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
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 October 28, 2004 was 22,760,666.
STONERIDGE, INC. AND SUBSIDIARIES
INDEX
Part I Financial Information
Part II Other Information
Signatures
Exhibit Index
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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, 22,759 (net of 7 treasury shares) and 22,459 issued and outstanding at September 30, 2004 and December 31, 2003, respectively, with no stated value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
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)
NET SALES
COSTS AND EXPENSES:
Cost of goods sold
Selling, general and administrative
OPERATING INCOME
Interest expense, net
Other income, net
INCOME BEFORE INCOME TAXES
Provision for income taxes
NET INCOME
BASIC NET INCOME PER SHARE
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING
DILUTED NET INCOME PER SHARE
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization
Equity earnings of unconsolidated subsidiaries
Loss on sale of fixed assets
Share based compensation
Changes in operating assets and liabilities-
Inventories
Other assets
Net cash provided by operating activities
INVESTING ACTIVITIES:
Capital expenditures
Proceeds from sale of fixed assets
Business acquisitions and other
Net cash used by investing activities
FINANCING ACTIVITIES:
Repayments of long-term debt
Net repayments under revolving credit facilities
Proceeds from exercise of share options
Other financing costs
Net cash used by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except for per share data, unless otherwise indicated)
The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year.
September 30,
2004
December 31,
2003
Raw materials
Work in progress
Finished goods
Less: LIFO reserve
Total
The Company uses derivative financial instruments to reduce exposure to market risks resulting from fluctuations in interest rates (swaps) and currency rates (forward contracts). The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. At September 30, 2004, the Company had no outstanding interest rate swaps.
The Company has entered into a foreign currency forward purchase contract with a notional value of 58.4 million of Swedish krona to reduce exposure related to the Company’s krona denominated receivables. The estimated fair value of this forward contract at September 30, 2004, per quoted market sources, was $(0.3) million. The contract is marked to market, with gains and losses recognized in the Condensed Consolidated Statement of Operations. The Company’s foreign currency forward purchase contract substantially offsets losses and gains on the underlying foreign denominated receivables.
5
Net income, as reported
Add: Share-based employee compensation expense included in reported net income, net of related tax effects
Deduct: Total share-based employee compensation expense determined under the fair value method for all awards, net of related tax effects
Pro forma net income
6
Net income per share:
Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma
Because the Company adopted the fair value method of SFAS 123 during the fourth quarter of 2003, but it was effective as of January 1, 2003, net income for the three and nine-month periods ended September 30, 2003 was restated as follows:
Three Months
EndedSeptember 30,2003
Net income, as originally reported
Share-based employee compensation expense
Net income, as restated
Basic net income per share, as originally reported
Basic net income per share, as restated
Diluted net income per share, as originally reported
Diluted net income per share, as restated
Other comprehensive income (loss):
Currency translation adjustments
Minimum pension liability adjustments
Unrealized gain on marketable securities
Amortization of terminated derivatives
Comprehensive income
7
exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.
In conjunction with the issuance of the senior notes, the Company also entered into a new $200.0 million credit agreement with a bank group. The credit agreement had the following components: a $100.0 million revolving facility (of which $96.2 million was available at September 30, 2004), which includes a $10.0 million swing line facility, and a $100.0 million term facility. The revolving facility expires on April 30, 2008 and requires a commitment fee of 0.375% to 0.500% on the unused balance. 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 0.25% to 1.25% or (ii) LIBOR plus a margin of 1.75% to 2.75%, 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 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined. The Company prepaid the entire outstanding balance of the term facility during 2003.
Long-term debt consists of the following:
11 1/2% Senior notes, due 2012
Other
Less: Current portion
Basic weighted-average shares outstanding
Effect of dilutive securities
Diluted weighted-average shares outstanding
Options to purchase 475 and 415 common shares at an average price of $16.56 and $16.97 per share were outstanding during the third quarter of 2004 and 2003, respectively, and options to purchase 475
8
and 488 common shares at an average price of $16.56 and $16.22 per share were outstanding during the first nine months of 2004 and 2003, respectively. These outstanding options were not included in the computation of diluted earnings per share because their respective exercise prices were greater than the average market price of common shares and, therefore, their effect would have been anti-dilutive.
On January 15, 2004, a judgment was entered against the Company in the District Court (365th Judicial District) in Maverick County, Texas. The plaintiffs alleged in their complaint that a Stoneridge fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The plaintiffs are the parents of the decedent. The judgment entered against the Company was approximately $36.5 million. The Company denies its fuel valve contributed to the fire. The trial court denied a motion for a new trial and other relief. An appeal of this judgment has been filed. The Company believes that there are valid grounds to reverse the judgment on appeal. If successful, the appeal may alter or eliminate the amount of the existing judgment. While legal proceedings are subject to inherent uncertainty, the Company believes that it is reasonably possible that this award will be substantially altered or eliminated by the appellate court. Consequently, in the opinion of management and the Company’s legal counsel, it is not possible to estimate the outcome of such uncertainty at this time. The Company will record a provision for any liability in this case, if and at the time that management and counsel conclude a loss is probable. Based upon advice received from the Company’s legal counsel, the Company believes a loss resulting from this matter is not probable as of September 30, 2004. Even at full judgment, however, the Company’s exposure is significantly less than the $36.5 million mentioned above, as it has been mitigated with appropriate levels of insurance.
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, 2003 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.
9
A summary of financial information by reportable operating segment is as follows:
Sales from external customers
Intersegment sales
Total net sales
Net income (loss)
Provision (benefit) for income taxes
10
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,
Nine months
Net Sales:
North America
Europe and other
Non-Current Assets:
11
Presented below are summarized condensed consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis, as of September 30, 2004 and December 31, 2003, and for the three and nine months ended September 30, 2004 and 2003.
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.
Prepaid expenses, intercompany and other
Investment in subsidiaries
SHAREHOLDERS’ EQUITY
12
Supplemental condensed consolidating financial statements (continued):
PROPERTY, PLANT AND EQUIPMENT, NET
13
Selling, general and administrative expenses
Interest expense (income), net
Other (income) expense, net
Equity earnings from subsidiaries
(Benefit) Provision for income taxes
14
15
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, 2004 Compared To Nine Months Ended September 30, 2003
Net Sales. Net sales for the nine months ended September 30, 2004 increased by $63.0 million, or 13.8%, to $518.4 million from $455.4 million for the corresponding period in 2003. The increase in sales was primarily due to an increase in North American commercial vehicle production partially offset by a decline in traditional domestic North American light vehicle production. The Company’s sales were also impacted by favorable foreign currency exchange rates.
Net sales for the nine months ended September 30, 2004 for North America increased $52.0 million to $421.8 million from $369.8 million for the corresponding period in 2003. This increase was primarily due to increased sales to the commercial vehicle market. North American net sales accounted for 81.4% of total net sales for the first nine months of 2004 compared with 81.2% for the corresponding period in 2003. Net sales for the nine months ended September 30, 2004 outside North America increased $11.0 million to $96.6 million from $85.6 million for the corresponding period in 2003. The increase in net sales outside North America was primarily attributable to increased commercial vehicle production and also to favorable currency exchange rates. Net sales outside North America accounted for 18.6% of total net sales for the nine months ended September 30, 2004 compared with 18.8% for the corresponding period in 2003.
Sales for the Vehicle Management & Power Distribution operating segment, net of intercompany sales, were $266.8 million for the nine months ended September 30, 2004 as compared to $204.7 million for the corresponding period in 2003. The increase in sales was primarily attributable to an increase in commercial vehicle volume and, to a much lesser extent, favorable currency exchange rates. Sales for the Control Devices operating segment, net of intercompany sales, were $251.6 million for the nine months ended September 30, 2004 as compared to $250.7 million for the corresponding period in 2003. The increase in sales was attributable to increased commercial vehicle production and favorable foreign currency exchange rates partially offset by lower North American light vehicle production.
Cost of Goods Sold. Cost of goods sold for the first nine months of 2004 increased by $45.9 million, or 13.5%, to $385.7 million from $339.8 million in the first nine months of 2003. As a percentage of sales, cost of goods sold decreased to 74.4% from 74.6% for the first nine months of 2004 and 2003, respectively. This decrease as a percentage of sales was due to a combination of higher production volumes and the Company’s continued focus on Lean Manufacturing utilizing Six Sigma principles, offset by a shift in product mix, price reductions and higher raw material costs.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses for the nine months ended September 30, 2004 increased by $11.5 million to $82.8 million from $71.3 million in the first nine months of 2003. Included in SG&A expenses for the nine months ended September 30, 2004 and 2003 were product development expenses of $25.6 million and $20.7 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 instrument cluster products, and increased sales and marketing efforts. Sarbanes-Oxley implementation and severance related costs also impacted SG&A during 2004. As a percentage of sales, SG&A expenses increased to 16.0% for the first nine months of 2004 from 15.7 % for the corresponding period in 2003.
Interest Expense, net. Net interest expense for the first nine months of 2004 decreased by $2.1 million to $18.5 million in 2004 from $20.6 million in 2003. Average outstanding indebtedness was $200.3 million and $234.5 million for the first nine months of 2004 and 2003, respectively. The decrease in interest expense reflects the Company’s lower debt balance as well as interest income received during the second quarter of 2004 related to a tax refund.
17
Other income, net. Other income, which primarily represented equity earnings of unconsolidated subsidiaries and effects of foreign exchange, was $0.8 million and $0.2 million for the nine months ended September 30, 2004 and 2003, respectively.
Income Before Income Taxes. As a result of the foregoing, income before income taxes increased by $8.1 million for the first nine months of 2004 to $32.1 million from $24.0 million in 2003. Income before income taxes for the first nine months of 2004 for North America increased by $7.0 million to $25.6 million from $18.6 million for the corresponding period in 2003. Income before income taxes for the first nine months of 2004 outside North America increased by $1.1 million to $6.5 million from $5.4 million for the corresponding period in 2003.
Provision for Income Taxes. The Company recognized provisions for income taxes of $9.7 million, or 30.2% of pre-tax income, and $7.7 million, or 32.0% of pre-tax income, for federal, state and foreign income taxes for the first nine months of 2004 and 2003, respectively. The decrease in the effective tax rate was primarily attributable to a higher proportion of non-U.S. pre-tax income to global pre-tax income in 2004, as well as to the settlement of certain state refund claims. In general, the Company’s operations outside of the U.S. are taxed at a lower effective tax rate than the domestic operations in the U.S. The tax decreases were partially offset by the legislative expiration of certain U.S. tax credits in the third quarter of 2004, which were legislatively reinstated in the fourth quarter.
Net Income. As a result of the foregoing, net income increased by $6.1 million to $22.4 million for the first nine months of 2004 from $16.3 million in 2003.
Net income for the Vehicle Management & Power Distribution operating segment was $15.6 million and $4.3 million for the nine-month period ended September 30, 2004 and 2003, respectively. This increase was primarily attributable to increased commercial vehicle production, offset by a decrease in passenger vehicle and light truck production and higher commodity costs. This increase also includes a benefit due to favorable currency exchange rates. Net income for the Control Devices operating segment was $6.8 million and $12.0 million for the nine-month period ended September 30, 2004 and 2003, respectively. This decrease was primarily due to a decrease in passenger car and light truck production as well as price reductions, higher commodity costs, higher depreciation, launch costs and increased product development activities.
Three Months Ended September 30, 2004 Compared To Three Months Ended September 30, 2003
Net Sales. Net sales for the quarter ended September 30, 2004 increased by $23.5 million, or 16.7%, to $164.3 million from $140.8 million for the corresponding period in 2003. The increase in sales was primarily due to an increase in North American commercial vehicle production partially offset by a decline in traditional domestic North American light vehicle production. The Company’s sales were also impacted by favorable foreign currency exchange rates.
Net sales for the quarter ended September 30, 2004 for North America increased $19.0 million to $135.7 million from $116.7 million for the corresponding period in 2003. This increase was primarily due to an increase in sales to the commercial vehicle market. North American net sales accounted for 82.6% of total net sales for the third quarter ended September 30, 2004 compared with 82.9% for the corresponding period in 2003. Net sales for the third quarter of 2004 outside North America increased by $4.5 million to $28.6 million from $24.1 million for the corresponding period in 2003. This increase was primarily due to an increase in commercial vehicle volume as well as to favorable foreign currency exchange rates. Net sales outside North America accounted for 17.4% of total net sales for the third quarter of 2004 compared with 17.1% for the corresponding period in 2003.
Sales for the Vehicle Management & Power Distribution operating segment, net of intercompany sales, were $88.6 million for the third quarter of 2004 as compared to $64.7 million for the corresponding period in 2003. Increased commercial vehicle production and, to a much lesser extent, favorable currency
18
exchange rates, were the primary drivers behind this increase. Sales for the Control Devices operating segment, net of intercompany sales, were $75.7 million for the third quarter of 2004 as compared to $76.1 million for the corresponding period in 2003.
Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2004 increased by $18.3 million, or 17.2%, to $124.8 million from $106.5 million for the corresponding period in 2003. As a percentage of sales, cost of goods sold increased to 76.0% from 75.6% for the third quarter of 2004 and 2003, respectively. The increase as a percent of sales was primarily attributable to a change in product mix, price reductions and higher raw material costs, partially offset by a combination of higher production volumes and the Company’s continued focus on Lean Manufacturing utilizing Six Sigma principles.
Selling, General and Administrative Expenses. SG&A expenses for the quarter ended September 30, 2004 increased by $5.6 million to $28.9 million from $23.3 million in the third quarter of 2003. Included in SG&A expenses for the quarters ended September 30, 2004 and 2003 were product development expenses of $8.8 million and $6.8 million, respectively. As a percentage of sales, SG&A expenses increased to 17.6% for the third quarter of 2004 from 16.5% for the corresponding period in 2003. 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 instrument cluster products, and increased sales and marketing efforts. Sarbanes-Oxley implementation and severance related costs also impacted SG&A during the third quarter of 2004.
Interest Expense, net. Net interest expense for the third quarter of 2004 decreased by $0.8 million to $6.0 million from $6.8 million in 2003. Average outstanding indebtedness was $200.2 million and $229.5 million for the third quarter of 2004 and 2003, respectively. The decrease in interest expense reflects the Company’s lower debt balance.
Other income, net. Other income, which primarily represented equity earnings of unconsolidated subsidiaries and effects of foreign exchange, was $0.4 million for the three months ended September 30, 2004 and $0.2 million for the corresponding period in 2003.
Income Before Income Taxes. As a result of the foregoing, income before income taxes increased $0.4 million for the third quarter of 2004 to $4.9 million from $4.5 million in 2003. Income before income taxes for the third quarter of 2004 for North America increased by $0.7 million to $5.3 million from $4.6 million for the corresponding period in 2003. Loss before income taxes for the third quarter of 2004 outside North America increased by $0.3 million to $0.4 million from $0.1 million for the corresponding period in 2003.
Provision for Income Taxes. The Company recognized provisions for income taxes of $1.0 million, or 20.0% of pre-tax income, and $1.4 million, or 31.0% of pre-tax income, for federal, state and foreign income taxes for the third quarter of 2004 and 2003, respectively. The decrease in the effective tax rate was attributable to a higher proportion of non-U.S. pre-tax income to global pre-tax income in 2004, as well as to the settlement of certain state refund claims. In general, the Company’s operations outside of the U.S. are taxed at a lower effective tax rate than the domestic operations in the U.S. The tax decreases were partially offset by the legislative expiration of certain U.S. tax credits in the third quarter of 2004, which were legislatively reinstated in the fourth quarter.
Net Income. As a result of the foregoing, net income increased by $0.8 million to $3.9 million for the third quarter of 2004 from $3.1 million in 2003.
Net income for the Vehicle Management & Power Distribution operating segment was $5.3 million and $1.3 million for the three-month period ended September 30, 2004 and 2003, respectively. This increase was primarily attributable to increased commercial vehicle production, offset by a decrease in passenger vehicle and light truck production and higher commodity costs. This increase also includes a benefit due to favorable currency exchange rates. Net (loss) income for the Control Devices operating segment was $(1.4) million and $1.8 million for the three month period ended September 30, 2004 and 2003, respectively. This decrease was primarily due to a decrease in passenger car and light truck production as
19
well as price reductions, higher commodity costs, higher depreciation, launch costs and increased product development activities.
Liquidity and Capital Resources
Net cash provided by operating activities was $26.9 million and $51.0 million for the nine months ended September 30, 2004 and 2003, respectively. The decrease in net cash from operating activities of $24.1 million was primarily attributable to higher levels of working capital (principally accounts receivable, inventory and accounts payable) to support higher sales volumes.
Net cash used by investing activities was $18.8 million and $10.8 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in net cash used by investing activities of $8.0 million was primarily attributable to capital expenditures and also to the Company’s investment in an Indian joint venture.
Net cash used by financing activities was $0.1 million and $22.8 million for the nine months ended September 30, 2004 and 2003, respectively. Cash flows from operations for the first nine months of 2003 were used primarily to pay down outstanding debt.
The Company has entered into a foreign currency forward purchase contract with a notional value of 58.4 million of Swedish krona to reduce exposure related to the Company’s krona denominated receivables. The estimated fair value of this forward contract at September 30, 2004, per quoted market sources, was $(0.3) million. This forward contract is marked to market, with gains and losses recognized in the Condensed Consolidated Statement of Operations. The Company’s foreign currency forward purchase contract substantially offsets losses and gains on the underlying foreign denominated receivables. The Company does not use derivatives for speculative or profit-motivated purposes.
As disclosed in Note 11 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 Stoneridge fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The Company denies its fuel valve contributed to the fire. The judgment entered against the Company was approximately $36.5 million. An appeal of this judgment has been filed. While legal proceedings are subject to inherent uncertainty, the Company believes that it is reasonably possible that this award will be substantially altered or eliminated by the appellate court. Even at full judgment, however, the Company’s exposure is significantly less than the $36.5 million mentioned above, as it has been mitigated with appropriate levels of insurance.
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. As outlined in Note 8 to the Company’s condensed consolidated financial statements, the Company has a revolving credit facility of which $96.2 million was available at September 30, 2004. The Company also has $32.1 million in available cash, 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 impact their 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 they are not significantly exposed to adverse economic conditions.
20
Forward-Looking Statements
Portions of this report may contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company’s (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 September 30, 2004, however, substantially all of the Company’s 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 has determined that it currently is experiencing an increased risk particularly with respect to the purchase of copper, steel 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 impacted the Company’s operating results, and a continuation of such price increases could significantly impact 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, except for commodity price risk, since December 31, 2003, as reported in the 2003 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2004, 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, 2004.
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2004 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 or the financial position of the Company.
On January 15, 2004, a judgment was entered against the Company in the District Court (365th Judicial District) in Maverick County, Texas. The plaintiffs alleged in their complaint that a Stoneridge fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The plaintiffs are the parents of the decedent. The judgment entered against the Company was approximately $36.5 million. The Company denies its fuel valve contributed to the fire. The trial court denied a motion for a new trial and other relief. An appeal of this judgment has been filed. The Company believes that there are valid grounds to reverse the judgment on appeal. If successful, the appeal may alter or eliminate the amount of the existing judgment. While legal proceedings are subject to inherent uncertainty, the Company believes that it is reasonably possible that this award will be substantially altered or eliminated by the appellate court. Consequently, in the opinion of management and the Company’s legal counsel, it is not possible to estimate the outcome of such uncertainty at this time. The Company will record a provision for any liability in this case, if and at the time that management and counsel conclude a loss is probable. Based upon advice received from the Company’s counsel, the Company believes a loss resulting from this matter is not probable as of September 30, 2004. Even at full judgment, however, the Company’s exposure is significantly less than the $36.5 million mentioned above, as it has been mitigated with appropriate levels of insurance.
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
23
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.
Date: November 9, 2004
/s/ Gerald V. Pisani
Gerald V. Pisani
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Joseph M. Mallak
Joseph M. Mallak
Vice President and Chief Financial Officer
(Principal Financial and Chief
Accounting Officer)
25
EXHIBIT INDEX
Exhibit
26