UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
STONERIDGE, INC.
(330) 856-2443
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 þ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
The number of Common Shares, without par value, outstanding as of May 2, 2005 was 23,182,141.
STONERIDGE, INC. AND SUBSIDIARIESINDEX
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
(in thousands except for per share data)
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
(in thousands except for per share data, unless otherwise indicated)
5
6
STONERIDGE, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
7
8
9
10
11
12
13
14
15
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is a leading, 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 first quarter of 2005 was affected by a number of challenging industry-wide issues, including intense competition, price reductions, higher commodity costs and global excess capacity by the Company’s major customers. The Company continuously works to address these challenges by implementing a broad range of initiatives aimed to improve operating performance.
As announced in January 2005, the Company is undertaking restructuring initiatives related to the rationalization of certain manufacturing facilities. This rationalization is a result of the Company’s cost reduction initiatives. In connection with this plan, the Company recorded restructuring charges of $2.1 million for the first quarter of 2005 and expects the total cost of this restructuring effort to be approximately $8.0 million. See Note 11 to the Company’s condensed consolidated financial statements for more information.
As announced in March 2005, the Company entered into a stock purchase agreement to acquire Vimercati, S.p.A. (“Vimercati”), an Italian full service switch products supplier for the automotive industry. The purchase price to acquire Vimercati was 24.9 million euros subject to post-closing adjustments, which are based upon Vimercati’s financial position at closing. In April 2005, a minority shareholder gave notice of his intent to exercise his pre-emptive right to match our offer. At this time, because of the exercise of the pre-emptive right, the Company does not expect to close the acquisition of Vimercati. See Note 3 to the Company’s condensed consolidated financial statements for more information.
The Company recognized net income for the first quarter of 2005 of $4.4 million, or $0.19 per diluted share, compared with $9.2 million, or $0.40 per diluted share, for the first quarter of 2004.
Significant factors inherent to the Company’s markets that could affect its full-year results in 2005 include customer production volume and profitability, as well as the Company’s ability to successfully execute its planned restructuring program, to recover commodity price increases, to implement planned productivity and cost reduction initiatives, and to successfully integrate potential acquisitions. The Company’s full-year results in 2005 also depend on conditions in the automotive and commercial vehicle industries, which are generally dependent on U.S. and global economies.
Results of Operations
The Company is organized based primarily on markets served and products produced. Under this organization structure, the Company’s operating segments have been aggregated into two reportable segments: Vehicle Management & Power Distribution and Control Devices. The Vehicle Management & Power Distribution reportable segment includes results of operations from the Company’s operations that primarily design and manufacture 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 reportable segment includes results of operations from the Company’s operations that primarily design and manufacture electronic and electromechanical switches, control actuation devices and sensors, and driver information systems.
17
Beginning in 2005, the Company changed from a calendar year end to a 52-53 week fiscal year end. The Company’s fiscal quarters are now comprised of 13-week periods and once every seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The first quarter of 2005 and 2004 ended on April 2 and March 31, respectively.
Three Months Ended April 2, 2005 Compared To Three Months Ended March 31, 2004
Net Sales. Net sales for each of the Company’s reportable segments, excluding intersegment sales, for the three months ended April 2, 2005 and March 31, 2004 are summarized in the following table:
The decrease in net sales for the Company’s Control Devices reportable segment during the first quarter of 2005 was primarily attributable to the decrease in lower North American light vehicle production and price reductions. The increase in net sales for the Company’s Vehicle Management & Power Distribution reportable segment was primarily due to an increase in commercial vehicle production partially offset by price reductions. Net sales were also favorably affected by foreign exchange rate fluctuations relative to the U.S. dollar, which increased sales by $1.9 million.
Net sales by geographic location for the three months ended April 2, 2005 and March 31, 2004 are summarized in the following table:
North American sales accounted for 77.7% of total net sales for the first quarter of 2005 compared with 81.0% for the first quarter of 2004. The decrease in North American sales was primarily attributable to decreased sales to the North American light vehicle market and price reductions. Sales outside North America accounted for 22.3% of total sales in 2005 compared with 19.0% in 2004. The increase in net sales outside North America was primarily attributable to increased commercial vehicle production and favorable currency exchange rates, partially offset by price reductions.
Cost of Goods Sold. Cost of goods sold for the first three months of 2005 increased by $7.4 million, or 5.8%, to $135.6 million from $128.2 million for the same period of 2004. As a percentage of sales, cost of goods sold increased to 75.0% in 2005 compared to 72.8% in 2004. This increase as a percentage of sales is predominately due to operational inefficiencies resulting from the Company’s restructuring efforts, price reductions required by the Company’s customers and higher commodity costs. The Company expects that these challenges will continue to affect its gross margin through the remainder of 2005.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased by $2.3 million to $30.4 million for the first three months of 2005 from $28.1 million for the first three months of 2004. Included in SG&A expenses for the first quarter of 2005 and 2004 were product development expenses of $11.1
18
million and $8.9 million, respectively. The increase in SG&A expenses reflects increased investment in the Company’s product development activities, which are focused on occupant safety, chassis, driveline and driver information products. As a percentage of sales, SG&A expenses increased to 16.8% for the first quarter of 2005 from 15.9 % for the first quarter of 2004.
Restructuring Charges. In January 2005, the Company announced that it would undertake restructuring initiatives related to the rationalization of certain manufacturing facilities. This rationalization is a result of the Company’s cost reduction initiatives. In connection with this plan, the Company recorded restructuring charges of $2.1 million for the quarter ended April 2, 2005, which include $1.8 million in severance costs and $0.3 million for asset impairments.
All restructuring charges, except for the asset impairments, will result in cash outflows. Severance costs relate to a reduction in workforce. Asset impairment charges relate primarily to the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Facility closure costs primarily relate to asset relocation and lease termination costs and other exit costs include miscellaneous expenditures associated with exiting business activities. Total restructuring costs, which are related to the Control Devices reportable segment, are expected to approximate $8.0 million, which includes $4.2 million of severance costs, $1.2 million of asset related impairment charges, $2.0 million of facility closure costs and $0.6 million of other exit costs.
Income Before Income Taxes. Income before income taxes, which is the primary profitability measure used by the Company’s chief executive officer, is summarized in the following table by reportable segment for the three months ended April 2, 2005 and March 31, 2004.
Income before income taxes for the first quarter of 2005 decreased by $12.0 million at the Control Devices reportable segment to $2.0 million from $14.0 million for the corresponding period in 2004, primarily as the result of restructuring activities, decreased North American light vehicle production, price reductions, higher commodity costs, and increased product development activities.
Income before income taxes for the first quarter of 2005 increased by $1.8 million at the Vehicle Management & Power Distribution reportable segment, primarily as the result of increased commercial vehicle production, offset by higher commodity costs, price reductions and increased product development activities.
Income before income taxes for the first quarter of 2005 for North America decreased by $5.2 million to $4.7 million from $9.9 million for the corresponding period in 2004. Income before income taxes for the first quarter of 2005 outside North America decreased by $0.9 million to $3.0 million from $3.9 million for the corresponding period in 2004. The decrease in the Company’s worldwide profitability was primarily due to the decrease in passenger car and light truck production, price reductions, operating inefficiencies related to restructuring efforts, higher commodity costs, and increased product development activities, partially offset by increased commercial vehicle production.
Provision for Income Taxes. The Company recognized a provision for income taxes of $3.3 million, or 43.0% of pre-tax income, and $4.6 million, or 33.1% of pre-tax income, for federal, state and foreign income taxes for the three months ended April 2, 2005 and March 31, 2004, respectively. The increase in the effective tax rate for the first quarter of 2005 compared to the first quarter of 2004 was attributable to the affect of foreign losses related to certain operations in the U.K. for which it is estimated that the tax benefit may not be realized. As a result, a valuation allowance was recorded in the first quarter.
19
Liquidity and Capital Resources
Net cash (used) provided by operating activities was $(5.3) million and $6.9 million for the quarters ended April 2, 2005 and March 31, 2004, respectively. The increase in net cash used by operating activities of $12.2 million was primarily due to a decrease in net income of $4.8 million and higher uses of cash for working capital requirements.
Net cash used by investing activities was $4.1 million and $4.8 million for the quarters ended April 2, 2005 and March 31, 2004, respectively, and related entirely to capital expenditures.
Net cash used by financing activities for the quarter ended March 31, 2004 was $0.6 million, and related almost entirely to share option activity.
As discussed in Note 5 to the Company’s condensed consolidated financial statements, the Company has entered into foreign currency forward contracts with a notional value of $18.0 million to reduce exposure related to the Company’s krona- and pound-denominated receivables. The estimated fair value of these contracts at April 2, 2005, per quoted market sources, was approximately $(0.2) million. The Company has entered into foreign currency option contracts with a notional value of $0.3 million to reduce the risk associated with the Company’s other known foreign currency exposures. The estimated fair value of these contracts at April 2, 2005, per quoted market sources, was approximately $(0.1) million. The foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other income. The option contracts are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of operating income. The Company’s forward foreign exchange and option contracts substantially offset gains and losses on the underlying foreign-denominated transactions. 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.
As discussed in Note 12 to the Company’s condensed consolidated financial statements, a judgment was entered against the Company on January 15, 2004 whereby the plaintiffs alleged in their complaint that a Company 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 judgment entered against the Company was approximately $36.5 million. The Company denied its fuel valve contributed to the fire and believed that there were valid grounds to reverse the judgment on appeal. An appellate hearing of this judgment was held during the first quarter of 2005. The Company has recently been advised that its legal counsel and the plaintiffs counsel have entered into a written agreement dated April 11, 2005 to settle this litigation. The court of appeals has been advised to abate its decision while the parties finalize the necessary documentation. When the documentation is complete, the parties will request that the court of appeals remand to the trial court. The trial court will be presented with a proposed order agreed to by both parties to enter a final judgment. The settlement amount is covered by the Company’s insurance.
Future capital expenditures are expected to increase as management targets specific growth opportunities 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 and senior notes will provide sufficient liquidity to meet the Company’s future growth and operating needs. As outlined in Note 9 to the Company’s condensed consolidated financial statements, the Company has a revolving credit facility of which $96.1 million was available at April 2, 2005. The Company also had $42.3 million in available cash at April 2, 2005, and believes it will have access to the debt and equity markets should the need arise.
Inflation and International Presence
Management believes that the Company’s operations have not historically been adversely affected by inflation; however, given the current economic climate and recent increases in certain commodity prices, management believes that a continuation of such price increases could significantly affect the Company’s
20
profitability. 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.
Forward-Looking Statements
Portions of this report 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:
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
From time to time, the Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At April 2, 2005, however, all of the Company’s outstanding debt was fixed-rate debt.
Commodity Price Risk
The Company’s risk related to commodity prices has historically not been material; however, given the current economic climate and the recent increases in certain commodity costs, the Company currently is experiencing an increased risk particularly with respect to the purchase of copper and resins. The Company is managing this risk through a combination of fixed-price agreements, staggered short-term contract maturities and commercial negotiations with its suppliers. The Company may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. At this time, the Company does not intend to use financial instruments to mitigate this risk. The recent increases in certain commodity costs have negatively affected the Company’s operating results, and a continuation of such price increases could significantly affect its profitability.
21
Foreign Currency Exchange Risk
The Company’s risks related to foreign currency exchange rates have historically not been material; however, given the current economic climate, the Company is monitoring this risk. The Company does not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries 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.
There have been no material changes to the Company’s exposures to market risk since December 31, 2004, as reported in the Company’s 2004 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
As of April 2, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (CEO) and chief financial officer (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 April 2, 2005.
There were no changes in the Company’s internal control over financial reporting during the quarter ended April 2, 2005 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in various legal proceedings, workers’ compensation and product liability disputes. The Company 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 Company 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 judgment entered against the Company was approximately $36.5 million. The Company denied its fuel valve contributed to the fire and believed that there were valid grounds to reverse the judgment on appeal. An appellate hearing of this judgment was held during the first quarter of 2005. The Company has recently been advised that its legal counsel and the plaintiff’s counsel have entered into a written agreement dated April 11, 2005 to settle this litigation. The court of appeals has been advised to abate its decision while the parties finalize the necessary documentation. When the documentation is complete, the parties will request that the court of appeals remand to the trial court. The trial court will be presented with a proposed order agreed to by both parties to enter a final judgment. The settlement amount is covered by the Company’s insurance.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused lthis report to be signed on its behalf by the undersigned thereunto duly authorized.
24
EXHIBIT INDEX
25