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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
| ||
(Address of principal executive offices) | (Zip Code) |
( | ||
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
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.
☒
Indicate by check 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).
☒
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.
Accelerated filer ☐ | Non-accelerated filer ☐ | |
Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by checkmark 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 is a shell company (as defined in Rule 12b-2 of the Act).
The number of Common Shares, without par value, outstanding as of July 29, 2022 was
STONERIDGE, INC. AND SUBSIDIARIES
2
Forward-Looking Statements
Portions of this report on Form 10-Q 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 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; |
| ● | fluctuations in the cost and availability of key materials (including semiconductors, printed circuit boards, resin, aluminum, steel and copper) and components and our ability to offset cost increases through negotiated price increases with our customers or other cost reduction actions; |
| ● | global economic trends, competition and geopolitical risks, including impacts from the ongoing conflict between Russia and Ukraine and the related sanctions and other measures, or an escalation of sanctions, tariffs or other trade tensions between the U.S. and China or other countries; |
| ● | our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions; |
| ● | 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 or agricultural vehicle production; |
| ● | competitive market conditions and resulting effects on sales and pricing; |
| ● | our ability to manage foreign currency fluctuations; |
| ● | 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 of our control; |
| ● | 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”) in the Company’s 2021 Form 10-K. |
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.
3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
STONERIDGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||
(in thousands) |
| 2022 |
| 2021 | ||
(Unaudited) | ||||||
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 | | | ||||
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 condensed consolidated financial statements.
4
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
(in thousands, except per share data) | 2022 |
| 2021 | 2022 |
| 2021 | |||||||
Net sales | $ | | $ | | $ | | $ | | |||||
Costs and expenses: | |||||||||||||
Cost of goods sold | | | | | |||||||||
Selling, general and administrative | | | | | |||||||||
Gain on sale of Canton Facility, net | - | ( | - | ( | |||||||||
Design and development | | | | | |||||||||
Operating (loss) income | ( | | ( | | |||||||||
Interest expense, net | | | | | |||||||||
Equity in loss (earnings) of investee | | ( | | ( | |||||||||
Other (income) expense, net | ( | ( | | | |||||||||
(Loss) income before income taxes | ( | | ( | | |||||||||
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 condensed consolidated financial statements.
5
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
Six months ended | |||||||||||
June 30, | June 30, | ||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||
Net (loss) income | $ | ( | $ | | ( | $ | | ||||
Other comprehensive (loss) income, net of tax: | |||||||||||
Foreign currency translation (1) | ( | | ( | ( | |||||||
Unrealized (loss) gain on derivatives (2) | ( | | | | |||||||
Other comprehensive (loss) income, net of tax | ( | | ( | ( | |||||||
Comprehensive (loss) income | $ | ( | $ | | ( | $ | | ||||
| (1) | Net of tax benefit of $ |
| (2) | Net of tax (benefit) expense of $( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30, (in thousands) |
| 2022 |
| 2021 |
| ||
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 | ( | | |||||
Loss (earnings) of equity method investee | | ( | |||||
Gain on sale of fixed assets | ( | ( | |||||
Share-based compensation expense | | | |||||
Excess tax deficiency (benefit) related to share-based compensation expense | | ( | |||||
Gain on settlement of net investment hedge | ( | - | |||||
Gain on sale of Canton Facility, net | - | ( | |||||
Gain on disposal of business, net | - | ( | |||||
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 used for operating activities | ( | ( | |||||
INVESTING ACTIVITIES: | |||||||
Capital expenditures, including intangibles | ( | ( | |||||
Proceeds from sale of fixed assets | | | |||||
Proceeds from settlement of net investment hedge | | - | |||||
Proceeds from disposal of business, net | - | | |||||
Proceeds from sale of Canton Facility, net | - | | |||||
Investment in venture capital fund, net | ( | ( | |||||
Net cash (used for) provided by 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 | ( | - | |||||
Repurchase of Common Shares to satisfy employee tax withholding | ( | ( | |||||
Net cash used for financing activities | ( | ( | |||||
Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||
Net change in cash and cash equivalents | ( | ( | |||||
Cash and cash equivalents at beginning of period | | | |||||
Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for interest, net | $ | | $ | | |||
Cash paid for income taxes, net | $ | | $ | | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
STONERIDGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
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, 2020 |
| |
| |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
Net income |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Unrealized loss on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Repurchased Common Shares for treasury, net |
| ( |
| |
| — |
| |
| — |
| — |
| | |||||
Share-based compensation, net | — | — | ( | — | — | — | ( | ||||||||||||
BALANCE MARCH 31, 2021 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Unrealized gain on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Repurchased Common Shares for treasury, net |
| — |
| — |
| — |
| |
| — |
| — |
| | |||||
Share-based compensation, net | — | — | | — | — | — | | ||||||||||||
BALANCE JUNE 30, 2021 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
BALANCE DECEMBER 31, 2021 | |
| |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
| $ | | |
Net loss |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Unrealized gain on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Repurchased Common Shares for treasury, net |
| ( |
| |
| — |
| |
| — |
| — |
| | |||||
Share-based compensation, net | — | — | ( | — | — | — | ( | ||||||||||||
BALANCE MARCH 31, 2022 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
Net loss |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Unrealized loss on derivatives, net |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Issuance of Common Shares |
| |
| ( |
| — |
| |
| — |
| — |
| | |||||
Repurchased Common Shares for treasury, net |
| ( |
| |
| — |
| — |
| — |
| — |
| — | |||||
Share-based compensation, net | — | — | | — | — | — | | ||||||||||||
BALANCE June 30, 2022 |
| |
| | $ | | $ | ( | $ | | $ | ( | $ | | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s 2021 Form 10-K.
The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the three and six months ended June 30, 2021 was determined to be an unconsolidated entity, and was therefore accounted for under the equity method of accounting based on the Company’s
Reclassifications
Certain prior period amounts have been reclassified to conform to their 2022 presentation in the condensed consolidated financial statements.
(2) Recently Issued Accounting Standards
Accounting Standards Not Yet Adopted
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 June 30, 2022, 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.
9
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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 condensed 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 and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in the North American 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, North American and Asia Pacific regions. The camera-based vision systems and related products are sold principally to the commercial vehicle and off-highway vehicle markets in the European and North American regions.
Stoneridge Brazil. Our Stoneridge Brazil segment (“SRB”) 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 three months ended June 30, 2022 and 2021:
Control Devices | Electronics | Stoneridge Brazil | Consolidated | |||||||||||||||||||||
Three months ended June 30, |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Net Sales: |
|
|
|
|
|
|
|
| ||||||||||||||||
North America | $ | | $ | | $ | | $ | | $ | - | $ | - | $ | | $ | | ||||||||
South America |
| - |
| - |
| - |
| - |
| |
| |
| |
| | ||||||||
Europe |
| - |
| |
| |
| |
| - |
| - |
| |
| | ||||||||
Asia Pacific |
| |
| |
| |
| |
| - |
| - |
| |
| | ||||||||
Total net sales | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
10
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The following tables disaggregate our revenue by reportable segment and geographical location(1) for the six months ended June 30, 2022 and 2021:
Control Devices | Electronics | Stoneridge Brazil | Consolidated | |||||||||||||||||||||
Six months ended June 30, |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
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 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 supplier customers are customized to the specific customer, with the exception of aftermarket camera-based vision systems (“CMS”) 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.
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 which 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
11
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
(4) 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:
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
Raw materials | $ | | $ | | ||
Work-in-progress | | | ||||
Finished goods | | | ||||
Total inventories, net | $ | | $ | | ||
Inventory valued using the FIFO method was $
(5) 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 Credit Facility and the maturity of the remaining outstanding debt.
Derivative Instruments and Hedging Activities
On June 30, 2022, 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 2022 and 2021. 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 and used net investment 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.
Net Investment Hedges
During 2021 the Company entered into
12
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The Company elected to assess hedge effectiveness under the spot method. Accordingly, periodic changes in the fair value of the derivative instruments attributable to factors other than spot exchange rate variability were excluded from the measurement of hedge ineffectiveness and reported directly in earnings each reporting period. The change in fair value of these derivative instruments was recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the condensed consolidated balance sheets.
Cash Flow Hedges
The Company entered into foreign currency forward contracts to hedge the Mexican peso currency in 2022 and 2021. 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 loss, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive loss 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 condensed consolidated statements of operations as a component of other expense, net. At June 30, 2022, 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:
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 June 30, 2022 of $
The Company evaluated the effectiveness of the Mexican peso and U.S. dollar-denominated forward contracts held as of June 30, 2022 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 “Interest Rate Swap”) with a notional amount of $
13
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
Prepaid expenses | Accrued expenses and | |||||||||||||||||
Notional amounts (A) | and other current assets | other current liabilities | ||||||||||||||||
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||
Cash flow hedges: | ||||||||||||||||||
Forward currency contracts | $ | | $ | | $ | | $ | | $ | - | $ | - | ||||||
Interest rate swap | $ | | $ | | $ | | $ | - | $ | - | $ | | ||||||
Net investment hedges: | ||||||||||||||||||
Cross-currency swaps | $ | - | $ | | $ | - | $ | | $ | - | $ | - | ||||||
| (A) | Notional amounts represent the gross contract of the derivatives outstanding in U.S. dollars. |
Gross amounts recorded for the cash flow and net investment hedges in other comprehensive (loss) income and in net (loss) income for the three months ended June 30 were as follows:
Gain (loss) reclassified from | ||||||||||||
Gain (loss) recorded in other | other comprehensive (loss) | |||||||||||
comprehensive (loss) income | income into net (loss) income (A) | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Derivatives designated as cash flow hedges: | ||||||||||||
Forward currency contracts | $ | | $ | | $ | | $ | | ||||
Interest rate swap | $ | | $ | ( | $ | ( | $ | ( | ||||
Derivatives designated as net investment hedges: | ||||||||||||
Cross-currency swaps | $ | | $ | - | $ | | $ | - | ||||
| (A) | Gains reclassified from other comprehensive (loss) income into net (loss) income recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $ |
Gross amounts recorded for the cash flow and net investment hedges in other comprehensive (loss) income and in net (loss) income for the six months ended June 30 were as follows:
Gain (loss) reclassified from | ||||||||||||
Gain recorded in other | other comprehensive (loss) | |||||||||||
comprehensive (loss) income | income into net (loss) income (A) | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Derivatives designated as cash flow hedges: | ||||||||||||
Forward currency contracts | $ | | $ | | $ | | $ | | ||||
Interest rate swap | $ | | $ | | $ | ( | $ | ( | ||||
Derivatives designated as net investment hedges: | ||||||||||||
Cross-currency swaps | $ | | $ | - | $ | | $ | - | ||||
| (A) | Gains reclassified from other comprehensive (loss) income into net (loss) income recognized in SG&A in the Company’s condensed consolidated statements of operations were $ |
14
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
For the six months ended June 30, 2022, the total net gains on the foreign currency contract cash flow hedges of $
Cash flows from derivatives used to manage foreign currency exchange and interest rate risks are classified as operating activities within the condensed consolidated statements of cash flows.
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 and cross-currency contracts, inputs include forward 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.
June 30, | December 31, | ||||||||||||||
2022 | 2021 | ||||||||||||||
Fair values estimated using | |||||||||||||||
Fair | Level 1 | Level 2 | Level 3 | Fair | |||||||||||
| value |
| inputs |
| inputs |
| inputs |
| value | ||||||
Financial assets carried at fair value: | |||||||||||||||
Forward currency contract | $ | | $ | - | $ | | $ | - | $ | | |||||
Cross-currency swaps | - | - | - | - | | ||||||||||
Interest rate swap | | - | | - | - | ||||||||||
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 | ||||||
| 2022 |
| 2021 | |||
Balance at January 1 | $ | | $ | | ||
Change in fair value | - | | ||||
Foreign currency adjustments | | | ||||
Earn-out consideration cash payment | ( | - | ||||
Balance at June 30 | $ | - | $ | | ||
15
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The Company was required to pay the Stoneridge Brazil earn-out consideration based on Stoneridge Brazil’s financial performance in 2021. The fair value of the Stoneridge Brazil earn-out consideration was based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) in 2021. The earn-out consideration obligation related to Stoneridge Brazil was recorded within accrued expenses and other current liabilities in the condensed consolidated balance sheets as of December 31, 2021. The earn-out consideration obligation of $
The change in fair value of the earn-out consideration for Stoneridge Brazil was due to updated financial performance projections during 2021 and foreign currency translation fluctuations through settlement. 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 expense, net in the condensed consolidated statements of operations.
There were
(6) Share-Based Compensation
Compensation expense for share-based compensation arrangements, which is recognized in the condensed consolidated statements of operations as a component of SG&A expenses, was $
(7) Debt
Debt consisted of the following at June 30, 2022 and December 31, 2021:
June 30, | December 31, | Interest rates at | ||||||||
| 2022 |
| 2021 |
| June 30, 2022 |
| Maturity | |||
Revolving Credit Facility | ||||||||||
Credit Facility | $ | | $ | | ||||||
Debt | ||||||||||
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 “Credit Facility”). The Credit Facility provided for a $
16
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The Credit Facility contains customary affirmative covenants and representations. The 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 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 $
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 provided 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). The Covenant Relief Period ended on August 14, 2021. During the Covenant Relief Period:
| ● | the maximum net leverage ratio was suspended; |
| ● | the calculation of the minimum interest coverage ratio excluded 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 could not be less than $ |
| ● | the Company’s aggregate amount of cash and cash equivalents could not exceed $ |
| ● | there were certain restrictions on Restricted Payments (as defined); and |
| ● | a Permitted Acquisition (as defined) could not be consummated unless otherwise approved in writing by the required lenders. |
Amendment No. 1 changed the leverage based LIBOR pricing grid through the maturity date of the Credit Facility and also provides for a LIBOR floor of
The Company capitalized an additional $
On December 17, 2021, the Company entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 2”). Amendment No. 2 implemented non-LIBOR interest reference rates for borrowings in euros and British pounds.
17
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Due to the ongoing impacts of the COVID-19 pandemic and supply chain disruptions on the Company’s end-markets and the resulting financial impacts on the Company, on February 28, 2022, the Company entered into Amendment No. 3 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 3”). Amendment No. 3 reduces the total revolving credit commitments from $
| ● | the maximum net leverage ratio is changed to |
| ● | the minimum interest coverage ratio of |
| ● | an additional condition to drawing on the Credit Facility has been added that restricts borrowings if the Company’s total of |
| ● | there are certain additional restrictions on Restricted Payments (as defined); and |
| ● | a Permitted Acquisition (as defined) may not be consummated unless the net leverage ratio is below |
Amendment No. 3 changes the leverage based LIBOR pricing grid through the maturity date and also retains a LIBOR floor of
Amendment No. 3 also incorporates hardwired mechanics to permit a future replacement of LIBOR as the interest reference rate without lender consent.
The Company capitalized an additional $
Borrowings outstanding on the Credit Facility were $
The Company also has outstanding letters of credit of $
Debt
Stoneridge Brazil maintained short-term notes used for working capital purposes which had fixed or variable interest rates during 2021. There were
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
18
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The Company’s wholly-owned subsidiary located in Suzhou, China (the “Suzhou subsidiary”), has lines of credit (the “Suzhou credit line”) which allow up to a maximum borrowing level of
(8) Leases
The Company, as lessor, entered into a lease with a third-party lessee effective July 1, 2020, for our Canton, Massachusetts facility. In conjunction with the Canton restructuring plan outlined in Note 12, the Company ceased operations at this facility in March 2020. As discussed in Note 16, the Company sold the Canton facility and assigned the lease to the buyer on June 17, 2021. The Company recognized lease income on a straight-line basis over the lease term
(9) (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 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
Weighted-average Common Shares outstanding used in calculating basic and diluted earnings per share were as follows:
Three months ended | Six months ended | |||||||
June 30, | June 30, | |||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |
Basic weighted-average Common Shares outstanding | | | | | ||||
Effect of dilutive shares | - | | - | | ||||
Diluted weighted-average Common Shares outstanding | | | | | ||||
There were
19
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
(10) Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss for the three months ended June 30, 2022 and 2021 were as follows:
Foreign | Unrealized | ||||||||
currency | gain (loss) | ||||||||
| translation |
| on derivatives |
| Total | ||||
Balance at April 1, 2022 | $ | ( | $ | | $ | ( | |||
Other comprehensive (loss) income before reclassifications | ( | | ( | ||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | ( | ||||||
Net other comprehensive loss, net of tax | ( | ( | ( | ||||||
Balance at June 30, 2022 | $ | ( | $ | | $ | ( | |||
Balance at April 1, 2021 | $ | ( | $ | ( | $ | ( | |||
Other comprehensive income before reclassifications | | | | ||||||
Amounts reclassified from accumulated other comprehensive loss | - | | | ||||||
Net other comprehensive income, net of tax | | | | ||||||
Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | |||
Changes in accumulated other comprehensive loss for the six months ended June 30, 2022 and 2021 were as follows:
Foreign | Unrealized | ||||||||
currency | gain (loss) | ||||||||
| translation |
| on derivatives |
| Total | ||||
Balance at January 1, 2022 | $ | ( | $ | | $ | ( | |||
Other comprehensive (loss) income before reclassifications | ( | | ( | ||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | ( | ||||||
Net other comprehensive (loss) income, net of tax | ( | | ( | ||||||
Balance at June 30, 2022 | $ | ( | $ | | $ | ( | |||
Balance at January 1, 2021 | $ | ( | $ | ( | $ | ( | |||
Other comprehensive (loss) income before reclassifications | ( | | ( | ||||||
Amounts reclassified from accumulated other comprehensive loss | - | | | ||||||
Net other comprehensive (loss) income, net of tax | ( | | ( | ||||||
Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | |||
(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.
20
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
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 the site and engaged an environmental engineering consultant to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. A remedial action plan was approved by the Florida Department of Environmental Protection and groundwater remediation began in the fourth quarter of 2015. During the three months ended June 30, 2022 and 2021, the Company recognized no expense related to groundwater remediation. During the six months ended June 30, 2022 and 2021, the Company recognized expense of $
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$
Product Warranty and Recall
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 hold 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 condensed consolidated balance sheets. Product warranty and recall included $
The following provides a reconciliation of changes in product warranty and recall liability:
Six months ended June 30, |
| 2022 |
| 2021 | ||
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 | $ | | $ | | ||
21
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Brazilian Indirect Tax
In 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. As a result, the Company 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 leading case was decided on May 13, 2021. The Company does not expect any impact to amounts previously recognized as a result of the Supreme Court decision.
(12) Business Realignment and Restructuring
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. In conjunction with the strategic exit of the PM sensor product line, the Company entered into an asset purchase agreement related to the sale of the PM sensor product line during the first quarter of 2021. Refer to Note 16 of the condensed consolidated financial statements for additional details regarding the sale.
As a result of the PM sensor restructuring actions, the Company recognized expense of $
The expenses and liabilities for the exit of the PM sensor line that relate to the Control Devices reportable segment include the following:
Accrual as of | 2022 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2022 | to Expense | Cash | Non-Cash | June 30, 2022 | |||||||||||
Fixed asset impairment and | $ | | $ | - | $ | - | $ | - | $ | | |||||
Employee termination benefits | | - | ( | - | | ||||||||||
Other related costs | | - | - | - | | ||||||||||
Total | $ | | $ | - | $ | ( | $ | - | $ | | |||||
Accrual as of | 2021 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2021 | to Expense | Cash | Non-Cash | June 30, 2021 | |||||||||||
Fixed asset impairment and | $ | | $ | | $ | - | $ | ( | $ | | |||||
Employee termination benefits | | | ( | - | | ||||||||||
Other related costs | | | ( | - | | ||||||||||
Total | $ | | $ | | $ | ( | $ | ( | $ | | |||||
22
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
On January 10, 2019, the Company committed to a restructuring plan that resulted in the closure of the Canton, Massachusetts facility (“Canton Facility”) on 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 | 2022 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2022 | to Expense | Cash | Non-Cash | June 30, 2022 | |||||||||||
Employee termination benefits | $ | | $ | - | $ | ( | $ | - | $ | | |||||
Other related costs | | - | - | - | | ||||||||||
Total | $ | | $ | - | $ | ( | $ | - | $ | | |||||
Accrual as of | 2021 Charge | Utilization | Accrual as of | ||||||||||||
January 1, 2021 | to Expense | Cash | Non-Cash | June 30, 2021 | |||||||||||
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 $
The expenses for the restructuring activities that relate to the Electronics reportable segment include the following:
Accrual as of | 2021 Charge to | Utilization | Accrual as of | ||||||||||||
January 1, 2021 | Expense | Cash | Non-Cash | June 30, 2021 | |||||||||||
Employee termination benefits | $ | | $ | | $ | ( | $ | - | $ | | |||||
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.
23
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Business realignment charges by reportable segment were as follows:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Control Devices (A) | $ | - | $ | - | $ | - | $ | | ||||
Electronics (B) | - | | - | | ||||||||
Stoneridge Brazil (C) | - | | | | ||||||||
Unallocated Corporate (D) | - | - | - | | ||||||||
Total business realignment charges | $ | - | $ | | $ | | $ | | ||||
| (A) | Severance costs for the six months ended June 30, 2021 related to SG&A were $ |
| (B) | Severance costs for the three months ended June 30, 2021 related to D&D were $ |
| (C) | Severance costs for the six months ended June 30, 2022 related to SG&A were $ |
| (D) | Severance costs for the six months ended 2021 related to SG&A were $ |
Business realignment charges classified by statement of operations line item were as follows:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Cost of goods sold | $ | - | $ | | $ | - | $ | | ||||
Selling, general and administrative | - | | | | ||||||||
Design and development | - | | - | | ||||||||
Total business realignment charges | $ | - | $ | | $ | | $ | | ||||
(13) Income Taxes
For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date ordinary income. Tax jurisdictions with a projected or year to date loss for which a benefit cannot be realized are excluded.
For the three months ended June 30, 2022, income tax expense of $
For the three months ended June 30, 2021, income tax expense of $
For the six months ended June 30, 2022, income tax expense of $
24
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
For the six months ended June 30, 2021, income tax expense of $
(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
The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s 2021 Form 10-K. 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
25
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
A summary of financial information by reportable segment is as follows:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
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 (Income), 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 | $ | | $ | | $ | | $ | | ||||
June 30, | December 31, | ||||||||||||
| 2022 |
| 2021 | ||||||||||
Total Assets: | |||||||||||||
Control Devices | $ | | $ | | |||||||||
Electronics | | | |||||||||||
Stoneridge Brazil | | | |||||||||||
Corporate (C) | | | |||||||||||
Eliminations | ( | ( | |||||||||||
Total assets | $ | | $ | | |||||||||
26
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
The following tables present net sales and long-term assets for each of the geographic areas in which the Company operates:
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Net Sales: | ||||||||||||
North America | $ | | $ | | $ | | $ | | ||||
South America | | | | | ||||||||
Europe and Other | | | | | ||||||||
Total net sales | $ | | $ | | $ | | $ | | ||||
June 30, | December 31, | ||||||||||||
| 2022 |
| 2021 | ||||||||||
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 loan receivables, fixed assets for the corporate headquarter building, leased assets, information technology assets, equity investments and investments in subsidiaries. |
(15) Investments
Minda Stoneridge Instruments Ltd.
The Company had a
PST Eletrônica Ltda.
The Company had a
27
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
Other Investments
In December 2018, the Company entered into an agreement to make a $
(16) Disposals
Disposal of Particulate Matter Sensor Business
On
On March 8, 2021 the Company’s Control Devices segment recognized net sales and cost of goods sold of $
Pursuant to the contract manufacturing agreement, the Company produced and sold PM sensor Gen 1 finished goods inventory to SMP for net sales of $
PM sensor Gen 1 net sales to SMP pursuant to the contract manufacturing agreement were $
Sale of Canton Facility
On
28
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data, unless otherwise stated)
(Unaudited)
On June 17, 2021, pursuant to the Agreement, as amended after May 7, 2021, the Company closed the sale of the Canton Facility to the Buyer for an adjusted purchase price of $
29
Item 2. 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 systems, components and modules primarily for the automotive, commercial, off-highway and agricultural vehicle markets.
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes related thereto and other financial information included elsewhere herein.
Global Market Conditions
The ongoing supply chain disruptions, primarily related to semiconductor shortages, and the continued impacts of the coronavirus pandemic (“COVID-19”), have had a negative impact on the global economy since the first quarter of 2020. In addition, the global economy more recently has been negatively affected by geopolitical conflicts, primarily related to the Russia-Ukraine war, beginning in the first quarter of 2022. These situations have disrupted, and likely will continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway and agricultural vehicles by end-consumers.
The adverse effects of the supply chain disruptions, geopolitical conflicts and COVID-19 have resulted in longer lead-times, higher material cost inflation, delays in procuring component parts, especially electronic components, and raw materials and production volume uncertainty and fluctuations. 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 these or any other issues. During the second quarter of 2022, the Company recognized $15.3 million of cost recoveries related to spot buys of materials purchased from electronic component brokers for our customers and $7.2 million of negotiated price increases to offset material cost inflation.
Global vehicle volumes are expected to increase in the second half of 2022 due to a combination of higher demand and historically low inventory levels. However, we expect that vehicle production volumes will continue to be negatively affected by the ongoing supply chain disruptions, including semiconductor shortages. The magnitude of the adverse impact on our financial condition, results of operations and cash flows depends on the evolution of the semiconductor supply shortage, vehicle production schedules and supply chain impacts.
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 (“SRB”). 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.
Second Quarter Overview
As a result of the volatile business environment, including material availability, rising material costs and fluctuations in customer production schedules, the second quarter of 2022 continued to present a number of commercial and operational challenges, however, we continue to effectively execute on our long-term strategy by focusing on the growth initiatives that will drive long-term profitable growth in 2022 and beyond. We continued to focus on controlling the variables that we could control and on mitigating the impact of externalities to our business. During the second quarter we benefited from the negotiated pricing actions previously agreed to with the majority of our customers to offset a portion of the incremental material and supply chain related costs we have incurred and are forecasting for 2022. The Company continues to work with our customers to preserve gross margin through price increases aligned with current market conditions and is executing on initiatives to reduce supply chain related costs and improve working capital.
The Company had a net loss of $7.3 million, or $(0.27) per diluted share, for the three months ended June 30, 2022.
30
Net loss for the quarter ended June 30, 2022 increased by $27.1 million, or $(0.99) per diluted share, from net income of $19.8 million, or $0.72 per diluted share, for the three months ended June 30, 2021. Net loss increased primarily due to the sale of our Canton Facility for a pretax net gain of $30.7 million, or $0.93 per diluted share, in the second quarter of 2021 as well as lower gross margin primarily driven by higher material costs from the adverse impacts of supply chain disruptions, adverse foreign exchange fluctuations and cost inflation net of pricing increases. Net sales increased by $29.6 million, or 15.5%, primarily from higher volumes as well as favorable customer pricing for recoveries of electronic component spot buy purchases in our Electronics segment and negotiated price increases in both our Electronics and Control Devices segments offset by lower volumes in our Control Devices segment. During the second quarter, the overall transportation industry continued to be challenged by on-going supply chain disruptions including electronic component shortages. Recent production shutdowns and altered production forecasts at our OEM customers, often on short notice, had a negative impact on our financial results for the second quarter. In other (income) expense, net we recognized a $3.7 million gain on the settlement of the net investment hedges that was offset by $3.1 million of adverse foreign currency fluctuations.
Our Control Devices segment net sales decreased by 2.1% compared to the second quarter of 2021 primarily as a result of decreased volumes in our European automotive markets due to our exit of the PM sensor business as well as lower North American commercial vehicle volumes offset by negotiated price increases and higher North American automotive volumes including production ramp-up of new products. Segment gross margin decreased due to lower sales volumes, increased costs associated with supply chain disruptions and unfavorable fixed cost leverage offset by negotiated price increases. Segment operating income decreased due to the gain on the sale of our Canton Facility in 2021, decreased sales volumes and lower gross margin.
Our Electronics segment net sales increased by 36.6% compared to the second quarter of 2021 primarily due to increased sales volumes in our European commercial, North American commercial and European off-highway vehicle markets, favorable customer pricing for recoveries of semiconductor spot buy purchases, negotiated price increases and launch of new products. Segment gross margin decreased primarily due to increased material costs associated with supply chain disruptions including spot purchases of electronic components, adverse foreign exchange fluctuations and inflation offsetting higher sales levels and the favorable impact of negotiated price increases. Operating loss for the segment increased compared to the second quarter of 2021 due to higher material costs from supply chain disruptions including spot purchases of electronic components and material inflation.
Our Stoneridge Brazil segment net sales decreased by 10.4% compared to the second quarter of 2021 primarily due to lower sales demand in most of our product lines partially offset by favorable foreign currency impact. Segment gross margin decreased slightly from lower net sales. Operating income increased compared to 2021 due to an unfavorable adjustment in the fair value of earn-out consideration which occurred in the second quarter of 2021 and favorable net adjustments for Brazilian indirect tax credits and lower selling related costs in 2022.
In the second quarter of 2022, SG&A expenses decreased by $2.4 million compared to the second quarter of 2021 primarily due to the unfavorable adjustment to the fair value of the SRB earn-out consideration in the second quarter of 2021 and net favorable adjustments related to Brazilian indirect tax credits.
In the second quarter of 2022, D&D costs remained consistent with the prior year second quarter as higher spending was offset by higher customer reimbursements.
At June 30, 2022 and December 31, 2021, we had cash and cash equivalents balances of $40.7 million and $85.5 million, respectively, and we had $157.8 million and $164.0 million, respectively, in borrowings outstanding on the Credit Facility. The 2022 decrease in cash and cash equivalents was to support higher working capital levels, specifically inventory, capital expenditures and the repayment of Credit Facility borrowings.
Outlook
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. Since the first quarter of 2020, COVID-19 caused worldwide adverse economic conditions and uncertainty in our served markets. In the first quarter of 2021, we began experiencing supply chain related disruptions because of a worldwide semiconductor shortage, which continues and has resulted in longer lead-times, higher costs and delays in procuring other component parts and raw materials. The Company expects that ongoing material cost challenges, resulting from supply chain disruptions, material cost inflation and COVID-19, will continue to put pressure on margins. In order to recover these higher costs, we have negotiated and expect to continue to negotiate price increases with our customers and implement supply chain strategies to help mitigate future costs.
31
Based on IHS Markit production forecast, the North American automotive market is expected to increase to 14.7 million units in 2022 from 13.0 million units in 2021 as the market continues to recover from supply chain disruptions and COVID-19. The Company expects sales volumes in our Control Devices segment to increase from 2021 based on second half 2022 production forecasts and market conditions and the ramp-up of certain electrified vehicle program launches, however, global supply chain shortages, primarily the global semiconductor supply shortage and COVID-19 could adversely impact our sales volumes and gross margin for the remainder of 2022.
For 2022, we expect an increase in our Electronics’ segment sales compared to 2021 primarily due to the increase in production volume forecasts in our European and North American commercial markets, strong demand for our products in our off-highway and commercial vehicle end-markets as well as the ramp up of new program launches in 2022. In addition, we expect increased sales from the launch of our first two MirrorEye camera-based vision systems for OEM applications as well as the continued roll out of MirrorEye in the retrofit markets. MirrorEye system take-rates continue to exceed prior expectations and customer production forecasts suggest these take-rates could continue to rise significantly as material becomes more readily available and customer truck production continues to shift to new models. Customer recoveries related to spot buys of materials purchased for our customers increased net sales by $15.3 million in the second quarter of 2022. Spot buy material purchasing activity, which is recognized as revenue and material costs, was mostly passed through to the customer and was driven by electronic component shortages. The Company expects continued spot buy activity for the remainder of 2022 but cannot predict the duration or magnitude of continued spot buy activity due to volatile supply chains and component availability. We expect to continue to offset a significant majority of spot buy related costs going forward and expect continued reduction in overall spot buy costs in the second half of the year. In addition, customer negotiated price increases also increased sales during the second quarter, which will continue to favorably impact sales for the remainder of the year.
In 2021 and continuing through the first half of 2022, our D&D spend increased to support near term launches of awarded business primarily in our Electronics segment. We expect that the rate of increase in our D&D spending will moderate from current levels as we continue to align our global engineering capabilities in order to develop advanced technologies and systems within our portfolio of products.
Our 2022 Stoneridge Brazil segment revenues decreased compared to the prior year due to lower sales of most of our product lines offset by favorable foreign currency translation. In April 2022, the International Monetary Fund forecasted the Brazil gross domestic product to grow 0.8% in 2022 and 1.4% in 2023. We expect our served market channels to remain stable 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.
Beginning in 2021, global transportation vehicle production was impacted by supply chain disruptions, including semiconductor shortages, primarily affecting our commercial vehicle and automotive end-markets. Based on the current market conditions, we expect continued impacts on production in 2022. We expect incremental costs related to supply chain disruptions and production schedule volatility to continue to adversely affect our gross margin in 2022. However, customer negotiated price increases will continue to mostly offset this adverse impact in 2022.
As a result of these supply chain disruptions and production schedule volatilities, our working capital balances, specifically inventory, have increased significantly compared to historical levels. We have developed and are actioning plans to reduce on hand inventory by refining our procurement process which we expect will improve liquidity.
Throughout 2022, we expect our effective tax rate to remain elevated primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions.
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 euro, Swedish krona and Argentine peso in 2022 and the euro, Swedish krona, Brazilian real, Argentine peso and Mexican peso in 2021, unfavorably impacting our material costs and reported results.
32
On November 2, 2021, the Company entered into a Share Purchase Agreement (the “SPA”) with Minda Corporation Limited (“Minda”), as the buyer, and MSIL. Pursuant to the SPA the Company agreed to sell to Minda the Company’s minority interest in MSIL for approximately $21.5 million equivalent Indian Rupee which was payable in U.S. dollars at closing. On December 30, 2021, pursuant to the SPA, the Company closed the sale of MSIL to Minda for $21.6 million. The Company recognized net proceeds of $21.0 million and a gain, net of direct selling costs, of $1.8 million.
On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers did not acquire any of the Company’s locations or employees. The purchase price for the sale of the PM sensor assets was $4.0 million (subject to a post-closing inventory adjustment which was a payment to SMP of $1.1 million) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3.2 million and $0.8 million, respectively. The sale of the Gen 2 assets occurred during November 2021, upon completion of the Company’s supply commitments to certain customers. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter 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 did not recognize any expense as a result of these actions during the three months ended June 30, 2022 and we recognized $0.3 million of expense as a result of this initiative during the three months ended June 30, 2021. The only remaining costs relate to potential commercial settlements and legal fees which we continue to negotiate. The estimated additional cost related to these settlements and fees is up to $4.2 million.
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. We did not recognize any business realignment costs during the three months ended June 30, 2022, we incurred $0.1 million of business realignment costs in the three months ended June 30, 2021.
We are being adversely affected by increased material costs associated with both supply chain disruptions, including spot purchases of electronic components, and overall inflation. In response to these material cost increases we have and continue to negotiate price increases with our customers and lowering certain controllable costs where feasible. However, if we are unable to effectively offset material price increases in the future, our results of operations will be further adversely affected.
33
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||
increase / | ||||||||||||||
Three months ended June 30, |
| 2022 |
| 2021 |
| (decrease) | ||||||||
Net sales | $ | 220,936 |
| 100.0 | % | $ | 191,334 |
| 100.0 | % | $ | 29,602 | ||
Costs and expenses: | ||||||||||||||
Cost of goods sold | 182,372 | 82.5 | 148,493 | 77.6 | 33,879 | |||||||||
Selling, general and administrative | 28,938 | 13.1 | 31,380 | 16.4 | (2,442) | |||||||||
Gain on sale of canton facility, net | - | - | (30,718) | (16.1) | 30,718 | |||||||||
Design and development | 15,554 | 7.0 | 15,495 | 8.1 | 59 | |||||||||
Operating (loss) income | (5,928) | (2.6) | 26,684 | 14.0 | (32,612) | |||||||||
Interest expense, net | 1,217 | 0.6 | 1,860 | 1.0 | (643) | |||||||||
Equity in loss (earnings) of investee | 377 | 0.3 | (496) | (0.2) | 873 | |||||||||
Other income, net | (596) | (0.3) | (272) | (0.1) | (324) | |||||||||
(Loss) income before income taxes | (6,926) | (3.2) | 25,592 | 13.3 | (32,518) | |||||||||
Provision for income taxes | 413 | 0.2 | 5,794 | 3.0 | (5,381) | |||||||||
Net (loss) income | $ | (7,339) | (3.4) | % | $ | 19,798 | 10.3 | % | $ | (27,137) | ||||
Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
increase | increase | ||||||||||||||||
Three months ended June 30, | 2022 |
| 2021 |
| (decrease) |
| (decrease) |
| |||||||||
Control Devices | $ | 84,566 |
| 38.3 | % | $ | 86,345 |
| 45.1 | % | $ | (1,779) | (2.1) | % | |||
Electronics | 123,021 | 55.7 | 90,085 | 47.1 | 32,936 | 36.6 | % | ||||||||||
Stoneridge Brazil | 13,349 | 6.0 | 14,904 | 7.8 | (1,555) | (10.4) | % | ||||||||||
Total net sales | $ | 220,936 | 100.0 | % | $ | 191,334 | 100.0 | % | $ | 29,602 | 15.5 | % | |||||
Our Control Devices segment net sales decreased $1.8 million due to a decrease in our European automotive, China commercial and North American commercial vehicle markets of $2.7 million, $1.8 million and $1.6 million, respectively. The decrease in our European automotive market was due to our exit of the PM sensor business. These decreases were offset by increases in our North American and China automotive markets of $2.6 million and $0.6 million, respectively. In addition, second quarter of 2022 net sales were favorably impacted by negotiated price increases of $1.3 million.
Our Electronics segment net sales increased due higher sales volumes in our European commercial, North American commercial and European off-highway vehicle markets of $9.9 million, $7.7 million and $0.8 million, respectively. In addition, second quarter of 2022 net sales were favorably impacted by both customer pricing for recoveries of electronics component spot buys and for negotiated price increases of $15.3 million and $5.9 million, respectively. These increases were offset by $7.8 million due to unfavorable euro and Swedish krona foreign currency translation compared to the prior year quarter.
Our Stoneridge Brazil segment net sales decreased due to lower sales in most of our product lines offset by favorable foreign currency translation.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
increase | increase | ||||||||||||||||
Three months ended June 30, |
| 2022 |
| 2021 |
| (decrease) |
| (decrease) |
| ||||||||
North America | $ | 109,642 |
| 49.6 | % | $ | 96,700 |
| 50.5 | % | $ | 12,942 | 13.4 | % | |||
South America | 13,349 | 6.0 | 14,904 | 7.8 | (1,555) | (10.4) | % | ||||||||||
Europe and Other | 97,945 | 44.4 | 79,730 | 41.7 | 18,215 | 22.8 | % | ||||||||||
Total net sales | $ | 220,936 | 100.0 | % | $ | 191,334 | 100.0 | % | $ | 29,602 | 15.5 | % | |||||
34
The increase in North American net sales was mostly attributable to an increase in sales volume in our Electronics segment commercial vehicle market of $7.7 million and our Control Devices segment automotive market of $2.6 million offset by sales volume decreases in our Control Devices segment commercial vehicle market of $1.6 million. The decrease in net sales in South America was primarily due to lower sales in most of our product lines offset by favorable foreign currency translation. The increase in net sales in Europe and Other was due to customer recoveries of electronic component spot buy purchases and negotiated price increases of $15.1 million and $3.6 million, respectively, and increases in our European commercial vehicle and European off-highway markets of $10.3 million and $0.8 million, respectively. This increase for Europe and Other was offset by decreases in our European automotive and China commercial vehicle markets of $2.7 million and $1.4 million, respectively. In addition, Europe and Other net sales decreased $8.1 million due to unfavorable foreign currency translation.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to the second quarter of 2021 and our gross margin decreased from 22.4% in the second quarter of 2021 to 17.5% in the second quarter of 2022. Our material cost as a percentage of net sales increased from 55.7% in the second quarter of 2021 to 63.5% in the second quarter of 2022 from higher material costs resulting from adverse foreign exchange fluctuations and inflation. In 2022, cost of goods sold increased by $15.3 million, or 6.9% of net sales, from the impact of electronic component spot buy purchases, which were offset by customer recoveries. The impact of these spot buy purchases reduced gross margin percent by 1.2%. Overhead as a percentage of net sales decreased to 14.5% for the second quarter of 2022 compared to 16.1% for the second quarter of 2021 due to leverage of fixed costs from higher sales levels.
Our Control Devices segment gross margin decreased primarily due to the decrease in sales volume, higher material costs associated with supply chain disruptions and inflation as well as adverse leverage of fixed costs.
Our Electronics segment gross margin decreased primarily due to increased material costs associated with supply chain disruptions, adverse foreign exchange fluctuations and inflation offsetting favorable pricing and leverage of fixed costs from higher sales levels.
Our Stoneridge Brazil segment gross margin as a percentage of sales was decreased from adverse leverage of fixed costs offset by favorable foreign currency translation.
Selling, General and Administrative. SG&A expenses decreased by $2.4 million primarily due to the unfavorable adjustment to the fair value of the SRB earn-out consideration in the second quarter of 2021, favorable net adjustments for Brazilian indirect tax credits as well as lower selling costs.
Design and Development. D&D costs remained consistent with the second quarter of 2021 increasing less than $0.1 million due to increased spend for product launches in our Electronics and Control Devices segments offset by higher customer reimbursements for Electronics of $2.5 million.
Operating (Loss) Income. Operating (loss) income by segment is summarized in the following table (in thousands):
Dollar | Percent | |||||||||||
|
|
| increase / |
| increase / | |||||||
Three months ended June 30, | 2022 | 2021 | (decrease) | (decrease) |
| |||||||
Control Devices | $ | 4,118 | $ | 37,065 | $ | (32,947) | (88.9) | % | ||||
Electronics | (2,524) | (1,807) | (717) | (39.7) | % | |||||||
Stoneridge Brazil | 970 | (749) | 1,719 | 229.5 | % | |||||||
Unallocated corporate | (8,492) | (7,825) | (667) | (8.5) | % | |||||||
Operating (loss) income | $ | (5,928) | $ | 26,684 | $ | (32,612) | (122.2) | % | ||||
Our Control Devices segment operating income decreased due to the gain on the sale of the Canton Facility of $30.7 million in the second quarter of 2021, the impact of gross margin from higher material costs associated with supply chain disruptions and inflation, and adverse leverage of fixed costs from lower sales levels.
Our Electronics segment operating loss increased primarily due to lower segment gross margin from higher material costs associated with supply chain disruptions, including spot purchases of electronic components net of recoveries, adverse foreign exchange fluctuations and inflation.
35
Our Stoneridge Brazil segment operating income increased primarily due to an unfavorable adjustment in the fair value of earn-out consideration occurring in the second quarter of 2021, favorable net adjustments for Brazilian indirect tax credits as well as lower selling related costs.
Our unallocated corporate operating loss increased primarily from higher employee-related and incentive compensation costs incurred during the second quarter of 2022.
Operating (loss) income by geographic location is summarized in the following table (in thousands):
Dollar | Percent | |||||||||||
|
|
| increase / |
| increase / |
| ||||||
Three months ended June 30, | 2022 | 2021 | (decrease) | (decrease) | ||||||||
North America | $ | (2,845) | $ | 25,948 | $ | (28,793) | (111.0) | % | ||||
South America | 970 | (749) | 1,719 | 229.5 | % | |||||||
Europe and Other | (4,053) | 1,485 | (5,538) | (372.9) | % | |||||||
Operating (loss) income | $ | (5,928) | $ | 26,684 | $ | (32,612) | (122.2) | % | ||||
Our North American operating income decreased due to the gain on the sale of the Canton Facility in 2021 offset by increased sales in our commercial vehicle and automotive markets offset by higher material costs associated with supply chain disruptions and inflation. The increase in operating income in South America was primarily due to an unfavorable adjustment in the fair value of the earn-out consideration in the second quarter of 2021 and favorable net adjustments for Brazilian indirect taxes and lower selling related costs in the second quarter of 2022. Our operating results in Europe and Other decreased primarily due to higher material costs from supply chain disruptions, adverse foreign exchange fluctuations and inflation.
Interest Expense, net. Interest expense, net was $1.2 million and $1.9 million for the three months ended June 30, 2022 and 2021, respectively. The decrease for the quarter ended June 30, 2022, was the result of higher interest income at Stoneridge Brazil and lower Credit Facility interest expense.
Equity in Loss (Earnings) of Investee. Equity earnings for MSIL was $0.4 million for the three months ended June 30, 2021. As discussed in Note 15 to the condensed consolidated financial statements, the Company sold its equity interest in MSIL on December 30, 2021. Equity loss (earnings) for Autotech were $0.4 million and less than $(0.1) million for the three months ended June 30, 2022 and 2021, respectively.
Other Income, net. We record certain foreign currency transaction losses (gains) as a component of other (income) expense, net on the condensed consolidated statement of operations. Other income, net of $0.6 million increased by $0.3 million compared to the second quarter of 2021 due to the 2022 settlement of the net investment hedge of $3.7 million offset by foreign currency transaction losses in our Electronics and Control Devices segments from the strengthening of the U.S. dollar.
Provision for Income Taxes. For the three months ended June 30, 2022, income tax expense of $0.4 million was attributable to the mix of earnings 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 (6.0)% varies from the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as tax credits and incentives offset by foreign rates that differ from the U.S. rate, U.S. taxes on foreign earnings and non-deductible expenses.
For the three months ended June 30, 2021, income tax expense of $5.8 million was attributable to the gain on the sale of the Canton facility, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit was recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 22.6% was greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit was recognized due to valuation allowances in certain jurisdictions as well as U.S. taxes on foreign earnings, partially offset by tax incentives.
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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||
increase / | ||||||||||||||
Six months ended June 30, |
| 2022 |
| 2021 |
| (decrease) | ||||||||
Net sales | $ | 441,994 |
| 100.0 | % | $ | 385,129 |
| 100.0 | % | $ | 56,865 | ||
Costs and expenses: | ||||||||||||||
Cost of goods sold | 361,987 | 81.9 | 296,202 | 76.9 | 65,785 | |||||||||
Selling, general and administrative | 56,337 | 12.7 | 60,756 | 15.8 | (4,419) | |||||||||
Gain on sale of Canton Facility, net | - | - | (30,718) | (8.0) | 30,718 | |||||||||
Design and development | 32,582 | 7.4 | 30,146 | 7.8 | 2,436 | |||||||||
Operating (loss) income | (8,912) | (2.0) | 28,743 | 7.5 | (37,655) | |||||||||
Interest expense, net | 3,003 | 0.7 | 3,626 | 0.9 | (623) | |||||||||
Equity in loss (earnings) of investee | 458 | 0.1 | (1,110) | (0.3) | 1,568 | |||||||||
Other expense, net | 735 | 0.3 | 86 | 0.1 | 649 | |||||||||
(Loss) income before income taxes | (13,108) | (3.1) | 26,141 | 6.8 | (39,249) | |||||||||
Provision for income taxes | 1,906 | 0.4 | 6,213 | 1.6 | (4,307) | |||||||||
Net (loss) income | $ | (15,014) | (3.5) | % | $ | 19,928 | 5.2 | % | $ | (34,942) | ||||
Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
increase | increase | ||||||||||||||||
Six months ended June 30, |
| 2022 |
| 2021 |
| (decrease) |
| (decrease) |
| ||||||||
Control Devices | $ | 168,626 |
| 38.2 | % | $ | 185,963 |
| 48.3 | % | $ | (17,337) | (9.3) | % | |||
Electronics | 247,974 | 56.1 | 172,855 | 44.9 | 75,119 | 43.5 | % | ||||||||||
Stoneridge Brazil | 25,394 | 5.7 | 26,311 | 6.8 | (917) | (3.5) | % | ||||||||||
Total net sales | $ | 441,994 | 100.0 | % | $ | 385,129 | 100.0 | % | $ | 56,865 | 14.8 | % | |||||
Our Control Devices segment net sales decreased $17.3 million due to a decrease in our European automotive, North American commercial and European commercial vehicle markets of $8.6 million, $5.3 million and $1.1 million, respectively, as well as decreases in our China commercial vehicle and automotive markets of $4.7 million and $1.0 million, respectively. The decrease in our European automotive market was due to our exit of the PM sensor business. In addition, 2022 net sales were favorably impacted by negotiated price increases of $3.6 million.
Our Electronics segment net sales increased due to higher sales volumes in our North American commercial, European commercial and European off-highway vehicle markets of $17.2 million, $16.7 million and $3.9 million, respectively. In addition, 2022 net sales were favorably impacted by both customer pricing for recoveries of electronic component spot buy purchases and for negotiated price increases of $39.7 million and $9.9 million, respectively. These increases were offset by unfavorable euro and Swedish krona foreign currency translation compared to the prior year quarter of $12.7 million.
Our Stoneridge Brazil segment net sales decreased primarily due to lower sales in most Stoneridge Brazil product lines offset by favorable foreign currency translation of $1.8 million and higher sales volumes for our OEM products.
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Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | ||||||||||||||||
increase | increase | ||||||||||||||||
Six months ended June 30, |
| 2022 |
| 2021 |
| (decrease) |
| (decrease) |
| ||||||||
North America | $ | 213,470 |
| 48.3 | % | $ | 193,234 |
| 50.1 | % | $ | 20,236 | 10.5 | % | |||
South America | 25,394 | 5.7 | 26,311 | 6.9 | (917) | (3.5) | % | ||||||||||
Europe and Other | 203,130 | 46.0 | 165,584 | 43.0 | 37,546 | 22.7 | % | ||||||||||
Total net sales | $ | 441,994 | 100.0 | % | $ | 385,129 | 100.0 | % | $ | 56,865 | 14.8 | % | |||||
The increase in North American net sales was mostly attributable to an increase in sales volume in our Electronics segment commercial vehicle market of $17.3 million offset by sales volume decreases in our Control Devices segment commercial vehicle market of $5.3 million. The decrease in net sales in South America was primarily due to lower sales in most Stoneridge Brazil product lines offset by favorable foreign currency translation and higher sales volumes for our OEM products. The increase in net sales in Europe and Other was due to customer recoveries of semiconductor spot buy purchases and contractual price increases of $38.8 million and $7.6 million, respectively and increases in our European commercial vehicle and European off-highway markets of $16.7 million and $3.9 million, respectively. This increase for Europe and Other was offset by decreases in our European automotive market of $8.6 million and China commercial vehicle and automotive markets of $6.0 million and $1.0 million, respectively. In addition, Europe and Other net sales decreased $13.8 million due to unfavorable foreign currency translation.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to the second half of 2021 and our gross margin decreased from 23.1% in the first half of 2021 to 18.1% in the first half of 2022. Our material cost as a percentage of net sales increased from 55.3% in the first half of 2021 to 62.9% in the first half of 2022 from higher material costs resulting from adverse foreign exchange fluctuations and inflation. In 2022, cost of goods sold increased by $39.7 million, or 9.0% of net sales, due to electronic component spot buy purchases which were offset by customer recoveries. The impact of these spot purchases reduced gross margin percent by 1.7%. Overhead as a percentage of net sales decreased to 14.5% for the first half of 2022 compared to 15.9% for the first half of 2021 due to leverage of fixed costs from higher sales levels.
Our Control Devices segment gross margin decreased primarily due to the decrease in sales volume, higher material costs associated with supply chain disruptions and inflation as well as adverse leverage of fixed costs.
Our Electronics segment gross margin decreased primarily due to increased material costs associated with supply chain disruptions including spot purchases of electronic components, adverse foreign exchange fluctuations and inflation offsetting favorable pricing and leverage of fixed costs from higher sales levels.
Our Stoneridge Brazil segment gross margin as a percentage of sales was consistent with the prior year as adverse leverage of fixed costs was offset by favorable foreign currency translation.
Selling, General and Administrative. SG&A expenses decreased by $4.4 million compared to the second half of 2021 due to favorable 2022 non-recurring commercial and legal settlements, an unfavorable adjustment to the fair value of the SRB earn-out consideration in 2021, the favorable net adjustments for Brazilian indirect tax credits and 2021 Sarasota environmental remediation costs in our Control Devices segment. Offsetting these favorable items was the 2021 gain on disposal of the PM Sensor business of $0.7 million.
Design and Development. D&D costs increased by $2.4 million due to increased spend for product launches in our Electronics and Control Devices segments offset by higher customer reimbursements for Electronics of $3.8 million.
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Operating (Loss) Income. Operating (loss) income by segment is summarized in the following table (in thousands):
Dollar | Percent | |||||||||||
increase / | increase / | |||||||||||
Six months ended June 30, |
| 2022 |
| 2021 |
| (decrease) |
| (decrease) |
| |||
Control Devices | $ | 10,894 | $ | 47,230 | $ | (36,336) | (76.9) | % | ||||
Electronics | (5,236) | (2,680) | (2,556) | (95.4) | % | |||||||
Stoneridge Brazil | 1,462 | (797) | 2,259 | 283.4 | % | |||||||
Unallocated corporate | (16,032) | (15,010) | (1,022) | (6.8) | % | |||||||
Operating (loss) income | $ | (8,912) | $ | 28,743 | $ | (37,655) | (131.0) | % | ||||
Our Control Devices segment operating income decreased due to the gain on the sale of the Canton Facility of $30.7 million in 2021, the adverse impact on gross margin from higher material costs associated with supply chain disruptions and inflation, adverse leverage of fixed costs from lower sales levels and higher D&D spending.
Our Electronics segment operating loss increased primarily due to lower segment gross margin from higher material costs associated with supply chain disruptions including spot purchases of electronic components net of recoveries, adverse foreign exchange fluctuations and offset by lower D&D spending caused by higher customer reimbursements.
Our Stoneridge Brazil segment operating income increased primarily due to the unfavorable adjustment to the fair value of the SRB earn-out consideration in 2021 and favorable net adjustments for Brazilian indirect tax credits.
Our unallocated corporate operating loss increased primarily from higher employee benefit and recruiting costs.
Operating (loss) income by geographic location is summarized in the following table (in thousands):
Dollar | Percent | |||||||||||
increase | increase | |||||||||||
Six months ended June 30, |
| 2022 |
| 2021 |
| (decrease) |
| (decrease) | ||||
North America | $ | (3,597) | $ | 23,310 | $ | (26,907) | (115.4) | % | ||||
South America | 1,462 | (797) | 2,259 | 283.4 | % | |||||||
Europe and Other | (6,777) | 6,230 | (13,007) | (208.8) | % | |||||||
Operating (loss) income | $ | (8,912) | $ | 28,743 | $ | (37,655) | (131.0) | % | ||||
Our North American operating income decreased due to the gain on the sale of the Canton Facility in 2021 and higher material costs associated with supply chain disruptions and inflation. The increase in operating income in South America was primarily due to an unfavorable adjustment in the fair value of earn-out consideration occurring in the second quarter of 2021 and favorable net adjustments for Brazilian indirect tax credits. Our operating results in Europe and Other decreased primarily due to higher material costs from supply chain disruptions including spot purchases of electronic components net of recoveries, adverse foreign exchange fluctuations and inflation as well as higher D&D spending caused by lower customer reimbursements offsetting favorable pricing.
Interest Expense, net. Interest expense, net was $3.0 million and $3.6 million for the six months ended June 30, 2022 and 2021. Interest expense, net included $0.4 million related to the write-off of deferred financing fees as a result of Amendment No. 3 to the Credit Facility and higher interest income at Stoneridge Brazil for the six months ended June 30, 2022.
Equity in Loss (Earnings) of Investee. Equity earnings for MSIL were $0.9 million for the six months ended June 30, 2021. As discussed in Note 15 to the condensed consolidated financial statements, the Company sold its equity interest in MSIL on December 30, 2021. Equity loss (earnings) for Autotech were $0.5 million and $(0.2) million for the six months ended June 30, 2022 and 2021, respectively.
Other Expense, net. We record certain foreign currency transaction losses (gains) as a component of other (income) expense, net on the condensed consolidated statement of operations. Other expense, net of $0.7 million increased by $0.6 million compared to the first half of 2021 due to foreign currency transaction losses in our Electronics and Control Devices segments from the strengthening of the U.S. dollar offsetting the 2022 gain on settlement of the net investment hedge of $3.7 million.
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Provision for Income Taxes. For the six months ended June 30, 2022, income tax expense of $1.9 million was attributable to the mix of earnings 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 (14.5)% varies from the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as tax credits and incentives offset by U.S. taxes on foreign earnings.
For the six months ended June 30, 2021, income tax expense of $6.2 million was attributable to the gain on the sale of the Canton facility, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit was recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 23.8% was greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit was recognized due to valuation allowances in certain jurisdictions as well as U.S. taxes on foreign earnings, partially offset by tax incentives.
Liquidity and Capital Resources
Summary of Cash Flows:
Six months ended June 30, |
| 2022 |
| 2021 |
| ||
Net cash provided by (used for): | |||||||
Operating activities | $ | (17,818) | $ | (22,641) | |||
Investing activities | (11,380) | 21,049 | |||||
Financing activities | (13,480) | (15,543) | |||||
Effect of exchange rate changes on cash and cash equivalents | (2,177) | (1,197) | |||||
Net change in cash and cash equivalents | $ | (44,855) | $ | (18,332) | |||
Cash used for operating activities decreased compared to 2021 due to lower use of cash to support working capital levels primarily inventory offset by lower net income. Our receivable terms and collections rates have remained consistent between periods presented. Our inventory levels as of both periods presented are elevated compared to historical balances due to a combination of supply chain disruptions and production volatility.
Net cash used for investing activities increased compared to 2021 due to the proceeds from the sale of the Canton Facility in 2021 being slightly offset by the proceeds from the settlement of the net investment hedge in 2022.
Net cash used for financing activities decreased compared to the prior year primarily due to lower 2022 net Credit Facility payments offset by the cash payment of Stoneridge Brazil earn-out consideration.
As outlined in Note 7 to our condensed consolidated financial statements, the Credit Facility permits borrowing up to a maximum level of $300.0 million, as amended on February 28, 2022, by Amendment No. 3 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 3”). This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The 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 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 Credit Facility had an outstanding balance of $157.8 million at June 30, 2022.
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 provided 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). The Covenant Relief Period ended on August 14, 2021. During the Covenant Relief Period:
| ● | the maximum net leverage ratio was suspended; |
| ● | the calculation of the minimum interest coverage ratio excluded 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 was reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively; |
40
| ● | the Company’s liquidity could not be less than $150,000; |
| ● | the Company’s aggregate amount of cash and cash equivalents could not exceed $130,000; |
| ● | there were certain restrictions on Restricted Payments (as defined); and |
| ● | a Permitted Acquisition (as defined) could not be consummated unless otherwise approved in writing by the required lenders. |
Amendment No. 1 increased the leverage based LIBOR pricing grid through the maturity date and also provided for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remained subject to a LIBOR floor of 0 basis points.
On December 17, 2021, the Company entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 2”). Amendment No. 2 implemented non-LIBOR interest reference rates for borrowings in euros and British pounds.
Due to the ongoing impacts of the COVID-19 pandemic and supply chain disruptions on the Company’s end-markets and the resulting financial impacts on the Company, on February 28, 2022, the Company entered into Amendment No. 3. Amendment No. 3 reduced the total revolving credit commitments from $400.0 million to $300.0 million and the maximum permitted amount of swing loans from $40.0 million to $30.0 million. Amendment No. 3 provides for certain financial covenant relief and additional covenant restrictions during the “Specified Period” (the period from February 28, 2022 until the date that the Company delivers a compliance certificate for the quarter ending March 31, 2023 in form and substance satisfactory to the administrative agent). During the Specified Period:
| ● | the maximum net leverage ratio is changed to 4.0x for the year ended December 31, 2021, suspended for the quarters ending March 31, 2022 through September 30, 2022 and cannot exceed 4.75 to 1.00 for the quarter ended December 31, 2022 or 3.50 to 1.00 for the quarter ended March 31, 2023; |
| ● | the minimum interest coverage ratio of 3.50 is reduced to 2.50 for the quarter ended March 31, 2022, 2.25 for the quarter ended June 30, 2022 and 3.00 for the quarters ended September 30, 2022 and December 31, 2022; |
| ● | an additional condition to drawing on the Credit Facility has been added that restricts borrowings if the Company’s total of 100% of domestic and 65% of foreign cash and cash equivalents exceeds $70.0 million; |
| ● | there are certain additional restrictions on Restricted Payments (as defined); and |
| ● | a Permitted Acquisition (as defined) may not be consummated unless the net leverage ratio is below 3.50x during the Specified Period. |
Amendment No. 3 changed the leverage based LIBOR pricing grid through the maturity date and also retained a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remained subject to a LIBOR floor of 0 basis points.
Amendment No. 3 also incorporates hardwired mechanics to permit a future replacement of LIBOR as the interest reference rate without lender consent.
As a result of Amendment No. 3, the Company was in compliance with all covenants at December 31, 2021. The Company has not experienced a violation which would limit the Company’s ability to borrow under the 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 Credit Facility may be limited as a result of lower than expected financial performance due to the adverse impact of COVID-19 and supply chain disruptions 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 and to remain in compliance with all covenants.
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 $2.0 million and $2.2 million, at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, there was 12.2 million Swedish krona, or $1.2 million outstanding on this overdraft credit line. At December 31, 2021, there was 19.0 million Swedish krona, or $2.1 million outstanding on this overdraft credit line. During the six months ended June 30, 2022, the subsidiary borrowed 170.0 million Swedish krona, or $16.6 million, and repaid 176.8 million Swedish krona, or $17.3 million.
41
The Company’s wholly-owned subsidiary located in Suzhou, China, has credit lines which allow up to a maximum borrowing level of 20.0 million Chinese yuan, or $3.0 million at June 30, 2022 and 50.0 million Chinese yuan, or $7.9 million at December 31, 2021. At June 30, 2022 and December 31, 2021 there was $3.0 million and $3.1 million, respectively, in borrowings outstanding on the Suzhou credit line with weighted-average interest rates of 3.85% and 4.15% at June 30, 2022 and December 31, 2021, respectively. The Suzhou credit line is included on the condensed consolidated balance sheet within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which facilitates the extension of trade payable payment terms by 180 days. The bank acceptance draft line of credit allows up to a maximum borrowing level of 60.0 million Chinese yuan, or $9.0 million at June 30, 2022 and 15.0 million Chinese yuan, or $2.4 million at December 31, 2021. There was no amount utilized on the Suzhou bank acceptance draft line of credit at June 30, 2022 and $2.2 million utilized at December 31, 2021.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices PM sensor product line. The estimated costs for the PM Sensor Exit include employee severance and 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 $0.3 million of expense as a result of this initiative during the three months ended June 30, 2021. The only remaining costs relate to potential commercial settlements and legal fees which we continue to negotiate. The estimated additional costs related to these settlements and fees is up to $4.2 million.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in Autotech Fund II managed by 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 June 30, 2022, the Company’s cumulative investment in the Autotech Fund II was $7.6 million. The Company contributed $0.5 million, net and $1.9 million, net to the Autotech Fund II during the six months ended June 30, 2022 and 2021, 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 condensed 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 June 30, 2022, we had a cash and cash equivalents balance of approximately $40.7 million, of which 90.6% was held in foreign locations. The Company has approximately $142.2 million of undrawn commitments under the Credit Facility as of June 30, 2022, which results in total undrawn commitments and cash balances of more than $181.2 million. However, despite the February 22, 2022 amendment, it is possible that future borrowing flexibility under our Credit Facility may be limited as a result of our financial performance.
Commitments and Contingencies
See Note 11 to the condensed consolidated financial statements for disclosures of the Company’s commitments and contingencies.
Seasonality
Our Control Devices and Electronics segments are moderately seasonal, impacted by mid-year and year-end shutdowns and the ramp-up of new model production at key customers. In addition, the demand for our Stoneridge Brazil segment consumer products is generally higher in the second half of the year.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies, which include management’s best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company’s 2021 Form 10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of the Company’s 2021 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no material changes in our significant accounting policies or critical accounting estimates during the second quarter of 2022.
Information regarding other significant accounting policies is included in Note 2 to our consolidated financial statements in Item 8 of Part II of the Company’s 2021 Form 10-K.
42
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 fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 5 to the condensed consolidated financial statements for additional details on the Company’s foreign currency exchange rate and interest rate risks.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously presented within Part II, Item 7A of the Company’s 2021 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2022, 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. Based on that evaluation, the Company’s management, including the PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II–OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in certain legal actions and claims primarily arising in the ordinary course of business. We establish accruals for matters which we believe that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, we do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. We are subject to litigation regarding civil, labor, regulatory and other tax contingencies in our Stoneridge Brazil segment for which we believe the likelihood of loss is reasonably possible, but not probable, although these claims might take years to resolve. We are also subject to product liability and product warranty claims. In addition, if any of our products prove to be defective, we may be required to participate in a government-imposed or customer OEM-instituted recall involving such products. There can be no assurance that we will not experience any material losses related to product liability, warranty or recall claims. See additional details of these matters in Note 11 to the condensed consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes with respect to risk factors previously disclosed in the Company’s 2021 Form 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to repurchases of Common Shares made by us during the three months ended June 30, 2022. There were 1,570 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 June 30, 2022.
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 | |
4/1/22-4/30/22 | - | $ | - | N/A | N/A | ||||
5/1/22-5/31/22 | 1,570 | $ | 18.67 | N/A | N/A | ||||
6/1/22-6/30/22 | - | $ | - | N/A | N/A | ||||
Total | 1,570 | ||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None
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Item 6. Exhibits
Exhibit |
| Exhibit | |
10.1 | |||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101 | XBRL Exhibits: | ||
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 | XBRL Taxonomy Extension Schema Document | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
104 | The cover page from our Quarterly Report on Form 10-Q for the period ended March 31, 2022, filed with the Securities and Exchange Commission on May 4, 2022, is formatted in Inline Extensible Business Reporting Language (“iXBRL”) | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STONERIDGE, INC. | |
Date: August 3, 2022 | /s/ Jonathan B. DeGaynor |
Jonathan B. DeGaynor | |
President, Chief Executive Officer and Director | |
(Principal Executive Officer) | |
Date: August 3, 2022 | /s/ Matthew R. Horvath |
Matthew R. Horvath | |
Chief Financial Officer and Treasurer | |
(Principal Financial Officer) |
46
