SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
STONERIDGE, INC.
——————————————————————————
(Exact Name of Registrant as Specified in Its Charter)
(330) 856-2443
——————————————————————–
Registrant’s Telephone Number, Including Area Code
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 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 .
The number of Common Shares, without par value, outstanding as of November 14, 2002 was 22,399,311.
INDEX
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
The accompanying notes to the condensed consolidated financial statements are an integral part of these condensed consolidated 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)
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited)
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Unaudited)
7
8
9
A summary of financial information by reportable operating segment is as follows:
10
The Company primarily sells its products directly to automotive manufacturers. A substantial majority of the Company’s consolidated revenues are from four automotive manufacturing companies, which accounted for approximately 65% and 61% of the Company’s revenues for the nine months ended September 30, 2002 and 2001, respectively.
11
The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:
Three months ended September 30,
12
13
Supplemental condensed consolidating financial statements (continued):
14
15
16
17
ITEM 2. 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. 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 polices”- those most important to the financial presentation and those that require the most difficult, subjective or complex judgements.
Revenue Recognition and Sales Commitments - The Company recognizes revenues from the sale of products, net of costs of returns and allowances, 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 customer 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.
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; the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of 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 the amortization of goodwill on January 1, 2002. In lieu of amortization, the new 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 4 for more information on the Company’s application of this new accounting standard.
Results of Operations
Nine Months Ended September 30, 2002 Compared To Nine Months Ended September 30, 2001
Net Sales. Net sales for the nine months ended September 30, 2002 increased by $43.7 million, or 9.8%, to $488.2 million from $444.5 million for the corresponding period in 2001. Sales revenues for the first nine months were favorably impacted by increased North American light and commercial vehicle builds as well as new business awards.
18
Sales for the nine months ended September 30, 2002 in North America increased $34.0 million to $415.3 million from $381.3 million for the corresponding period in 2001. North American sales accounted for 85.1% of total sales for the first nine months of 2002 compared with 85.8% for the corresponding period in 2001. Sales for the nine months ended September 30, 2002 outside North America increased $9.8 million to $72.9 million from $63.1 million for the corresponding period in 2001. Sales outside North America accounted for 14.9% of total sales for the nine months ended September 30, 2002 compared with 14.2% for the corresponding period in 2001.
Net sales for the Vehicle Management & Power Distribution operating segment were $207.6 million for the first nine months of 2002 as compared to $189.4 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase. Net sales for the Control Devices operating segment were $291.2 million for the first nine months of 2002 as compared to $263.7 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase.
Cost of Goods Sold. Cost of goods sold for the first nine months of 2002 increased by $21.8 million, or 6.4%, to $361.2 million from $339.4 million in the first nine months of 2001. As a percentage of sales, cost of goods sold decreased to 74.0% from 76.4% for the first nine months of 2002 and 2001, respectively. The improvement as a percent of sales was primarily attributable to cost reduction programs and increased production volumes.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased by $9.0 million to $68.9 million in the first nine months of 2002 from $77.9 million for the corresponding period in 2001. As a percentage of sales, SG&A expenses decreased to 14.1% for the first nine months of 2002 from 17.5% for the corresponding period in 2001. The decrease was primarily attributable to the Company’s adopting the non-amortization of goodwill provisions of SFAS 142 on January 1, 2002. Goodwill amortization expenses for the first nine months of 2001was $7.4 million. Excluding the impact of goodwill amortization expense, SG&A decreased $1.6 million, or 2.3%, in the first nine months of 2002 compared to the corresponding period in 2001, primarily as a result of the Company’s cost cutting initiatives.
Interest Expense, net. Net interest expense for the first nine months of 2002 increased by $3.6 million to $26.2 million from $22.6 million in 2001, primarily due to an increase in the effective rate of interest resulting from the debt refinancing.
Other Expense, net. Other expense, which primarily represented equity losses of unconsolidated subsidiaries, was $0.3 million and $0.5 million for the nine months ended September 30, 2002 and 2001, respectively. These losses were predominately the result of foreign currency fluctuations.
Income Before Income Taxes. As a result of the foregoing, income before income tax increased by $27.6 million for the first nine months of 2002 to $31.7 million from $4.1million in 2001.
Provision for Income Taxes. The Company recognized provisions for income taxes of $11.5 million and $1.3 million for federal, state and foreign income taxes for the first nine months of 2002 and 2001, respectively.
Income Before Extraordinary Loss and Cumulative Effect of Accounting Change. As a result of the foregoing, income before extraordinary loss and cumulative effect of accounting change increased by $17.4 million to $20.2 million for the first nine months of 2002 from $2.8 million in 2001.
Income before extraordinary loss and cumulative effect of accounting change for the Vehicle Management & Power Distribution operating segment was $2.0 million for the first nine months of 2002 as compared to a net loss of $11.0 million for the corresponding period in 2001. The increase in net income was primarily due to ongoing cost reduction programs and increased production volumes. Income before extraordinary loss and cumulative effect of accounting change for the Control Devices operating segments was $18.2
19
million for the first nine months of 2002 as compared to $13.8 million for the corresponding period in 2001. The increase was primarily due to ongoing cost reduction programs and increased production volumes.
Extraordinary Loss, net of tax. The Company recognized a net of tax loss of $3.6 million during the first nine months of 2002 in connection with the early extinguishment of debt related to the Company’s debt refinancing.
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. As a result, the Company recorded as a cumulative effect of accounting change, a non-cash charge of $69.8 million, net of tax, to write off a portion of the carrying value of goodwill.
Three Months Ended September 30, 2002 Compared To Three Months Ended September 30, 2001
Net Sales. Net sales for the quarter ended September 30, 2002 increased by $22.1 million, or 16.2%, to $158.4 million from $136.4 million for the corresponding period in 2001. Sales revenues for the third quarter ended September 30, 2002 were favorably impacted by increased North American light and commercial vehicle production as well as new business awards.
Sales for the quarter ended September 30, 2002 in North America increased $20.0 million to $137.1 million from $117.1 million for the corresponding period in 2001. North American sales accounted for 86.5% of total sales for the third quarter ended September 30, 2002 compared with 85.9% for the corresponding period in 2001. Sales for the third quarter of 2002 outside North America increased by $2.1 million to $21.3 million from $19.2 million for the corresponding period in 2001. Sales outside North America accounted for 13.5% of total sales for the third quarter of 2002 compared with 14.1% for the corresponding period in 2001.
Net sales for the Vehicle Management & Power Distribution operating segment were $69.5 million for the third quarter of 2002 as compared to $57.0 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase. Net sales for the Control Devices operating segment were $92.7 million for the third quarter of 2002 as compared to $82.0 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase.
Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2002 increased by $12.7 million, or 12.0%, to $118.8 million from $106.1 million for the corresponding period in 2001. As a percentage of sales, cost of goods sold decreased to 75.0% from 77.8% for the third quarter of 2002 and 2001, respectively. The improvement as a percent of sales was primarily attributable to ongoing cost reduction programs and increased production volumes.
Selling, General and Administrative Expenses . SG&A expenses decreased by $2.0 million to $23.8 million in the third quarter of 2002 from $25.8 for the corresponding period in 2001. As a percentage of sales, SG&A expenses decreased to 15.0% for the third quarter of 2002 from 18.9% for the corresponding period in 2001. The decrease was primarily attributable to the Company’s adopting the non-amortization of goodwill provisions of SFAS 142 on January 1, 2002. Goodwill amortization expense for the third quarter of 2001 was $2.5 million. Excluding the impact of goodwill amortization expense, SG&A increased by $0.5 million, or 2.1%, in the third quarter of 2002.
Interest Expense, net. Net interest expense for the third quarter of 2002 increased by $2.2 million to $9.4 million from $7.2 million in the corresponding period of 2001. The increase was primarily attributable to an increase in the effective rate of interest resulting from the debt refinancing.
20
Other Expense, net. Other expense, which primarily represented equity losses of unconsolidated subsidiaries, was $0.3 million for the third quarter of 2001 and was predominately the result of foreign currency fluctuations.
Income (Loss) Before Income Taxes. As a result of the foregoing, income (loss) before income taxes increased to income of $6.4 million from a loss of $3.0 million for the third quarter of 2002 and 2001, respectively.
Provision (Benefit) for Income Taxes. The Company recognized a provision for income taxes of $2.2 and a benefit for income taxes of $1.2 million for federal, state and foreign income taxes for the third quarter of 2002 and 2001, respectively.
Net Income (Loss). As a result of the foregoing, net income increased by $6.0 million to $4.2 million of income for the third quarter of 2002 from a $1.8 million loss for the corresponding period in 2001.
Net income was $0.5 million for the Vehicle Management & Power Distribution operating segment for the third quarter of 2002, as compared to a net loss of $5.5 million for the corresponding period in 2001. The increase in net income was primarily due to ongoing cost reduction programs and increased production volumes. Net income for the Control Devices operating segment remained steady at $3.7 million for the third quarter of 2002 and 2001.
Liquidity and Capital Resources
Net cash provided by operating activities was $68.0 million and $32.6 million for the nine months ended September 30, 2002 and 2001, respectively. The increase in operating cash flow was primarily attributable to lower working investment and higher operating income.
Net cash used by investing activities was $9.6 million and $20.6 million for the nine months ended September 30, 2002 and 2001, respectively, and primarily related to capital expenditures. Lower capital expenditures were the predominant factor behind the reduction.
Net cash used by financing activities was $34.1 million and $13.2 million for the nine months ended September 30, 2002 and 2001, respectively. The $20.9 million increase was due to higher debt repayment rates and debt issuance costs associated with our debt refinancing. In the third quarter of 2002, the Company prepaid $30.0 million of its $100.0 million term debt.
The Company has a new $200.0 million credit agreement (of which $69.5 million was outstanding at September 30, 2002) with a bank group. The credit agreement has the following components: a $100.0 million revolving facility (of which $97.8 million is currently available) including 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 same rate as the revolving facility. The term facility expires on April 30, 2008. Interest is 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. As mentioned above, during the third quarter of 2002, the Company prepaid $30.0 million of the term facility. The Company was in compliance with its covenants as of September 30, 2002.
On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes, the proceeds of which were used to repay existing debt. 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.
21
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.
The following table summarizes the Company’s cash outflows resulting from financial contracts and commitments:
Management 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 growth and operating needs.
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 they are not significantly exposed to adverse economic conditions.
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 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:
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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. At September 30, 2002, approximately 26.0% of the Company’s debt was variable rate debt. The Company believes that a 1.0% increase or decrease in the interest rate on variable rate debt could affect annual interest expense by approximately $0.7 million.
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 financial position.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, 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 September 30, 2002. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002.
23
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 or the financial position of the Company.
ITEM 2. CHANGES IN 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 AND REPORTS ON FORM 8-K
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
25
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002
I, Cloyd J. Abruzzo, President and Chief Executive Officer, of Stoneridge, Inc. (the “Company”), certify that:
/S/ Cloyd J. Abruzzo
Cloyd J. Abruzzo, President and Chief Executive Officer November 14, 2002
26
I, Kevin P. Bagby, Vice-President and Chief Financial Officer, of Stoneridge, Inc. (the “Company”), certify that:
/S/ Kevin P. Bagby
Kevin P. Bagby, Vice-President and Chief Financial Officer November 14, 2002
27