financial Data
The following is a condensed summary of actual quarterly results of operations for 2003 and 2002:
Net sales
Operating income (B)
Net income (B)
Basic net income per share (D)
Diluted net income per share (D)
Income before cumulative effect of accounting change (C)
Net income (loss) (C)
Basic income before cumulative effect of accounting change per share (D)
Diluted income before cumulative effect of accounting change per share (D)
Operating income as originally reported
Share-based compensation expense
Operating income as restated
Net income as originally reported
Tax effect on share-based compensation
Net income as restated
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We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Stoneridge, Inc. and Subsidiaries included in this Form 10-K, and have issued our report thereon dated January 22, 2002. Our audits were made for the purpose of forming an opinion on those financial statements taken as a whole. The schedule on page 45 is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance atBeginning
of Period
Balance atEnd
Allowance for doubtful accounts:
Year ended December 31, 2001
Year ended December 31, 2002
Year ended December 31, 2003
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no disagreement between the management of the Company and its independent auditors on any matter of accounting principles or practices of financial statement disclosures, or auditing scope or procedure.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, 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 CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2003.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference to the information under the heading or subheadings “Election of Directors,” “Audit Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 10, 2004, and the information under the heading “Executive Officers” in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to the information under the heading “Executive Compensation” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 10, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 (other than the information required by Item 201(d) of Regulation S-K) is incorporated by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 10, 2004. The information required by Item 201(d) of Regulation S-K is set forth in Item 5 of this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to the information under the heading “Certain Relationships and Related Transactions” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 10, 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated by reference to the information under the heading “Other Matters” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 10, 2004.
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PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. Consolidated Financial Statements:
2. Financial Statement Schedule:
Report of Independent Public Accountants for the Years Ended December 31, 2001
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(b) The following reports on Form 8-K were filed during the quarter ended December 31, 2003.
(c) The exhibits listed on the Index to Exhibits are filed with this Form 10-K or incorporated by reference as set forth below.
(d) Additional Financial Statement Schedules.
None.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
Date: March 15, 2004
/s/ KEVIN P. BAGBY
(Principal Financial and Accounting Officer)
Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ D.M. DRAIME
Chairman of the Board of Directors, Interim President and Chief Executive Officer
(Principal Executive Officer)
/s/ AVERY S. COHEN
Secretary and Director
/s/ RICHARD E. CHENEY
Richard E. Cheney
Director
/s/ JOHN C. COREY
John C. Corey
/s/ SHELDON J. EPSTEIN
Sheldon J. Epstein
/s/ WILLIAM M. LASKY
William M. Lasky
/s/ EARL L. LINEHAN
Earl L. Linehan
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INDEX TO EXHIBITS
Exhibit