UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
Commission file number 001-13337
STONERIDGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio
34-1598949
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
9400 East Market Street, Warren, Ohio
44484
(Address of Principal Executive Offices)
(Zip Code)
(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 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
The number of Common Shares, without par value, outstanding as of May 13, 2003 was 22,402,311.
STONERIDGE, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
2
Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002
3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
4
Notes to Condensed Consolidated Financial Statements
5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3. Quantitative and Qualitative Disclosure About Market Risk
17
Item 4. Controls and Procedures
Part II Other Information
18
Signatures
19
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
20
Exhibit Index
22
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, 2003
December 31, 2002
(Unaudited)
(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
22,172
27,235
Accounts receivable, net
93,487
79,342
Inventories, net
46,905
51,139
Prepaid expenses and other
9,528
12,055
Deferred income taxes
6,391
5,904
Total current assets
178,483
175,675
PROPERTY, PLANT AND EQUIPMENT, net
109,826
111,838
OTHER ASSETS:
Goodwill
255,292
Investments and other, net
28,993
28,322
TOTAL ASSETS
572,594
571,127
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
2,018
1,992
Accounts payable
49,920
43,151
Accrued expenses and other
52,701
45,070
Total current liabilities
104,639
90,213
LONG-TERM LIABILITIES:
Long-term debt, net of current portion
228,274
248,918
16,771
15,278
Other liabilities
790
816
Total long-term liabilities
245,835
265,012
SHAREHOLDERS’ EQUITY:
Preferred shares, without par value, 5,000 authorized, none issued
—
Common shares, without par value, 60,000 authorized, 22,402 and 22,399 issued and outstanding at March 31, 2003 and December 31, 2002, respectively, with no stated value
Additional paid-in capital
141,540
141,516
Retained earnings
84,384
77,379
Accumulated other comprehensive loss
(3,804
)
(2,993
Total shareholders’ equity
222,120
215,902
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
The accompanying notes to the condensed consolidated financial statements arean integral part of these condensed consolidated balance sheets.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands except for per share data)
For the three months ended March 31,
2003
2002
NET SALES
159,559
157,744
COSTS AND EXPENSES:
Cost of goods sold
118,634
118,462
Selling, general and administrative expenses
23,276
21,638
OPERATING INCOME
17,649
17,644
Interest expense, net
7,161
8,622
Other (income) expense, net
(175
100
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
10,663
8,922
Provision for income taxes
3,658
3,345
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
7,005
5,577
Cumulative effect of accounting change, net of tax
(69,834
NET INCOME (LOSS)
(64,257
BASIC NET INCOME (LOSS) PER SHARE:
Income before cumulative effect of accounting change, net of tax
0.31
0.25
(3.12
Basic net income (loss) per share
(2.87
WEIGHTED AVERAGE SHARES OUTSTANDING
22,402
22,399
DILUTED NET INCOME (LOSS) PER SHARE:
(3.11
Diluted net income (loss) per share
(2.86
22,600
22,486
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities-
Depreciation and amortization
5,857
5,709
1,104
1,693
Equity in (earnings) loss of unconsolidated subsidiaries
(261
11
Loss on sale of fixed assets
38
69,834
Changes in operating assets and liabilities-
(13,975
(13,835
Inventories
4,388
1,848
534
3,542
Other assets, net
(792
(1,505
6,662
3,917
9,462
7,238
Net cash provided by operating activities
20,022
14,195
INVESTING ACTIVITIES:
Capital expenditures
(4,357
(4,249
Proceeds from sale of fixed assets
182
Other, net
(2
Net cash used for investing activities
(4,177
(4,247
FINANCING ACTIVITIES:
Repayments of long-term debt
(20,992
(8,514
Net borrowings (repayments) under revolving credit facilities
26
(887
Net cash used for financing activities
(20,966
(9,401
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
58
(80
NET CHANGE IN CASH AND CASH EQUIVALENTS
(5,063
467
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
4,369
CASH AND CASH EQUIVALENTS AT END OF PERIOD
4,836
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Commission’s rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company’s 2002 Annual Report to Shareholders.
The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.
2.
Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 71% and 73% of the Company’s inventories at March 31, 2003 and December 31, 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:
Raw materials
24,911
28,157
Work in progress
10,021
10,229
Finished goods
12,413
13,313
LIFO reserve
(440
(560
Total
3.
The Company uses derivative financial instruments to reduce exposure to market risk resulting from fluctuations in interest rates and currency rates. The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest.
The Company has foreign currency forward contracts to purchase $11.2 million of Swedish krona and British pounds to satisfy krona and pound denominated debt obligations. The estimated fair value of these forward contracts at March 31, 2003, per quoted market sources, was $11.2 million. The contracts are marked to market through earnings.
4.
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
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 no additional impairment was recognized.
Vehicle Management & Power Distribution
Control Devices
Goodwill balance at January 1, 2002
31,800
313,592
345,392
Cumulative effect of accounting change
(31,800
(58,300
(90,100
Goodwill balance at December 31, 2002
There was no change in the carrying value of goodwill by reportable operating segment during the first quarter of 2003.
The transitional goodwill impairment analysis mentioned above was completed during the second quarter of 2002; however, the cumulative effect charge was effective as of January 1, 2002. Therefore, the first quarter 2002 net income is restated as follows:
Net income, as originally reported
Net loss, as restated
The Company had the following intangible assets subject to amortization at March 31, 2003 and December 31, 2002, respectively:
Patents:
Gross carrying amount
2,779
Accumulated amortization
1,313
1,243
Net carrying amount
1,466
1,536
Aggregate amortization expense on patents was $70 for the quarter ended March 31, 2003. Estimated annual amortization expense is $279 for 2003-2006, $212 for 2007 and $210 for 2008.
5.
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. Any gain or loss on an extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion 30 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 as a result of the early extinguishment of debt which occurred in the second quarter of 2002, will be reclassified as a component of income from continuing operations in the financial statements for the quarter ending June 30, 2003.
6.
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
6
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.
7.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” as an amendment to SFAS 123. SFAS 148 provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS 148 effective December 31, 2002. The transition provisions do not currently affect the Company’s consolidated financial statements.
The Company has adopted the disclosure-only provisions of SFAS 123, “Accounting for Stock-Based Compensation.” The Company continues to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its employee share options. Because the exercise price of the Company’s employee share options equaled the market price of the shares on the date of grant, no compensation expense has been recorded.
The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.
March 31, 2002
Net income (loss), as reported
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards
246
326
Pro forma net income (loss)
6,759
(64,583
Net income (loss) per share:
Basic – as reported
Basic – pro forma
0.30
(2.88
Diluted – as reported
Diluted – pro forma
8.
Other comprehensive (loss) income includes foreign currency translation adjustments and derivative transactions, net of related tax. Comprehensive income (loss) consists of the following:
Other comprehensive (loss) income
(811
593
Comprehensive income (loss)
6,194
(63,664
7
9.
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 (of which $29.0 million was outstanding at March 31, 2003) with a bank group. The credit agreement has the following components: a $100.0 million revolving facility (of which $96.5 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 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, as defined. 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. During the first quarter of 2003, the Company prepaid $20.0 million of the term facility and during 2002 the Company prepaid $50.0 million of the term facility.
Long-term debt consists of the following:
11 ½% Senior notes, due 2012
200,000
Borrowings under credit agreement
29,000
49,250
Borrowings payable to foreign banks
1,021
1,108
Other
271
552
230,292
250,910
Less: Current portion
10.
The Company presents basic and diluted net income (loss) per share 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:
Three Months Ended March 31,
Basic weighted average shares outstanding
Effect of dilutive securities
198
87
Diluted weighted average shares outstanding
8
11.
SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” established 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,” of the Company’s December 31, 2002 Form 10-K. 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.
A summary of financial information by reportable operating segment is as follows:
Eliminations
Consolidated
Sales from external customers
69,777
89,782
Intersegment sales
3,738
496
(4,234
Total net sales
73,515
90,278
Net income
1,658
5,347
2,003
3,233
5,236
1,017
6,144
866
2,792
2,029
2,328
4,357
Total assets
141,343
431,251
9
62,640
95,104
2,855
332
(3,187
65,495
95,436
Net loss
(31,672
(32,585
1,960
3,121
5,081
1,222
7,400
77
3,268
(38,034
1,900
2,349
4,249
180,702
499,324
680,026
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
128,759
133,157
Europe and other
30,800
24,587
Non-Current Assets:
342,676
344,450
51,435
51,002
394,111
395,452
10
12.
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 March 31, 2003 and December 31, 2002, and for the three months ended March 31, 2003 and 2002.
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.
Parent
Guarantor Subsidiaries
Non-Guarantor Subsidiaries
11,328
23
10,821
43,414
33,108
20,456
(3,491
21,070
12,180
13,655
(196,626
181,221
24,933
3,756
2,822
(187
(117,058
229,354
69,678
54,387
32,949
22,490
234,701
20,591
38,971
603
398
(10,979
Investment in subsidiaries
304,063
(304,063
515,064
283,497
92,566
(318,533
1,000
1,018
22,382
16,966
14,004
(3,432
25,574
10,487
16,699
(59
48,956
27,453
31,721
228,002
11,251
15,986
3,836
(3,051
243,988
8,990
SHAREHOLDERS’ EQUITY
252,208
51,855
Supplemental condensed consolidating financial statements (continued):
18,698
167
8,370
35,941
30,295
16,137
(3,031
23,940
13,346
13,853
(175,807
168,489
19,373
3,051
3,043
(190
(94,177
215,340
57,543
PROPERTY, PLANT AND EQUIPMENT, NET
55,714
33,875
22,249
40,514
507
914
(13,613
287,092
(287,092
523,844
270,313
80,706
(303,736
992
19,025
16,864
10,219
(2,957
24,521
5,423
15,200
(74
44,546
22,287
26,411
247,565
14,966
15,498
3,879
(4,099
333
483
263,396
11,350
244,147
42,945
12
For the three months ended March 31, 2003
69,588
55,700
39,758
(5,487
55,803
38,931
29,387
10,426
7,757
5,093
3,359
9,012
5,278
7,060
101
(996
821
Equity earnings from subsidiaries
(9,211
9,211
INCOME BEFORE INCOME TAXES
6,506
8,191
5,177
(Benefit) Provision for income taxes
(499
2,810
1,347
NET INCOME
5,381
3,830
For the three months ended March 31, 2002
69,631
60,082
32,619
(4,588
53,351
43,156
26,543
9,053
7,560
5,025
7,227
9,366
1,051
8,439
183
(444
544
30,381
(30,381
(LOSS) INCOME BEFORE INCOME TAXES
(31,149
8,822
868
(250
3,088
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
(30,899
5,734
361
(33,358
(4,701
(31,775
NET (LOSS) INCOME
1,033
(31,414
13
14,618
857
7,184
(2,637
(1,780
(1,001
(1,576
171
(5
(1,774
(1,402
(20,214
(3,415
2,637
Net borrowings under revolving credit facilities
(3,389
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
(7,370
(144
2,451
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
9,813
2,692
1,607
83
(1,339
(2,678
(232
(29
(403
434
(1,368
(635
(9,798
1,801
(517
695
(1,582
(9,103
219
(658
14
1,111
714
29
3,626
56
43
4,737
13.
Certain prior year amounts have been reclassified to conform to their 2003 presentation in the condensed consolidated financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 2003 Compared To Three Months Ended March 31, 2002
Net Sales. Net sales for the first quarter of 2003 increased by $1.9 million, or 1.2%, to $159.6 million from $157.7 million for the same period in 2002. The increase in sales was primarily due to increased content per vehicle within the commercial vehicle market.
Sales for the first quarter of 2003 for North America decreased $4.4 million to $128.8 million from $133.2 million for the same period in 2002. North American sales accounted for 80.7% of total sales for the first quarter of 2003 compared with 84.4% for the same period in 2002. An exited product line primarily accounted for the reduction in North American sales. Sales for the first quarter of 2003 outside North America increased $6.2 million to $30.8 million from $24.6 million for the same period in 2002. Sales outside North America accounted for 19.3% of total sales for the first quarter of 2003 compared with 15.6% for the same period in 2002. The increase in sales outside North America were primarily attributable to favorable currency exchange rates.
Net sales for the Vehicle Management & Power Distribution operating segment were $73.5 million for the first quarter of 2003 as compared to $65.5 million for the corresponding period in 2002. Increased content per vehicle and favorable currency exchange rates positively impacted first quarter results. Net sales for the Control Devices operating segment were $90.3 million for the first quarter of 2003 as compared to $95.4 million for the corresponding period in 2002. An exited product line primarily accounted for the reduction in sales.
Cost of Goods Sold. Cost of goods sold for the first quarter of 2003 increased by $0.1 million, or 0.1 %, to $118.6 million from $118.5 million in the first quarter of 2002. As a percentage of sales, cost of goods sold decreased to 74.4% from 75.1% in 2002. The improvement as a percent of sales was primarily attributable to moving production to low cost locations, as well as 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. Selling, general and administrative (SG&A) expenses increased by $1.7 million to $23.3 million in the first quarter of 2003 from $21.6 million for the same period in 2002. As a percentage of sales, SG&A expenses increased to 14.6% for the first quarter of 2003 from 13.7% for the same period in 2002. The increase in SG&A expenses was primarily due to the restoration of certain benefits that were eliminated in the prior year.
Interest Expense, net. Interest expense for the first quarter was $7.2 million and $8.6 million in 2003 and 2002, respectively. Average outstanding indebtedness was $244.0 million and $287.3 million for the first three months of 2003 and 2002, respectively.
Other (Income) Expense, net. Other (income) expense, which primarily represented equity (income) losses of unconsolidated subsidiaries, was $(0.2) million and $0.1 million for the quarters ended March 31, 2003 and 2002, 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 $1.8 million for the first quarter of 2003 to $10.7 million from $8.9 million in 2002.
Provision for Income Taxes. The Company recognized provisions for income taxes of $3.7 million, or 34.3% of pre-tax income and $3.3 million, or 37.5% of pre-tax income for federal, state and foreign income taxes for the first quarter of 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to the fact that non-U.S. pre-tax income, which is taxed at a lower rate than U.S. income, in the first quarter of 2003, was higher than in the first quarter of 2002. Ongoing tax planning initiatives also contributed to the decrease.
Income Before Cumulative Effect of Accounting Change. As a result of the foregoing, income before cumulative effect of accounting change increased by $1.4 million for the first quarter of 2003 to $7.0 million from $5.6 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 of goodwill as of October 1, 2002 and no additional impairment was recognized. See Note 4 to the Company’s consolidated financial statements for more information on the Company’s application of this new accounting standard.
Net Income (Loss). As a result of the foregoing, net income increased by $71.3 million to $7.0 million for the first quarter of 2003 from a net loss of $(64.3) million in 2002.
Liquidity and Capital Resources
Net cash provided by operating activities was $20.0 million and $14.2 million for the quarters ended March 31, 2003 and 2002, respectively. The increase in net cash from operating activities of $5.8 million was primarily attributable to a combination of lower levels of working capital and an increase in net income.
Net cash used for investing activities was $4.2 million for each of the quarters ended March 31, 2003 and 2002, respectively, and primarily related to capital expenditures.
Net cash used for financing activities was $21.0 million and $9.4 million for the quarters ended March 31, 2003 and 2002, respectively. Improved cash flows from operations for the quarter ended March 31, 2003 were used primarily to pay down outstanding debt.
The Company has entered into foreign currency forward contracts to purchase $11.2 million of Swedish krona and British pounds to satisfy krona and pound denominated debt obligations. The estimated fair value of these forward contracts at March 31, 2003, per quoted market sources, was $11.2 million. The contracts are marked to market through earnings and are not accounted for using hedge accounting. 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 March 31, 2003:
Contractual Obligations:
Less than 1 year
1 – 3 years
4 – 5 years
After 5 years
Long-term debt
2,274
2,000
224,000
Operating leases
10,185
4,137
4,353
1,646
49
Total contractual obligations
240,477
6,155
6,627
3,646
224,049
Management 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 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.
16
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:
•
the loss of a major customer;
a decline in automotive, medium- and heavy-duty truck, agricultural or off-highway vehicle production;
a decline in general economic conditions in any of the various countries in which the Company operates;
labor disruptions at the Company’s facilities or at any of the Company’s significant customers or suppliers;
the ability of the Company’s suppliers to supply it with parts and components at competitive prices on a timely basis;
the significant amount of debt and the restrictive covenants contained in the Company’s credit facility;
customer acceptance of new products;
capital availability or costs, including changes in interest rates or market perceptions of the Company;
changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
the impact of laws and regulations, including environmental laws and regulations; and
the occurrence or non-occurrence of circumstances beyond the Company’s control.
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 March 31, 2003, approximately 12.7% 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 $0.3 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 March 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 March 31, 2003. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2003.
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
(a)
Exhibits
99.1
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
99.2
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
(b)
Reports on Forms 8-K
On March 31, 2003, the Company filed a Current Report on Form 8-K reporting the Chief Executive Officer and Chief Financial Officer’s certification of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
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.
Date: May 13, 2003
/s/ CLOYD J. ABRUZZO
Cloyd J. Abruzzo
President and Chief Executive Officer
(Principal Executive Officer)
/s/ KEVIN P. BAGBY
Kevin P. Bagby
Vice President and Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
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:
(1)
I have reviewed this quarterly report on Form 10-Q of the Company;
(2)
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
(4)
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
(5)
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:
all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
(6)
The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Cloyd J. Abruzzo, President and Chief Executive Officer May 13, 2003
I, Kevin P. Bagby, Vice President and Chief Financial Officer, of Stoneridge, Inc. (the “Company”), certify that:
(d)
(e)
(f)
Kevin P. Bagby, Vice President and Chief Financial Officer May 13, 2003
21
EXHIBIT INDEX
Exhibit Number
Exhibit