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 September 30, 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
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
The number of Common Shares, without par value, outstanding as of November 14, 2003 was 22,425,211.
STONERIDGE, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosure About Market Risk
Item 4.Controls and Procedures
Part II. Other Information
Signatures
Exhibit Index
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
2003
December 31,
2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net
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, 22,425 and 22,399 issued and outstanding at September 30, 2003 and December 31, 2002, respectively, with no stated value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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)
For the three months
ended September 30,
For the nine months
NET SALES
COSTS AND EXPENSES:
Cost of goods sold
Selling, general and administrative expenses
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:
Income before cumulative effect of accounting change
Basic net income (loss) per share
DILUTED NET INCOME (LOSS) PER SHARE:
Diluted net income (loss) per share
Basic Weighted Average Shares Outstanding
Diluted Weighted Average Shares Outstanding
The accompanying notes to the condensed consolidated financial statements
are an integral part of these condensed consolidated statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ended
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
Cumulative effect of accounting change
Changes in operating assets and liabilities-
Accounts receivable
Inventories
Other assets
Net cash provided by operating activities
INVESTING ACTIVITIES:
Capital expenditures
Proceeds from sale of fixed assets
Other
Net cash used by investing activities
FINANCING ACTIVITIES:
Proceeds from issuance of senior notes
Extinguishment of revolving facility
Extinguishment of term debt
Net repayments under revolving facilities
Proceeds from long-term debt
Repayments of long-term debt
Debt issuance costs
Interest rate swap termination costs
Proceeds from stock options exercised
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
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Raw materials
Work in progress
Finished goods
LIFO reserve
Total
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
5
Vehicle
Management
& Power
Distribution
Control
Devices
Goodwill balance at January 1, 2002
Goodwill balance at December 31, 2002
Nine months
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
6
Three months ended
Nine months ended
Net income (loss), as reported
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards
Pro forma net income (loss)
Net income (loss) per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
In January 2003, the FASB issued interpretation (FIN) 46, “Consolidation of Variable Interest Entities - 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 are
7
Other comprehensive (loss) income
Comprehensive income (loss)
8
11 1/2% Senior notes, due 2012
Borrowings under credit agreement
Borrowings payable to foreign banks
Less: Current portion
Three Months Ended
Nine Months Ended
Basic weighted average shares outstanding
Effect of dilutive securities
Diluted weighted average shares outstanding
9
A summary of financial information by reportable operating segment is as follows:
Sales from external customers
Intersegment sales
Total net sales
Net income
10
Net loss
The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:
Three months
Net Sales:
North America
Europe and other
Non-Current Assets:
11
Guarantor
Subsidiaries
Non-Guarantor
Investment in subsidiaries
SHAREHOLDERS’ EQUITY
12
Supplemental condensed consolidating financial statements (continued):
PROPERTY, PLANT AND EQUIPMENT, NET
13
Equity earnings from subsidiaries
INCOME BEFORE INCOME TAXES
(Benefit) Provision for income taxes
NET INCOME
INCOME (LOSS) BEFORE INCOME TAXES
14
Equity losses from subsidiaries
(LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
NET (LOSS) INCOME
15
Net cash used for investing activities
Net repayments under revolving credit facilities
Net cash used for 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
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 2003 Compared To Nine Months Ended September 30, 2002
Net Sales. Net sales for the nine months ended September 30, 2003 decreased by $32.8 million, or 6.7%, to $455.4 million from $488.2 million for the corresponding period in 2002. The decrease in sales was primarily due to lower vehicle production in the Company’s served markets and the reduced sales from an exited product line.
Sales for the nine months ended September 30, 2003 in North America decreased $45.5 million to $369.8 million from $415.3 million for the corresponding period in 2002. North American sales accounted for 81.2% of total sales for the first nine months of 2003 compared with 85.1% for the corresponding period in 2002. The decrease in sales was primarily due to lower light and commercial vehicle production in the Company’s served markets and the reduced sales from an exited product line. Sales for the nine months ended September 30, 2003 outside North America increased $12.7 million to $85.6 million from $72.9 million for the corresponding period in 2002. Sales outside North America accounted for 18.8% of total sales for the nine months ended September 30, 2003 compared with 14.9% for the corresponding period in 2002. The increase in sales outside North America was primarily attributable to favorable currency exchange rates.
Net sales for the Vehicle Management & Power Distribution operating segment were $215.0 million for the first nine months of 2003 as compared to $207.6 million for the corresponding period in 2002. Increased content per vehicle and favorable currency exchange rates positively impacted sales for the first nine months. Net sales for the Control Devices operating segment were $252.4 million for the first nine months of 2003 as compared to $291.2 million for the corresponding period in 2002. The decrease in sales was primarily due to lower light and commercial vehicle production in the Company’s served markets and the reduced sales from an exited product line.
Cost of Goods Sold. Cost of goods sold for the first nine months of 2003 decreased by $21.4 million, or 5.9%, to $339.8 million from $361.2 million in the first nine months of 2002. As a percentage of sales, cost of goods sold increased to 74.6% from 74.0% for the first nine months of 2003 and 2002, respectively. The increase as a percentage of sales was primarily attributable to lower sales levels.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased by $3.2 million to $70.9 million in the first nine months of 2003 from $67.7 million for the corresponding period in 2002. As a percentage of sales, SG&A expenses increased to 15.6% for the first nine months of 2003 from 13.9% for the corresponding period in 2002. The increase in SG&A expenses reflects increased investment in the Company’s design and development activities and increased sales and marketing efforts.
Interest Expense, net. Net interest expense for the first nine months of 2003 decreased by $5.6 million to $20.6 million from $26.2 million in 2002. Average outstanding indebtedness was $234.5 million and $292.9 million for the first nine months of 2003 and 2002, respectively. The decrease in interest expense reflects the Company’s lower debt balance as well as interest income of $0.3 million related to a tax refund recorded in the second quarter of 2003.
Loss on Extinguishment of Debt. The Company recognized a non-cash loss of $5.8 million during the first nine months of 2002 in connection with the early extinguishment of debt related to the Company’s debt refinancing.
Other (Income) Expense, net. Other (income) expense, which primarily represented equity (earnings) losses of unconsolidated subsidiaries and effects of foreign currency exchange, was $(0.2) million and $1.5 million for the nine months ended September 30, 2003 and 2002, respectively.
17
Income Before Income Taxes and Cumulative Effect of Accounting Change. As a result of the foregoing, income before income tax and cumulative effect of accounting change decreased by $1.5 million for the first nine months of 2003 to $24.3 million from $25.9 million in 2002.
Provision for Income Taxes. The Company recognized provisions for income taxes of $7.8 million, or 32.0% of pre-tax income, and $9.3 million, or 35.9% of pre-tax income, for federal, state and foreign income taxes for the first nine months of 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to tax refunds related to the completion of several 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.
Income Before Cumulative Effect of Accounting Change. As a result of the foregoing, income before cumulative effect of accounting change decreased to $16.5 million for the first nine months of 2003 from $16.6 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. 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 as of January 31, 2002. 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 the new accounting standard.
Net Income. As a result of the foregoing, net income increased by $69.8 million to $16.5 million for the first nine months of 2003 from a loss of $53.2 million in 2002.
Three Months Ended September 30, 2003 Compared To Three Months Ended September 30, 2002
Net Sales. Net sales for the quarter ended September 30, 2003 decreased by $17.6 million, or 11.1%, to $140.8 million from $158.4 million for the corresponding period in 2002. The decrease in sales was primarily due to lower vehicle build rates in the Company’s markets and the reduced sales from an exited product line.
Sales for the quarter ended September 30, 2003 in North America decreased $20.4 million to $116.7 million from $137.1 million for the corresponding period in 2002. North American sales accounted for 82.9% of total sales for the third quarter ended September 30, 2003 compared with 86.5% for the corresponding period in 2002. An exited product line and reduced production volumes in both the light and commercial vehicle markets accounted for the reduction in North American sales. Sales for the third quarter of 2003 outside North America increased by $2.8 million to $24.1 million from $21.3 million for the corresponding period in 2002. Sales outside North America accounted for 17.1% of total sales for the third quarter of 2003 compared with 13.5% for the corresponding period in 2002. The increase in sales outside North America was primarily attributable to favorable currency exchange rates.
Net sales for the Vehicle Management & Power Distribution operating segment were $68.2 million for the third quarter of 2003, as compared to $69.5 million for the corresponding period in 2002. Favorable currency exchange rates were more than offset by lower volumes in the Company’s markets. Net sales for the Control Devices operating segment were $76.7 million for the third quarter of 2003 as compared to $92.7 million for the corresponding period in 2002. The decrease in sales was primarily due to lower light and commercial vehicle production in the Company’s served markets and the reduced sales from an exited product line.
Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2003 decreased by $12.4 million, or 10.4%, to $106.5 million from $118.8 million for the corresponding period in 2002. As a percentage of sales, cost of goods sold increased to 75.6% from 75.0% for the third quarter of 2003 and 2002, respectively. The increase as a percentage of sales was primarily attributable to lower sales levels.
18
Selling, General and Administrative Expenses. SG&A expenses decreased by $0.2 million to $23.1 million in the third quarter of 2003 from $23.3 for the corresponding period in 2002. As a percentage of sales, SG&A expenses increased to 16.4% for the third quarter of 2003 from 14.7% for the corresponding period in 2002.
Interest Expense, net. Net interest expense for the third quarter of 2003 decreased by $2.6 million to $6.8 million from $9.4 million in the corresponding period of 2002. Average outstanding indebtedness was $229.5 million and $296.9 million for the third quarter of 2003 and 2002, respectively. The decrease in interest expense reflects the Company’s lower debt balance.
Other (Income) Expense, net. Other (income) expense, which primarily represented equity (earnings) losses of unconsolidated subsidiaries and effects of foreign exchange, was $(0.2) million for the third quarter of 2003 and $0.5 million for the corresponding period in 2002.
Income Before Income Taxes. As a result of the foregoing, income before income taxes decreased to $4.6 million from $6.4 million for the third quarter of 2003 and 2002, respectively.
Provision for Income Taxes. The Company recognized a provision for income taxes of $1.4 million, or 31.0% of pre-tax income, and $2.2 million, or 34.7% of pre-tax income, for federal, state and foreign income taxes for the third quarter of 2003 and 2002, respectively. The decrease in the effective tax rate was primarily due to tax refunds related to the completion of several 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.
Net Income. As a result of the foregoing, net income decreased by $1.0 million to $3.2 million for the third quarter of 2003 from $4.2 million for the corresponding period in 2002.
Liquidity and Capital Resources
Net cash provided by operating activities was $51.0 million and $68.0 million for the nine months ended September 30, 2003 and 2002, respectively. The reduction in cash provided by operating activities is primarily the result of a reduction in positive contribution from accrued expenses recorded in 2003 compared to 2002.
Net cash used by investing activities was $10.8 million and $9.6 million for the nine months ended September 30, 2003 and 2002, respectively. The increase in net cash used by investing activities of $1.2 million was primarily attributable to an increase in capital expenditures.
Net cash used by financing activities was $22.8 million and $34.1 million for the nine months ended September 30, 2003 and 2002, respectively, and primarily related to the reduction of the Company’s debt obligations in both periods.
The Company has entered into foreign currency forward purchase contracts with a notional value of $6.8 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 September 30, 2003, per quoted market sources, was $(0.6) 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. The Company does not use derivatives for speculative or profit-motivated purposes.
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.
19
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:
20
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, 2003, approximately 13.0% 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 $0.3 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 September 30, 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 September 30, 2003.
21
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
22
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: November 14, 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)
23
EXHIBIT INDEX
Exhibit
24