UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal year ended
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
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Registrant’s telephone number, including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
SRI |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | ◻ Yes ☒ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | ◻ Yes ☒ |
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.
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Indicate by mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | Non-accelerated filer ◻ | |
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). |
As of June 30, 2020, the aggregate market value of the registrant’s Common Shares held by non-affiliates of the registrant was approximately $
The number of Common Shares outstanding as of February 19, 2021 was
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2021, into Part III, Items 10, 11, 12, 13 and 14.
INDEX
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Forward-Looking Statements
Portions of this report on Form 10-K 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 may include statements regarding the intent, belief or current expectations of the Company, with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) operational expectations. Forward-looking statements may be identified by the words “will,” “may,” “should,” “designed to,” “believes,” “plans,” “projects,” “intends,” “expects,” “estimates,” “anticipates,” “continue,” and similar words and expressions. The forward-looking statements 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 impact of COVID-19, or other future pandemics, on the global economy, and on our customers, suppliers, employees, business and cash flows; |
| ● | the reduced purchases, loss or bankruptcy of a major customer or supplier; |
| ● | the costs and timing of business realignment, facility closures or similar actions; |
| ● | a significant change in automotive, commercial, off-highway, motorcycle or agricultural vehicle production; |
| ● | competitive market conditions and resulting effects on sales and pricing; |
| ● | the impact on changes in foreign currency exchange rates on sales, costs and results, particularly the Argentinian peso, Brazilian real, Chinese renminbi, euro, Mexican peso and Swedish krona; |
| ● | our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions; |
| ● | customer acceptance of new products; |
| ● | our ability to successfully launch/produce products for awarded business; |
| ● | adverse changes in laws, government regulations or market conditions, including tariffs, affecting our products or our customers’ products; |
| ● | our ability to protect our intellectual property and successfully defend against assertions made against us; |
| ● | liabilities arising from warranty claims, product recall or field actions, product liability and legal proceedings to which we are or may become a party, or the impact of product recall or field actions on our customers; |
| ● | labor disruptions at our facilities or at any of our significant customers or suppliers; |
| ● | business disruptions due to natural disasters or other disasters outside our control, such as the recent coronavirus outbreak; |
| ● | the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis, including the impact of potential tariffs and trade considerations on their operations and output; |
| ● | the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving credit facility; |
| ● | capital availability or costs, including changes in interest rates or market perceptions; |
| ● | the failure to achieve the successful integration of any acquired company or business; |
| ● | risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber attack and other similar disruptions; and |
| ● | the items described in Part I, Item IA (“Risk Factors”). |
The forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.
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PART I
Item 1. Business.
Overview
Founded in 1965, Stoneridge, Inc. (the “Company”) is a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets. Our products and systems are critical elements in the management of mechanical and electrical systems to improve overall vehicle performance, convenience and monitoring in areas such as safety and security, intelligence, efficiency and emissions. Our worldwide footprint is primarily comprised of 26 locations in 12 countries and enables us to supply global and regional automotive, commercial, off-highway, motorcycle, agricultural and other vehicle markets.
Our custom-engineered products and systems are used to activate equipment and accessories, monitor and display vehicle performance and control, distribute electrical power and signals and provide vehicle security and convenience. Our product offerings consist of actuators, sensors, switches and connectors, driver information systems, camera-based vision systems, connectivity and compliance products, electronic control units, vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions. We supply the majority of our products, predominantly on a sole-source basis, to many of the world’s leading automotive and commercial vehicle original equipment manufacturers (“OEMs”) and select non-vehicle OEMs, as well as certain automotive and commercial vehicle Tier 1 suppliers. Our customers are increasingly utilizing electronic technology to comply with more stringent regulations (particularly emissions and safety) and to meet end-user demand for improved vehicle performance and greater convenience. As a result of this trend, per-vehicle electronic content has been increasing. Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and systems for this trend.
Beginning with the divestiture of our wiring business in 2014, we accelerated a shift in our product portfolio towards smart products, or those products which contain embedded electronics or logic. While the wiring business was our largest single business, based on revenues and employees, and the business that the Company was founded on, it was largely a commodity that did not provide a technology platform to drive our expected future growth. In addition to the divestiture of the wiring business, we deployed capital in 2017 to make strategic investments including the acquisition of Orlaco, our partner on the development of MirrorEye, our camera-based vision system, and the acquisition of 100 percent of our Stoneridge Brazil business. In 2019, the Company sold the Control Devices Non-core Products business to further align with our strategic plan. These activities have acted as a catalyst for the advancement of our smart product portfolio, increasing our smart content from just over 50 percent of our sales in 2014 to almost 73% of our sales in 2020. Our product portfolio shift focuses on the megatrends driving the transportation industry.
In January 2019, the Company committed to a restructuring plan that resulted in the closure of the Canton, Massachusetts facility (“Canton Facility”) as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized $3.0 million and $12.5 million of expense as a result of these actions during the years ended December 31, 2020 and 2019, respectively. During the third quarter of 2020, we leased the Canton facility to a third party and are evaluating the sale of the facility. The Company expects additional costs to be immaterial related to the Canton Restructuring.
On April 1, 2019, the Company entered into an Asset Purchase Agreement and sold product lines and assets related to certain Control Devices non-core switches and connectors (the “Non-core Products”). The Non-core Products were manufactured in Juarez, Mexico and Canton, Massachusetts, and include ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components. See Note 2 to the consolidated financial statement for additional details regarding the disposal of Non-core Products.
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On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line (“PM Sensor Exit”). The decision to exit the PM sensor product line was made after the consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial and supplier settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM sensor production. We recognized $3.4 million of expense as a result of this initiative during the year ended December 31, 2020. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $2.8 million and $6.3 million and is related to employee severance and termination costs, contract terminations costs, other related costs such as potential commercial and supplier settlements and accelerated depreciation. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.
We have positioned each of our segments for continued long-term success. Our Control Devices segment is increasingly well positioned with a focus on continued development and commercialization of actuation and electrified powertrain applications that will drive future growth for the segment. Our Electronics segment is expected drive strong revenue growth through previously awarded new program launches including our first two launches for our MirrorEye® camera-based vision system in the OEM market, as well as our continued investment in current and future technologies. Our Stoneridge Brazil segment continues to integrate into our global Electronics strategy as we leverage our global engineering footprint and prepare for continued expansion of our local OEM presence. Overall, we will continue to focus our resources on the areas of largest opportunity for the Company and drive long-term value creation for our shareholders.
Segments and Products
We conduct our business in three reportable business segments which are the same as our operating segments: Control Devices, Electronics and Stoneridge Brazil.
Control Devices. Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as actuators, sensors, switches and connectors. Actuator products enable OEMs to deploy power functions in a vehicle and can be designed to integrate switching and control functions including our park lock and shift by wire products. Sensor products are employed in major vehicle systems such as the emissions, safety, powertrain, braking, climate control, steering and suspension systems. Switches and connectors transmit signals that activate specific functions. Our switch and connector technology is principally used in two capacities, user-activated and hidden. User-activated switches are used by a vehicle’s operator or passengers to manually activate in-vehicle accessories. Hidden switches are not typically visible to vehicle operators or passengers and are engaged to activate or deactivate selected functions as part of normal vehicle operations. We sell these products principally to the automotive market. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets.
Electronics. Our Electronics segment designs and manufactures driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. Driver information systems and connectivity and compliance products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled and driver messages related to vehicle performance. Camera-based vision products provide enhanced vehicle visibility to drivers. Electronic control units regulate, coordinate, monitor and direct the operation of the electrical system within a vehicle. These products are sold principally to the commercial vehicle market through both the OEM and aftermarket channels. In addition, camera-based vision systems are sold to the off-highway and commercial vehicle markets.
Stoneridge Brazil. Our Stoneridge Brazil segment, formerly referred to as “PST”, primarily serves the South American market and specializes in the design, manufacture and sale of vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions primarily for the automotive and motorcycle markets. This segment includes product lines such as vehicle monitoring and tracking devices, security alarms, convenience applications such as parking sensors and review view cameras, audio and infotainment systems and telematics products used for fleet management. These products improve the performance, safety and convenience features of our customers’ vehicles. Stoneridge Brazil sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers. In addition, monitoring services and tracking devices are sold directly to corporate and individual customers.
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Our products and systems are sold to numerous OEM and Tier 1 customers, as well as aftermarket distributors and mass merchandisers, for use on many different vehicle platforms. We supply multiple parts to many of our principal OEM and Tier 1 customers under requirements contracts for a particular vehicle model. These contracts range in duration from one year to the production life of the model, which commonly extends for three to seven years.
The following table sets forth for the periods indicated, the percentage of net sales derived from our principal end markets:
Year ended December 31 |
| 2020 |
| 2019 |
| 2018 | |
Automotive | 49 | % | 41 | % | 41 | % | |
Commercial vehicle | 30 | 33 | 33 | ||||
Off-highway and other | 14 | 18 | 17 | ||||
Aftermarket distributors, mass merchandisers and monitoring services | 7 | 8 | 9 | ||||
For further information related to our reportable segments and financial information about geographic areas, see Note 14 to the consolidated financial statements.
Production Materials
The principal production materials used in the Company’s manufacturing process are molded plastic components and resins, copper, steel, precious metals and certain electrical components such as printed circuit boards, semiconductors, microprocessors, memory devices, resistors, capacitors, fuses, relays, infotainment devices and cameras. We purchase production materials pursuant to both annual contract and spot purchasing methods. Such materials are available from multiple sources, but we generally establish collaborative relationships with a qualified supplier for each of our key production materials in order to lower costs and enhance service and quality. As global demand for our production materials increases, we may have difficulties obtaining adequate production materials from our suppliers to satisfy our customers. Refer to the Risk Factors for risks related to the current supply chain disruption related to semiconductors and other production materials. Any extended period of time for which we cannot obtain adequate production material or which we experience an increase in the price of production material would materially affect our results of operations and financial condition.
Patents, Trademarks and Intellectual Property
We maintain and have pending various U.S. and foreign patents, trademarks and other rights to intellectual property relating to the reportable segments of our business, which we believe are appropriate to protect the Company’s interests in existing products, new inventions, manufacturing processes and product developments. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or ability to compete.
Industry Cyclicality and Seasonality
The markets for products in each of our reportable segments have been cyclical. Because these products are used principally in the production of vehicles for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets, revenues and therefore results of operations, are significantly dependent on the general state of the economy and other factors, like the impact of environmental regulations on our customers and end market consumers, which affect these markets. A significant decline in automotive, commercial, off-highway, motorcycle and agricultural vehicle production of our principal customers could adversely impact the Company. Our Control Devices and Electronics and segments are typically not affected by seasonality, however the demand for our Stoneridge Brazil segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.
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Customers
We have several customers which account for a significant percentage of our sales. The loss of any significant portion of our sales to these customers, or the loss of a significant customer, would have a material adverse impact on our financial condition and results of operations. We supply numerous different products to each of our principal customers. Contracts with several of our customers provide for supplying their requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. These contracts are subject to potential renegotiation from time to time, which may affect product pricing and generally may be terminated by our customers at any time. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of our major customers would have a material adverse impact on the Company. We may enter into contracts to supply products, the introduction of which may then be delayed or cancelled. We also compete to supply products for successor models, and are therefore subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on our financial condition and results of operations.
Due to the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.
Backlog
The Company typically enters into customer agreements at the beginning of a vehicle life cycle with the intent to fulfill customer-purchasing requirements for the entire vehicle production life cycle. The vehicle life cycle usually includes the two to four year pre-production period and production for a term covering the life of such vehicle model or platform, generally between three to seven years, although there is no guarantee that this will occur. Our customers make no firm commitments regarding volume and may terminate these agreements or orders at any time. The Company’s estimated sourced future sales may also be impacted by various assumptions, including new program vehicle production levels, customer price reductions, foreign currency exchange rates and program launch timing. The Company’s customer agreements may be terminated by customers at any time and, accordingly, estimated sourced future sales information does not represent firm orders or firm commitments. The Company defines backlog as the estimated cumulative awarded sales for the next five years (or “estimated sourced future sales”). The Company’s estimated sourced future sales were $3.0 billion as of December 31, 2020, compared to $3.2 billion as of December 31, 2019. Sales related to the disposal of the Control Devices Non-core Products business are excluded from our estimated sourced future sales as of December 31, 2019. There were no sales related to the disposal of the Control Devices Non-core Products business for the year ended December 31, 2020. Due to the planned exit of the Control Devices particulate matter (“PM”) sensor products business, related sales are excluded from our estimated sourced future sales as of December 31, 2020.
Competition
The markets for our products in our reportable segments are highly competitive. We compete based on technological innovation, price, quality, performance, service and delivery. We compete for new business both at the beginning of the development of new models and upon the redesign of existing models for OEM customers. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM customer will usually continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns. We compete for aftermarket and mass merchandiser sales based on price, product functionality, quality and service.
Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. We compete based on strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price. We compete against the following companies:
Control Devices. Our primary competitors include Aisin Seiki, Dana Incorporated, EFI Automotive, Erich Jaeger, ETO: Gruppe, Ficosa Corporation, Futronic, GHSP, Johnson Electric, Kongsberg Automotive, Korea Fuel Tech Corporation (KFTC), Mitsubishi Electronics (MELCO), Nidec, Sensata and Sonceboz.
Electronics. Our primary competitors include Actia Group, Aptiv, Bosch, Continental, Delphi Technologies, Hella KGaA Hueck & Co., Magneti Marelli, Mekra Lang, Valeo, Visteon and ZF Frierichshafen.
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Stoneridge Brazil. Our primary competitors include Autotrac, Bosch, CalAmp, Car System, Continental, Harman Automotive, Hinor, Ituran, Magneti Marelli, Maxtrack, Onix, Pioneer Corporation, Quelink, Sascar, Suntech, Taramps, Tury and Visteon.
Product Development
Our research and development efforts for our reportable segments are largely product design and development oriented and consist primarily of applying known technologies to customer requests. We work closely with our customers to solve customer requests using innovative approaches. The majority of our development expenses are related to customer-sponsored programs where we are involved in designing custom-engineered solutions for specific applications or for next generation technology. To further our vehicle platform penetration, we have also developed collaborative relationships with the design and engineering departments of key customers. These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.
While our engineering and product development departments are organized by market, our segments interact and collaborate on new products. The product development operations are complimented by technology groups in Barneveld, Netherlands; Campinas, Brazil; Juarez, Mexico; Lexington, Ohio; Novi, Michigan; Pune, India, Stockholm, Sweden and Suzhou, China.
We have invested, and will continue to invest heavily in technology to develop new products for our customers. Product development costs, other than capitalized software development costs, incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are expensed as incurred.
We will continue to prioritize investment spending toward the design and development of new products over sustaining existing product programs for specific customers, which allows us to sell our products to multiple customers. The typical product development process takes three to seven years to show tangible results. As part of our effort to evaluate our investment spending, we review our current product portfolio and adjust our spending to either accelerate or eliminate our investment in these products based on our position in the market and the potential of the market and product.
Environmental and Other Regulations
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to water and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
Human Capital Management
As of December 31, 2020, Stoneridge employed approximately 4,800 full time and temporary employees in 13 countries, with about 84% located outside of the United States. Although we have no collective bargaining agreements covering U.S. employees, a significant number of employees located in Brazil, China, Estonia, Mexico, Netherlands, Sweden and the United Kingdom either (i) are represented by a union and are covered by a collective bargaining agreement, or (ii) are covered by a works council or other employment arrangements required by law. We work to ensure positive relations with our employees.
We strive to create a work environment that enhances employee engagement, fosters productivity, and is aligned with our values of Integrity, Accountability, Teamwork, Adaptability, Customer Orientation, and Social Responsibility. We know that our success is dependent on our employees’ engagement, performance, skills, and development. To that end, we have established talent management programs at Stoneridge, which include but are not limited to the following:
| ● | Periodic global employee engagement surveys and subsequent action planning |
| ● | Regular talent reviews for employee development and succession planning |
| ● | Feedback and coaching to ensure performance is aligned with our goals and strategic direction |
| ● | Delivery of Code of Conduct and global policy training |
| ● | New employee orientation with globally consistent and locally flexible messaging |
| ● | Frequent global “townhall” meetings and other communications |
| ● | Employee wellness programs |
| ● | Opportunities for community and charitable involvement (reduced in 2020 due to COVID-19 pandemic) |
| ● | Employee mentoring program |
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| ● | Internship programs |
When we hire new employees, we focus not just on the skills required for current positions, but the ever-changing complex skills and competencies that will be required as we move forward on our path to being the mobility industry’s integrated technology partner. We seek diverse sources for candidates and we offer wages and benefits that are competitive in the markets where employees are located.
We believe a diverse workforce and an inclusive work environment is required for us to achieve our full potential as an organization. We further recognize the importance of having a strong Diversity, Equity & Inclusion (“DEI”) strategy. In 2020, we embarked on an initiative to reassess our DEI strategy, identify gaps between our ideal and current states, and develop goals and actions to realize measurable improvement. We look forward to continuing this work in 2021.
It is always a top priority, but in 2020 employee health and safety was of paramount importance due to the COVID-19 global pandemic. Where feasible, employees began working from home in March 2020 through the remainder of the year and into early 2021. For jobs that could not be done remotely, extensive safety measures were implemented, including temperature and health screenings, distanced workstations, plexiglass barriers, enhanced cleaning and disinfection protocols, required face coverings, contact tracing when needed, published Safe Workplace Guidelines, and employee training. Our safety measures are aligned with the recommendations of US and global health organizations, and have continued into 2021.
The Human Resources function at Stoneridge is an active and visible partner to the business at all levels. Our Chief Human Resources Officer reports directly to the Chief Executive Officer and interacts frequently with the Company’s Board of Directors. In 2021, our Human Capital focus will continue to be on employee engagement, employee and leadership development, communications, and employee health and safety.
Joint Ventures
We form joint ventures in various global markets in order to achieve several strategic objectives including (i) diversifying our business by expanding in high-growth regions, (ii) employing complementary design processes, growth technologies and intellectual capital, and (iii) realizing cost savings from combined sourcing.
We have a 49% noncontrolling equity interest in Minda Stoneridge Instruments Ltd. (“MSIL”). Based in India, MSIL manufactures electromechanical/electronic instrumentation equipment and sensors primarily for the automotive, motorcycle and commercial vehicle markets. We leverage our investment in MSIL by sharing our knowledge and expertise in electrical components and systems and expanding MSIL’s product offering through the joint development of our products designed for the market in India.
Information About Our Executive Officers
Each executive officer of the Company serves the Board of Directors at its pleasure. The Board of Directors appoints corporate officers annually. The following table sets forth the names, ages, and positions of the executive officers of the Company:
Name |
| Age |
| Position |
Jonathan B. DeGaynor |
| 54 |
| President, Chief Executive Officer and Director |
Robert R. Krakowiak |
| 50 |
| Executive Vice President, Chief Financial Officer and Treasurer |
Susan Benedict |
| 54 |
| Chief Human Resources Officer and Assistant General Counsel |
Laurent Borne | 46 | President of the Electronics Division and Chief Technology Officer | ||
Thomas M. Dono, Jr. |
| 48 |
| Chief Legal Officer and Secretary |
Caetano R. Ferraiolo |
| 53 |
| President of the PST Electronics Division |
Robert J. Hartman Jr. |
| 54 |
| Chief Accounting Officer |
Kevin Heigel | 61 | Vice President of Operations | ||
Daniel M. Kusiak | 51 | Chief Procurement Officer | ||
James Zizelman |
| 60 |
| President of the Control Devices Division |
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Jonathan B. DeGaynor, President, Chief Executive Officer and Director. Mr. DeGaynor was appointed as President and Chief Executive Officer in March 2015. He has served as a director since May 2015. Prior to joining Stoneridge, Mr. DeGaynor served as the Vice President of Strategic Planning and Innovation of Guardian Industries Corp. (“Guardian”), from October 2014 until March 2015. Mr. DeGaynor served as Vice President of Business Development, Managing Director Asia for SRG Global, Inc., a Guardian company, from 2008 through September 2014. Mr. DeGaynor served as Chief Operating Officer, International for Autocam Corporation from 2005 to 2008. Prior to that, Mr. DeGaynor held positions of increasing responsibility with Delphi Corporation from 1993 to 2005.
Robert R. Krakowiak, Executive Vice President, Chief Financial Officer and Treasurer. Mr. Krakowiak was appointed as Executive Vice President in October 2018 and Chief Financial Officer and Treasurer in August 2016. Prior to joining Stoneridge, Mr. Krakowiak served as Vice President, Treasurer and Investor Relations at Visteon Corporation from 2012 until August 2016. Prior to that, Mr. Krakowiak held the following positions at Owens Corning: from 2009 until 2012, Vice President of Finance (Composite Solutions Business); from 2008 until 2009, Vice President–Corporate Financial Planning and Analysis; from 2006 until 2008, Vice President and Controller (Roofing and Asphalt); and from 2005 until 2006, Assistant Treasurer.
Susan Benedict, Chief Human Resources Officer and Assistant General Counsel. Ms. Benedict was appointed chief human resources officer and assistant general counsel – labor and employment (CHRO) in June 2019. Ms. Benedict previously served as Stoneridge’s Director of Legal since November 2017. Prior to Stoneridge, Ms. Benedict served as Senior Counsel for Koch Industries in October 2017 and Corporate Counsel for Guardian Industries from December 2012 to September 2017.
Laurent Borne, President of the Electronics Division and Chief Technology Officer. Mr. Borne was appointed as President of the Electronics Division in January 2019. Mr. Borne joined the Company in August 2018 and has been serving as the Company’s Chief Technology Officer and will continue to serve in this role. Prior to joining Stoneridge, Mr. Borne served as Vice President of Product Development at Whirlpool Corporation from 2014 until August 2018.
Thomas M. Dono, Jr., Chief Legal Officer and Secretary. Mr. Dono was appointed as Chief Legal Officer and Secretary in January 2018. Prior to joining Stoneridge, Mr. Dono served as Executive Vice President, General Counsel and Corporate Secretary at Metaldyne Performance Group, Inc. from July 2016 to April 2017. Prior to that, Mr. Dono served as Senior Vice President, Legal Affairs, General Counsel and Corporate Secretary at Key Safety Systems, Inc. from May 2009 to July 2016.
Caetano R. Ferraiolo, President of the PST Electronics Division. Mr. Ferraiolo was appointed to President of the Stoneridge Brazil Electronics Division in June 2017. Mr. Ferraiolo joined the Company in 2015 and previously served as the Chief Operating Officer of Stoneridge Brazil. From 2010 to 2015 he served as Vice President of Operations for Cannondale Sports Group in Brazil. Prior to that, Mr. Ferraiolo served as Director of European Commercial and Development, Autocam Corporation from 2005 to 2010.
Robert J. Hartman Jr., Chief Accounting Officer. Mr. Hartman was appointed as Chief Accounting Officer and to the role of principal accounting officer in July 2016. Prior to that, Mr. Hartman served as Corporate Controller of the Company since 2006 and prior to that as Stoneridge’s Director of Internal Audit from 2003.
Kevin Heigel, Vice President of Operations. Mr. Heigel was appointed Vice President of Operations in January 2020. Prior to that Mr. Heigel had been employed at ALPHA Performance Group, LLC as its Co-Founder and Managing Director from 2009 until December 2019. Prior to that Mr. Heigel was at served in various roles at Delphi last serving as Managing Director, Delphi Electrical Centers from 2006 to 2009.
Daniel M. Kusiak, Chief Procurement Officer. Mr. Kusiak was appointed as Chief Procurement Officer in October 2018. Prior to that, Mr. Kusiak served as Vice President of Global Procurement since he joined Stoneridge in 2015. Prior to that, he served as head of Strategic Business Initiatives at Sypris Technologies, Inc. from 2013. Prior to that, Kusiak was employed at Meritor, Inc. where he held positions of increasing responsibility in the purchasing function over a 10-year tenure.
James Zizelman, President of the Control Devices Division. Mr. Zizelman was appointed to President of the Control Devices Division in April 2020. Until his employment with the Company, Mr. Zizelman served as the Vice President of Engineering and Program Management for Aptiv from December 2017 to March 2019. Prior to that, Mr. Zizelman was employed at Delphi for more than 20 years, where he was last a Vice President of Engineering from 2016.
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Available Information
We make available, free of charge through our website (www.stoneridge.com), our Annual Report on Form 10-K (“Annual Report”), Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the U.S. Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, Whistleblower Policy and Procedures and the charters of the Board of Director’s Audit, Compensation and Nominating and Corporate Governance Committees are posted on our website as well. Copies of these documents will be available to any shareholder upon request. Requests should be directed in writing to Investor Relations at Stoneridge, Inc., 39675 MacKenzie Drive, Suite 400, Novi, Michigan 48377. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.
Item 1A. Risk Factors.
Risks Related to the Coronavirus (COVID-19) Pandemic
Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt our business, which could adversely affect our results of operation and financial condition.
Pandemics or disease outbreaks, such as COVID-19, have disrupted, and may continue to disrupt, the global economy. In late 2019, a novel strain of the coronavirus (COVID-19) was reported to have been detected in Wuhan, China and on March 11, 2020 it was declared by the World Health Organization to be a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupting the financial markets and increasing volatility, and has impeded global supply chains, restricted manufacturing operations and resulted in significantly reduced economic activity and higher unemployment rates. It has disrupted, and may continue to disrupt for an indefinite period of time, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway, motorcycle and agricultural vehicles by end-consumers. International, federal, state and local public health and governmental authorities have taken and may continue to take actions to contain the outbreak and spread of COVID-19 throughout most regions of the world, including travel bans, quarantines, "work-from-home" orders and similar mandates that have caused many businesses to modify normal operations. During 2020 we took actions to enhance our financial flexibility and minimize the impact on our business, such as the ramping down of certain production facilities in response to customer plant closures and changes in vehicle production schedules, imposing certain travel restrictions, obtaining a waiver on our existing 2019 Credit Facility through June 2021 and actively managing costs, capital spending and working capital to further strengthen our liquidity. Despite these measures, the ultimate impact to our business continues to remain highly uncertain and we have experienced, and may continue to experience, delays in the production and distribution of our products, supply chain disruptions impacting the availability of production materials and the loss or delay of customers’ sales.
COVID-19 continues to spread in most regions of the world and the extent to which our financial performance will be adversely affected will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or treat its impact and how quickly and to what extent normal economic and operating conditions can resume. Our business may also be affected by the ultimate impacts of the pandemic on economic activity and whether recessionary conditions will persist or reoccur, consumer demand and vehicle production schedules and the ability of our supply chain to deliver in a timely and cost-effective manner. In addition, if a significant portion of our workforce or our customers’ workforce are affected by COVID-19, either directly or due to government closures or otherwise, associated work stoppages or facility closures could halt or further delay production in our facilities, including our manufacturing facilities in Juarez, Mexico and Manaus, Brazil which are currently producing at limited capacity due to governmental decrees. Our full year 2020 results of operations and financial condition were adversely affected by COVID-19, and the full extent of the effect of COVID-19 on our customers, our supply chain and our business, in either scope or duration, cannot be assessed at this time.
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Uncertain Economic and Market Conditions
Our business is cyclical and a downturn in the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets as well as overall economic conditions could reduce the sales and profitability of our business.
The demand for products is largely dependent on the domestic and foreign production of automotive, commercial, off-highway, motorcycle and agricultural vehicles. The markets for our products have been cyclical, because new vehicle demand is dependent on, among other things, consumer spending and is tied closely to the overall strength of the economy. Because the majority of our products are used principally in the production of vehicles for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets, our net sales, and therefore our results of operations, are significantly dependent on the general state of the economy and other factors which affect these markets.
In 2020, approximately 93% of our net sales were derived from automotive, commercial, off-highway, motorcycle and agricultural vehicle markets while approximately 7% were derived from aftermarket distributors, mass merchandisers and monitoring services markets.
Due to the overall global economic conditions in 2020, largely as a result of COVID-19 pandemic, the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets experienced a decline in global customer sales and production volumes. As a result, we have experienced and may continue to experience reductions in orders from our customers in certain regions. An economic downturn or other adverse industry conditions that result in a decline in automotive, commercial, off-highway, motorcycle or agricultural vehicle production, or a material decline in market share by our significant customers, could adversely affect our results of operations and financial condition.
Our business is very competitive and increased competition could reduce our sales and profitability.
The markets for our products are highly competitive. We compete based on technological innovation, price, quality, performance, service and delivery. Many of our competitors are more diversified and have greater financial and other resources than we do. In addition, with respect to certain products, some of our competitors are divisions of our OEM customers. We cannot assure that our business will not be adversely affected by competition or that we will be able to maintain our profitability if the competitive environment changes.
The loss or insolvency of any of our principal customers would adversely affect our future results.
We are dependent on several principal customers for a significant percentage of our net sales. In 2020, our top five customers were Ford Motor Company, Volvo, American Axle, Daimler and FCA Group which comprised 11%, 8%, 6%, 5% and 5% of our net sales, respectively. In 2020, our top ten customers accounted for 56% of our net sales. The loss of any significant portion of our sales to these customers would have a material adverse effect on our results of operations and financial condition. In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy.
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The Company’s estimated sourced future sales from awarded programs may not be realized.
The Company typically enters into customer agreements at the beginning of a vehicle life cycle with the intent to fulfill customer-purchasing requirements for the entire vehicle production life cycle. The vehicle life cycle typically included the two to four year pre-production period and production for a term covering the life of such vehicle model or platform, generally between three to seven years, although there is no guarantee that this will occur. The Company’s customers make no firm commitments regarding volume and may terminate these agreements or orders at any time. Therefore, these arrangements do not represent firm orders. The Company’s estimated sourced future sales from awarded programs, also referred to as backlog, is the estimated remaining cumulative awarded life-of-program sales for up to a five year period. Several factors may change forecasted revenue from awarded programs; namely, new business wins, vehicle production volume changes, customer price reductions, foreign currency exchange rates, component take rates by customers and short cycled or cancelled models or platforms.
We must implement and sustain a competitive technological advantage in producing our products to compete effectively.
Our products are subject to changing technology, which could place us at a competitive disadvantage relative to alternative products introduced by competitors. Our success will depend on our ability to continue to meet customers’ changing specifications with respect to technological innovation, price, quality, performance, service and delivery by implementing and sustaining competitive technological advances. Our business may, therefore, require significant recurring additional capital expenditures and investment in product development, manufacturing and management information systems. We cannot assure that we will be able to achieve technological advances or introduce new products that may be necessary to remain competitive. Our inability to continuously improve existing products, to develop new products and to achieve technological advances could have a material adverse effect on our business, financial condition or results of operations.
The discontinuation of, loss of business or lack of commercial success, with respect to a particular vehicle model for which the Company is a significant supplier could reduce the Company’s sales and harm its profitability.
Although the Company has purchase orders from many of its customers, these purchase orders generally provide for the supply of a customer’s annual requirements for a particular vehicle model and assembly plant, or in some cases, for the supply of a customer’s requirements for the life of a particular vehicle model, rather than for the purchase of a specific quantity of products. In addition, it is possible that our customers could elect to manufacture components internally that are currently produced by outside suppliers, such as our Company. The discontinuation of, the loss of business with respect to or a lack of commercial success of a particular vehicle model for which the Company is a significant supplier, could reduce the Company’s sales and have a material adverse effect on our business, financial condition or results of operations.
Financial Risks
We have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity.
The financial position and results of operations of our international subsidiaries are initially recorded in various foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. The strengthening of the U.S. dollar against these foreign currencies ordinarily has a negative effect on our reported sales and operating margin (and conversely, the weakening of the U.S. dollar against these foreign currencies has a positive impact). The volatility of currency exchange rates may materially adversely affect our business, financial condition or results of operations.
Our debt obligations could limit our flexibility in managing our business and expose us to risks.
As of December 31, 2020, there was $136.0 million in borrowings outstanding on our revolving credit facility, as amended, (the “2019 Credit Facility”). In addition, we are permitted under our 2019 Credit Facility to incur additional debt, subject to specified limitations. Our leverage and the terms of our indebtedness may have important consequences including the following:
| ● | we may have difficulty satisfying our obligations with respect to our indebtedness, and if we fail to comply with these requirements, an event of default could result; |
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| ● | we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate activities; |
| ● | covenants relating to our debt may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities; |
| ● | covenants relating to our debt may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
| ● | we may be placed at a competitive disadvantage against any less leveraged competitors. |
These and other consequences of our leverage and the terms of our indebtedness could have a material adverse effect on our business, financial condition or results of operations.
Covenants in our 2019 Credit Facility may limit our ability to pursue our business strategies.
Our 2019 Credit Facility limits our ability to, among other things:
| ● | incur additional debt and guarantees; |
| ● | pay dividends and repurchase our shares; |
| ● | make other restricted payments, including investments; |
| ● | create liens; |
| ● | sell or otherwise dispose of assets, including capital shares of subsidiaries; |
| ● | enter into agreements that restrict dividends from subsidiaries; |
| ● | consolidate, merge or sell or otherwise dispose of all or substantially all of our assets; and |
| ● | substantially change the nature of our business. |
During 2020 we amended the 2019 Credit Facility. As amended the 2019 Credit Facility provides for certain covenant relief restrictions during the Covenant Relief Period (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021 in form and substance satisfactory to the administrative agent). During the Covenant Relief Period:
| ● | the maximum net leverage ratio is suspended; |
| ● | the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021; |
| ● | the minimum interest coverage ratio of 3.50 is reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively; |
| ● | the Company’s liquidity may not be less than $150,000; |
| ● | the Company’s aggregate amount of cash and cash equivalents cannot exceed $130,000; |
| ● | there are certain restrictions on Restricted Payments (as defined); and |
| ● | a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders. |
Following the Covenant Relief Period, the agreement governing our 2019 Credit Facility requires us to maintain a maximum leverage ratio of 3.50 to 1.00, and a minimum interest coverage ratio of 3.50 to 1.00 and places a maximum annual limit on capital expenditures. Our ability to comply with these covenants as well as the negative covenants under the terms of our indebtedness, may be affected by events beyond our control.
A breach of any of the negative covenants under our indebtedness or our inability to comply with the leverage and interest ratio requirements in the 2019 Credit Facility could result in an event of default. If an event of default occurs, the lenders under the 2019 Credit Facility could elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable and terminate any commitments they have to provide further borrowings, and the 2019 Credit Facility lenders could pursue foreclosure and other remedies against us and our assets.
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Our annual effective tax rate could be volatile and materially change as a result of changes in the mix of earnings and other factors including changes in the recognition and/or release of valuation allowances against deferred tax assets.
Our overall effective tax rate is computed by dividing our total tax expense (benefit) by our total earnings (loss) before tax. However, tax expense and benefits are not recognized on a global basis, but rather on a jurisdictional or legal entity basis. Losses in certain jurisdictions may not provide a current financial statement tax benefit as a result of the need to maintain a valuation allowance against the associated deferred tax asset. Also, management periodically evaluates the realizability of our deferred tax assets which may result in the recognition and/or release of valuation allowances. As a result, changes in the mix of earnings between jurisdictions and changes in the recognition and/or release of valuation allowances, among other factors, could have a significant effect on our overall effective tax rate.
Risks Related to Products, Pricing and Supply
We are dependent on the availability and price of raw materials and other supplies.
We require substantial amounts of raw materials and other supplies, and substantially all such materials we require are purchased from outside sources. The availability and prices of raw materials and other supplies may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers and interruptions in production by suppliers, weather emergencies, natural disasters, commercial disputes, acts of terrorism or war, changes in exchange rates and worldwide price levels. If demand for raw materials we require increases, we may have difficulties obtaining adequate raw materials and other supplies from our suppliers to satisfy our customers. Currently, and at times in the past, we have experienced difficulty obtaining adequate supplies of semiconductors and memory chips. In addition, there have been challenges at times in obtaining timely supply of nylon and resins for our Control Devices segment and audio component parts for our Stoneridge Brazil segment. If we cannot obtain adequate raw materials and other supplies, or if we experience an increase in the price of raw materials and other supplies, our business, financial condition or results of operations could be materially adversely affected.
The adverse impacts of the COVID-19 pandemic led to a significant vehicle production slowdown in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules in the second half of 2020. This surge in demand led to a worldwide semiconductor supply shortage at the end of 2020 and into early 2021, as semiconductor suppliers have been unable to rapidly reallocate production lines to serve the transportation industry. In addition, we have experienced longer lead-times, higher costs and delays in procuring other component parts and raw materials. As a result, we are currently experiencing supply chain disruptions. We are assessing the potential supply chain impacts, which may directly or indirectly impact various suppliers, and correspondingly, OEM production. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise, due to this or any other issue. However, any direct or indirect supply chain disruptions may have an adverse impact on our financial condition, results of operations or cash flows.
The prices that we can charge our customers are typically predetermined and we bear the risk of costs in excess of our estimates, in addition to the risk of adverse effects resulting from general customer demands for cost reductions and quality improvements.
Our supply agreements with our customers typically require us to provide our products at predetermined prices. In some cases, these prices decline over the course of the contract and may require us to meet certain productivity and cost reduction targets. In addition, our customers may require us to share productivity savings in excess of our cost reduction targets. The costs that we incur in fulfilling these contracts may vary substantially from our initial estimates. Unanticipated cost increases or the inability to meet certain cost reduction targets may occur as a result of several factors, including increases in the costs of labor, components or materials. In some cases, we are permitted to pass on to our customers the cost increases associated with specific materials. However, cost overruns that we cannot pass on to our customers could adversely affect our business, financial condition or results of operations.
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OEM customers have exerted and continue to exert considerable pressure on component suppliers to reduce costs, improve quality and provide additional design and engineering capabilities and continue to demand and receive price reductions and measurable increases in quality through their use of competitive selection processes, rating programs and various other arrangements. We may be unable to generate sufficient production cost savings in the future to offset required price reductions. Additionally, OEMs have generally required component suppliers to provide more design engineering input at earlier stages of the product development process, the costs of which have, in some cases, been absorbed by the suppliers. Future price reductions, increased quality standards and additional engineering capabilities required by OEMs may reduce our profitability and have a material adverse effect on our business, financial condition or results of operations.
We have limited or no redundancy for certain of our manufacturing facilities, and therefore damage or disruption to those facilities could interrupt our operations, increase our costs of doing business and impair our ability to deliver our products on a timely basis.
If certain of our existing production facilities become incapable of manufacturing products for any reason, we may be unable to meet production requirements, we may lose revenue and we may not be able to maintain our relationships with our customers. Without operation of certain existing production facilities, we may be limited in our ability to deliver products until we restore the manufacturing capability at the particular facility, find an alternative manufacturing facility or arrange an alternative source of supply. We carry business interruption insurance to cover lost revenue and profits in an amount we consider adequate, however, this insurance does not cover all possible situations and may be insufficient. Also, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing customers resulting from our inability to produce products for them.
We rely on independent dealers and distributors to sell certain products in the aftermarket sales channel and a disruption to this channel would harm our business.
Because we sell certain products such as security accessories and driver information products to independent dealers and distributors, we are subject to many risks, including risks related to their inventory levels and support for our products. If dealers and distributors do not maintain sufficient inventory levels to meet customer demand, our sales could be negatively impacted.
Our dealer network also sells products offered by our competitors. If our competitors offer our dealers more favorable terms, those dealers may de-emphasize or decline to carry our products. In the future, we may not be able to retain or attract a sufficient number of qualified dealers and distributors. Our inability to maintain successful relationships with dealers and distributors, or to expand our distribution channels, could have a material adverse effect on our business, financial condition or results of operations.
Our Global Positioning Systems (“GPS”) products depend upon satellites maintained by the United States Department of Defense. If a significant number of these satellites become inoperable, unavailable or are not replaced, or if the policies of the United States government for the use of the GPS without charge are changed, our business will suffer.
The GPS is a satellite-based navigation and positioning system consisting of a constellation of orbiting satellites. The satellites and their ground control and monitoring stations are maintained and operated by the United States Department of Defense. The Department of Defense does not currently charge users for access to the satellite signals. These satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage.
If a significant number of satellites were to become inoperable, unavailable or are not replaced, it would impair the current utility of our GPS products and the growth of market opportunities. In addition, there can be no assurance that the U.S. government will remain committed to the operation and maintenance of GPS satellites over a long period, or that the policies of the U.S. government that provide for the use of the GPS without charge and without accuracy degradation will remain unchanged. Because of the increasing commercial applications of the GPS, other U.S. government agencies may become involved in the administration or the regulation of the use of GPS signals. Any of the foregoing factors could affect the willingness of buyers of our products to select GPS-based products instead of products based on competing technologies, which could adversely affect our operational revenues, financial condition and results of operation.
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Geopolitical Uncertainties
We are subject to risks related to our international operations.
Approximately 49% of our net sales in 2020 were derived from sales outside of North America. At December 31, 2020, significant concentrations of net assets outside of North America included $221.3 million in Europe and Other and $30.3 million in South America. Non-current assets outside of North America accounted for approximately 62% of our non-current assets as of December 31, 2020. International sales and operations are subject to significant risks, including, among others:
| ● | political and economic instability; |
| ● | restrictive trade policies; |
| ● | economic conditions in local markets; |
| ● | currency exchange rates and controls; |
| ● | labor unrest; |
| ● | difficulty in obtaining distribution support and potentially adverse tax consequences; and |
| ● | the imposition of product tariffs and the burden of complying with a wide variety of international and U.S. export laws. |
We operate our business on a global basis and policy changes affecting international trade could adversely impact the demand for our products and our competitive position.
We manufacture, sell and service products globally and rely upon a global supply chain to deliver the raw materials, components, systems and parts that we need to manufacture and service our products. Changes in government policies on foreign trade and investment can affect the demand for our products and services, cause non-U.S. customers to shift preferences toward domestically manufactured or branded products and impact the competitive position of our products or prevent us from being able to sell products in certain countries. Our business benefits from free trade agreements, such as the new United States-Mexico-Canada Agreement and the U.S. trade relationship with China and Brazil and efforts to withdraw from, or substantially modify such agreements or arrangements, in addition to the implementation of more restrictive trade policies, such as more detailed inspections, higher tariffs import or export licensing requirements, exchange controls or new barriers to entry, could adversely impact our production costs, customer demand and our relationships with customers and suppliers. Any of these consequences could have a material adverse effect on our business, financial condition or results of operations.
Strategic Performance Risks
Our inability to effectively manage the timing, quality and costs of new program launches could adversely affect our financial performance.
In connection with the award of new business, we obligate ourselves to deliver new products and services that are subject to our customers’ timing, performance and quality standards. Additionally, as a Tier 1 supplier, we must effectively coordinate the activities of numerous suppliers in order for the program launches of our products to be successful. Given the complexity of new program launches, we may experience difficulties managing product quality, timeliness and associated costs. In addition, new program launches require a significant ramp-up of costs; however, our sales related to these new programs generally are dependent upon the timing and success of our customers’ introduction of new vehicles. Our inability to effectively manage the timing, quality and costs of these new program launches could adversely affect our business, financial condition or results of operations.
We may not be able to successfully integrate acquisitions into our business or may otherwise be unable to benefit from pursuing acquisitions.
Failure to successfully identify, complete and/or integrate acquisitions could have a material adverse effect on us. A portion of our growth in sales and earnings has been generated from acquisitions and subsequent improvements in the performance of the businesses acquired. We expect to continue a strategy of selectively identifying and acquiring businesses with complementary products. We cannot assure you that any business acquired by us will be successfully integrated with our operations or prove to be profitable. We could incur substantial indebtedness in connection with our acquisition strategy, which could significantly increase our interest expense.
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We anticipate that acquisitions could occur in foreign markets in which we do not currently operate. As a result, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Any failure to successfully integrate such acquisitions could have a material adverse effect on our business, financial condition or results of operations.
Product Liability Risks
Increased or unexpected product warranty claims could adversely affect us.
We typically provide our customers a warranty covering workmanship, and in some cases materials, on products we manufacture. Our warranty generally provides that products will be free from defects and adhere to customer specifications. If a product fails to comply with the warranty, we may be obligated or compelled, at our expense, to correct any defect by repairing or replacing the defective product. Our customers are increasingly seeking to hold suppliers responsible for product warranties, which could negatively impact our exposure to these costs. We maintain warranty reserves in an amount based on historical trends of units sold and costs incurred, combined with our current understanding of the status of existing claims. To estimate the warranty reserves, we must forecast the resolution of existing claims, as well as expected future claims on products previously sold. The costs of claims estimated to be due and payable could differ materially from what we may ultimately be required to pay. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could have a material adverse effect on our customer relations, our business, financial condition or results of operations.
We may incur material product liability costs.
We may be subject to product liability claims in the event that the failure of any of our products results in personal injury or death and we cannot assure that we will not experience material product liability losses in the future. We cannot assure that our product liability insurance will be adequate for liabilities ultimately incurred or that it will continue to be available on terms acceptable to us. In addition, if any of our products prove to be defective, we may be required to participate in government-imposed or customer OEM-instituted recalls involving such products. A successful claim brought against us that exceeds available insurance coverage or a requirement to participate in any product recall could have a material adverse effect on our business, financial condition or results of operations.
Intellectual Property Risks
If we fail to protect our intellectual property rights or maintain our rights to use licensed intellectual property or are found liable for infringing the rights of others, our business could be adversely affected.
Our intellectual property, including our patents, trademarks, copyrights, trade secrets and license agreements, are important in the operation of our businesses, and we rely on the patent, trademark, copyright and trade secret laws of the United States and other countries, as well as nondisclosure agreements, to protect our intellectual property rights. We may not, however, be able to prevent third parties from infringing, misappropriating or otherwise violating our intellectual property, breaching any nondisclosure agreements with us, or independently developing technology that is similar or superior to ours and not covered by our intellectual property. Any of the foregoing could reduce any competitive advantage we have developed, cause us to lose sales or otherwise harm our business. We cannot assure that any intellectual property will provide us with any competitive advantage or will not be challenged, rejected, cancelled, invalidated or declared unenforceable. In the case of pending patent applications, we may not be successful in securing issued patents, or securing patents that provide us with a competitive advantage for our businesses. In addition, our competitors may design products around our patents that avoid infringement and violation of our intellectual property rights.
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We cannot be certain that we have rights to all intellectual property currently used in the conduct of our businesses or that we have complied with the terms of agreements by which we acquire such rights, which could expose us to infringement, misappropriation or other claims alleging violations of third party intellectual property rights. Third parties have asserted and may assert or prosecute infringement claims against us in connection with the services and products that we offer, and we may or may not be able to successfully defend these claims. Litigation, either to enforce our intellectual property rights or to defend against claims regarding intellectual property rights of others, could result in substantial costs and a diversion of our resources. Any such claims and resulting litigation could require us to enter into licensing agreements (if available on acceptable terms or at all), pay damages and cease making or selling certain products and could result in a loss of our intellectual property protection. Moreover, in such a situation, we may need to redesign some of our products to avoid future infringement liability. We also may be required to indemnify customers or other third parties at significant expense in connection with such claims and actions. Recently, the Company has seen an increase in customer requests for indemnification in connection with third party patent claims related to connectivity-enabled products. These claims are being made by patent-holders seeking royalties and who may enter into litigation based on patent infringement allegations. The Company has taken actions to mitigate this risk from new programs, however, significant indemnification claims related to these products could have a material adverse effect on our business, financial condition or results of operations.
Information Technology and Cybersecurity Risks
A failure of our information technology (IT) networks and systems, or the inability to successfully implement upgrades to our enterprise resource planning (ERP) systems, could adversely impact our business and operations.
We rely upon information technology networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes and/or activities. The secure operation of these IT networks and systems and the proper processing and maintenance of this information are critical to our business operations.
Also, we continually expand and update our IT networks and systems in response to the changing needs of our business and periodically upgrade our ERP systems. Should our networks or systems not be implemented successfully, or if the systems do not perform in a satisfactory manner once implementation is complete, our business and operations could be disrupted and our results of operations could be adversely affected, including our ability to report accurate and timely financial results.
We may be subject to risks relating to our information technology systems and cybersecurity.
We rely on information technology systems to process, transmit and store electronic information and manage and operate our business. Despite the implementation of security measures, our IT networks and systems are at risk to damages from computer viruses, unauthorized access, cyber-attack and other similar disruptions. A breach in security could expose us and our customers and suppliers to risks of misuse of confidential information, manipulation and destruction of data, production downtimes and operations disruptions, which in turn could adversely affect our reputation, competitive position, business or results of operations. While we have taken steps to protect the Company from cybersecurity risks and security breaches (including enhancing our firewall, workstation, email security and network monitoring and alerting capabilities, and training employees around phishing, malware and other cybersecurity risks), and we have policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from all potential compromises or breaches of security. We may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Privacy and security concerns relating to the Company’s current or future products and services could damage its reputation and deter current and potential users from using them.
We may gain access to sensitive, confidential or personal data or information that is subject to privacy and security laws, regulations and customer-imposed controls. Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy related matters, even if unfounded, could damage our reputation and adversely affect our business, our financial condition or operating results. Furthermore, regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning cybersecurity and data protection. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. Complying with these various laws could cause the Company to incur substantial costs.
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Environmental, Climate and Weather Risks
Compliance with environmental and other governmental regulations could be costly and require us to make significant expenditures.
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things:
| ● | the discharge of pollutants into the air and water; |
| ● | the generation, handling, storage, transportation, treatment, and disposal of waste and other materials; |
| ● | the cleanup of contaminated properties; and |
| ● | the health and safety of our employees. |
Our business, operations and facilities are subject to environmental and health and safety laws and regulations, many of which provide for substantial fines for violations. The operation of our manufacturing facilities entails risks and we cannot assure you that we will not incur material costs or liabilities in connection with these operations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or requirements that may be adopted or imposed in the future. Changes in environmental, health and safety laws, regulations and requirements or other governmental regulations could increase our cost of doing business or adversely affect the demand for our products.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
At December 31, 2020, the Company and its joint venture owned or leased ten manufacturing facilities, which together contain approximately 1.1 million square feet of manufacturing space. Of these manufacturing facilities, four are used by our Control Devices reportable segment, five are used by our Electronics reportable segment, one is used by our Stoneridge Brazil reportable segment and three are used by our joint venture, MSIL. The following table provides information regarding our facilities:
Owned/ | Square | |||||
Location |
| Leased |
| Use |
| Footage |
Control Devices | ||||||
Lexington, Ohio | Owned | Manufacturing/Engineering | 219,612 | |||
Juarez, Mexico (A) | Owned | Manufacturing/Engineering | 235,035 | |||
Suzhou, China (A) | Leased | Manufacturing/Engineering/Sales Office | 145,033 | |||
Canton, Massachusetts(B) | Owned | Leased to Third Party | 132,560 | |||
El Paso, Texas (A) | Leased | Warehouse | 57,000 | |||
Lexington, Ohio | Leased | Warehouse | 15,000 | |||
Novi, Michigan | Leased | Engineering | 6,398 | |||
Lexington, Ohio | Leased | Warehouse | 2,700 | |||
Electronics | ||||||
Tallinn, Estonia (C) | Leased | Manufacturing/Engineering | 85,911 | |||
Orebro, Sweden | Leased | Manufacturing | 77,472 | |||
Barneveld, Netherlands | Owned | Manufacturing/Engineering | 62,700 | |||
Stockholm, Sweden | Leased | Engineering/Division Office | 41,248 | |||
Jasper, Georgia | Leased | Sales Office/Warehouse | 12,250 | |||
Bayonne, France | Leased | Sales Office/Warehouse | 9,655 | |||
Dundee, Scotland | Leased | Sales Office/Engineering | 4,683 | |||
Ottobrunn, Germany | Leased | Sales Office | 1,119 | |||
Stoneridge Brazil | ||||||
Manaus, Brazil | Owned | Manufacturing | 102,247 | |||
Campinas, Brazil | Owned | Engineering/Division Office | 45,467 | |||
Campinas, Brazil | Leased | Sales Office | 9,246 | |||
Buenos Aires, Argentina | Leased | Sales Office | 2,906 | |||
Serra, Brazil | Leased | Sales Office | 172 | |||
Corporate and Other | ||||||
Novi, Michigan (C) | Leased | Headquarters/Division Office | 37,713 | |||
Stuttgart, Germany | Leased | Sales Office/Engineering | 2,000 | |||
Joint Venture | ||||||
Pune, India | Owned | Manufacturing/Engineering/Sales Office | 86,817 | |||
Pune, India | Leased | Manufacturing/Engineering | 71,000 | |||
Chennai, India | Leased | Manufacturing | 25,844 |
| (A) | This facility is also used in the Electronics reportable segment. |
| (B) | This facility was closed in March 31, 2020 as a result of a restructuring plan and the consolidation of operations at this site into other Company locations. Refer to Notes 7 and 13 to the consolidated financial statements. |
| (C) | This facility is also used in the Control Devices reportable segment. |
Item 3. Legal Proceedings.
From time to time we are subject to various legal actions and claims incidental to our business, including those arising out of breach of contracts, product warranties, product liability, patent infringement, regulatory matters, and employment-related matters. It is our opinion that the outcome of such matters will not have a material adverse impact on our consolidated financial position, results of operations, or cash flows. However, the final amounts required to resolve these matters could differ materially from our recorded estimates. See Note 11 to the consolidated financial statements.
18
Item 4. Mine Safety Disclosure.
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “SRI.” As of February 19, 2021, we had 27,005,257 Common Shares, without par value, outstanding which were owned by approximately 160 shareholders of record. This does not include persons whose stock is in nominee or “street name” accounts held by banks, brokers and other nominees.
The following table presents information with respect to repurchases of Common Shares made by us during the three months ended December 31, 2020. There were no Common Shares delivered to us by employees as payment for withholding taxes due upon vesting of performance share awards and share unit awards during the three months ended December 31, 2020.
Total number of | Maximum number | ||||||||
shares purchased as | of shares that may | ||||||||
part of publicly | yet be purchased | ||||||||
Total number of | Average price | announced plans | under the plans | ||||||
Period |
| shares purchased |
| paid per share |
| or programs |
| or programs | |
10/1/20-10/31/20 | - | $ | - | N/A | N/A | ||||
11/1/20-11/30/20 | - | - | N/A | N/A | |||||
12/1/20-12/31/20 | - | - | N/A | N/A | |||||
Total | - | ||||||||
Other than the repurchase of Common Shares in March 2020 and May 2019 and the repurchase of Common Shares of 80,427 and 136,644, respectively, to satisfy employee tax withholdings associated with the delivery of Common Shares earned by employees pursuant to equity-base awards under the Company’s Long-Term Incentive Plan there were no other repurchases of Common Shares made by us during the years ended December 31, 2020 or 2019. Refer to Note 2 of the consolidated financial statements for additional details regarding Common Share repurchases.
For information on “Related Stockholder Matters” required by Item 201(d) of Regulation S-K, refer to Item 12 of this report.
19
Performance Graph
Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in our Common Shares with the cumulative total return of hypothetical investments in the Morningstar Auto Parts Industry Group Index and the NYSE Composite Index based on the respective market price of each investment as of December 31, 2015, 2016, 2017, 2018, 2019 and 2020 assuming in each case an initial investment of $100 on December 31, 2015, and reinvestment of dividends.
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 | |||||||
Stoneridge, Inc. |
| $ | 100 |
| $ | 120 |
| $ | 154 |
| $ | 167 |
| $ | 198 |
| $ | 204 |
Morningstar Auto Parts Index |
| $ | 100 |
| $ | 105 |
| $ | 133 |
| $ | 93 |
| $ | 115 |
| $ | 147 |
NYSE Composite Index |
| $ | 100 |
| $ | 112 |
| $ | 133 |
| $ | 122 |
| $ | 153 |
| $ | 164 |
20
Item 6. Selected Financial Data.
The following table sets forth selected historical financial data and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data was derived from our consolidated financial statements.
Year ended December 31, (in thousands, except per share data) |
| 2020 |
| 2019 (A) |
| 2018 |
| 2017 |
| 2016 | |||||
Statement of Operations Data: | |||||||||||||||
Net sales: | |||||||||||||||
Control Devices | $ | 342,576 | $ | 431,560 | $ | 441,297 | $ | 447,528 | $ | 408,132 | |||||
Electronics (B) | 257,767 | 335,195 | 344,727 | 282,383 | 205,256 | ||||||||||
Stoneridge Brazil | 47,663 | 67,534 | 80,175 | 94,533 | 82,589 | ||||||||||
Total net sales | $ | 648,006 | $ | 834,289 | $ | 866,199 | $ | 824,444 | $ | 695,977 | |||||
Gross profit | $ | 154,196 | $ | 213,733 | $ | 256,631 | $ | 248,140 | $ | 195,439 | |||||
Operating (loss) income: | |||||||||||||||
Control Devices | $ | 22,072 | $ | 73,327 | $ | 64,191 | $ | 72,555 | $ | 61,815 | |||||
Electronics (B) | (3,672) | 25,006 | 28,236 | 18,119 | 14,798 | ||||||||||
Stoneridge Brazil | 3,766 | 6,539 | 4,989 | 2,661 | (3,462) | ||||||||||
Unallocated Corporate (F) | (29,830) | (33,591) | (30,412) | (35,965) | (29,069) | ||||||||||
Total operating (loss) income | $ | (7,664) | $ | 71,281 | $ | 67,004 | $ | 57,370 | $ | 44,082 | |||||
Equity in earnings of investees | $ | 1,536 | $ | 1,578 | $ | 2,038 | $ | 1,636 | $ | 1,233 | |||||
(Loss) income before income taxes from continuing operations (B) | $ | (10,724) | $ | 68,393 | $ | 65,058 | $ | 52,582 | $ | 39,185 | |||||
Net (loss) income (B) (C) (D) (E) | (7,950) | 60,291 | 53,848 | 45,049 | 75,574 | ||||||||||
Net loss attributable to noncontrolling interest (E) | - | - | - | (130) | (1,887) | ||||||||||
Net (loss) income attributable to Stoneridge, Inc. (B) (C) (D) (E) | $ | (7,950) | $ | 60,291 | $ | 53,848 | $ | 45,179 | $ | 77,461 | |||||
Basic (loss) earnings per share attributable to Stoneridge, Inc. | $ | (0.29) | $ | 2.17 | $ | 1.90 | $ | 1.61 | $ | 2.79 | |||||
Diluted (loss) earnings per share attributable to Stoneridge, Inc. | $ | (0.29) | $ | 2.13 | $ | 1.85 | $ | 1.57 | $ | 2.74 | |||||
Other Continuing Operations Data: | |||||||||||||||
Design and development | $ | 49,386 | $ | 52,198 | $ | 51,074 | $ | 48,877 | $ | 40,212 | |||||
Capital expenditures | $ | 27,660 | $ | 35,824 | $ | 29,027 | $ | 32,170 | $ | 24,476 | |||||
Depreciation and amortization (G) | $ | 33,236 | $ | 30,859 | $ | 29,191 | $ | 27,930 | $ | 23,258 | |||||
Balance Sheet Data (as of December 31): | |||||||||||||||
Working capital | $ | 188,616 | $ | 192,670 | $ | 172,870 | $ | 167,245 | $ | 128,184 | |||||
Total assets | $ | 621,408 | $ | 602,209 | $ | 559,519 | $ | 559,037 | $ | 394,529 | |||||
Long-term debt, net of current portion | $ | 136,000 | $ | 126,454 | $ | 96,983 | $ | 124,852 | $ | 75,060 | |||||
Shareholders' equity | $ | 296,634 | $ | 289,904 | $ | 283,266 | $ | 244,072 | $ | 192,077 | |||||
| (A) | The amounts for 2019 include the effect of the disposal of Non-core Products which is disclosed in Note 2 to the Company’s consolidated financial statements. The Company recognized a gain on disposal of Non-core Products, net of $33,599 which is included within our Control Devices segment. |
| (B) | The amounts for 2020, 2019, 2018 and 2017 include the Orlaco business as of the acquisition date which is included within our Electronics operating segment and is disclosed in Note 2 to the Company’s consolidated financial statements. |
| (C) | The amounts for 2017 include the impact of the Tax Legislation, a net tax benefit of $(9,062), consisting of an increase in tax expense of $6,207 due to the one-time deemed repatriation tax, offset by the favorable impact of the reduced tax rate on the Company’s net deferred tax liabilities and other deferred tax adjustments of $(15,269) related to certain earnings included in the one-time transition tax. |
| (D) | The Company recorded a release of a valuation allowance associated with its U.S. federal, certain state and foreign deferred tax assets of $48.5 million for the year ended December 31, 2016. |
| (E) | The Company recorded a full valuation allowance on Stoneridge Brazil’s net deferred tax assets of $1,237 for the year ended December 31, 2016 of which $322 was attributable to noncontrolling interest. |
| (F) | Unallocated corporate expenses include, among other items, accounting/finance, human resources, information technology and legal costs as well as share-based compensation. |
| (G) | These amounts represent depreciation and amortization on fixed and certain finite-lived intangible assets. |
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We are a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems primarily for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.
Impact of COVID-19 on Our Business
The coronavirus pandemic (“COVID-19”) has had a negative impact on the global economy in 2020, disrupting financial markets and increasing volatility, and has impeded global supply chains, restricted manufacturing operations and resulted in significantly reduced economic activity and higher unemployment rates. It has disrupted, and likely will continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway, motorcycle and agricultural vehicles by end-consumers. COVID-19 began to impact our operations in the first quarter of 2020 as government authorities imposed mandatory closures, work-from-home orders, social distancing protocols, and other restrictions. These actions materially affected our ability to adequately staff and maintain our operations and supply chain and significantly impacted our financial results in the first half of 2020. The adverse conditions caused by COVID-19 initially reduced demand for our products and increased operating costs, which resulted in lower overall margins. Similar to our customers, we instituted several changes to our manufacturing operations to reduce the spread of COVID-19 and keep our employees safe. In the second half of 2020, as a result of recovery across our global end-markets, we experienced significant sales growth compared to the second quarter 2020. Although our end-markets showed strong recovery in the second half of 2020, during the fourth quarter of 2020, certain European, North American and South American countries began to initiate new governmental restrictions in response to renewed pandemic impacts and concerns, and many of these restrictions have continued into the first quarter of 2021. As a result, COVID-19 may continue to adversely impact demand for our products, financial condition and results of operations in the near term.
The adverse impacts of the COVID-19 pandemic led to a significant vehicle production slowdown in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules in the second half of 2020. This surge in demand led to a worldwide semiconductor supply shortage at the end of 2020 and into early 2021, as semiconductor suppliers have been unable to rapidly reallocate production lines to serve the transportation industry. In addition, we have experienced longer lead-times, higher costs and delays in procuring other component parts and raw materials. As a result, we are currently experiencing supply chain disruptions. We are assessing the potential supply chain impacts, which may directly or indirectly impact various suppliers, and correspondingly, OEM production. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise, due to this or any other issue. However, any direct or indirect supply chain disruptions may have an adverse impact on our financial condition, results of operations or cash flows.
We continue to actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Beginning in the first quarter and into the second quarter of 2020, we undertook several actions to reduce costs and spending across our organization. This included reducing hiring activities, temporarily reducing our workforce in facilities impacted by volume reductions or shutdowns and limiting discretionary spending. Due to the adverse financial impact of COVID-19 resulting from significantly reduced production during the second quarter of 2020, we amended our existing credit facility to waive several financial covenants, including our net debt leverage compliance ratio, until the second quarter of 2021. As of December 31, 2020, our cash and cash equivalents balance was $73.9 million while undrawn commitments on our credit facility were $262.3 million.
We will also continue to actively monitor the impact of COVID-19 on our business and served-markets and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
22
Segments
We are organized by products produced and markets served. Under this structure, our operations have been reported using the following segments:
Control Devices. This segment includes results of operations that manufacture actuators, sensors, switches and connectors.
Electronics. This segment includes results of operations from the production of driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units.
Stoneridge Brazil (formerly referred to as “PST”). This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.
Overview
The Company had net loss of $8.0 million, or $(0.29) per diluted share, for the year ended December 31, 2020.
Net income in 2020 decreased by $68.3 million, or $(2.42) per diluted share, from $60.3 million, or $2.13 per diluted share, for the year ended December 31, 2019 primarily due to the COVID-19 pandemic, the 2019 gain on disposal of Control Devices’ Non-core Products of $33.6 million, or $0.98 per diluted share, and the recovery of Brazilian indirect taxes of $6.5 million, or $0.20 per diluted share. This decrease in net income was partially offset by a favorable fair value adjustment, net for earn-out consideration of $5.5 million, or $0.20 per diluted share, at Stoneridge Brazil and a $4.3 million decrease in restructuring costs during 2020.
In 2020, our net sales decreased by $186.3 million, or 22.3%, while our operating income decreased $79.5 million.
Our Control Devices segment net sales decreased by 20.6% primarily as a result of COVID-19 and 2019 sales of $41.6 million under the contract manufacturing agreement pursuant to the disposal of the Non-core Products. Including the impact of COVID-19, Control Devices experienced decreased sales volume in our North American automotive, North American commercial vehicle, agricultural and other markets. These decreases were partially offset by increased sales volume in our European and China automotive markets. Segment gross margin decreased due to lower sales from COVID-19, the adverse impact of the disposal of Non-core Products in the second quarter of 2019 and COVID-19 related incremental operating costs for employee safety protocols. Segment operating income decreased 69.9% relative to 2019 due to the 2019 gain on disposal of Non-Core Products, lower sales primarily related to COVID-19 and impact from the disposal of Non-core Products that occurred in the second quarter of 2019.
Our Electronics segment net sales decreased by 23.1% primarily as a result of COVID-19 including a decrease in sales volume in our European, North American and China commercial vehicle markets as well as European off-highway vehicle products. These decreases were partially offset by a favorable foreign currency translation. Segment gross margin decreased primarily due to lower sales as a result of the of COVID-19 pandemic and from the adverse leverage of fixed costs and COVID-19 related incremental operating costs for employee safety protocols. Operating income for the segment decreased compared to 2019 due to lower sales as a result of COVID-19 resulting in lower gross margin. Electronics SG&A cost reductions were offset by business realignment and restructuring expenses.
Our Stoneridge Brazil segment net sales decreased by 29.4% due to unfavorable foreign currency translation and the effects of COVID-19 causing lower volumes for our aftermarket, mass retail and OES channels mostly in the second quarter of 2020. Segment gross margin was consistent with the prior year as lower sales levels were offset with favorable product mix of a greater percentage of monitoring service fees. Operating income decreased 42.4% compared to 2019 primarily from the 2019 recovery of Brazilian indirect taxes of $6.5 million, lower sales volumes and margin offset by a favorable fair value adjustment, net for earn-out consideration of $5.5 million recognized in 2020.
In 2020, SG&A expenses were favorably impacted due to lower incentive compensation costs, professional service fees and travel related expenses. Additionally, a favorable fair value adjustment, net for earn-out consideration of $5.5 million at Stoneridge Brazil offset by the 2019 recovery of Brazilian indirect taxes of $6.5 million and higher 2020 business realignment and restructuring costs of $3.1 million.
23
At December 31, 2020 and 2019, we had cash and cash equivalents of $73.9 million and $69.4 million, respectively. The 2020 increase in borrowings under the 2019 Credit Facility were to maintain a high level of liquidity to ensure adequate available capital across our global locations due to adverse economic conditions caused by COVID-19. At December 31, 2020 and 2019, we had $136.0 million and $126.0 million, respectively, in borrowings outstanding on the 2019 Credit Facility.
Outlook
While the Company believes that focusing on products that address industry megatrends will have a positive impact on both our top-line growth and underlying margins, beginning in the first quarter of 2020 and continuing through the fourth quarter, COVID-19 has caused worldwide adverse economic conditions and uncertainty in our served markets.
The North American automotive market is expected to increase from 13.0 million units in 2020 to 16.2 million units in 2021 as the market recovers from adverse economic conditions caused by COVID-19 in 2020. The Company expects sales volumes in our Control Devices segment to increase from 2020 based on the current 2021 production forecasts and ramp up of certain program launches, however, global supply chain shortages, such as the global semiconductor supply shortage, could potentially have an adverse impact on our sales volumes in the first half of 2021.
For 2021, we expect an increase in our Electronics’ segment sales in 2021 compared to 2020 primarily due to the increase in production volume forecasts in our European and North American commercial markets and new program launches in 2021, including the first two launches of our MirrorEye camera based vision system in OEM markets as well as the continued roll out of MirrorEye in the retrofit markets.
Our 2020 Stoneridge Brazil segment revenues declined compared to the prior year due to the adverse economic conditions caused by COVID-19 and lower volumes in our Brazilian served markets for our audio and alarm products. In January 2021, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow 3.6% in 2021 and 2.6% in 2022. We expect our served market channels to remain relatively flat based on current market conditions. Our financial performance in our Stoneridge Brazil segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.
Global transportation production has been impacted by supply chain disruptions, in the first quarter of 2021, primarily in our automotive passenger vehicle end-market. Based on the current market conditions, we expect production reductions to be limited in the first half of 2021 and expect most production to be to be made up in the second half of year due to current market demand. We do not expect a significant revenue impact in 2021, however, we do expect that increased material costs, due to material spot buys and increased expediting and premium freight costs, to have an adverse impact on gross margin, particularly in the first half of 2021.
Other Matters
A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and Stoneridge Brazil segments are denominated in U.S. dollars, and therefore movements in foreign currency exchange rates can also have a significant effect on our results of operations. The U.S. Dollar strengthened against the Brazilian real, Argentine peso and Mexican peso in 2020 and the Swedish krona, euro, Brazilian real and Argentine peso in 2019, unfavorably impacting our material costs and reported results. In 2020, the U.S. Dollar weakened against the Swedish krona and euro which favorably impacted our material costs and reported results.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line (“PM Sensor Exit”). The decision to exit the PM sensor product line was made after the consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial and supplier settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM sensor production. We recognized $3.4 million of expense as a result of this initiative during the year ended December 31, 2020. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $2.8 million and $6.3 million and is related to employee severance and termination costs, contract terminations costs, other related costs such as commercial and supplier settlements and accelerated depreciation. The estimated range of additional cost increased since the third quarter of 2020 due to customer and supplier negotiations. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.
24
In January 2019, we committed to a restructuring plan that resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized $3.0 million and $12.5 million of expense as a result of these actions during the years ended December 31, 2020 and 2019, respectively. During the third quarter of 2020, we leased the Canton facility to a third party and are evaluating the sale of the facility. We expect additional costs to be immaterial related to the Canton Restructuring.
In the fourth quarter of 2018, we undertook restructuring actions for our Electronics segment affecting our European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced a restructuring program to transfer the European production of its Controls product line to China. For the years ended December 31, 2020 and 2019, we recognized expense of $2.4 million and $0.6 million, respectively, as a result of these actions for related costs and non-cash fixed asset charges for accelerated depreciation. The Company expects to incur approximately $0.2 million of additional restructuring costs related to employee severance and other related costs for these actions through the second quarter of 2021.
On April 1, 2019, the Company entered into an Asset Purchase Agreement by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40.0 million (subject to a post-closing inventory adjustment which was a payment to SMP of $1.6 million) and the assumption of certain liabilities, the Company and SCD sold to SMP product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company provided and was compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis. The products related to the Non-core Products were manufactured in Juarez, Mexico and Canton, Massachusetts, and included ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components. On April 1, 2019, the Company’s Control Devices segment recognized net sales and costs of goods sold of $4.2 million and $2.8 million, respectively, for the one-time sale of finished goods inventory and a gain on disposal of $33.9 million for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs. On June 17, 2020, the Company and SMP terminated the transition services agreement and the contract manufacturing agreement.
On October 26, 2018 the Company announced a Board of Directors approved share repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program of $50.0 million for the repurchase of outstanding Common Shares over an 18 month period. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, under the new 2020 repurchase program, the Company repurchased 242,634 Common Shares for $5.0 million, which became treasury shares, in accordance with this repurchase program authorization. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.
In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduced Stoneridge Brazil’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on Stoneridge Brazil’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017.
25
Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $6.5 million as a reduction to SG&A expense which is inclusive of related interest income of $2.4 million, net of applicable professional fees of $1.0 million in the second quarter of 2019. The Company received administrative approval in January 2020 and is now offsetting eligible federal taxes with these tax credits. The Brazilian tax authorities have sought clarification before the Supreme Court of Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these credits. The timing for a decision is uncertain due to the COVID-19 pandemic. If the Brazilian tax authorities challenge our rights to these credits, we may become subject to new litigation that could impact the amount ultimately realized by Stoneridge Brazil.
We regularly evaluate the performance of our businesses and their cost structures, including personnel, and make necessary changes thereto in order to optimize our results. We also evaluate the required skill sets of our personnel and periodically make strategic changes. As a consequence of these actions, we incur severance related costs which we refer to as business realignment charges. On May 4, 2020, the Company began business realignment actions that resulted in the reduction of our global salaried workforce by approximately 5.0%. These actions were made to better align our resources and cost structure with our current business opportunities and market outlook as well as respond to COVID-19. One-time separation costs of $4.0 million associated with these and other realignment actions were incurred during the year ended December 31, 2020.
Because of the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which to date has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.
Year Ended December 31, 2020 Compared To Year Ended December 31, 2019
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||
increase / | ||||||||||||||
Year ended December 31, |
| 2020 |
| 2019 |
| (decrease) | ||||||||
Net sales | $ | 648,006 |
| 100.0 | % | $ | 834,289 |
| 100.0 | % | $ | (186,283) | ||
Costs and expenses: | ||||||||||||||
Cost of goods sold | 493,810 | 76.2 | 620,556 | 74.4 | (126,746) | |||||||||
Selling, general and administrative | 112,474 | 17.4 | 123,853 | 14.8 | (11,379) | |||||||||
Gain on disposal of non-core products, net | - | - | (33,599) | (4.0) | 33,599 | |||||||||
Design and development | 49,386 | 7.6 | 52,198 | 6.3 | (2,812) | |||||||||
Operating (loss) income | (7,664) | (1.2) | 71,281 | 8.5 | (78,945) | |||||||||
Interest expense, net | 6,124 | 0.9 | 4,324 | 0.5 | 1,800 | |||||||||
Equity in earnings of investee | (1,536) | (0.2) | (1,578) | (0.2) | (42) | |||||||||
Other (income) expense, net | (1,528) | (0.2) | 142 | - | 1,670 | |||||||||
(Loss) income before income taxes | (10,724) | (1.7) | 68,393 | 8.2 | (79,117) | |||||||||
(Benefit) provision for income taxes | (2,774) | (0.4) | 8,102 | 1.0 | (10,876) | |||||||||
Net (loss) income | $ | (7,950) | (1.3) | % | $ | 60,291 | 7.2 | % | $ | (68,241) | ||||
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
Year ended December 31, |
| 2020 |
| 2019 |
| decrease |
| decrease |
| ||||||||
Control Devices | $ | 342,576 |
| 52.9 | % | $ | 431,560 |
| 51.7 | % | $ | (88,984) | (20.6) | % | |||
Electronics | 257,767 | 39.7 | 335,195 | 40.2 | (77,428) | (23.1) | % | ||||||||||
Stoneridge Brazil | 47,663 | 7.4 | 67,534 | 8.1 | (19,871) | (29.4) | % | ||||||||||
Total net sales | $ | 648,006 | 100.0 | % | $ | 834,289 | 100.0 | % | $ | (186,283) | (22.3) | % | |||||
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Our Control Devices segment net sales decreased primarily as a result of COVID-19 and 2019 sales of $41.6 million under the contract manufacturing agreement pursuant to the 2019 disposal of the Non-core Products. Including the impact of COVID-19, Control Devices experienced decreased sales volume in our North American automotive, North American commercial vehicle, agricultural and other markets of $61.5 million, $17.4 million, $9.6 million and $14.5 million, respectively. These decreases were offset by increased sales volume in our European and China automotive markets of $7.2 million and $6.6 million, respectively.
Our Electronics segment net sales decreased primarily as a result of COVID-19 including a decrease in sales volume in our European, North American and China commercial vehicle markets of $47.2 million, $23.4 million and $1.0 million, respectively. In addition, the Electronics segment net sales decreased due to a decrease in sales volume in our European off-highway vehicle products of $17.1 million. These decreases were offset by a favorable foreign currency translation of $11.4 million.
Our Stoneridge Brazil segment net sales decreased due to unfavorable foreign currency translation of $19.5 million and the effects of COVID-19 causing lower volumes for our aftermarket, mass retail and OES channels mostly in the second quarter of 2020.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
Year ended December 31, |
| 2020 |
| 2019 |
| decrease |
| decrease |
| ||||||||
North America | $ | 330,528 |
| 51.0 | % | $ | 457,633 |
| 54.8 | % | $ | (127,105) | (27.8) | % | |||
South America | 47,663 | 7.4 | 67,534 | 8.1 | (19,871) | (29.4) | % | ||||||||||
Europe and Other | 269,815 | 41.6 | 309,122 | 37.1 | (39,307) | (12.7) | % | ||||||||||
Total net sales | $ | 648,006 | 100.0 | % | $ | 834,289 | 100.0 | % | $ | (186,283) | (22.3) | % | |||||
The decrease in North American net sales was primarily attributable to the impact of COVID-19 and 2019 sales of Non-core Products under the contract manufacturing agreement of $41.6 million. Including the impact of COVID-19, sales volume has decreased in our North American automotive, commercial vehicle, agricultural and other markets by $60.8 million, $40.8 million, $9.6 million and $14.5 million, respectively. The decrease in net sales in South America was primarily due to unfavorable foreign currency translation of $19.5 million and lower volumes for our aftermarket, mass retail and OES channels mostly in the second quarter of 2020 primarily due to COVID-19. The decrease in net sales in Europe and Other was primarily due to a decrease in our European commercial vehicle and off-highway markets of $47.2 million and $17.1 million, respectively, primarily impacted by COVID-19. Europe and Other sales were favorably impacted due to increased sales volume in our European automotive and China automotive of $6.7 million and $6.6 million, respectively, as well as favorable foreign currency translation of $11.6 million.
Cost of Goods Sold and Gross Margin. Cost of goods sold decreased compared to 2019 and our gross margin decreased to 23.8% in 2020 compared to 25.6% in 2019. Our material cost as a percentage of net sales decreased by 0.3% to 52.8% in 2020 compared to 53.1% in 2019. Overhead as a percentage of net sales increased by 2.1% to 18.0% for 2020 compared to 15.9% for 2019 primarily due to adverse fixed cost leverage on lower sales levels including COVID-19 related incremental operating costs.
Our Control Devices segment gross margin decreased due to lower sales from COVID-19, the impact of the disposal of Non-core Products in the second quarter of 2019, as well as adverse fixed cost leverage on lower sales levels including our Canton facility which ceased production in accordance with our Canton restructuring plan in December 2019 and COVID-19 related incremental operating costs for employee safety protocols.
Our Electronics segment gross margin decreased primarily due to lower sales as a result of the of COVID-19 pandemic and higher overhead costs from the adverse leverage of fixed costs and COVID-19 related incremental operating costs for employee safety protocols.
Our Stoneridge Brazil segment gross margin decreased due to lower sales volumes partially offset by lower material costs due to favorable product mix from a greater percentage of monitoring service fees.
Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $11.4 million compared to 2019 due to a favorable fair value adjustment, net for earn-out consideration of $5.5 million at Stoneridge Brazil, lower incentive compensation costs, professional service fees and travel related expenses offset by the 2019 recovery of Brazilian indirect taxes of $6.5 million and higher 2020 business realignment and restructuring costs of $3.1 million.
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Gain on Disposal of Non-core Products, net. The gain on disposal in 2019 relates to the disposal of Control Devices’ Non-core Products.
Design and Development (“D&D”). D&D costs decreased by $2.8 million mostly due to lower restructuring and business realignment expenses at Control Devices of $2.3 million and lower spending at Control Devices due to the pace of the restoration of the engineering function previously located at the Canton facility.
Operating (Loss) Income. Operating (loss) income is summarized in the following table by reportable segment (in thousands):
Dollar | Percent | |||||||||||
increase / | increase / | |||||||||||
Year ended December 31, |
| 2020 |
| 2019 |
| (decrease) |
| (decrease) |
| |||
Control Devices | $ | 22,072 | $ | 73,327 | $ | (51,255) | (69.9) | % | ||||
Electronics | (3,672) | 25,006 | (28,678) | NM | ||||||||
Stoneridge Brazil | 3,766 | 6,539 | (2,773) | (42.4) | % | |||||||
Unallocated corporate | (29,830) | (33,591) | 3,761 | 11.2 | % | |||||||
Operating (loss) income | $ | (7,664) | $ | 71,281 | $ | (78,945) | NM | |||||
Our Control Devices segment operating income decreased due to the 2019 gain on disposal of Non-core Products, lower sales primarily related to COVID-19 as well as lower sales from the disposal of Non-core Products from the second quarter of 2019. Adverse leverage of fixed costs from lower sales volumes and COVID-19 related incremental operating costs offset by lower restructuring costs also affected operating income.
Our Electronics segment operating income decreased primarily due to lower sales as a result of COVID-19 resulting in lower gross margin. Electronics SG&A cost reductions were offset by business realignment and restructuring expenses.
Our Stoneridge Brazil segment operating income decreased primarily from the 2019 recovery of Brazilian indirect taxes of $6.5 million, lower sales volumes and margin offset by a favorable fair value adjustment, net for earn-out consideration of $5.5 million recognized in 2020.
Our unallocated corporate operating loss decreased primarily from lower incentive compensation, professional fees and travel related expenses.
Operating (loss) income by geographic location is summarized in the following table (in thousands):
Dollar | Percent | |||||||||||
Year ended December 31, |
| 2020 |
| 2019 |
| decrease |
| decrease | ||||
North America | $ | (22,179) | $ | 32,694 | $ | (54,873) | NM | |||||
South America | 3,766 | 6,539 | (2,773) | (42.4) | % | |||||||
Europe and Other | 10,749 | 32,048 | (21,299) | (66.5) | % | |||||||
Operating (loss) income | $ | (7,664) | $ | 71,281 | $ | (78,945) | NM | |||||
Our North American operating results decreased due to lower sales in our automotive, commercial vehicle, agriculture and off-highway markets, adverse leverage of fixed costs and COVID-19 related incremental operating costs for employee safety protocols. The decrease in operating income in South America was primarily due to the 2019 recovery of indirect Brazilian taxes and lower sales volumes offset by the favorable fair value adjustment, net for earn-out consideration. Our operating results in Europe and Other decreased primarily due to lower sales in our commercial vehicle and off-highway markets, adverse leverage of fixed costs and COIVD-19 related incremental operating costs for employee safety protocols.
Interest Expense, net. Interest expense, net increased by $1.8 million compared to 2019 due to an increase in outstanding debt balances.
Equity in Earnings of Investee. Equity earnings for MSIL were $1.5 million and $1.6 million for the years ended December 31, 2020 and 2019, respectively. The decrease in MSIL earnings was due to lower sales volume from the COVID-19 pandemic.
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Other (Income) Expense, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other income, net on the consolidated statement of operations. Other income, net increased by $1.7 million to $1.5 million in 2020 compared to other expense, net of $0.1 million in 2019 primarily due to higher foreign currency transaction gains in our Electronics, Control Devices and Stoneridge Brazil segments.
(Benefit) Provision for Income Taxes. In 2020, income tax benefit of $(2.8) million was attributable to the mix of earnings and losses among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 25.9% is slightly greater than the statutory tax rate primarily due to non-deductible expenses and tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions offset by the impact of certain incentives.
In 2019, income tax expense of $8.1 million was attributable to the mix of earnings amount jurisdictions and the sale of Non-core-Products on April 1, 2019. The effective tax rate of 11.8% is lower than the statutory tax rate primarily due to certain tax incentives offset by non-deductible expenses and tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions.
Year Ended December 31, 2019 Compared To Year Ended December 31, 2018
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||
increase / | ||||||||||||||
Year ended December 31, |
| 2019 |
| 2018 |
| (decrease) | ||||||||
Net sales | $ | 834,289 |
| 100.0 | % | $ | 866,199 |
| 100.0 | % | $ | (31,910) | ||
Costs and expenses: | ||||||||||||||
Cost of goods sold | 620,556 | 74.4 | 609,568 | 70.4 | 10,988 | |||||||||
Selling, general and administrative | 123,853 | 14.8 | 138,553 | 16.0 | (14,700) | |||||||||
Gain on disposal of Non-core Products, net | (33,599) |
(4.0) | - | - | (33,599) | |||||||||
Design and development | 52,198 | 6.3 | 51,074 | 5.9 | 1,124 | |||||||||
Operating income | 71,281 | 8.5 | 67,004 | 7.7 | 4,277 | |||||||||
Interest expense, net | 4,324 | 0.5 | 4,720 | 0.5 | (396) | |||||||||
Equity in earnings of investee | (1,578) | (0.2) | (2,038) | (0.2) | 460 | |||||||||
Other expense (income), net | 142 | - | (736) | (0.1) | 878 | |||||||||
Income before income taxes | 68,393 | 8.2 | 65,058 | 7.5 | 3,335 | |||||||||
Provision for income taxes | 8,102 | 1.0 | 11,210 | 1.3 | (3,108) | |||||||||
Net income | $ | 60,291 | 7.2 | % | $ | 53,848 | 6.2 | % | $ | 6,443 | ||||
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
Year ended December 31, |
| 2019 |
| 2018 |
| decrease |
| decrease |
| ||||||||
Control Devices | $ | 431,560 |
| 51.7 | % | $ | 441,297 |
| 50.9 | % | $ | (9,737) | (2.2) | % | |||
Electronics | 335,195 | 40.2 | 344,727 | 39.8 | (9,532) | (2.8) | % | ||||||||||
Stoneridge Brazil | 67,534 | 8.1 | 80,175 | 9.3 | (12,641) | (15.8) | % | ||||||||||
Total net sales | $ | 834,289 | 100.0 | % | $ | 866,199 | 100.0 | % | $ | (31,910) | (3.7) | % | |||||
Our Control Devices segment net sales decreased primarily as a result of decreased sales volume in the North American automotive market of $28.0 million due to certain program volume reductions related to the legacy shift-by-wire programs, the disposal of Non-core Products and the impact of a fourth quarter labor strike at a major customer. In addition, Control Devices experienced decreased sales volume in our North American commercial vehicle and agriculture markets of $3.0 million and $1.7 million, respectively. These decreases were partially offset by sales volume increases in our China automotive, European automotive and European commercial vehicle markets of $15.3 million, $4.5 million and $3.2 million, respectively, as well as the one-time sale of Non-core Product inventory of $4.2 million.
29
Our Electronics segment net sales decreased primarily due to a decrease in sales volume in our European commercial vehicle market of $14.8 million and unfavorable foreign currency translation of $7.4 million. This decrease was offset by an increase in sales volume in our North American and China commercial vehicle markets of $7.1 million and $1.7 million, respectively and increased sales of European and North American off-highway vehicle products of $3.6 million and $1.2 million, respectively.
Our Stoneridge Brazil segment net sales decreased due to lower volumes for our Argentina aftermarket channel, audio and alarm products, tracking devices and monitoring service revenues. This decrease was offset by higher volumes for our OEM and factory authorized dealer installer products.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
increase / | increase / | ||||||||||||||||
Year ended December 31, |
| 2019 |
| 2018 |
| (decrease) |
| (decrease) |
| ||||||||
North America | $ | 457,633 |
| 54.8 | % | $ | 480,869 |
| 55.5 | % | $ | (23,236) | (4.8) | % | |||
South America | 67,534 | 8.1 | 80,175 | 9.3 | (12,641) | (15.8) | % | ||||||||||
Europe and Other | 309,122 | 37.1 | 305,155 | 35.1 | 3,967 | 1.3 | % | ||||||||||
Total net sales | $ | 834,289 | 100.0 | % | $ | 866,199 | 100.0 | % | $ | (31,910) | (3.7) | % | |||||
The decrease in North American net sales was primarily attributable to a decrease in sales volume in our North American automotive market of $28.0 million resulting from certain program volume reductions related to the legacy shift-by-wire programs, the disposal of Non-core Products and the impact of the labor strike at a major customer that occurred in the second half of 2019. In addition, we experienced decreased sales volume in our agriculture market of $1.8 million. These decreases were partially offset by increased sales volume in our North American commercial vehicle and off-highway markets of $3.3 million and $1.2 million, respectively as well as the one-time sale of Non-core Product inventory of $4.2 million. The decrease in net sales in South America was primarily due to lower volumes for our Argentina aftermarket channel, audio and alarm products, tracking devices and monitoring service revenues. This decrease was offset by higher volumes for our OEM and factory authorized dealer installer products. The increase in net sales in Europe and Other was primarily due to an increase in sales volume in our China automotive, European automotive, European off-highway and China commercial vehicle markets of $15.3 million, $4.2 million, $3.6 million and $1.7 million, respectively. This increase was offset by a decrease in sales volume of our European commercial vehicle market of $11.6 million. In addition, Europe and Other sales were unfavorably impacted by foreign currency translation of $8.0 million.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to 2018 and our gross margin decreased to 25.6% in 2019 compared to 29.6% in 2018. Our material cost as a percentage of net sales increased by 1.6% to 53.1% in 2019 compared to 51.5% in 2018. Direct material costs in our Control Devices segment were negatively impacted by adverse product mix primarily from the impact of Non-core Product sales pursuant to the contract manufacturing agreement at an average margin of 5.5% and higher tariffs while our Electronics and Stoneridge Brazil segments were negatively impacted by adverse product mix and higher costs for electronic components. Overhead as a percentage of net sales increased by 2.0% to 15.9% in 2019 compared to 13.9% in 2018 primarily due to the Canton Restructuring costs of $7.6 million in our Control Devices segment.
Our Control Devices segment gross margin decreased due to lower sales and higher direct material costs as a percentage of sales, adversely affected by tariffs, Canton Restructuring costs of $7.6 million and the unfavorable impact of Non-Core Product sales pursuant to the contract manufacturing agreement at an average margin of 5.5%.
Our Electronics segment gross margin decreased primarily due to lower sales, unfavorable product mix and higher costs for electronic components.
Our Stoneridge Brazil segment gross margin decreased due to a reduction in sales volume and adverse sales mix.
30
Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $14.7 million compared to 2018 primarily due to a decrease in Stoneridge Brazil SG&A costs from the recovery of Brazilian indirect taxes of $6.5 million and lower selling costs. Electronics SG&A expense decreased due to lower restructuring expenses of $2.1 million, a reduction in expense related to the fair value adjustment for the Orlaco earn-out consideration of $0.4 million and lower wages. Control Devices SG&A costs decreased due to transitional service cost reimbursement associated with the disposal of its Non-core Products and lower wages offset by Canton Restructuring costs of $1.5 million and higher business realignment costs of $0.6 million. Unallocated corporate SG&A costs increased primarily due to higher business realignment costs of $1.0 million, accelerated share-based compensation expense of $0.7 million associated with a retirement and higher wages offset by lower incentive compensation.
Gain on Disposal of Non-core Products, net. The gain on disposal in 2019 relates to the disposal of Control Devices’ Non-core Products.
Design and Development (“D&D”). D&D costs increased by $1.1 million compared to the prior year due to higher D&D costs in our Control Devices segment due to Canton Restructuring costs of $3.4 million and in our unallocated corporate segment for the establishment of the chief technology office. This increase was offset by lower D&D costs in our Electronics and Control Devices segments from the capitalization of software development costs of $2.2 million and $1.4 million, respectively.
Operating Income. Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Dollar | Percent | |||||||||||
increase / | increase / | |||||||||||
Year ended December 31, |
| 2019 |
| 2018 |
| (decrease) |
| (decrease) |
| |||
Control Devices | $ | 73,326 | $ | 64,191 | $ | 9,135 | 14.2 | % | ||||
Electronics | 25,007 | 28,236 | (3,229) | (11.4) | % | |||||||
Stoneridge Brazil | 6,539 | 4,989 | 1,550 | 31.1 | % | |||||||
Unallocated corporate | (33,591) | (30,412) | (3,179) | (10.5) | % | |||||||
Operating income | $ | 71,281 | $ | 67,004 | $ | 4,277 | 6.4 | % | ||||
Our Control Devices segment operating income increased primarily due to the gain on disposal of Non-core Products and the favorable impact to D&D from the capitalization of software development costs offset by Canton Restructuring of $12.5 million and lower sales and margin including the adverse impact of tariffs,
Our Electronics segment operating income decreased primarily due to lower sales, unfavorable mix and higher costs for electronic components partially offset by a decrease in SG&A expense from lower restructuring costs and lower wages, and from lower D&D costs due to capitalization of software development costs.
Our Stoneridge Brazil segment operating income increased primarily due to the recovery of Brazilian indirect taxes, lower selling costs offsetting the impact of lower sales and gross margin.
Our unallocated corporate operating loss increased primarily due to higher SG&A costs from increase in business realignment costs of $1.0 million, accelerated share-based compensation expense associated with a retirement of eligible employees of $0.7 million, higher wages offset by lower incentive compensation. In addition, D&D expenses increased for the establishment of the chief technology office.
Operating income by geographic location is summarized in the following table (in thousands):
Dollar | Percent | |||||||||||
increase / | increase / | |||||||||||
Year ended December 31, |
| 2019 |
| 2018 |
| (decrease) |
| (decrease) | ||||
North America | $ | 32,694 | $ | 33,219 | $ | (525) | (1.6) | % | ||||
South America | 6,539 | 4,989 | 1,550 | 31.1 | % | |||||||
Europe and Other | 32,048 | 28,796 | 3,252 | 11.3 | % | |||||||
Operating income | $ | 71,281 | $ | 67,004 | $ | 4,277 | 6.4 | % | ||||
Our North American operating results decreased primarily due lower sales in our automotive market, Canton Restructuring costs as well as higher SG&A and D&D costs offset by the gain on disposal of Non-core Products and higher sales volume in the North American commercial vehicle and off-highway markets. The increase in operating income in South America was primarily due to lower SG&A from the recovery of Brazilian indirect taxes and lower selling costs and lower overhead costs offsetting lower sales. Our operating results in Europe and Other increased slightly primarily due to lower SG&A and D&D costs offset by lower gross margin from adverse product mix.
31
Interest Expense, net. Interest expense, net decreased by $0.4 million compared to the prior year primarily due to lower interest expense at our Stoneridge Brazil segment from lower outstanding debt offset by the write-off of deferred financing fees as a result of refinancing the 2019 Credit Facility.
Equity in Earnings of Investee. Equity earnings for MSIL were $1.6 million and $2.0 million for the years ended December 31, 2019 and 2018, respectively. The decrease compared to the prior period is primarily due to lower gross margin from lower sales volumes in served markets as well as unfavorable changes in foreign currency exchange rates.
Other Expense (Income), net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other expense (income), net on the consolidated statement of operations. Other expense (income), net decreased by $0.8 million to other expense (income), net of $0.1 million in 2019 compared to other expense (income), net of ($0.7) million in 2018 primarily due to lower foreign currency transaction gains in our Electronics segment.
Provision for Income Taxes. We recognized income tax expense of $8.1 million and $11.2 million for federal, state and foreign income taxes for 2019 and 2018, respectively. The decrease in tax expense for the year ended December 31, 2019 compared to the same period for 2018 was primarily due to the impact of certain tax incentives, which did not impact 2018. The effective tax rate decreased to 11.8% in 2019 from 17.2% in 2018 primarily due to the impact of certain tax incentives, which did not impact 2018.
Liquidity and Capital Resources
Summary of Cash Flows for the years ended December 31, 2020 and 2019 (in thousands):
Dollar | |||||||||
increase / | |||||||||
Years ended December 31, |
| 2020 |
| 2019 |
| (decrease) | |||
Net cash provided by (used for): | |||||||||
Operating activities | $ | 28,641 | $ | 24,505 | $ | 4,136 | |||
Investing activities | (33,885) | (6,299) | (27,586) | ||||||
Financing activities | 6,513 | (28,258) | 34,771 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 3,247 | (1,637) | 4,884 | ||||||
Net change in cash and cash equivalents | $ | 4,516 | $ | (11,689) | $ | 16,205 | |||
Cash provided by operating activities increased compared to 2019 primarily due to a reduction in cash used to fund working capital levels and the 2019 payment of Orlaco earn-out consideration of $5.1 million offset by lower net income and the payment of dividends to former noncontrolling interest holders of Stoneridge Brazil of $6.0 million. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash used for investing activities increased compared to 2019 due to proceeds from the 2019 sale of Control Devices Non-core Products offset by lower capital expenditures.
Net cash provided by (used for) financing activities increased compared to the prior year primarily due to lower Common Share repurchases of $45.0 million offset by higher Credit Facility borrowings, net of $20.0 million and the 2019 cash payment for Orlaco earn-out consideration.
32
Summary of Cash Flows for the years ended December 31, 2019 and 2018 (in thousands):
Years ended December 31, |
| 2019 |
| 2018 |
| Dollar Increase / (decrease) | |||
Net cash provided by (used for): | |||||||||
Operating activities | $ | 24,505 | $ | 80,772 | $ | (56,267) | |||
Investing activities | (6,299) | (27,950) | 21,651 | ||||||
Financing activities | (28,258) | (33,870) | 5,612 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,637) | (3,863) | 2,226 | ||||||
Net change in cash and cash equivalents | $ | (11,689) | $ | 15,089 | $ | (26,778) | |||
Cash provided by operating activities decreased compared to 2018 primarily due to the lower net income excluding the gain on disposal related to Control Devices’ Non-core Products and a higher use of cash to fund working capital levels. This decrease includes a portion of the cash payment of the Orlaco earn-out consideration obligation of $5.0 million paid during 2019. The higher working capital levels mostly relate to higher inventory levels from bank builds attributable to the Canton Restructuring activities and the disposal of Non-core Products as well as the delay of a product launch in our Electronics segment. Our receivable terms have remained consistent between 2019 and 2018 however we have experienced a timing related decline in 2019 year-end collection rates.
Net cash provided by investing activities increased compared to 2018 due to the cash proceeds received from the disposal of Control Devices’ Non-core Products offset by higher capital expenditures, 2019 capitalized software development costs, 2019 investments in the Autotech Fund II and insurance proceeds received in 2018.
Net cash used for financing activities increased compared to the prior year primarily due to the repurchase of Common Shares during the second quarter of 2019 and the cash payment of Orlaco earn-out consideration offset by higher net Credit Facility borrowings.
Summary of Future Cash Flows
The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2020 (in thousands):
Less than | After | ||||||||||||||
| Total |
| 1 year |
| 2-3 years |
| 4-5 years |
| 5 years | ||||||
Credit Facility | $ | 136,000 | $ | - | $ | - | $ | 136,000 | $ | - | |||||
Debt | 7,673 | 7,673 | - | - | - | ||||||||||
Interest payments(A) | 13,516 | 4,097 | 7,752 | 1,667 | - | ||||||||||
Operating leases | 23,721 | 4,873 | 7,489 | 5,652 | 5,707 | ||||||||||
Total contractual obligations(B) | $ | 180,910 | $ | 16,643 | $ | 15,241 | $ | 143,319 | $ | 5,707 | |||||
| (A) | Includes estimated payments under the Company’s 2019 Credit Facility and other debt obligations using the most current interest rate and principal balance information available at December 31, 2020, extended through the end of the term. |
| (B) | In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten year life of the fund. The Company has contributed $3.6 million to the Autotech Fund II since December 2018. |
Management will continue to focus on efficiently managing its weighted-average cost of capital and believes that cash flows from operations and the availability of funds from our 2019 Credit Facility provides sufficient liquidity to meet our future growth and operating needs.
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As outlined in Note 5 to our consolidated financial statements, the 2019 Credit Facility increased our borrowing capacity by $100.0 million and permits borrowing up to a maximum level of $400.0 million. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The 2019 Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The 2019 Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The 2019 Credit Facility had an outstanding balance of $136.0 million at December 31, 2020.
Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts on the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provides for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021). During the Covenant Relief Period:
| ● | the maximum net leverage ratio is suspended; |
| ● | the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021; |
| ● | the minimum interest coverage ratio of 3.50 is reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively; |
| ● | the Company’s liquidity may not be less than $150,000; |
| ● | the Company’s aggregate amount of cash and cash equivalents cannot exceed $130,000; |
| ● | there are certain restrictions on Restricted Payments (as defined); and |
| ● | a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders. |
Amendment No. 1 increases the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points.
The Company was in compliance with all covenants at December 31, 2020. The Company has not experienced a violation which would limit the Company’s ability to borrow under the 2019 Credit Facility, as amended and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the 2019 Credit Facility may be limited as a result of lower than expected financial performance due to the adverse impact of COVID-19 on the Company’s markets and general global demand. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.
Stoneridge Brazil maintains short-term loans used for working capital purposes. At December 31, 2020, there was $1.6 million of Stoneridge Brazil debt outstanding. Principal repayments of $1.6 million on Stoneridge Brazil debt at December 31, 2020 are due in 2021.
In December 2019, Stoneridge Brazil established an overdraft credit line which allowed overdrafts on Stoneridge Brazil’s bank account up to a maximum level of Brazilian real 5.0 million, or $1.2 million, at December 31, 2019. There was no balance outstanding on the overdraft credit line as of December 31, 2019, and the overdraft credit line was terminated during the year ended December 31, 2020.
The Company’s wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20.0 million Swedish krona, or $2.4 million and $2.1 million, at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020, there was 13.1 million Swedish krona, or $1.6 million outstanding on this overdraft credit line. At December 31, 2019, there was no balance outstanding on this overdraft credit line. During the year ended December 31, 2020, the subsidiary borrowed 312.9 million Swedish krona, or $38.1 million, and repaid 299.8 million Swedish krona, or $36.5 million.
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The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of 50.0 million Chinese yuan, or $7.7 million at December 31, 2020 and 40.0 million Chinese yuan, or $5.7 million at December 31, 2019. At December 31, 2020 and December 31, 2019 there was $4.5 million and $2.2 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which allows up to a maximum borrowing level of 15.0 million Chinese yuan, or $2.3 million and $2.2 million at December 31, 2020 and December 31, 2019, respectively. At December 31, 2020 there was $0.4 million utilized on the Suzhou bank acceptance draft line and at December 31, 2019 there was approximately $0.2 million utilized on the Suzhou bank acceptance draft line of credit.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line (“PM Sensor Exit”). The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial and supplier settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM sensor production. We recognized $3.4 million of expense as a result of this initiative during 2020. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $2.8 million to $6.3 million and is related to employee severance and termination costs, contract terminations costs, other related costs such as potential commercial and supplier settlements and accelerated depreciation. The Company expects the exit from the PM sensor product line to be completed in the third quarter of 2021.
In January 2019, the Company committed to a restructuring plan that resulted in the closure of its Canton Facility as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The estimated costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized $3.0 million and $12.5 million of expense as a result of these actions during the years ended December 31, 2020 and 2019, respectively. During the third quarter of 2020, we leased the Canton facility to a third party and are evaluating the sale of the facility. We expect additional costs to be immaterial related to the Canton Restructuring.
In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced a restructuring program to transfer the European production of its Controls product line to China. For the years ended December 31, 2020 and 2019, we recognized expense of $2.4 million and $0.6 million, respectively, as a result of these actions for related costs and non-cash fixed asset charges for accelerated depreciation fixed assets. The Company expects to incur approximately $0.2 million of additional restructuring costs related to employee severance and other related costs for these actions through the second quarter of 2021.
On October 26, 2018 the Company announced a Board of Directors approved repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program for $50.0 million of outstanding Common Shares over an 18 month period. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of repurchases of Common Shares will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, the Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program authorization. In April 2020, the Company announced that was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.
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In January 2020, Stoneridge Brazil paid dividends to former noncontrolling interest holders of Brazilian real (“R$”) 24.2 million ($6.0 million) as of December 31, 2019. The dividends payable balance included R$3.7 million ($1.0 million) in monetary correction for the year ended December 31, 2019 based on the Brazilian National Extended Consumer Price inflation index. The dividend payable related to Stoneridge Brazil was recorded within other current liabilities on the consolidated balance sheet as of December 31, 2019.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. As of December 31, 2020, the Company’s cumulative investment in the Autotech Fund II was $3.6 million. The Company contributed $1.6 million to the Autotech Fund II during both years ended December 31, 2020 and 2019, respectively.
Our future results could also be adversely affected by unfavorable changes in foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden, Estonia, the Netherlands, United Kingdom and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 5 to the consolidated financial statements for additional details. Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of our raw material purchases.
At December 31, 2020, we had a cash and cash equivalents balance of approximately $73.9 million, of which 88.4% was held in foreign locations. The Company has approximately $262.3 million of undrawn commitments under the 2019 Credit Facility as of December 31, 2020, which results in total undrawn commitments and cash balances of more than $336.2 million. However, despite the June 26, 2020 amendment, it is possible that future borrowing flexibility under our 2019 Credit Facility may be limited as a result of our financial performance due the adverse impact of COVID-19 on the Company’s markets and general global demand.
Commitments and Contingencies
See Note 11 to the consolidated financial statements for disclosures of the Company’s commitments and contingencies.
Seasonality
Our Control Devices and Electronics segments are not typically materially affected by seasonality, however the demand for our Stoneridge Brazil segment consumer products is generally higher in the second half of the year, the fourth quarter in particular.
Inflation and International Presence
By operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Furthermore, given the current economic climate and recent fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 10 to the consolidated financial statements for additional details on the Company’s commodity price and foreign currency exchange rate risks.
Off-balance Sheet Arrangements
At December 31, 2020 we do not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our financial condition or results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions used in our consolidated financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
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Our critical accounting policies, those most important to the financial presentation and those that are the most complex, subjective or require significant judgment, are as follows.
Revenue Recognition and Sales Commitments. We recognize revenue when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. Revenue for OEM and Tier 1 supplier customers and aftermarket products are recognized at the point in time it satisfies a performance obligation by transferring control of a part to the customer. A small portion of our sales are comprised of monitoring services of which the revenue is recognized over the life of the contract. See Note 3 to the consolidated financial statements for additional information on our revenue recognition policies, including recognizing revenue based on satisfying performance obligations.
Warranties. Our warranty liability is established based on our best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to holding the company responsible for their product warranties. Although we believe that our warranty liability is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
Contingencies. We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters.
We have accrued for estimated losses when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating that amount of probable loss. The liabilities may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Goodwill. Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized.
The Company utilizes an income statement approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income statement approach provides a reasonable estimate of the fair value of a reporting unit. The market valuation approach is used to further support our analysis.
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Income Taxes. Deferred income taxes are provided for temporary differences between the amount of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred tax assets include, among other items, net operating loss carryforwards and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Our U.S. state and foreign net operating losses expire at various times or have indefinite expiration dates. Our U.S. federal general business credits, if unused, begin to expire in 2025, and the state and foreign tax credits expire at various times.
Accounting standards require that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment, and in making this evaluation, the Company considers available positive and negative evidence, including the potential to carryback net operating losses and credits, the future release of certain taxable temporary differences, actual and forecasted results, and tax planning strategies that are both prudent and feasible. Risk factors include U.S. and foreign economic conditions that affect the automotive and commercial vehicle markets of which the Company has significant operations.
The Company has recognized deferred taxes related to foreign withholding taxes and the expected foreign currency impact upon repatriation from foreign subsidiaries not considered indefinitely reinvested.
The Tax Cuts and Jobs Act of 2017 created a provision known as Global Intangible Low-Taxed Income (“GILTI”) that imposes a tax on certain earnings of foreign subsidiaries. The Company has made an accounting policy election to reflect GILTI taxes, if any, as a current period tax expense when incurred.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard prospectively as of January 1, 2020 using the modified retrospective basis. The impact of the adoption was a reduction to deferred tax liabilities and an increase to retained earnings of $13.8 million on the consolidated balance sheet as of December 31, 2020. The adoption of this standard did not have an impact on the Company’s consolidated results of operations and cash flows.
In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this standard prospectively as of January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The guidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
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In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019. The guidance allows for various methods for measuring expected credit losses. The Company has elected to apply a historical loss rate based on historical write-offs by region, adjusted for current economic conditions and forecasts about future economic conditions that are reasonable and supportable. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2020
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance in ASU 2020-04 provides temporary optional expedient and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”) (also known as the “reference rate reform”). The guidance allows companies to elect not to apply certain modification accounting requirements to contracts affected by the reference rate reform, if certain criteria are met. The guidance will also allow companies to elect various optional expedients which would allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. As of December 31, 2020, the Company has not yet had contracts modified due to rate reform.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rates
We are exposed to interest rate risk primarily from the effects of changes in interest rates. At December 31, 2020, approximately 94.7% of our outstanding debt was floating-rate and 5.3% was fixed-rate. We estimate that a 1.0% change in the interest costs of our floating-rate debt outstanding as of December 31, 2020 would change interest expense on an annual basis by approximately $1.4 million.
Currency Exchange Rates
In addition to the United States, we have significant operations in Europe, South America, Mexico and China. As a result we are subject to translation risk because of the transactions of our foreign operations are in local currency (particularly the Brazilian real, Chinese renminbi, Mexican peso, euro, Swedish krona and Argentinian peso) and must be translated into U.S. dollars. As currency exchange rates fluctuate, the translation of our consolidated statements of operations into U.S. dollars affects the comparability of revenues, expenses, operating income, net income and earnings per share between years.
We have previously used derivative financial instruments, including foreign currency forward contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory material purchases and other foreign currency exposures.
As discussed in detail in Note 10 to our consolidated financial statements, we entered into foreign currency forward contracts the purpose of which is to reduce exposure related to the Company’s future Mexican peso-denominated purchases.
We estimate that a 10.0% unidirectional change in currency exchange rates relative to the U.S dollar would have changed our income before income taxes for the year ended December 31, 2020 by approximately $0.9 million.
Commodity Price Risk
The competitive marketplace in which we operate may limit our ability to recover increased costs through higher prices. As such, we are subject to market risk with respect to commodity price fluctuations principally related to our purchases of purchase of copper, steel, zinc, resins and certain other commodities through a combination of fixed price agreements, staggered short-term contract maturities and commercial negotiations with our suppliers and customers. In the future, if we believe that the terms of a fixed price agreement become beneficial to us, we will enter into another such instrument. We may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Stoneridge, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Product warranty and recall reserves | ||
Description of the Matter | The Company's reserves for product warranty and recall totaled $12.7 million at December 31, 2020. As described in Note 2 to the consolidated financial statements, the Company's reserve for product warranty and recall is based on several factors, including the historical trends of units sold and payment amounts, combined with the Company’s current understanding of existing warranty and recall claims. The warranty liability requires a forecast of the resolution of existing claims as well as expected future claims on products previously sold. Auditing the Company’s reserve for product warranty and recall is complex due to the measurement uncertainty associated with the estimate, management’s judgment in determining the cost and volume estimates used in the computation as well as volume and costing assumptions in determining the expected future claims on products previously sold. | |
How We Addressed the Matter in Our Audit | We evaluated the design and tested the operating effectiveness of the Company’s controls over the product warranty and recall process. For example, we tested management review controls over the appropriateness of assumptions management used in the calculation and the completeness of warranty claims. To evaluate the reserve for product warranty and recall, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims data and costs used in the computation of management’s estimate, performing inquiries of the Company’s quality control team, and obtaining a legal confirmation letter to evaluate the status and assessment of certain reserves. We assessed the historical accuracy of management’s product warranty and recall reserves and performed sensitivity analyses of significant assumptions to evaluate the impact to the reserve that would result from changes in the assumptions. |
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Description of the Matter | Valuation of earn-out consideration As discussed in Notes 4 and 10 of the consolidated financial statements, in 2017 the Company acquired the remaining 26% noncontrolling interest in Stoneridge Brazil for $1.5 million in cash along with earn-out consideration. The Company will be required to pay additional earn-out consideration, which is not capped, based on Stoneridge Brazil’s financial performance in either 2020 or 2021. The estimated fair value of the Stoneridge Brazil earn-out consideration, which approximated $5.8 million as of December 31, 2020, is based on discounted cash flows utilizing forecasted earnings before taxes, interest, depreciation, and amortization.
Auditing management’s estimate of the fair value of the earn-out consideration was complex and highly judgmental due to the significant estimation required. In particular, the fair value estimate was sensitive to significant assumptions such as forecasted sales, expected operating income, and the discount rate. | |
How we addressed the matter in our audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for measuring the Stoneridge Brazil earn-out consideration. This included testing management review controls over projected financial information over the Stoneridge Brazil business and other key inputs to the calculation.
To test the estimated fair value of the Company’s earn-out consideration, we performed audit procedures that included, among others, testing the significant assumptions discussed above and the underlying data used by the Company in its calculation. We compared the significant assumptions used by management to current industry and economic trends, changes to the company’s customer base or product mix and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the calculated earn-out consideration that would result from changes in the assumptions. We also involved a valuation specialist to assist in our evaluation of the significant assumptions in the Company’s calculation, including the discount rate used in the fair value estimate. |
/s/Ernst & Young LLP
We have served as the Company‘s auditor since 2002.
Detroit, MI
February 24, 2021
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STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| ||||||
December 31, (in thousands) |
| 2020 |
| 2019 | ||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, less reserves of $ | | | ||||
Inventories, net | | | ||||
Prepaid expenses and other current assets | | | ||||
Total current assets | | | ||||
Long-term assets: | ||||||
Property, plant and equipment, net | | | ||||
Intangible assets, net | | | ||||
Goodwill | | | ||||
Operating lease right-of-use asset | | | ||||
Investments and other long-term assets, net | | | ||||
Total long-term assets | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
Current liabilities: | ||||||
Current portion of debt | $ | | $ | | ||
Accounts payable | | | ||||
Accrued expenses and other current liabilities | | | ||||
Total current liabilities | | | ||||
Long-term liabilities: | ||||||
Revolving credit facility | | | ||||
Long-term debt, net | - | | ||||
Deferred income taxes | | | ||||
Operating lease long-term liability | | | ||||
Other long-term liabilities | | | ||||
Total long-term liabilities | | | ||||
Shareholders' equity: | ||||||
Preferred Shares, without par value, | ||||||
Common Shares, without par value, | ||||||
Additional paid-in capital | | | ||||
Common Shares held in treasury, | ( | ( | ||||
Retained earnings | | | ||||
Accumulated other comprehensive loss | ( | ( | ||||
Total shareholders' equity | | | ||||
Total liabilities and shareholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
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STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, (in thousands, except per share data) | 2020 |
| 2019 |
| 2018 | |||||
Net sales | $ | | $ | | $ | | ||||
Costs and expenses: | ||||||||||
Cost of goods sold | | | | |||||||
Selling, general and administrative | | | | |||||||
Gain on disposal of Non-core Products, net | - | ( | - | |||||||
Design and development | | | | |||||||
Operating (loss) income | ( | | | |||||||
Interest expense, net | | | | |||||||
Equity in earnings of investee | ( | ( | ( | |||||||
Other (income) expense, net | ( | | ( | |||||||
(Loss) income before income taxes | ( | | | |||||||
(Benefit) provision for income taxes | ( | | | |||||||
Net (loss) income | $ | ( | $ | | $ | | ||||
(Loss) earnings per share: | ||||||||||
Basic | $ | ( | $ | | $ | | ||||
Diluted | $ | ( | $ | | $ | | ||||
Weighted-average shares outstanding: | ||||||||||
Basic | | | | |||||||
Diluted | | | | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
45
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, (in thousands) | 2020 | 2019 |
| 2018 | ||||||
Net (loss) income | $ | ( | $ | | $ | | ||||
Other comprehensive income (loss), net of tax: | ||||||||||
Foreign currency translation | | ( | ( | |||||||
Unrealized (loss) gain on derivatives (1) | ( | ( | | |||||||
Other comprehensive income (loss), net of tax | | ( | ( | |||||||
Comprehensive (loss) income | $ | ( | $ | | $ | | ||||
| (1) | Net of tax (benefit) expense of $( |
The accompanying notes are an integral part of these consolidated financial statements.
46
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, (in thousands) |
| 2020 |
| 2019 |
| 2018 | |||
OPERATING ACTIVITIES: | |||||||||
Net (loss) income | $ | ( | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||||||||
Depreciation | | | | ||||||
Amortization, including accretion and write-off of deferred financing costs | | | | ||||||
Deferred income taxes | ( | | | ||||||
Earnings of equity method investee | ( | ( | ( | ||||||
Loss (gain) on sale of fixed assets | | ( | | ||||||
Share-based compensation expense | | | | ||||||
Excess tax benefit related to share-based compensation expense | ( | ( | ( | ||||||
Gain on disposal of Non-core Products, net | - | ( | - | ||||||
Property, plant and equipment impairment charge | | - | - | ||||||
Intangible impairment charge | - | - | | ||||||
Change in fair value of earn-out contingent consideration | ( | | | ||||||
Changes in operating assets and liabilities: | |||||||||
Accounts receivable, net | | ( | ( | ||||||
Inventories, net | | ( | ( | ||||||
Prepaid expenses and other assets | | ( | | ||||||
Accounts payable | | ( | | ||||||
Accrued expenses and other liabilities | ( | ( | ( | ||||||
Net cash provided by operating activities | | | | ||||||
INVESTING ACTIVITIES: | |||||||||
Capital expenditures, including intangibles | ( | ( | ( | ||||||
Proceeds from sale of fixed assets | | | | ||||||
Insurance proceeds for fixed assets | - | - | | ||||||
Proceeds from disposal of Non-core Products | - | | - | ||||||
Investment in venture capital fund | ( | ( | ( | ||||||
Net cash used for investing activities | ( | ( | ( | ||||||
FINANCING ACTIVITIES: | |||||||||
Revolving credit facility borrowings | | | | ||||||
Revolving credit facility payments | ( | ( | ( | ||||||
Proceeds from issuance of debt | | | | ||||||
Repayments of debt | ( | ( | ( | ||||||
Earn-out consideration cash payment | - | ( | - | ||||||
Other financing costs | ( | ( | - | ||||||
Common Share repurchase program | ( | ( | - | ||||||
Repurchase of Common Shares to satisfy employee tax withholding | ( | ( | ( | ||||||
Net cash provided by (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 | $ | | $ | | $ | | |||
Supplemental disclosure of cash flow information: | |||||||||
Cash paid for interest | $ | | $ | | $ | | |||
Cash (received) paid for income taxes, net | $ | ( | $ | | $ | | |||
Supplemental disclosure of non-cash activity: | |||||||||
Adoption of ASU 2019-12 (Note 2) | $ | | $ | - | $ | - | |||
|
| ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
47
STONERIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Number of | Accumulated |
| |||||||||||||||||
Common | Number of | Additional | Common | other | Total | ||||||||||||||
Shares | treasury | paid-in | Shares held | Retained | comprehensive | shareholders' | |||||||||||||
(in thousands) |
| outstanding |
| shares |
| capital |
| in treasury |
| earnings |
| loss |
| equity | |||||
BALANCE DECEMBER 31, 2017 |
| |
| |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Net income |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Unrealized gain on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Repurchased Common Shares for treasury, net |
| ( |
| |
| — |
| ( |
| — |
| — |
| ( | |||||
Share-based compensation, net | — | — | | — | — | — | | ||||||||||||
Cumulative effect of an accounting change |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
BALANCE DECEMBER 31, 2018 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Unrealized loss on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Repurchased Common Shares for treasury, net |
| ( |
| |
| — |
| ( |
| — |
| — |
| ( | |||||
Common Share repurchase program |
| ( |
| |
| ( |
| ( |
| — |
| — |
| ( | |||||
Share-based compensation, net | — | — | | — | — | — | | ||||||||||||
BALANCE DECEMBER 31, 2019 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Net loss |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Unrealized loss on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Repurchased Common Shares for treasury, net |
| ( |
| |
| — |
| |
| — |
| — |
| | |||||
Common Share repurchase program |
| ( |
| |
| |
| ( |
| — |
| — |
| ( | |||||
Share-based compensation, net | — | — | ( | — | — | — | ( | ||||||||||||
Adoption of ASU 2019-12 (Note 2) | — |
| — |
| — |
| — |
| |
| — |
| | ||||||
BALANCE DECEMBER 31, 2020 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these consolidated financial statements.
48
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
1. Organization and Nature of Business
Stoneridge, Inc. and its subsidiaries are global designers and manufacturers of highly engineered electrical and electronic components, modules and systems for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Stoneridge, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany transactions and balances have been eliminated in consolidation. The Company analyzes its ownership interests in accordance with Accounting Standards Codification (“ASC”) “Consolidations (Topic 810)” to determine whether they are a variable interest entity and, if so, whether the Company is the primary beneficiary.
The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the years ended December 31, 2020, 2019 and 2018 has been determined to be an unconsolidated entity, and therefore is accounted for under the equity method of accounting based on the Company’s
Accounting Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
Cash and Cash Equivalents
The Company’s cash and cash equivalents include actively traded money market funds with short-term investments in marketable securities, primarily U.S. government securities. Cash and cash equivalents are stated at cost, which approximates fair value, due to the highly liquid nature and short-term duration of the underlying securities with original maturities of 90 days or less.
Accounts Receivable and Concentration of Credit Risk
Revenues are principally generated from the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets. The Company’s largest customers are Ford Motor Company and Volvo, primarily related to the Control Devices and Electronics reportable segments and accounted for the following percentages of consolidated net sales:
Year ended December 31 |
| 2020 |
| 2019 |
| 2018 | |||
Ford Motor Company | % | % | % | ||||||
Volvo | % | % | % | ||||||
Accounts receivable are recorded at the invoice price, net of an estimate of allowance for doubtful accounts and other reserves.
49
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectability in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The Company does not have collateral requirements with its customers.
Inventories
Inventories are valued at the lower of cost (using either the first-in, first-out (“FIFO”) or average cost methods) or net realizable value. The Company evaluates and adjusts as necessary its excess and obsolescence reserve on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. Inventory cost includes material, labor and overhead. Inventories consist of the following:
December 31 |
| 2020 |
| 2019 | ||
Raw materials | $ | | $ | | ||
Work-in-progress | | | ||||
Finished goods | | | ||||
Total inventories, net | $ | | $ | | ||
Inventory valued using the FIFO method was $
Pre-production Costs Related to Long-term Supply Arrangements
Engineering, research and development and other design and development costs for products sold on long-term supply arrangements are expensed as incurred unless the Company has a contractual guarantee for reimbursement from the customer which are capitalized as pre-production costs. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company either has title to the assets or has the noncancelable right to use the assets during the term of the supply arrangement are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets, typically to
50
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Disposal of Non-Core Products
On April 1, 2019, the Company entered into an Asset Purchase Agreement by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $
On April 1, 2019, the Company’s Control Devices segment recognized net sales and costs of goods sold (“COGS”) of $
The Company received $
There were no Non-core Product net sales for the year ended December 31, 2020. Non-core Products net sales and operating income, including sales to SMP pursuant to the contract manufacturing agreement, were $
On June 17, 2020, the Company and SMP terminated the transition services agreement and the contract manufacturing agreement.
Acquisitions
Orlaco
On January 31, 2017, Stoneridge B.V., an indirect wholly-owned subsidiary of Stoneridge, Inc., acquired Exploitatiemaatschappij Berghaaf B.V. (“Orlaco”). Orlaco designs, manufactures and sells camera-based vision systems, monitors and related products primarily to the heavy off-road machinery, commercial vehicle, lifting crane and warehousing and logistics industries. Stoneridge and Orlaco jointly developed the MirrorEye camera monitor system, which is a vision-based system solution to improve the safety and fuel economy of commercial vehicles. The MirrorEye camera monitor system integrates Orlaco’s vision processing technology and Stoneridge’s driver information capabilities as well as the combined software capabilities of both businesses. The acquisition of Orlaco enhanced the Stoneridge’s Electronics segment global technical capabilities in vision systems and facilitated entry into new markets.
The aggregate consideration for the Orlaco acquisition was €
The Company’s statement of operations included $
51
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Orlaco earn-out consideration reached the capped amount of €
The earn-out consideration obligation related to Orlaco of $
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the following: | ||||||
December 31 |
| 2020 |
| 2019 | ||
Land and land improvements | $ | | $ | | ||
Buildings and improvements | | | ||||
Machinery and equipment | | | ||||
Office furniture and fixtures | | | ||||
Tooling | | | ||||
Information technology | | | ||||
Vehicles | | | ||||
Leasehold improvements | | | ||||
Construction in progress | | | ||||
Total property, plant, and equipment | | | ||||
Less: accumulated depreciation | ( | ( | ||||
Property, plant and equipment, net | $ | | $ | | ||
Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $
Buildings and improvements |
| ||
Machinery and equipment | |||
Office furniture and fixtures | |||
Tooling | |||
Information technology | |||
Vehicles | |||
Leasehold improvements | shorter of lease term or |
Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of the property, plant and equipment are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is recorded in the consolidated statements of operations as a component of SG&A expenses.
52
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Impairment of Long-Lived or Finite-Lived Assets
The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there are two asset groups comprised of PM sensor fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM sensor fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $
Goodwill and Other Intangible Assets
Goodwill
The total purchase price associated with acquisitions is allocated to the acquisition date fair values of identifiable assets acquired and liabilities assumed with the excess purchase price assigned to goodwill.
Goodwill was $
53
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company utilizes an income statement approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income statement approach provides a reasonable estimate of the fair value of a reporting unit. The market valuation approach is used to further support our analysis. There was
Goodwill and changes in the carrying amount of goodwill for the Electronics segment for the years ended December 31, 2020 and 2019 were as follows:
| |||
Balance at January 1, 2020 | $ | | |
Currency translation | | ||
Balance at December 31, 2020 | $ | | |
Balance at January 1, 2019 | $ | | |
Currency translation | ( | ||
Balance at December 31, 2019 | $ | |
The Company’s cumulative goodwill impairment loss since inception was $
Other Intangible Assets
Other intangible assets, net at December 31, 2020 and 2019 consisted of the following:
Acquisition | Accumulated | ||||||||
As of December 31, 2020 |
| cost |
| amortization |
| Net | |||
Customer lists | $ | | $ | ( | $ | | |||
Tradenames | | ( | | ||||||
Technology | | ( | | ||||||
Capitalized software development | | - | | ||||||
Total | $ | | $ | ( | $ | | |||
Acquisition | Accumulated | ||||||||
As of December 31, 2019 |
| cost |
| amortization |
| Net | |||
Customer lists | $ | | $ | ( | $ | ||||
Tradenames | | ( | |||||||
Technology | | ( | | ||||||
Capitalized software development | | - | | ||||||
Total | $ | | $ | ( | $ | ||||
54
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Other intangible assets, net at December 31, 2020 for customer lists, tradenames, technology and capitalized software development include $
The Company designs and develops software that will be embedded into certain products and sold to customers. Software development costs are capitalized after the software product development reaches technological feasibility and until the software product becomes available for general release to customers. These intangible assets will be amortized using the straight-line method over estimated useful lives generally ranging from to
The Company recognized $
For the year ended December 31, 2018, the Company recognized $
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
As of December 31 |
| 2020 |
| 2019 | ||
Compensation related liabilities | $ | | $ | | ||
Product warranty and recall obligations | | | ||||
Other (A) | | | ||||
Total accrued expenses and other current liabilities | $ | | $ | | ||
| (A) | “Other” is comprised of miscellaneous accruals, none of which individually contributed a significant portion of the total. |
Income Taxes
The Company accounts for income taxes using the liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not to occur. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
Deferred tax assets are recognized to the extent that these assets are more likely than not to be realized (See Note 6). In making such a determination, the Company considers all available positive and negative evidence, including future release of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. Release of some or all of a valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.
The Company’s policy is to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected.
The Tax Cuts and Jobs Act of 2017 (“Tax Legislation”) created a provision known as Global Intangible Low-Taxed Income (“GILTI”) that imposes a tax on certain earnings of foreign subsidiaries. The Company has made an accounting policy election to reflect GILTI taxes, if any, as a current period tax expense when incurred.
55
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Currency Translation
The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive loss in the Company’s consolidated balance sheets.
Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction with the resulting adjustments included on the consolidated statements of operations within other (income) expense, net. These foreign currency transaction (gains) losses, including the impact of hedging activities, were $(
Revenue Recognition and Sales Commitments
The Company recognizes revenue when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. The Company recognizes monitoring service revenues over time, as the services are provided to customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. The Company collects certain taxes and fees on behalf of government agencies and remits such collections on a periodic basis. The taxes are collected from customers but are not included in net sales. Estimated returns are based on historical authorized returns. The Company often enters into agreements with its customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to potential renegotiation from time to time, which may affect product pricing. See Note 3 for additional disclosure.
Shipping and Handling Costs
Shipping and handling costs are included in COGS on the consolidated statements of operations.
Product Warranty and Recall Reserves
Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to holding the Company responsible for their product warranties. The Company can provide no assurances that it will not experience material claims or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued. The current portion of the product warranty and recall reserve is included as a component of accrued expenses and other current liabilities on the consolidated balance sheets. Product warranty and recall includes $
The following provides a reconciliation of changes in the product warranty and recall reserve:
Year ended December 31 |
| 2020 |
| 2019 | ||
Product warranty and recall at beginning of period | $ | | $ | | ||
Accruals for warranties established during period | | | ||||
Aggregate changes in pre-existing liabilities due to claim developments | | | ||||
Settlements made during the period | ( | ( | ||||
Foreign currency translation | | ( | ||||
Product warranty and recall at end of period | $ | | $ | | ||
56
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Design and Development Costs
Expenses associated with the development of new products, and changes to existing products, other than capitalized software development costs, are charged to expense as incurred, and are included in the Company’s consolidated statements of operations as a separate component of costs and expenses. These product development costs amounted to $
Research and Development Activities
The Company enters into research and development contracts with certain customers, which generally provide for reimbursement of costs. The Company incurred and was reimbursed for contracted research and development costs of $
Share-Based Compensation
At December 31, 2020, the Company had two types of share-based compensation plans: (1) 2016 Long-Term Incentive Plan for employees and (2) the 2018 Amended and Restated Directors’ Restricted Shares Plan, for non-employee directors. See Note 8 for additional details on share-based compensation plans.
Total compensation expense recognized as a component of SG&A expense on the consolidated statements of operations for share-based compensation arrangements was $
Financial Instruments and Derivative Financial Instruments
Financial instruments, including derivative financial instruments, held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt, interest rate swap agreement and foreign currency forward contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. See Note 10 for fair value disclosures of the Company’s financial instruments.
Common Shares Held in Treasury
The Company accounts for Common Shares held in treasury under the cost method (applied on a FIFO basis) and includes such shares as a reduction of total shareholders’ equity.
(Loss) Earnings Per Share
Basic (loss) earnings per share was computed by dividing net (loss) income by the weighted-average number of Common Shares outstanding for each respective period. Diluted earnings per share was calculated by dividing net (loss) income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented. However, for all periods in which the Company recognized a net loss, the Company did not recognize the effect of the potential dilutive securities as their inclusion would be anti-dilutive. Potential dilutive shares of
57
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Actual weighted-average Common Shares outstanding used in calculating basic and diluted net income per share were as follows:
2020 |
| 2019 |
| 2018 | ||
Basic weighted-average Common Shares outstanding | | | | |||
Effect of dilutive shares | - | | | |||
Diluted weighted-average Common Shares outstanding | | | |
There were
Deferred Financing Costs, net
Deferred financing costs are amortized over the life of the related financial instrument using the straight-line method, which approximates the effective interest method. Deferred finance cost amortization and debt discount accretion, for the years ended December 31, 2020, 2019 and 2018 was $
Equity and Changes in Accumulated Other Comprehensive Loss by Component
Common Share Repurchase
On October 26, 2018, the Company’s Board of Directors authorized the Company to repurchase up to $
On February 25, 2020, the Bank notified the Company that it terminated early its commitment pursuant the ASR Agreement and would deliver
On February 24, 2020, the Company’s Board of Directors authorized a new repurchase program of $
58
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
On March 3, 2020, under the new repurchase program the Company entered into a 10b-18 Agreement Letter (the “10b-18 Agreement”), with the Bank to purchase Company Common Shares, under purchasing conditions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”), for up to $
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the years ended December 31, 2020 and 2019 were as follows:
Foreign | Unrealized | ||||||||
currency | gain (loss) | ||||||||
| translation |
| on derivatives |
| Total | ||||
Balance at January 1, 2020 | $ | ( | $ | - | $ | ( | |||
Other comprehensive income (loss) before reclassifications | | ( | | ||||||
Amounts reclassified from accumulated other comprehensive loss | - | | | ||||||
Net other comprehensive income (loss), net of tax | | ( | | ||||||
Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | |||
Balance at January 1, 2019 | $ | ( | $ | | $ | ( | |||
Other comprehensive (loss) income before reclassifications | ( | | ( | ||||||
Amounts reclassified from accumulated other comprehensive loss | - | ( | ( | ||||||
Net other comprehensive loss, net of tax | ( | ( | ( | ||||||
Balance at December 31, 2019 | $ | ( | $ | - | $ | ( | |||
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard prospectively as of January 1, 2020 using the modified retrospective basis. The impact of the adoption was a reduction to deferred tax liabilities and an increase to retained earnings of $
59
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this standard prospectively as of January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The guidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019. The guidance allows for various methods for measuring expected credit losses. The Company has elected to apply a historical loss rate based on historical write-offs by region, adjusted for current economic conditions and forecasts about future economic conditions that are reasonable and supportable. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2020
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance in ASU 2020-04 provides temporary optional expedient and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”) (also known as the “reference rate reform”). The guidance allows companies to elect not to apply certain modification accounting requirements to contracts affected by the reference rate reform, if certain criteria are met. The guidance will also allow companies to elect various optional expedients which would allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. As of December 31, 2020, the Company has not yet had contracts modified due to rate reform.
3. Revenue
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. The expected costs associated with our base warranties continue to be recognized as expense when the products are sold. Customer returns only occur if products do not meet the specifications of the contract and are not connected to any repurchase obligations of the Company.
60
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company does not have any financing components or significant payment terms as payment occurs shortly after the point of sale. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. Amounts billed to customers related to shipping and handling costs are included in net sales in the consolidated statements of operations. Shipping and handling costs associated with outbound freight after control over a product is transferred to the customer are accounted for as a fulfillment cost and are included in cost of sales.
Revenue by Reportable Segment
Control Devices. Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as actuators, sensors, switches and connectors. We sell these products principally to the automotive market in the North American, European, and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in the North American, European and Asia Pacific regions. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“Tier 1 supplier”).
Electronics. Our Electronics segment designs and manufactures driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. These products are sold principally to the commercial vehicle market primarily through our OEM and aftermarket channels in the European and North American regions, and to a lesser extent, the Asia Pacific region. The camera-based vision systems and related products are sold principally to the off-highway vehicle market in the European and North American regions.
Stoneridge Brazil. Our Stoneridge Brazil segment (also referred to as “PST” in prior filings) primarily serves the South American region and specializes in the design, manufacture and sale of vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions. Stoneridge Brazil sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, directly to OEMs and through mass merchandisers. In addition, monitoring services and tracking devices are sold directly to corporate customers and individual consumers.
The following tables disaggregate our revenue by reportable segment and geographical location(1) for the periods ended December 31, 2020, 2019 and 2018:
Control Devices | Electronics | Stoneridge Brazil | Consolidated | |||||||||||||||||||||||||||||||||
Year ended December 31 |
| 2020 |
| 2019 | 2018 |
| 2020 |
| 2019 | 2018 |
| 2020 |
| 2019 | 2018 |
| 2020 |
| 2019 |
| 2018 | |||||||||||||||
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
North America | $ | | $ | | $ | | $ | | $ | | $ | | $ | - | $ | - | $ | - | $ | | $ | | $ | | ||||||||||||
South America |
| - |
| - |
| - |
| - |
| - |
| - |
| |
| |
| |
| |
| |
| | ||||||||||||
Europe |
| |
| |
| |
| |
| |
| |
| - |
| - |
| - |
| |
| |
| | ||||||||||||
Asia Pacific |
| |
| |
| |
| |
| |
| |
| - |
| - |
| - |
| |
| |
| | ||||||||||||
Total net sales | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
| (1) | Company sales based on geographic location are where the sale originates not where the customer is located. |
Performance Obligations
For OEM and Tier 1 supplier customers, the Company typically enters into contracts with its customers to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts. The majority of the parts sold to OEM and Tier 1 suppliers are specifically customized to the specific customer, with the exception of off-highway products that are common across all customers. The transaction price is equal to the contracted price per part and there is no expectation of material variable consideration in the transaction price. For most customer contracts, the Company does not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer; therefore, the Company recognizes revenue at the point in time it satisfies a performance obligation by transferring control of a part to the customer. Certain customer contracts contain an enforceable right to payment if the customer terminates the contract for convenience and therefore are recognized over time using the cost to complete input method.
61
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Our aftermarket products are focused on meeting the demand for repair and replacement parts, compliance parts and accessories and are sold primarily to aftermarket distributors and mass retailers in our South American, European and North American markets. Aftermarket products have one type of performance obligation which is the delivery of aftermarket parts and spare parts. For aftermarket customers, the Company typically has standard terms and conditions for all customers. In addition, aftermarket products have alternative use as they can be sold to multiple customers. Revenue for aftermarket part production contracts is recognized at a point in time when the control of the parts transfer to the customer which is based on the shipping terms. Aftermarket contracts may include variable consideration related to discounts and rebates and is included in the transaction price upon recognizing the product revenue.
A small portion of the Company’s sales are comprised of monitoring services that include both monitoring devices and fees to individual, corporate, fleet and cargo customers in our Stoneridge Brazil segment. These monitoring service contracts are generally not capable of being distinct and are accounted for as a single performance obligation. We recognize revenue for our monitoring products and services contracts over the life of the contract. There is no variable consideration associated with these contracts. The Company has the right to consideration from a customer in the amount that corresponds directly with the value to the customer of the Company’s performance to date. Therefore the Company recognizes revenue over time using the practical expedient ASC 606-10-55-18 in the amount the Company has a “right to invoice” rather than selecting an output or input method.
Contract Balances
The Company had
4. Investments
Minda Stoneridge Instruments Ltd.
The Company has a
PST Eletrônica Ltda.
The Company had a
Stoneridge Brazil had dividends payable to former noncontrolling interest holders of Brazilian real (“R$”)
62
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Other Investments
In December 2018, the Company entered into an agreement to make a $
5. Debt
Interest rates at | ||||||||||
Year ended December 31 |
| 2020 |
| 2019 |
| December 31, 2020 |
| Maturity | ||
Revolving Credit Facility | ||||||||||
Credit Facility | $ | | $ | | ||||||
Debt | ||||||||||
Stoneridge Brazil short-term obligations | | - | ||||||||
Stoneridge Brazil long-term notes | - | | ||||||||
Sweden short-term credit line | | - | ||||||||
Suzhou short-term credit line | | | ||||||||
Total debt | | | ||||||||
Less: current portion | ( | ( | ||||||||
Total long-term debt, net | $ | - | $ | | ||||||
Revolving Credit Facility
On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the “2019 Credit Facility”). The 2019 Credit Facility provides for a $
The 2019 Credit Facility contains customary affirmative covenants and representations. The 2019 Credit Facility also contains customary negative covenants, which, among other things, are subject to certain exceptions, including restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The 2019 Credit Facility contains customary events of default, subject to customary thresholds and exceptions, including, among other things, (i) non-payment of principal and non-payment of interest and fees, (ii) a material inaccuracy of a representation or warranty at the time made, (iii) a failure to comply with any covenant, subject to customary grace periods in the case of certain affirmative covenants, (iv) cross default of other debt, final judgments and other adverse orders in excess of $
63
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts to the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provides for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021 in form and substance satisfactory to the administrative agent). During the Covenant Relief Period:
● | the maximum net leverage ratio is suspended; |
● | the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021; |
● | the minimum interest coverage ratio of |
● | the Company’s liquidity may not be less than $ |
● | the Company’s aggregate amount of cash and cash equivalents cannot exceed $ |
● | there are certain restrictions on Restricted Payments (as defined); and |
● | a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders. |
Amendment No. 1 changes the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of
The Company capitalized an additional $
Borrowings outstanding on the 2019 Credit Facility, were $
The Company also had outstanding letters of credit of $
Debt
Stoneridge Brazil maintains short-term notes used for working capital purposes which have fixed or variable interest rates. The weighted-average interest rate of Stoneridge Brazil short-term debt at December 31, 2020 was
In December 2019, Stoneridge Brazil established an overdraft credit line which allowed overdrafts on Stoneridge Brazil’s bank account up to a maximum level of R$
The Company’s wholly-owned subsidiary located in Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of
64
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines (the “Suzhou credit line”) which allow up to a maximum borrowing level of
At December 31, 2020, the future maturities of the Credit Facility and debt were as follows:
Year ended December 31 |
| ||
2021 | $ | | |
2022 | - | ||
2023 | - | ||
2024 | | ||
2025 | - | ||
Total | $ | |
6. Income Taxes
The income tax (benefit) expense included in the accompanying consolidated statement of operations represents federal, state and foreign income taxes. The components of (loss) income before income taxes and the (benefit) provision for income taxes consist of the following:
Year ended December 31 |
| 2020 |
| 2019 |
| 2018 | |||
(Loss) income before income taxes: | |||||||||
Domestic | $ | ( | $ | | $ | | |||
Foreign | | | | ||||||
Total (loss) income before income taxes | $ | ( | $ | | $ | | |||
Provision for income taxes: | |||||||||
Current: | |||||||||
Federal | $ | ( | $ | ( | $ | | |||
State and foreign | | | | ||||||
Total current expense | $ | | $ | | $ | | |||
Deferred: | |||||||||
Federal | $ | ( | $ | | $ | | |||
State and foreign | | ( | ( | ||||||
Total deferred (benefit) provision | ( | | | ||||||
Total income tax (benefit) provision | $ | ( | $ | | $ | | |||
65
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
A summary of the differences between the statutory federal income tax rate of 21.0% and the consolidated provision for income taxes is shown below.
Year ended December 31 |
| 2020 |
| 2019 |
| 2018 | ||||
Statutory U.S. federal income tax (benefit) provision | $ | ( | $ | | $ | | ||||
State income taxes, net of federal tax benefit | ( | | | |||||||
Tax credits and incentives | ( | ( | ( | |||||||
Foreign tax rate differential | | | | |||||||
Impact of change in enacted tax law | | | ( | |||||||
Change in valuation allowance | | ( | ( | |||||||
U.S. tax on foreign earnings | ( | ( | | |||||||
Compensation and benefits | | ( | | |||||||
Other (A) | ( | | | |||||||
(Benefit) provision for income taxes | $ | ( | $ | | $ | | ||||
| (A) | The amount for 2018 includes the impact of reducing tax attributes due to legal entity consolidation which is completely offset with change in valuation allowance. |
Significant components of the Company’s deferred tax assets and liabilities were as follows:
As of December 31 |
| 2020 |
| 2019 | ||
Deferred tax assets: | ||||||
Inventories | $ | |
| $ | | |
Employee compensation and benefits |
| |
|
| | |
Accrued liabilities and reserves |
| |
|
| | |
Property, plant and equipment |
| |
|
| | |
Tax loss carryforwards |
| |
|
| | |
Tax credit carryforwards |
| |
|
| | |
Lease liability | | | ||||
Other |
| |
|
| | |
Gross deferred tax assets |
| |
|
| | |
Less: Valuation allowance |
| ( |
|
| ( | |
Deferred tax assets less valuation allowance |
| |
|
| | |
Deferred tax liabilities: | ||||||
Property, plant and equipment |
| ( |
|
| ( | |
Intangible assets |
| ( |
|
| ( | |
Outside basis difference in foreign subsidiary | - | ( | ||||
Right-of-use-assets |
| ( |
|
| ( | |
Other |
| ( |
|
| ( | |
Gross deferred tax liabilities |
| ( |
|
| ( | |
Net deferred tax assets (liabilities) | $ | |
| $ | ( | |
The balance sheet classification of our net deferred tax asset (liability) is shown below:
Year ended December 31 |
| 2020 |
| 2019 | ||
Long-term deferred tax assets | $ | | $ | | ||
Long-term deferred tax liabilities | ( | ( | ||||
Net deferred tax assets (liabilities) | $ | | $ | ( | ||
The Company adopted ASU 2019-12,Income Taxes: Simplifying the Accounting for Income Taxes. As a result, the Company reversed a deferred tax liability of $
66
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company has recognized deferred taxes related to foreign withholding taxes and the expected foreign currency impact upon repatriation from foreign subsidiaries not considered indefinitely reinvested. At December 31, 2020, the aggregate undistributed earnings of our foreign subsidiaries amounted to $
Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at December 31, 2020, a valuation allowance is recorded against certain deferred tax assets based upon the conclusion that it was more likely than not they would not be realized.
The Company generated federal net operating loss of $
The following is a reconciliation of the Company’s total gross unrecognized tax benefits:
| 2020 |
| 2019 |
| 2018 | ||||
Balance as of January 1 | $ | | $ | | $ | | |||
Tax positions related to the current year: | |||||||||
Additions | |||||||||
Tax positions related to the prior years: | |||||||||
Reductions | - | ( | ( | ||||||
Expirations of statutes of limitation | - | - | | ||||||
Balance as of December 31 | $ | | $ | | $ | | |||
At December 31, 2020, the Company has classified $
The Company classifies interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each jurisdiction:
Jurisdiction |
| Open Tax Years | |
U.S. Federal | |||
Argentina | |||
Brazil | |||
China | |||
France | |||
Germany | |||
Italy | |||
Mexico | |||
Netherlands | |||
Spain | |||
Sweden | |||
United Kingdom | |||
67
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
7. Leases
Lessee
The Company has various cancelable and noncancelable leased assets within all segments, which include certain properties, vehicles and equipment of which are all classified as operating leases. Payments for these leases are generally fixed; however, several of our leases are composed of variable lease payments including index-based payments or inflation-based payments based on a Consumer Price Index (“CPI”) or other escalators. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Under Leases (Topic 842), the Company determines an arrangement is a lease when we have the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Other than the leases that we have already identified, we are not aware of any material leases that have not yet commenced. For leases that have a calculated lease term of 12 months or less and do not include an option to purchase the underlying asset which we are reasonably certain to exercise, the Company has made the policy election to not apply the recognition requirements in Leases (Topic 842). For these short-term leases, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
For the leases identified, right of use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company used the calculated incremental borrowing rate based on the information available at the implementation date, and going forward at the commencement date, in determining the present value of lease payments. The Company will use the implicit rate when readily determinable. The ROU asset includes the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The Company’s lease terms may include options to
As a result of the Company’s election to apply the modified retrospective transition method at the effective date of the standard, information prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period (ASC Topic 840).
The components of lease expense are as follows:
Year ended December 31 | 2020 | 2019 | ||
Operating lease cost | $ | | $ | |
Short-term lease cost | | | ||
Variable lease cost | | | ||
Total lease cost | $ | | $ | |
Balance sheet information related to leases is as follows:
As of December 31 | 2020 | 2019 | ||
Assets: | ||||
$ | | $ | | |
Liabilities: | ||||
$ | | $ | | |
| | |||
Total leased liabilities | $ | | $ | |
68
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Maturities of operating lease liabilities are as follows:
As of December 31 | 2020 | |
2021 | $ | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
Thereafter | | |
Total future minimum lease payments | $ | |
Less: imputed interest | ( | |
Total lease liabilities | $ | |
Weighted-average remaining lease term and discount rate for operating leases is as follows:
As of December 31 | 2020 | 2019 | |||
Weighted-average remaining lease term (in years) | |||||
Weighted-average discount rate | % | % | |||
Other information:
Year ended December 31 | 2020 | 2019 | ||
Operating cash flows: | ||||
Cash paid related to operating lease obligations | $ | | $ | |
Non-cash activity: | ||||
Right-of-use assets obtained in exchange for | ||||
operating lease obligations | $ | | $ | |
Lessor
The Company, as lessor, has entered into a lease with a third-party lessee effective July 1, 2020, of its Canton, Massachusetts facility. In conjunction with the Canton restructuring plan outlined in Note 13, the Company ceased operations at this facility in March 2020. The Company recognizes lease income on a straight-line basis over the lease term, and the leased asset is included in property, plant and equipment, net in the consolidated balance sheet and depreciated to its estimated residual value over the remaining useful life of the assets. The carrying value of the leased facility is comprised of land of $
Maturities of future minimum lease payments to be received are as follows:
As of December 31 | 2020 | |
2021 | $ | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
Thereafter | | |
Total future minimum lease payments to be received | $ | |
|
69
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
8. Share-Based Compensation Plans
In May 2016, the Company’s shareholders approved the 2016 Long-Term Incentive Plan (the “2016 Plan”) and reserved
In 2020, 2019 and 2018, pursuant to the 2016 Plan, the Company granted time-based share units and performance-based performance shares. The time-based share units cliff vest
The allocation of performance shares granted between total shareholder return, earnings per share and return on invested capital were as follows for the years ended December 31:
| 2020 |
| 2019 |
| 2018 | ||
Total shareholder return | | % | | % | | % | |
Earnings per share | | % | | % | | % | |
Return on invested capital | | % | | % | - | % |
In April 2005, the Company adopted the Directors’ Restricted Shares Plan (the “Director Share Plan”) and reserved
Share Units and Performance Shares
The fair value of the non-vested time-based share unit awards was calculated using the market value of the Common Shares on the date of issuance. The weighted-average grant-date fair value of time-based share units granted during the years ended December 31, 2020, 2019 and 2018 was $
The fair value of the non-vested performance-based performance share awards with a performance condition requiring the Company to obtain certain earnings per share and return on invested capital targets were estimated using the market value of the shares on the date of grant. The fair value of non-vested performance-based performance share awards with a market condition requiring the Company to obtain a total shareholder return target relative to a group of peer companies was estimated using a Monte Carlo valuation model taking into consideration the probability of achievement using multiple simulations. The awards that use earnings per share and return on invested capital as the performance target are expensed beginning when it is probable that the Company will meet the underlying performance condition.
70
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
A summary of the status of the Company’s non-vested share units and performance shares as of December 31, 2020 and the changes during the year then ended, are presented below:
Time-based awards | Performance-based awards | |||||||||
Weighted- | Weighted- | |||||||||
average grant | Performance | average grant | ||||||||
| Share Units |
| date fair value |
| Shares |
| date fair value | |||
Non-vested as of December 31, 2019 | | $ | | | $ | | ||||
Granted | | $ | | | $ | | ||||
Vested | ( | $ | | ( | $ | | ||||
Forfeited or cancelled | ( | $ | | ( | $ | | ||||
Non-vested as of December 31, 2020 | | $ | | | $ | | ||||
A summary of the status of the Company’s non-vested share units and performance shares as of December 31, 2019 and the changes during the year then ended, are presented below:
Time-based awards | Performance-based awards | |||||||||
Weighted- | Weighted- | |||||||||
average grant | Performance | average grant | ||||||||
| Share Units |
| date fair value |
| Shares |
| date fair value | |||
Non-vested as of December 31, 2018 | | $ | | | $ | | ||||
Granted | | $ | | | $ | | ||||
Vested | ( | $ | | ( | $ | | ||||
Forfeited or cancelled | ( | $ | | ( | $ | | ||||
Non-vested as of December 31, 2019 | | $ | | | $ | | ||||
As of December 31, 2020, total unrecognized compensation cost related to non-vested time-based share units granted was $
For the years ended December 31, 2020, 2019 and 2018, the total fair value of awards vested was $
As of December 31, 2020, total unrecognized compensation cost related to non-vested performance shares granted was $
The excess tax benefit realized from the vesting of share units and performance shares of the share-based payment arrangements was $
9. Employee Benefit Plans
The Company has certain defined contribution profit sharing and 401(k) plans covering substantially all of its employees in the United States and Europe. The Company provides matching contributions to the Company’s 401(k) plan. Company contributions are generally discretionary. For the years ended December 31, 2020, 2019 and 2018, expenses related to these plans amounted to $
71
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
10. Financial Instruments and Fair Value Measurements
Financial Instruments
A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair value of debt approximates the carrying value of debt, due to the variable interest rate on the 2019 Credit Facility and the maturity of the remaining outstanding debt.
Derivative Instruments and Hedging Activities
On December 31, 2020, the Company had open Mexican peso-denominated foreign currency forward contracts. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2020 and 2019. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings.
Foreign Currency Exchange Rate Risk
The Company conducts business internationally and, therefore, is exposed to foreign currency exchange rate risk. The Company uses derivative financial instruments as cash flow hedges to manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The Company hedged the euro and Mexican peso currencies during 2020 and 2018 and, during 2019, the Company hedged only the Mexican peso. In addition, the Company hedged the U.S. dollar against the Swedish krona and euro on behalf of its European subsidiaries in 2018.
These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated other comprehensive income, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive income will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the currency.
In certain instances, the foreign currency forward contracts may not qualify for hedge accounting or are not designated as hedges and, therefore, are marked-to-market with gains and losses recognized in the Company’s consolidated statements of operations as a component of other (income) expense, net. At December 31, 2020, all of the Company’s foreign currency forward contracts were designated as cash flow hedges.
The Company’s foreign currency forward contracts offset a portion of the gains and losses on the underlying foreign currency denominated transactions as follows:
Euro-denominated Foreign Currency Forward Contracts – Cash Flow Hedges
At December 31, 2017, the Company held foreign currency forward contracts with an underlying notional amount of $
U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedges
The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, and expired ratably on a monthly basis during 2020. There were
72
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedges
The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at December 31, 2020 of $
The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of December 31, 2020 and the year then ended, and concluded that the hedges were effective.
Interest Rate Risk
Interest Rate Risk – Cash Flow Hedge
On February 18, 2020, the Company entered into a floating-to-fixed interest rate swap agreement (the “Swap”) with a notional amount of $
The notional amounts and fair values of derivative instruments in the consolidated balance sheets were as follows:
Prepaid expenses | Accrued expenses and | |||||||||||||||||
Notional amounts (A) | and other current assets | other current liabilities | ||||||||||||||||
December 31 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||
Forward currency contracts | $ | | $ | - | $ | | $ | - | $ | - | $ | - | ||||||
Interest rate swap | $ | | $ | - | $ | - | $ | - | $ | | $ | - | ||||||
Gross amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net (loss) income for the years ended December 31 were as follows:
Gain (loss) reclassified from | ||||||||||||||||
Gain (loss) recorded in other | other comprehensive income | |||||||||||||||
comprehensive income (loss) | (loss) into net (loss) income (A) | |||||||||||||||
| 2020 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2018 | |||||
Derivatives designated as cash flow hedges: | ||||||||||||||||
Forward currency contracts | $ | ( | $ | | $ | | $ | ( | $ | | $ | | ||||
Interest rate swap | $ | ( | $ | - | $ | - | $ | ( | $ | - | $ | - | ||||
| (A) | Gains (losses) reclassified from comprehensive income (loss) into net (loss) income recognized in COGS in the Company’s consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 were $( |
73
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
For the year ended December 31, 2020, the total net gain on the foreign currency contract cash flow hedges of $
Cash flows from derivatives used to manage foreign exchange and interest rate risks are classified as operating activities within the consolidated statements of cash flows.
The Company has measured the ineffectiveness of the forward currency contracts and any amounts recognized in the consolidated financial statements were immaterial for the years ended December 31, 2020, 2019 and 2018.
Fair Value Measurements
Certain assets and liabilities held by the Company are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency contracts, inputs include foreign currency exchange rates. For the interest rate swap, inputs include LIBOR. Fair values estimated using Level 3 inputs consist of significant unobservable inputs.
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of inputs used.
December 31 | 2020 | 2019 | |||||||||||||
Fair values estimated using | |||||||||||||||
Fair | Level 1 | Level 2 | Level 3 | ||||||||||||
| value |
| inputs |
| inputs |
| inputs |
| Fair value | ||||||
Financial assets carried at fair value: | |||||||||||||||
Forward currency contract | $ | | $ | - | $ | | $ | - | $ | - | |||||
Total financial assets carried at fair value | $ | | $ | - | $ | | $ | - | $ | - | |||||
Financial liabilities carried at fair value: | |||||||||||||||
Interest rate swap | $ | | $ | - | $ | | $ | - | $ | - | |||||
Earn-out consideration | | - | - | | | ||||||||||
Total financial liabilities carried at fair value | $ | | $ | - | $ | | $ | | $ | | |||||
The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities related to earn-out consideration that are measured at fair value on a recurring basis.
| Stoneridge Brazil |
| Total | |||
Balance at December 31, 2019 | $ | | $ | | ||
Change in fair value | ( | ( | ||||
Foreign currency adjustments | ( | ( | ||||
Balance at December 31, 2020 | $ | | $ | | ||
| Orlaco |
| Stoneridge Brazil |
| Total | ||||
Balance at December 31, 2018 | $ | | $ | | $ | | |||
Change in fair value | - | | | ||||||
Foreign currency adjustments | ( | ( | ( | ||||||
Earn-out consideration cash payment | ( | - | ( | ||||||
Balance at December 31, 2019 | $ | - | $ | | $ | | |||
74
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company will be required to pay the Stoneridge Brazil earn-out consideration, which is not capped, based on Stoneridge Brazil’s financial performance in either 2020 or 2021. The fair value of the Stoneridge Brazil earn-out consideration is based on discounted cash flows utilizing forecasted earnings before interest, depreciation and amortization (“EBITDA”) in 2020 or 2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The former Stoneridge Brazil owners may choose either the 2020 or 2021 financial performance period to be used to determine the earn-out consideration payment. The former Stoneridge Brazil owners must choose the 2020 financial performance period by March 31, 2021 otherwise the 2021 financial performance period will automatically be used. The Company has assigned a zero probability that the former owners will choose the 2020 performance period given Stoneridge Brazil’s financial performance has been negatively impacted by COVID-19. As such, the earn-out fair value assumes 2021 financial performance will be the basis for the earn-out consideration obligation. The earn-out consideration obligation related to Stoneridge Brazil is recorded within other long-term liabilities in the consolidated balance sheets as of December 31, 2020 and 2019.
The change in fair value of the earn-out consideration for Stoneridge Brazil was due to updated financial performance projections and favorable foreign currency translation offset by the reduced time from the current period end to the payment date. The change in fair value of the Stoneridge Brazil earn-out consideration was recorded in SG&A expense and the foreign currency impact was included in other (income) expense, net in the consolidated statements of operations.
The fair value of the Orlaco earn-out consideration was based on a Monte Carlo simulation utilizing forecasted EBITDA for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return.
The Orlaco earn-out consideration reached the capped amount of €
There were
Impairment of Long-Lived Assets or Finite-Lived Assets
The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired.
75
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there are two asset groups comprised of PM sensor fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM sensor fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $
11. Commitments and Contingencies
From time to time we are subject to various legal actions and claims incidental to our business, including those arising out of breach of contracts, product warranties, product liability, patent infringement, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its consolidated results of operations or financial position.
As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at this site. The Company engaged an environmental engineering consultant to assess the level of contamination and to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. Upon approval of the remedial action plan by the Florida Department of Environmental Protection, ground water remediation began in the fourth quarter of 2015. During the year ended December 31, 2020 environmental remediation costs incurred were $
The Company’s Stoneridge Brazil subsidiary has civil, labor and other tax contingencies (excluding income tax) for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$
On August 12, 2020, the Brazilian Administrative Counsel for Economic Defense (“CADE”) issued a ruling against Stoneridge Brazil for abuse of dominance and market foreclosure through its prior use of exclusivity provisions in agreements with its distributors. The CADE tribunal imposed a R$
Insurance Recoveries
The Company incurred losses and incremental costs related to the damage to assets caused by a storm at its Mexican production facility in the fourth quarter of 2016 and pursued recovery of such costs under applicable insurance policies. As of December 31, 2020, the claims have been resolved and the case has been closed with our insurance providers.
76
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Loss recoveries related to the damage of inventory and incremental costs included in COGS were not significant for the years ended December 31, 2020, 2019 and 2018, and there were
Brazilian Indirect Tax
In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduced Stoneridge Brazil’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on Stoneridge Brazil’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $
The Brazilian tax authorities have sought clarification before the Supreme Court of Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these credits. The timing for a decision is uncertain due to the COVID-19 pandemic. If the Brazilian tax authorities challenge our rights to these credits, we may become subject to new litigation that could impact the amount ultimately realized by Stoneridge Brazil.
12. Headquarter Relocation and Consolidation
During the fourth quarter of 2016, the Company relocated its corporate headquarters from Warren, Ohio to Novi, Michigan and consolidated its other corporate functions into one location. As a result, the Company incurred headquarter relocation costs recorded within SG&A expense, which included employee retention and relocation expense of $
In connection with the headquarter relocation, the Company was approved for a Michigan Business Development Program grant of up to $
13. Restructuring and Business Realignment
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. The decision to exit the PM sensor product line was made after consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.
As a result of the PM sensor restructuring actions, the Company recognized expense of $
77
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The expenses for the exit of the PM sensor line that relate to the Control Devices reportable segment include the following:
Accrual as of | 2020 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2020 | to Expense | Cash | Non-Cash | December 31, 2020 | |||||||||||
Fixed asset impairment and | $ | - | $ | | $ | - | $ | ( | $ | - | |||||
Other related costs | - | | ( | - | - | ||||||||||
Total | $ | - | $ | | $ | ( | $ | ( | $ | - | |||||
On January 10, 2019, the Company committed to a restructuring plan that resulted in the closure of the Canton, Massachusetts facility (“Canton Facility”) on by March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). Company management informed employees at the Canton Facility of this restructuring decision on January 11, 2019. The costs for the Canton Restructuring included employee severance and termination costs, contract terminations costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility.
As a result of the Canton Restructuring actions, the Company recognized expense of $
The expenses for the Canton Restructuring that relate to the Control Devices reportable segment include the following:
Accrual as of | 2020 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2020 | to Expense | Cash | Non-Cash | December 31, 2020 | |||||||||||
Employee termination benefits | $ | | $ | | $ | ( | $ | $ | | ||||||
Other related costs | | ( | |||||||||||||
Total | $ | | $ | | $ | ( | $ | $ | | ||||||
Accrual as of | 2019 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2019 | to Expense | Cash | Non-Cash | December 31, 2019 | |||||||||||
Employee termination benefits | $ | - | $ | | $ | ( | $ | - | $ | | |||||
Other related costs | - | | ( | - | - | ||||||||||
Total | $ | - | $ | | $ | ( | $ | - | $ | | |||||
In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced a restructuring program to transfer the European production of its controls product line to China. As a result of these actions, the Company recognized expense of $
78
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The expenses for the restructuring activities that relate to the Electronics reportable segment include the following:
Accrual as of | 2020 Charge to | Utilization | Accrual as of | ||||||||||||
January 1, 2020 | Expense | Cash | Non-Cash | December 31, 2020 | |||||||||||
Employee termination benefits | $ | | $ | | $ | ( | $ | - | $ | | |||||
Contract termination costs | - | | ( | - | - | ||||||||||
Other related costs | - | | ( | - | - | ||||||||||
Total | $ | | $ | | $ | ( | $ | - | $ | | |||||
Accrual as of | 2019 Charge to | Utilization | Accrual as of | ||||||||||||
January 1, 2019 | Expense | Cash | Non-Cash | December 31, 2019 | |||||||||||
Employee termination benefits | $ | | $ | ( | $ | ( | $ | | $ | | |||||
Accelerated depreciation | - | | - | ( | - | ||||||||||
Contract termination costs | | | ( | - | - | ||||||||||
Other related costs | | | ( | - | - | ||||||||||
Total | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Accrual as of | 2018 Charge to | Utilization | Accrual as of | ||||||||||||
January 1, 2018 | Expense | Cash | Non-Cash | December 31, 2018 | |||||||||||
Employee termination benefits | $ | $ | | $ | ( | $ | - | $ | | ||||||
Excess and obsolete inventory | | - | ( | - | |||||||||||
Intangible impairment | | - | ( | - | |||||||||||
Fixed asset impairment | | - | ( | - | |||||||||||
Contract termination costs | | ( | - | | |||||||||||
Other related costs | | ( | - | | |||||||||||
Total | $ | $ | | $ | ( | $ | ( | $ | | ||||||
In addition to the specific restructuring activities, the Company regularly evaluates the performance of its businesses and cost structures, including personnel, and makes necessary changes thereto in order to optimize its results. The Company also evaluates the required skill sets of its personnel and periodically makes strategic changes. As a consequence of these actions, the Company incurs severance related costs which are referred to as business realignment charges.
Business realignment charges by reportable segment were as follows:
Year ended December 31 | 2020 |
| 2019 |
| 2018 | ||||
Control Devices (A) | $ | | $ | | $ | | |||
Electronics (B) | | | | ||||||
Stoneridge Brazil (C) | | - | | ||||||
Unallocated Corporate (D) | | | - | ||||||
Total business realignment charges | $ | | $ | | $ | | |||
| (A) | Severance costs for the year ended December 31, 2020 related to COGS, D&D and SG&A were $ |
| (B) | Severance costs for the year ended December 31, 2020 related to COGS, D&D and SG&A were $ |
| (C) | Severance costs for the year ended December 31, 2020 related to COGS and SG&A were $ |
| (D) | Severance costs for the years ended December 31, 2020 and 2019 related to SG&A were $ |
79
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Business realignment charges classified by statement of operations line item were as follows:
Year ended December 31 | 2020 |
| 2019 |
| 2018 | ||||
Cost of goods sold | $ | | $ | - | $ | | |||
Selling, general and administrative | | | | ||||||
Design and development | | - | | ||||||
Total business realignment charges | $ | | $ | | $ | |
14. Segment Reporting
Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s 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 three reportable segments, Control Devices, Electronics and Stoneridge Brazil, which also represent its operating segments. The Control Devices reportable segment produces actuators, sensors, switches and connectors. The Electronics reportable segment produces driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. The Stoneridge Brazil reportable segment designs and manufactures vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.
The accounting policies of the Company’s reportable segments are the same as those described in Note 2. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and operating income. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.
The financial information presented below is for our
80
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Year ended December 31 | 2020 |
| 2019 |
| 2018 | ||||
Net Sales: | |||||||||
Control Devices | $ | | $ | | $ | | |||
Inter-segment sales | | | | ||||||
Control Devices net sales | | | | ||||||
Electronics | | | | ||||||
Inter-segment sales | | | | ||||||
Electronics net sales | | | | ||||||
Stoneridge Brazil | | | | ||||||
Inter-segment sales | - | | | ||||||
Stoneridge Brazil net sales | | | | ||||||
Eliminations | ( | ( | ( | ||||||
Total net sales | $ | | $ | | $ | | |||
Operating (Loss) Income: | |||||||||
Control Devices | $ | | $ | | $ | | |||
Electronics | ( | | | ||||||
Stoneridge Brazil | | | | ||||||
Unallocated Corporate (A) | ( | ( | ( | ||||||
Total operating (loss) income | $ | ( | $ | | $ | | |||
Depreciation and Amortization: | |||||||||
Control Devices | $ | | $ | | $ | | |||
Electronics | | | | ||||||
Stoneridge Brazil | | | | ||||||
Unallocated Corporate | | | | ||||||
Total depreciation and amortization (B) | $ | | $ | | $ | | |||
Interest Expense, net: | |||||||||
Control Devices | $ | | $ | | $ | | |||
Electronics | | | | ||||||
Stoneridge Brazil | | | | ||||||
Unallocated Corporate | | | | ||||||
Total interest expense, net | $ | | $ | | $ | | |||
Capital Expenditures: | |||||||||
Control Devices | $ | | $ | | $ | | |||
Electronics | | | | ||||||
Stoneridge Brazil | | | | ||||||
Unallocated Corporate(C) | | | | ||||||
Total capital expenditures | $ | | $ | | $ | | |||
As of December 31 | 2020 |
| 2019 | |||
Total Assets: | ||||||
Control Devices | $ | | $ | | ||
Electronics | | | ||||
Stoneridge Brazil | | | ||||
Corporate (C) | | | ||||
Eliminations | ( | ( | ||||
Total assets | $ | | $ | | ||
81
STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The following table presents net sales and long-term assets for the geographic areas in which the Company operates:
Year ended December 31 | 2020 |
| 2019 |
| 2018 | ||||
Net Sales: | |||||||||
North America | $ | | $ | | $ | | |||
South America | | | | ||||||
Europe and Other | | | | ||||||
Total net sales | $ | | $ | | $ | | |||
As of December 31 | 2020 |
| 2019 | |||
Long-term Assets: | ||||||
North America | $ | | $ | | ||
South America | | | ||||
Europe and Other | | | ||||
Total long-term assets | $ | | $ | | ||
| (A) | Unallocated Corporate expenses include, among other items, accounting/finance, human resources, information technology and legal costs as well as share-based compensation. |
| (B) | These amounts represent depreciation and amortization on property, plant and equipment and certain intangible assets. |
| (C) | Assets located at Corporate consist primarily of cash, intercompany receivables, fixed and leased assets for the headquarter building, information technology assets, equity investments and investments in subsidiaries. |
15. Unaudited Quarterly Financial Data
The following is a summary of quarterly results of operations:
Quarter ended | ||||||||||||
2020 |
| December 31 |
| September 30 |
| June 30 |
| March 31 | ||||
Net sales | $ | | $ | | $ | | $ | | ||||
Gross profit | | | | | ||||||||
Operating income (loss) | | | ( | | ||||||||
Income tax expense (benefit) | | | ( | | ||||||||
Net income (loss) | | | ( | | ||||||||
Earnings (loss) per share: | ||||||||||||
Basic (A) | $ | | $ | | $ | ( | $ | | ||||
Diluted (A) | $ | | $ | | $ | ( | $ | | ||||
Quarter ended | ||||||||||||
2019 |
| December 31 |
| September 30 |
| June 30 (B) |
| March 31 | ||||
Net sales | $ | | $ | | $ | | $ | | ||||
Gross profit | | | | | ||||||||
Operating income | | | | | ||||||||
Income tax (benefit) expense | ( | | | | ||||||||
Net income | | | | | ||||||||
Earnings per share: | ||||||||||||
Basic (A) | $ | | $ | | $ | | $ | | ||||
Diluted (A) | $ | | $ | | $ | | $ | | ||||
| (A) | Earnings per share for the year may not equal the sum of the four historical quarters earnings per share due to changes in weighted-average basic and diluted shares outstanding. |
| (B) | The Company recognized a gain on disposal of Non-core Products in our Control Devices segment, net of $ |
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The following schedule provides the activity for accounts receivable reserves and valuation allowance for deferred tax assets for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Balance at | Charged to | |||||||||||
beginning of | costs and | Balance at | ||||||||||
| period |
| expenses (income) |
| Write-offs |
| end of period | |||||
Accounts receivable reserves: | ||||||||||||
Year ended December 31, 2020 | $ | | $ | | $ | ( | $ | | ||||
Year ended December 31, 2019 | | | ( | | ||||||||
Year ended December 31, 2018 | | | ( | | ||||||||
Net additions | Exchange rate | |||||||||||
Balance at | charged to | fluctuations | ||||||||||
beginning of | expense | and other | Balance at | |||||||||
| period |
| (benefit) |
| items |
| end of period | |||||
Valuation allowance for deferred tax assets: | ||||||||||||
Year ended December 31, 2020 | $ | | $ | | $ | ( | $ | | ||||
Year ended December 31, 2019 | | ( | ( | | ||||||||
Year ended December 31, 2018 | | ( | ( | | ||||||||
Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.
There have been no disagreements between the management of the Company and its Independent Registered Public Accounting Firm on any matter of accounting principles or practices of financial statement disclosures, or auditing scope or procedure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In evaluating the Company’s internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Under the supervision and with the participation of our management, including the PEO and PFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2020. Based on our evaluation under the framework in Internal Control-Integrated Framework (2013 Framework), our management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, as auditor of the Company’s financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2020. Ernst & Young’s report is included herein.
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Changes in Internal Control Over Financial Reporting
There were no changes to our internal controls over financial reporting during the quarter ended December 31, 2020 that has materially or is reasonably likely to materially affect internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Stoneridge, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Stoneridge, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Stoneridge, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule of the Company and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Detroit, Michigan
February 24, 2021
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Item 9B. Other Information.
Change in Control Agreements
On February 22, 2021, each of the following executive officers entered into a new Change in Control Agreement (the “CIC Agreement”) with the Company: Thomas M. Dono Jr, Robert R. Krakowiak and Laurent Borne. The CIC Agreement is designed to provide for continuity of management in the event of change in control of the Company. The Company believes that it is important for the Company’s executive officer to be able to react neutrally to a potential change in control and not be influenced by personal financial concerns. For these executive officers, the CIC Agreement sets a level of benefits, as described below, to remain competitive with our select peer group. All payments under the CIC Agreement are conditioned on a customary non-compete, non-solicitation and non-disparagement agreement. There is no excise tax gross-up payment under the CIC Agreement. The CIC Agreement is “double trigger” agreement meaning that in order for the executive officers to receive a payment and other benefits both of the following must occur: (1) a change in control of the Company, and (2) a triggering event within two years of a change in control where (a) the Company separates the executive officer other than in the case of a termination for cause (as defined), or (b) the executive officer separates from service from the Company for good reason (as defined). Under the CIC Agreement if the events set forth above occur and the executive delivers a release to the Company, the Company will be obligated to pay the applicable executive officers (1) an amount equal to two times the greater of the executive officer’s annual base salary at the time of a triggering event or at the time of the occurrence of a change in control, (2) an amount equal to two times the greater of the executives officer’s target annual incentive award at the time of termination or the actual incentive award received for the fiscal year prior to termination, and (3) an amount equal to the pro rata amount of annual incentive compensation the executive officer would have been entitled to at the time of a triggering event calculated based on the performance goals that were achieved in the year in which the triggering event occurred. In addition, the executive officer will be provided continued life and health insurance benefits for twenty-four months following termination.
The material amendments to the prior Change in Control agreements are that the new CIC Agreement changes (i) changes the defined term “Executives Annual Bonus” to mean the greater of the target annual incentive award at the time of termination or the actual incentive award received for the year prior to termination, and (ii) the provisions related to payment in connection total compensation in excess of the safe harbor amount of Section 208G of the Internal Revenue Code so that the covered executive will receive the greater of safe harbor amount (as defined) or aggregate parachute value (as defined) of the total payments (as defined) less applicable excise tax. The prior Change in Control Agreements with Thomas M. Dono Jr, Robert R. Krakowiak and Laurent Borne are superseded and replaced by the new CIC Agreement described above. The above summary of the CIC Agreement is qualified in its entirety by reference to the full text of the CIC Agreement, a copy of which are filed as an exhibit to this Form 10-K and incorporated herein by reference.
Amendment to Jonathan DeGaynor Employment Agreement
On February 23, 2021, the Company and Jonathan B. DeGaynor (“DeGaynor”) entered into an amendment (the “Amendment”) to DeGaynor’s March 16, 2015 Employment Agreement (the “Employment Agreement”). The Amendment also amended the Change in Control Agreement, also dated March 16, 2015, by and between DeGaynor and the Company (the, “DeGaynor CIC Agreement”). The CIC Agreement is attached as Appendix C to the Employment Agreement.
The Amendment was designed to conform the Employment Agreement and the DeGaynor CIC Agreement to other compensation plans and practices applicable to the Company’s other executive officers in terms of the vesting of equity-based awards under the Company’s Long-Term Incentive Plan and the treatment of certain payments in the event of a Company change in control. The material changes made by the Amendment (i) eliminate automatic (single trigger) vesting of equity-based awards under the Company’s Long-Term Incentive Plan pursuant to the Employment Agreement so that all current and future awards under the Company’s Long-Term Incentive Plan will be subject to “double trigger” vesting in the event of a change in control, and (ii) adjusts the provisions related to payment in connection total compensation in excess of the safe harbor amount of Section 208G of the Internal Revenue Code so that DeGaynor will receive the greater of safe harbor amount (as defined) or aggregate parachute value (as defined) of the total payments (as defined) less applicable excise tax.
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The Employment Agreement will be automatically renewed for one year every year unless notice of termination is delivered by either party before the end of the then current term. The Employment Agreement provides the payment of an annual base salary of $500,000; participation in the Company’s annual incentive plan (“AIP”) at a target of 100% of base salary (since 2015 both DeGaynor’s base salary and AIP percentage target have been increased by the Board’s Compensation Committee as result of regular, annual merit pay increases – in 2019, DeGaynor’s base salary was $825,000 and his AIP base salary target was 103%); relocation benefits; a monthly car allowance; and participation in the Company’s customary benefit plans for senior executive officers. Under the Employment Agreement if DeGaynor is terminated by the Company without cause or he terminates the Employment Agreement and his employment for good reason, the Company will be obligated to pay him severance in equal to his annual base salary and target annual incentive. In addition, upon a termination without cause (or good reason termination) the Company must continue to cover his health and welfare benefits for a period of twelve months following such termination. In connection with the Employment Agreement, DeGaynor and the Company entered in the DeGaynor CIC Agreement. Under the DeGaynor CIC Agreement, if within two years after a Change in Control (as defined in the DeGaynor CIC Agreement) DeGaynor is terminated without cause or resigns for good reason then the Company shall be obligated to pay DeGaynor a lump sum cash payment equal to the sum of two times DeGaynor’s annual salary, plus two times his annual bonus, plus his pro rata annual bonus. The Company shall also be obligated to continue DeGaynor’s health and welfare benefits for twenty-four months.
DeGaynor is entitled to be nominated each year for election to serve on the Company’s Board of Directors under the Employment Agreement. The Employment Agreement also contains certain other customary provisions for employment agreements, such as covenants by DeGaynor regarding non-competition and non-solicitation and use of confidential information and a release obligation as a condition to severance payments.
The above summaries of the Employment Agreement, the DeGaynor CIC Agreement and the Amendment are qualified in their entirety by references to the full text of such agreements or amendment, copies of which are filed as exhibits to this Form 10-K and incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 regarding our directors is incorporated by reference to the information under the sections and subsections entitled, “Proposal One: Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021. The information required by this Item 10 regarding our executive officers appears as a Supplementary Item following Item 1 under Part I, hereof.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference to the information under the sections and subsections “Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Executive Compensation” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 (other than the information required by Item 201(d) of Regulation S-K which is set forth below) is incorporated by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
In May 2010, we adopted an Amended Directors’ Restricted Share Plan and an Amended and Restated Long-Term Incentive Plan, as amended. In May 2013, we adopted an Amended Directors’ Restricted Shares Plan and an Amended and Restated Long-Term Incentive Plan, as amended, to increase the number of shares available for issuance under the plans. In May 2016, we adopted the 2016 Long-Term Incentive Plan. In May 2018, we adopted the 2018 Amended and Restated Director’s Restricted Shares Plan. Our shareholders approved each plan.
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Equity compensation plan information as of December 31, 2020 is as follows:
| Number of securities | |
Equity compensation plans approved by shareholders | 1,457,832 | |
Equity compensation plans not approved by shareholders | - |
| (A) | Excludes 1,207,841 share units issued to key employees pursuant to the Company’s 2016 Long-Term Incentive Plan. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated by reference to the information under the subsections “Transactions with Related Persons”, “Review and Approval of Transactions with Related Persons” and “Director Independence” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated by reference to the information under the subsections “Service Fees Paid to Independent Registered Accounting Firm” and “Pre-Approval Policies and Procedures” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
PART IV
Item 15. Exhibits, Financial Statement Schedule.
| (a) | The following documents are filed as part of this Form 10-K. |
| Page in | ||
(1) | Consolidated Financial Statements: | ||
41 | |||
Consolidated Balance Sheets as of December 31, 2020 and 2019 | 44 | ||
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 | 45 | ||
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 | 46 | ||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 | 47 | ||
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018 | 48 | ||
49 | |||
(2) | Financial Statement Schedule: | ||
83 | |||
(3) | Exhibits: | ||
88
Exhibit | ||
|---|---|---|
Number |
| Exhibit |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | Amended and Restated Officers’ and Key Employees’ Severance Plan of Stoneridge, Inc., filed herewith. | |
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
89
Exhibit | ||
|---|---|---|
Number |
| Exhibit |
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
21.1 | Principal Subsidiaries and Affiliates of the Company, filed herewith. | |
23.1 | Consent of Independent Registered Public Accounting Firm, filed herewith. | |
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
90
Exhibit | ||
|---|---|---|
Number |
| Exhibit |
104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document |
* - Reflects management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K.
| (b) | The exhibits listed are filed as part of or incorporated by reference into this report. |
| (c) | Additional Financial Statement Schedules. None. |
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
STONERIDGE, INC. | |
Date: February 24, 2021 | /s/ ROBERT R. KRAKOWIAK |
Robert R. Krakowiak | |
Executive Vice President, Chief Financial Officer and Treasurer | |
(Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 24, 2021 | /s/ JONATHAN B. DEGAYNOR |
Jonathan B. DeGaynor | |
President, Chief Executive Officer and Director | |
(Principal Executive Officer) | |
Date: February 24, 2021 | /s/ ROBERT R. KRAKOWIAK |
Robert R. Krakowiak | |
Executive Vice President, Chief Financial Officer and Treasurer | |
(Principal Financial Officer) | |
Date: February 24, 2021 | /s/ ROBERT J. HARTMAN JR. |
Robert J. Hartman Jr. | |
Chief Accounting Officer | |
(Principal Accounting Officer) | |
Date: February 24, 2021 | /s/ WILLIAM M. LASKY |
William M. Lasky | |
Chairman of the Board of Directors | |
Date: February 24, 2021 | /s/ JEFFREY P. DRAIME |
Jeffrey P. Draime | |
Director | |
Date: February 24, 2021 | /s/ DOUGLAS C. JACOBS |
Douglas C. Jacobs | |
Director | |
Date: February 24, 2021 | /s/ IRA C. KAPLAN |
Ira C. Kaplan | |
Director | |
Date: February 24, 2021 | /s/ KIM KORTH |
Kim Korth | |
Director | |
Date: February 24, 2021 | /s/ GEORGE S. MAYES, JR. |
George S. Mayes, Jr. | |
Director | |
Date: February 24, 2021 | /s/ PAUL J. SCHLATHER |
Paul J. Schlather | |
Director | |
Date: February 24, 2021 | |
Frank S. Sklarsky* | |
* Mr. Sklarsky was added to the Board of Directors on February 22, 2021 |
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