Back to GetFilings.com



Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002.   Commission file number 001-13337

STONERIDGE, INC.

——————————————————————————

(Exact Name of Registrant as Specified in Its Charter)

Ohio   34-1598949
 
(State or Other Jurisdiction of Incorporation or Organization)
  (I.R.S. Employer Identification No.)
     
9400 East Market Street, Warren, Ohio   44484
 
(Address of Principal Executive Offices)   (Zip Code)

(330) 856-2443

——————————————————————–

Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X    No       .

The number of Common Shares, without par value, outstanding as of November 14, 2002 was 22,399,311.

Table of Contents

 

STONERIDGE, INC.

INDEX

  Page No.
Part I   Financial Information  
   
     Item 1. Financial Statements  
      Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 2
      Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and 2001 3
      Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 4
      Notes to Condensed Consolidated Financial Statements 5-17
      Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-22
      Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
      Item 4. Controls and Procedures 23
   
Part II   Other Information 24
   
Signatures 25
   
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 26-27

1

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

    September 30,   December 31,  
    2002   2001  
   
 
 
    (Unaudited)   (Audited)  
ASSETS
                  
                   
CURRENT ASSETS:
                  
Cash and cash equivalents
   $ 29,079     $ 4,369    
Accounts receivable, net
     107,017       91,018    
Inventories, net
     53,230       54,504    
Prepaid expenses and other
     10,018       15,538    
Deferred income taxes
     8,432       7,316    
   
 
 
Total current assets
     207,776       172,745    
   
 
 
PROPERTY, PLANT AND EQUIPMENT, net
     111,949       118,061    
OTHER ASSETS:
                  
Goodwill, net
     255,292       345,392    
Investments and other, net
     31,652       30,645    
   
 
 
TOTAL ASSETS
   $ 606,669     $ 666,843    
   
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
                  
                   
CURRENT LIABILITIES:
                  
Current portion of long-term debt
   $ 1,881     $ 41,621    
Accounts payable
     51,452       50,792    
Accrued expenses and other
     57,050       33,933    
   
 
 
Total current liabilities
     110,383       126,346    
   
 
 
LONG-TERM LIABILITIES:
                  
Long-term debt, net of current portion
     272,946       249,720    
Deferred income taxes
     12,933       24,352    
Other liabilities
     94       6,818    
   
 
 
Total long-term liabilities
     285,973       280,890    
   
 
 
SHAREHOLDERS' EQUITY:
                  
Preferred shares, without par value, 5,000 authorized, none issued
     --       --    
Common shares, without par value, 60,000 authorized, 22,399
                  
issued and outstanding at September 30, 2002 and 22,397 at
                  
December 31, 2001, with no stated value
     --       --    
Additional paid-in capital
     141,516       141,506    
Retained earnings
     72,917       126,157    
Accumulated other comprehensive loss
     (4,120 )     (8,056 )  
   
 
 
Total shareholders' equity
     210,313       259,607    
   
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
   $ 606,669     $ 666,843    
   
 
 

The accompanying notes to the condensed consolidated financial statements are an integral part of these condensed consolidated statements.

2

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(in thousands except for per share data)

    For the three months   For the nine months
    ended September 30,   ended September 30,
   
 
    2002   2001   2002   2001  
                   
NET SALES
   $ 158,441     $ 136,361     $ 488,229     $ 444,461  
COSTS AND EXPENSES:
                                
Cost of goods sold
     118,842       106,122       361,156       339,410  
Selling, general and administrative expenses
     23,783       25,766       68,915       77,906  
 
  
 
 
 
OPERATING INCOME
     15,816       4,473       58,158       27,145  
Interest expense, net
     9,378       7,205       26,154       22,573  
Other expense, net
     9       285       349       463  
 
  
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
     6,429       (3,017 )     31,655       4,109  
Provision (Benefit) for income taxes
     2,231       (1,204 )     11,454       1,325  
 
  
 
 
 
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
                                
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
     4,198       (1,813 )     20,201       2,784  
Extraordinary loss, net of tax
     --       --       3,607       --  
 
  
 
 
 
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
                                
ACCOUNTING CHANGE
     4,198       (1,813 )     16,594       2,784  
Cumulative effect of accounting change, net of tax
     --       --       (69,834 )     --  
 
  
 
 
 
NET INCOME (LOSS)
   $ 4,198     $ (1,813 )   $ (53,240 )   $ 2,784  
 
  
 
 
 
BASIC NET INCOME (LOSS) PER SHARE:
                                
Income (loss) before extraordinary loss and cumulative effect of
                                
accounting change
   $ 0.19     $ (0.08 )   $ 0.90     $ 0.12  
Extraordinary loss, net of tax
     --       --       (0.16 )     --  
Cumulative effect of accounting change, net of tax
     --       --       (3.12 )     --  
 
  
 
 
 
Basic net income (loss) per share
   $ 0.19     $ (0.08 )   $ (2.38 )   $ 0.12  
 
  
 
 
 
DILUTED NET INCOME (LOSS) PER SHARE:
                                
Income (loss) before extraordinary loss and cumulative effect of
                                
accounting change
   $ 0.19     $ (0.08 )   $ 0.89     $ 0.12  
Extraordinary loss, net of tax
     --       --       (0.16 )     --  
Cumulative effect of accounting change, net of tax
     --       --       (3.08 )     --  
 
  
 
 
Diluted net income (loss) per share
   $ 0.19     $ (0.08 )   $ (2.35 )   $ 0.12  
 
  
 
 
 

The accompanying notes to the condensed consolidated financial statements are an integral part of these condensed consolidated statements.

3

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(in thousands)

    For the nine months ended  
    September 30,  
   
 
    2002   2001  
   
 
 
OPERATING ACTIVITIES:
                  
Net (loss) income
   $ (53,240 )   $ 2,784    
Adjustments to reconcile net (loss) income to net cash provided by operating
                  
activities-
                  
Depreciation and amortization
     19,395       21,423    
Deferred income taxes
     6,816       1,652    
(Gain) loss on sale of fixed assets
     (156 )     6    
Equity in loss (earnings) of unconsolidated subsidiaries
     1,148       (63 )  
Extraordinary loss
     3,607       --    
Cumulative effect of accounting change
     69,834       --    
Changes in operating assets and liabilities-
                  
Accounts receivable
     (13,645 )     (8,373 )  
Inventories
     2,448       10,607    
Prepaid expenses and other
     7,248       (3,285 )  
Other assets
     (37 )     1,847    
Accounts payable
     (342 )     95    
Accrued expenses and other
     24,914       5,896    
 
  
 
 
Net cash provided by operating activities
     67,990       32,589    
 
  
 
 
INVESTING ACTIVITIES:
                  
Capital expenditures
     (9,902 )     (20,896 )  
Proceeds from sale of fixed assets
     298       --    
Other
     2       262    
 
  
 
 
Net cash used by investing activities
     (9,602 )     (20,634 )  
 
  
 
 
FINANCING ACTIVITIES:
                  
Proceeds from issuance of senior notes
     200,000       --    
Extinguishment of revolving facility
     (37,641 )     --    
Extinguishment of term debt
     (226,139 )     --    
Net (repayments) borrowings under revolving facilities
     (44,677 )     18,290    
Proceeds from long-term debt
     100,000       1,381    
Repayments of long-term debt
     (9,648 )     (31,675 )  
Debt issuance costs
     (10,694 )     (1,223 )  
Interest rate swap termination costs
     (5,274 )     --    
 
  
 
 
Net cash used by financing activities
     (34,073 )     (13,227 )  
 
  
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
                  
EQUIVALENTS
     395       (88 )  
NET CHANGE IN CASH AND CASH EQUIVALENTS
     24,710       (1,360 )  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
     4,369       5,594    
 
  
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
   $  29,079     $ 4,234    
 
  
 
 

The accompanying notes to the condensed consolidated financial statements are an integral part of these condensed consolidated statements.

4

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(in thousands)

 1.   The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Commission's rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's 2001 Annual Report to Shareholders.
     
    The results of operations for the three and nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.
     
 2.   Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 69% and 74% of the Company's inventories at September 30, 2002 and December 31, 2001, respectively, and by the first-in, first-out (FIFO) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following:

      September 30,       December 31,  
        2002         2001  
   
 
                       
Raw materials   $ 30,328     $ 35,488  
Work in progress     11,000        8,192  
Finished goods     12,986       11,142  
LIFO reserve     (1,084 )       (318 )
   
 
Total   $ 53,230     $ 54,504  
   
 

 3.   The Company uses derivative financial instruments to reduce exposure to market risks resulting from fluctuations in interest rates and currency rates. The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company's best interest.
     
    In order to manage the interest rate risk associated with our previous debt portfolio, the Company entered into interest rate swap agreements to manage exposure to changes in interest rates. These agreements required the Company to pay a fixed interest rate to counterparties while receiving a floating interest rate based on LIBOR. The counterparties to each of the interest rate swap agreements were major commercial banks. These agreements were due to mature on or before December 31, 2003 and qualified as cash flow hedges; however, as a result of the recent debt refinancing and in accordance with Statement of Financial Accounting Standard No. 133 (SFAS 133), these agreements were terminated at a cost of $5.3 million on May 1, 2002.
     
    Changes in the fair market value of derivatives qualifying as cash flow hedges are recorded in other comprehensive income (loss) to the extent that the hedges are effective until the underlying transactions are recognized in earnings. Net losses included in accumulated other comprehensive loss as of May 1, 2002 were $3.3 million after tax ($5.3 million pre-tax). This amount is currently being amortized to interest expense over the remaining contractual terms of the agreements. The remaining unamortized balance as of September 30, 2002 was $1.6 million after tax ($2.6 million pre-tax).

5

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

    The Company has foreign currency forward contracts to purchase $16.3 million of Swedish krona and British pounds to satisfy krona and pound denominated debt obligations. The estimated fair value of these forward contracts at September 30, 2002, per quoted market sources, was $16.6 million.
     
 4.   In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 142, “Goodwill and Other Intangible Assets”. Under SFAS 142, goodwill is no longer subject to amortization. Goodwill amortization, which approximated $9.5 million annually, ceased when the Statement became effective for the Company on January 1, 2002. Goodwill is now subject to at least an annual assessment for impairment by applying a fair value-based test. In accordance with the transition provisions of SFAS 142, the Company has completed the two-step transitional goodwill impairment analysis for both reporting units of the Company. The initial impairment test indicated that the carrying values of the reporting units exceeded the corresponding fair values of the reporting units, which were determined based on a combination of valuation techniques including the guideline company method, the transaction method and the discounted cash flow method. The implied fair value of goodwill in these reporting units was then determined through the allocation of the fair values to the underlying assets and liabilities. The January 1, 2002 carrying value of the goodwill in these reporting units exceeded their implied fair value by $90.1 million. The $69.8 million write-down of goodwill to its fair value, which is net of $20.3 million of related tax benefits, was reported as a cumulative effect of accounting change in the accompanying condensed consolidated financial statements as of January 1, 2002.
     
    The change in the carrying amount of goodwill by reportable operating segment during 2002 is as follows:

    Vehicle                
    Management                
    & Power   Control        
    Distribution   Devices   Total
   
 
 
Balance at December 31, 2001
   $  31,800     $  313,592     $  345,392  
Cumulative effect of accounting change
     (31,800 )     (58,300 )     (90,100 )
 
  
 
 
Balance at September 30, 2002
   $  --     $  255,292     $  255,292  
 
  
 
 

The unaudited pro forma consolidated net income (loss) as though SFAS 142 had been in effect at the beginning of fiscal 2001 is as follows:

    Three months ended     Nine months ended
    September 30,     September 30,
   
 
    2002   2001   2002   2001
   
 
 
 
Reported income (loss) before cumulative effect of accounting change
   $ 4,198     $ (1,813 )   $ 16,594     $ 2,784  
Add back: Goodwill amortization, net of tax
     --       1,717       --       5,151  
 
  
 
 
 
Adjusted income (loss) before cumulative effect of accounting change
     4,198       (96 )     16,594       7,935  
Cumulative effect of accounting change, net of tax
     --       --       (69,834 )     --  
 
  
 
 
 
Adjusted net income (loss)
   $ 4,198     $ (96 )   $ (53,240 )   $ 7,935  
 
  
 
 
 

6

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

    Three months ended
September 30,		     Nine months ended
September 30,
   
   
    2002   2001     2002   2001
   
 
   
 
Basic net income (loss) per share:
                          
Reported income (loss) before cumulative effect of accounting change
   $ 0.19   $  (0.08 )   $ 0.74   $ 0.12
Add back: Goodwill amortization, net of tax
     —     0 .08       —     0.23
 
  
 
   
 
Adjusted income before cumulative effect of accounting change
     0.19     —       0.74     0.35
Cumulative effect of accounting change, net of tax
     —     —       (3.12 )   —
 
  
 
   
 
Adjusted net income (loss)
   $ 0.19   $ —     $ (2.38 ) $ 0.35
   
 
   
 
                           
                           
    Three months ended
September 30,		     Nine months ended
September 30,
   
   
    2002   2001     2002   2001
   
 
   
 
Diluted net income (loss) per share:
                          
Reported income (loss) before cumulative effect of accounting change
   $ 0.19   $  (0.08 )   $ 0.73   $ 0.12
Add back: Goodwill amortization, net of tax
     —     0.08       —     0.23
 
  
 
   
 
Adjusted income before cumulative effect of accounting change
     0.19     —       0.73     0.35
Cumulative effect of accounting change, net of tax
     —     —       (3.08 )   —
 
  
 
   
 
Adjusted net income (loss)
   $ 0.19   $ —     $ (2.35 ) $ 0.35
 
  
 
   
 

    The Company has the following intangible assets subject to amortization as of September 30, 2002 and December 31, 2001, respectively:

  September 30, 2002   December 31, 2001
 
 
Patents:
          
Gross Carrying Amount
 $ 2,779   $ 3,659
Accumulated Amortization
   1,157     1,327
 
 
Net Carrying Amount
 $ 1,622   $ 2,332
 
 

    Aggregate amortization expense on patents was $0.1 million and $0.3 million for the three and nine months ended September 30, 2002, respectively. Estimated annual amortization expense is $0.4 million for 2002, $0.3 million for 2003-2005 and $0.4 million for 2006.
     
5.   In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144, which became effective for the Company in 2002, supersedes SFAS 121 and establishes guidelines for accounting for the impairment and disposal of long-lived assets. The provisions of SFAS 144 had no impact on the Company’s financial statements upon adoption.
     
6.   In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. Among other things, SFAS 145 requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Accounting Principles Board Opinion 30 for

7

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

          classification as an extraordinary item shall be reclassified. The Company will adopt this Statement effective January 1, 2003, and accordingly, the extraordinary loss of $3.6 million, net of tax, recorded as a result of the early extinguishment of debt described in Note 8 will be reclassified as a component of income from continuing operations.
              
 7.          In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 addresses financial accounting and reporting for costs associated with exit and disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 (EITF 94-3),“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 is not expected to have a material impact on the Company's consolidated financial statements.
       
     
 8.   Other comprehensive income (loss) includes foreign currency translation adjustments and derivative transactions, net of related tax. Comprehensive income (loss) consists of the following:
     

    Three months   Nine months
    ended September 30,   ended September 30,
   
 
    2002   2001   2002   2001
   
 
 
 
Net income (loss)   $ 4,198     $ (1,813 )   $ (53,240 )   $ 2,784  
Other comprehensive income (loss)     916       (1,870 )     3,936       (5,530 )
   
 
 
 
Comprehensive income (loss)   $ 5,114     $ (3,683 )   $ (49,304 )   $ (2,746 )
   
 
 
 
     
 9.          On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes.The $200.0 million notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. Interest is payable on May 1 and November 1 of each year. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.
        
    In conjunction with the issuance of the senior notes, the Company also entered into a new $200.0 million credit agreement with a bank group. The credit agreement has two components: a $100.0 million revolving facility, including a $10.0 million swing line facility, and a $100.0 million term facility. The revolving facility expires on April 30, 2007 and requires a commitment fee of 0.375% to 0.500% on the unused balance as well as a utilization fee of 0.125% to 0.250% when the unutilized balance equals or exceeds 50.0% of the total revolving commitment. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.50% to 1.50% or (ii) LIBOR plus a margin of 2.00% to 3.00%, depending upon the Company's ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined. Interest on the swing line facility is payable monthly at the same rate as the revolving facility. The term facility expires on April 30, 2008. Interest is payable quarterly at either (i) the prime rate plus 1.75% or (ii) LIBOR plus 3.25%. The Company has the right to prepay any of the above mentioned loans in whole or in part, without premium or penalty. During the third quarter of 2002, the Company prepaid $30.0 million of the term facility. The Company was in compliance with its covenants as of September 30, 2002.

8

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

    The Company incurred debt-financing costs of $10.7 million in connection with the issuance of the senior notes and credit facility, which are being amortized over the respective terms of the debt.
     
    The proceeds of the senior notes were used to repay the amounts outstanding under the Company's then existing debt obligations on May 1, 2002, which consisted of $37.6 million of revolving credit borrowings and $226.1 million of term debt borrowings (“the old debt”). The Company also had $5.8 million of unamortized deferred financing costs related to the old debt. These costs were written off in connection with the repayment of the debt and are presented as an extraordinary loss on the extinguishment of debt of $3.6 million, net of taxes of $2.2 million, in the accompanying condensed consolidated financial statements.
     
    Long-term debt consists of the following:
  September 30,
2002		 December 31,
2001
 
11 ½% Senior Notes, due 2012
 $ 200,000   $ --  
Borrowings under old credit agreement
   --     286,610  
Borrowings under new credit agreement
   69,500     --  
Borrowings payable to foreign banks
   2,065     3,891  
Other
   3,262     840  
 
    274,827     291,341  
Less: Current portion
   1,881     41,621  
 
  $ 272,946   $ 249,720  
 

10.   Basic earnings per share amounts were computed using weighted average shares outstanding for each respective period. Diluted earnings per share also reflects the weighted-average impact from the date of issuance of all potentially dilutive securities during the periods presented. Actual weighted average shares outstanding used in calculating basic and diluted earnings per share were as follows:

  Three Months Ended
September 30,		   Nine Months Ended
September 30,
 
 
  2002   2001   2002   2001
 
 
 
 
Basic weighted average shares outstanding
 22,399   22,397   22,399   22,397
Effect of dilutive securities
 294   --   233   78
 
 
 
 
Diluted weighted average shares outstanding
 22,693   22,397   22,632   22,475
 
 
 
 

11.   SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Chief Executive Officer.
     
    The Company has two reportable operating segments: Vehicle Management & Power Distribution and Control Devices. These reportable operating segments were determined based on the differences in the nature of the products offered. The Vehicle Management & Power Distribution segment produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for

9

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

    electrical power and signal distribution. The Control Devices segment produces electronic and electromechanical switches, control actuation and sensors.
     
    The accounting policies of the Company’s operating segments are the same as those described in Note 2, “Summary of Significant Accounting Policies”, of the Company’s December 31, 2001 Form 10-K. The Company evaluates the performance of its operating segments based primarily on revenues from external customers, net income and capital expenditures. Intersegment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

A summary of financial information by reportable operating segment is as follows:

  Three months ended September 30, 2002
 
  Vehicle Management & Power Distribution   Control Devices        Eliminations   Consolidated  
 
 
 
 
Sales from external customers
 $ 66,175   $ 92,266 $ —   $ 158,441  
Intersegment sales
   3,333     473   (3,806 )   —  
 
 
 
 
Total net sales
 $ 69,508   $ 92,739 $ (3,806 ) $ 158,441  
 
                      
Net income
 $ 537   $ 3,661 $ —   $ 4,198  
Depreciation and amortization
 $ 1,889   $ 3,233 $ —   $ 5,122  
Interest expense, net
 $ 1,432   $ 7,946 $ —   $ 9,378  
Provision for income taxes
 $ 246   $ 1,985 $ —   $ 2,231  
 
                      
Capital expenditures
 $ 652   $ 1,998 $ —   $ 2,650  
 
                      
Total assets
 $ 150,198   $ 456,471 $ —   $ 606,669  
                       
                       
  Three months ended September 30, 2001
 
  Vehicle Management & Power Distribution   Control Devices        Eliminations   Consolidated  
 
 
 
 
Sales from external customers
 $ 54,550   $ 81,811 $ —   $ 136,361  
Intersegment sales
   2,416     213   (2,629 )   —  
 
 
 
 
Total net sales
 $ 56,966   $ 82,024 $ (2,629 ) $ 136,361  
 
                      
Net (loss) income
 $ (5,539 ) $ 3,726 $ —   $ (1,813 )
Depreciation and amortization
 $ 1,621   $ 5,291 $ —   $ 6,912  
Interest expense, net
 $ 1,257   $ 5,948 $ —   $ 7,205  
(Benefit) provision for income taxes
 $ (2,103 ) $ 899 $ —   $  (1,204 )
 
                      
Capital expenditures
 $ 1,620   $ 7,584 $ —   $ 9,204  
 
                      
Total assets
 $ 176,852   $ 515,236 $ —   $ 692,088  

10

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

  Nine months ended September 30, 2002
 
  Vehicle Management & Power Distribution   Control Devices   Eliminations   Consolidated  
 
 
 
 
 
                         
Sales from external customers
 $ 198,196   $ 290,033   $ —   $ 488,229  
Intersegment sales
   9,434     1,195     (10,629 )   —  
 
 
 
 
 
Total net sales
 $ 207,630   $ 291,228   $ (10,629 ) $ 488,229  
 
                        
Net loss
 $ (30,230 ) $  (23,010 ) $ —   $ (53,240 )
Depreciation and amortization
 $  5,854   $ 9,624   $ —   $ 15,478  
Interest expense, net
 $  4,081   $ 22,073   $ —   $ 26,154  
Provision for income taxes
 $  928   $ 10,526   $ —   $ 11,454  
 
                        
Extraordinary loss, net of tax
 $  402   $ 3,205   $ —   $ 3,607  
Cumulative effect of accounting change, net of tax
 $ (31,800 ) $ (38,034 ) $ —   $ (69,834 )
 
                        
Capital expenditures
 $  3,679   $ 6,223   $ —   $ 9,902  
 
                        
Total assets
 $ 150,198   $ 456,471   $ —   $ 606,669  
                         
                         
  Nine months ended September 30, 2001
 
  Vehicle Management & Power Distribution   Control Devices   Eliminations   Consolidated  
 
 
 
 
 
                         
Sales from external customers
 $ 182,590   $ 261,871   $ —   $ 444,461  
Intersegment sales
   6,850     1,823     (8,673 )   —  
 
 
 
 
 
Total net sales
 $ 189,440   $ 263,694   $ (8,673 ) $ 444,461  
 
                        
Net (loss) income
 $  (11,030 ) $ 13,814   $  --   $ 2,784  
Depreciation and amortization
 $  5,370   $ 15,626   $  --   $ 20,996  
Interest expense
 $  3,802   $ 18,771   $  --   $ 22,573  
(Benefit) provision for income taxes
 $  (3,626 ) $ 4,951   $  --   $ 1,325  
 
                        
Capital expenditures
 $  4,296   $ 16,600   $  --   $ 20,896  
 
                        
Total assets
 $ 176,852   $ 515,236   $  --   $ 692,088  

The Company primarily sells its products directly to automotive manufacturers. A substantial majority of the Company’s consolidated revenues are from four automotive manufacturing companies, which accounted for approximately 65% and 61% of the Company’s revenues for the nine months ended September 30, 2002 and 2001, respectively.

11

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:

   

Three months
ended September 30,

   Nine months
ended September 30,
   
 
    2002   2001   2002   2001
   
 
 
 
Net Sales:
                        
North America
   $  137,123   $  117,126   $  415,331   $  381,323
Europe and other
     21,318     19,235     72,898     63,138
 
  
 
 
 
Total
   $  158,441   $  136,361   $  488,229   $  444,461
   
 
 
 

    September 30,
2002		   December 31,
2001
   
 
Non-Current Assets:
            
North America
   $ 347,355   $ 440,915
Europe and other
     51,538     53,183
 
  
 
Total
   $ 398,893   $ 494,098
 
  
 

12

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

12.   The senior notes and the credit facility are fully and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future domestic wholly-owned subsidiaries (Guarantor Subsidiaries). The Company’s non-U.S. subsidiaries did not guarantee the senior notes and the credit facility (Non-Guarantor Subsidiaries).
     
    Presented below are summarized condensed consolidating financial statements of the Parent (which include certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis, as of September 30, 2002 and December 31, 2001, and for the three and nine months ended September 30, 2002 and 2001.
     
    These summarized condensed consolidating financial statements are prepared on the equity method. Separate financial statements for the Guarantor Subsidiaries are not presented based on management’s determination that they do not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below.
    September 30, 2002
   
            Guarantor   Non-Guarantor                
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
   
 
 
 
 
ASSETS
                                        
CURRENT ASSETS:
                                        
Cash and cash equivalents
   $ 19,922     $ 23     $ 9,134     $ —     $ 29,079  
Accounts receivable, net
     48,964       39,738       21,498       (3,183 )     107,017  
Inventories, net
     22,755       13,830       16,645       —       53,230  
Prepaid expenses and other
     (162,204 )     154,752       17,470       —       10,018  
Deferred income taxes
     5,230       3,388       (186 )     —       8,432  
 
  
   
   
   
   
 
Total current assets
     (65,333 )     211,731       64,561       (3,183 )     207,776  
 
  
   
   
   
   
 
PROPERTY, PLANT AND EQUIPMENT, net
     54,367       35,443       22,139       —       111,949  
OTHER ASSETS:
                                        
Goodwill, net
     234,701       20,591       —       —       255,292  
Investments and other, net
     46,215       847       904       (16,314 )     31,652  
Investment in subsidiaries
     279,606       —       —       (279,606 )     —  
 
  
   
   
   
   
 
TOTAL ASSETS
   $ 549,556     $ 268,612     $ 87,604     $ (299,103 )   $ 606,669  
 
  
   
   
   
   
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                        
CURRENT LIABILITIES:
                                        
Current portion of long-term debt
   $ 1,000     $ —     $ 881     $ —     $ 1,881  
Accounts payable
     23,316       18,820       12,414       (3,098 )     51,452  
Accrued expenses and other
     30,481       10,070       16,587       (88 )     57,050  
 
  
   
   
   
   
 
Total current liabilities
     54,797       28,890       29,882       (3,186 )     110,383  
 
  
   
   
   
   
 
LONG-TERM LIABILITIES:
                                        
Long-term debt, net of current portion
     270,939       —       18,319       (16,312 )     272,946  
Deferred income taxes
     13,090       3,281       (3,438 )     —       12,933  
Other liabilities
     417       —       (323 )     —       94  
 
  
   
   
   
   
 
Total long-term liabilities
     284,446       3,281       14,558       (16,312 )     285,973  
 
  
   
   
   
   
 
SHAREHOLDERS’ EQUITY
     210,313       236,441       43,164       (279,605 )     210,313  
 
  
   
   
   
   
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
   $ 549,556     $ 268,612     $ 87,604     $ (299,103 )   $ 606,669  
 
  
   
   
   
   
 

13

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

      Supplemental condensed consolidating financial statements (continued):

  December 31, 2001
 
            Guarantor   Non-Guarantor                
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
   
 
 
 
 
ASSETS                                        
CURRENT ASSETS:                                        
Cash and cash equivalents
   $ 714     $ 29     $ 3,626     $ —     $ 4,369  
Accounts receivable, net
     40,209       30,088       22,132       (1,411 )     91,018  
Inventories, net
     25,334       14,988       14,182       —       54,504  
Prepaid expenses and other
     (142,780 )     138,656       19,662       —       15,538  
Deferred income taxes
     4,035       3,453       (172 )     —       7,316  
 
  
 
 
 
 
Total current assets
     (72,488 )     187,214       59,430       (1,411 )     172,745  
   
 
 
 
 
                                         
PROPERTY, PLANT AND EQUIPMENT, NET     56,468       37,901       23,692       —       118,061  
OTHER ASSETS:
                                        
Goodwill, net
     288,325       25,292       31,775       —       345,392  
Investments and other, net
     42,822       1,592       752       (14,521 )     30,645  
Investment in subsidiaries
     282,726       —       —       (282,726 )     —  
 
  
 
 
 
 
TOTAL ASSETS
   $ 597,853     $ 251,999     $ 115,649     $ (298,658 )   $ 666,843  
   
 
 
 
 
                                         
LIABILITIES AND SHAREHOLDERS' EQUITY                                        
CURRENT LIABILITIES:
                                        
Current portion of long-term debt
   $ 39,250     $ —     $ 2,371     $ —     $ 41,621  
Accounts payable
     20,360       18,712       13,133       (1,413 )     50,792  
Accrued expenses and other
     2,025       19,600       12,308       —       33,933  
 
  
 
 
 
 
Total current liabilities
     61,635       38,312       27,812       (1,413 )     126,346  
 
  
 
 
 
 
                                         
LONG-TERM LIABILITIES:
                                        
Long-term debt, net of current portion
     246,019       —       18,220       (14,519 )     249,720  
Deferred income taxes
     23,242       3,398       (2,288 )     —       24,352  
Other liabilities
     7,350       —       (532 )     —       6,818  
   
 
 
 
 
Total long-term liabilities
     276,611       3,398       15,400       (14,519 )     280,890  
   
 
 
 
 
                                         
SHAREHOLDERS' EQUITY
     259,607       210,289       72,437       (282,726 )     259,607  
   
 
 
 
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
   $ 597,853     $ 251,999     $ 115,649     $ (298,658 )   $ 666,843  
   
 
 
 
 

14

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

      Supplemental condensed consolidating financial statements (continued):

    For the three months ended September 30, 2002
   
            Guarantor   Non-Guarantor                  
    Parent   Subsidiaries   Subsidiaries     Eliminations   Consolidated
   
 
 
   
 
                                           
NET SALES
   $ 70,980     $ 66,801     $  31,006       $ (10,346 )   $ 158,441  
COSTS AND EXPENSES:
                                          
Cost of goods sold
     54,933       48,844       25,411         (10,346 )     118,842  
Selling, general and administrative expenses
     9,765       7,820       6,198         —       23,783  
   
 
 
   
 
                                           
OPERATING INCOME
     6,282       10,137       (603 )       —       15,816  
 
                                          
Interest expense, net
     9,075       —       303         —       9,378  
Other (income) expense, net
     (378 )     545       (158 )       —       9  
Equity earnings from subsidiaries
     (5,127 )     —       —         5,127       —  
   
 
 
   
 
                                           
INCOME (LOSS) BEFORE INCOME TAXES
     2,712       9,592       (748 )       (5,127 )     6,429  
                                           
(Benefit) Provision for income taxes
     (1,486 )     3,357       360         —       2,231  
   
 
 
   
 
                                           
NET INCOME (LOSS)
   $ 4,198     $ 6,235     $  (1,108 )     $ (5,127 )   $ 4,198  
   
 
 
   
 
                                           
    For the three months ended September 30, 2001
   
            Guarantor   Non-Guarantor                  
    Parent   Subsidiaries   Subsidiaries     Eliminations   Consolidated
   
 
 
   
 
                                           
NET SALES
   $ 61,645     $ 51,888     $  29,120       $ (6,292 )   $ 136,361  
COSTS AND EXPENSES:
                                          
Cost of goods sold
     49,142       39,021       24,251         (6,292 )     106,122  
Selling, general and administrative expenses
     14,630       7,386       3,750         —       25,766  
   
 
 
   
 
                                           
OPERATING (LOSS) INCOME
     (2,127 )     5,481       1,119         —       4,473  
                                           
Interest expense, net
     6,943       —       262         —       7,205  
Other (income) expense, net
     (372 )     656       1         —       285  
Equity earnings from subsidiaries
     (3,907 )     —       —         3,907       —  
   
 
 
   
 
                                           
(LOSS) INCOME BEFORE INCOME TAXES
     (4,791 )     4,825       856         (3,907 )     (3,017 )
                                           
(Benefit) Provision for income taxes
     (2,978 )     1,689       85         —       (1,204 )
   
 
 
   
 
                                           
NET (LOSS) INCOME
   $ (1,813 )   $ 3,136       771       $ (3,907 )   $ (1,813 )
   
 
 
   
 

15

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

      Supplemental condensed consolidating financial statements (continued):

    For the nine months ended September 30, 2002
   
            Guarantor   Non-Guarantor                  
    Parent   Subsidiaries   Subsidiaries     Eliminations   Consolidated
   
 
 
   
 
                                           
NET SALES
   $ 216,380     $ 197,228     $ 104,687       $ (30,066 )   $ 488,229  
COSTS AND EXPENSES:
                                          
Cost of goods sold
     165,104       142,535       83,583         (30,066 )     361,156  
Selling, general and administrative expenses
     29,226       22,805       16,884         —       68,915  
   
 
 
   
 
                                           
OPERATING INCOME
     22,050       31,888       4,220         —       58,158  
                                           
Interest expense, net
     25,317       —       837         —       26,154  
Other (income) expense, net
     (1,124 )     1,633       (160 )       —       349  
Equity earnings from subsidiaries
     14,952       —       —         (14,952 )     —  
   
 
 
   
 
INCOME (LOSS) BEFORE INCOME TAXES
     (17,095 )     30,255       3,543         14,952       31,655  
                                           
(Benefit) Provision for income taxes
     (820 )     10,589       1,685         —       11,454  
   
 
 
   
 
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
     (16,275 )     19,666       1,858         14,952       20,201  
                                           
Extraordinary loss, net of tax
     3,607       —       —         —       3,607  
   
 
 
   
 
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
     (19,882 )     19,666       1,858         14,952       16,594  
                                           
Cumulative effect of accounting change, net of tax
     (33,358 )     (4,701 )     (31,775 )       —       (69,834 )
   
 
 
   
 
NET (LOSS) INCOME
   $ (53,240 )   $  14,965     $  (29,917 )     $  14,952     $ (53,240 )
   
 
 
   
 

    For the nine months ended September 30, 2001
   
            Guarantor   Non-Guarantor                  
    Parent   Subsidiaries   Subsidiaries     Eliminations   Consolidated
   
 
 
   
 
                                           
NET SALES
   $  197,108     $  171,653     $ 93,977       $  (18,277 )   $  444,461  
COSTS AND EXPENSES:
                                          
Cost of goods sold
     154,707       126,500       76,480         (18,277 )     339,410  
Selling, general and administrative expenses
     43,088       23,979       10,839         —       77,906  
   
 
 
   
 
OPERATING (LOSS) INCOME
     (687 )     21,174       6,658         —       27,145  
                                           
Interest expense, net
     21,834       —       739         —       22,573  
Other (income) expense, net
     (1,488 )     1,965       (14 )       —       463  
Equity earnings from subsidiaries
     (17,463 )     —       —         17,463       —  
   
 
 
   
 
(LOSS) INCOME BEFORE INCOME TAXES
     (3,570 )     19,209       5,933         (17,463 )     4,109  
                                           
(Benefit) Provision for income taxes
     (6,354 )     6,723       956         —       1,325  
   
 
 
   
 
NET INCOME (LOSS)
   $  2,784     $ 12,486     $ 4,977       $  (17,463 )   $ 2,784  
   
 
 
   
 

16

Table of Contents

 

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)

(in thousands)

      Supplemental condensed consolidating financial statements (continued):

    For the nine months ended September 30, 2002
   
    Parent   Guarantor
Subsidiaries		   Non-Guarantor
Subsidiaries		     Eliminations   Consolidated
   
 
 
   
 
                                           
Net cash provided by operating activities
   $ 24,516     $ 33,034     $ 8,647       $ 1,793     $ 67,990  
                                           
INVESTING ACTIVITIES:
                                          
Capital expenditures
     (4,069 )     (4,123 )     (1,710 )       —       (9,902 )
Proceeds from sale of fixed assets
     222       —       76         —       298  
Other     (34 )     —       (398 )       434       2  
   
 
 
   
 
Net cash used for investing activities
     (3,881 )     (4,123 )     (2,032 )       434       (9,602 )
   
 
 
   
 
FINANCING ACTIVITIES:
                                          
Proceeds from issuance of senior notes 
     200,000       —       —         —       200,000  
Extinguishment of revolving facility
     (37,641 )     —       —         —       (37,641 )
Extinguishment of term debt
     (226,139 )     —       —         —       (226,139 )
Net repayments under revolving facilities
     (41,082 )     —       (3,595 )       —       (44,677 )
Proceeds from long-term debt 
     100,000       —       —         —       100,000  
Repayments of long-term debt
     19,682       (29,407 )     2,304         (2,227 )     (9,648 )
Debt issuance costs
     (10,694 )     —       —         —       (10,694 )
Interest rate swap termination costs
     (5,274 )     —       —         —       (5,274 )
   
 
 
   
 
Net cash used for financing activities
     (1,148 )     (29,407 )     (1,291 )       (2,227 )     (34,073 )
   
 
 
   
 
                                           
Effect of exchange rate changes on cash and cash equivalents
     —       —       395         —       395  
Net change in cash and cash equivalents
     19,487       (496 )     5,719         —       24,710  
Cash and cash equivalents at beginning of period
     714       29       3,626         —       4,369  
   
 
 
   
 
Cash and cash equivalents at end of period
   $ 20,201     $ (467 )   $ 9,345       $ —     $  29,079  
   
 
 
   
 
                                           
    For the nine months ended September 30, 2001
   
    Parent   Guarantor
Subsidiaries		   Non-Guarantor
Subsidiaries		     Eliminations   Consolidated
   
 
 
   
 
                                           
Net cash provided by operating activities
   $ (720 )   $  28,628     $ 4,249       $ 432     $ 32,589  
                                           
INVESTING ACTIVITIES:
                                          
Capital expenditures
     (9,263 )     (9,295 )     (2,338 )       —       (20,896 )
Other     (248 )     —       510         —       262  
   
 
 
   
 
Net cash used for investing activities
     (9,511 )     (9,295 )     (1,828 )       —       (20,634 )
   
 
 
   
 
FINANCING ACTIVITIES:
                                          
Net repayments under revolving facilities
     16,411       —       1,879         —       18,290  
Proceeds from long-term debt
     —       —       1,381         —       1,381  
Repayments of long-term debt
     (4,985 )     (18,956 )     (7,302 )       (432 )     (31,675 )
Debt issuance costs
     (1,223 )     —       —         —       (1,223 )
   
 
 
   
 
Net cash used for financing activities
     10,203       (18,956 )     (4,042 )       (432 )     (13,227 )
   
 
 
   
 
                                           
Effect of exchange rate changes on cash and cash equivalents
     —       —       (88 )       —       (88 )
Net change in cash and cash equivalents
     (28 )     377       (1,709 )       —       (1,360 )
Cash and cash equivalents at beginning of period
     172       109       5,313         —       5,594  
   
 
 
   
 
Cash and cash equivalents at end of period 
   $ 144     $ 486     $ 3,604       $  —     $  4,234  
   
 
 
   
 
13.   Certain prior period amounts have been reclassified to conform to their 2002 presentation in the condensed consolidated financial statements.

17

Table of Contents

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                         CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, the Company evaluates estimates and assumptions used. The Company bases its estimates used on historical experience and on various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

The Company believes the following are its“critical accounting polices”- those most important to the financial presentation and those that require the most difficult, subjective or complex judgements.

Revenue Recognition and Sales Commitments - The Company recognizes revenues from the sale of products, net of costs of returns and allowances, at the point of passage of title, which is generally at the time of shipment. The Company often enters into agreements with its customers at the beginning of a given vehicle’s life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements generally may be terminated by our customer at any time, but usually are not.

Bad Debts - The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectibility in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount.

Inventory - Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for U.S. inventories and by the first-in, first-out (FIFO) method for non-U.S. inventories. Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.

Goodwill - In connection with the adoption of SFAS 142,“Goodwill and Other Intangible Assets,”the Company discontinued the amortization of goodwill on January 1, 2002. In lieu of amortization, the new standard requires that goodwill be tested for impairment as of the date of adoption, at least annually thereafter and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. See Note 4 for more information on the Company’s application of this new accounting standard.

Results of Operations

Nine Months Ended September 30, 2002 Compared To Nine Months Ended September 30, 2001

Net Sales. Net sales for the nine months ended September 30, 2002 increased by $43.7 million, or 9.8%, to $488.2 million from $444.5 million for the corresponding period in 2001. Sales revenues for the first nine months were favorably impacted by increased North American light and commercial vehicle builds as well as new business awards.

18

Table of Contents

Sales for the nine months ended September 30, 2002 in North America increased $34.0 million to $415.3 million from $381.3 million for the corresponding period in 2001. North American sales accounted for 85.1% of total sales for the first nine months of 2002 compared with 85.8% for the corresponding period in 2001. Sales for the nine months ended September 30, 2002 outside North America increased $9.8 million to $72.9 million from $63.1 million for the corresponding period in 2001. Sales outside North America accounted for 14.9% of total sales for the nine months ended September 30, 2002 compared with 14.2% for the corresponding period in 2001.

Net sales for the Vehicle Management & Power Distribution operating segment were $207.6 million for the first nine months of 2002 as compared to $189.4 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase. Net sales for the Control Devices operating segment were $291.2 million for the first nine months of 2002 as compared to $263.7 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase.

Cost of Goods Sold. Cost of goods sold for the first nine months of 2002 increased by $21.8 million, or 6.4%, to $361.2 million from $339.4 million in the first nine months of 2001. As a percentage of sales, cost of goods sold decreased to 74.0% from 76.4% for the first nine months of 2002 and 2001, respectively. The improvement as a percent of sales was primarily attributable to cost reduction programs and increased production volumes.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses decreased by $9.0 million to $68.9 million in the first nine months of 2002 from $77.9 million for the corresponding period in 2001. As a percentage of sales, SG&A expenses decreased to 14.1% for the first nine months of 2002 from 17.5% for the corresponding period in 2001. The decrease was primarily attributable to the Company’s adopting the non-amortization of goodwill provisions of SFAS 142 on January 1, 2002. Goodwill amortization expenses for the first nine months of 2001was $7.4 million. Excluding the impact of goodwill amortization expense, SG&A decreased $1.6 million, or 2.3%, in the first nine months of 2002 compared to the corresponding period in 2001, primarily as a result of the Company’s cost cutting initiatives.

Interest Expense, net. Net interest expense for the first nine months of 2002 increased by $3.6 million to $26.2 million from $22.6 million in 2001, primarily due to an increase in the effective rate of interest resulting from the debt refinancing.

Other Expense, net. Other expense, which primarily represented equity losses of unconsolidated subsidiaries, was $0.3 million and $0.5 million for the nine months ended September 30, 2002 and 2001, respectively. These losses were predominately the result of foreign currency fluctuations.

Income Before Income Taxes. As a result of the foregoing, income before income tax increased by $27.6 million for the first nine months of 2002 to $31.7 million from $4.1million in 2001.

Provision for Income Taxes. The Company recognized provisions for income taxes of $11.5 million and $1.3 million for federal, state and foreign income taxes for the first nine months of 2002 and 2001, respectively.

Income Before Extraordinary Loss and Cumulative Effect of Accounting Change. As a result of the foregoing, income before extraordinary loss and cumulative effect of accounting change increased by $17.4 million to $20.2 million for the first nine months of 2002 from $2.8 million in 2001.

Income before extraordinary loss and cumulative effect of accounting change for the Vehicle Management & Power Distribution operating segment was $2.0 million for the first nine months of 2002 as compared to a net loss of $11.0 million for the corresponding period in 2001. The increase in net income was primarily due to ongoing cost reduction programs and increased production volumes. Income before extraordinary loss and cumulative effect of accounting change for the Control Devices operating segments was $18.2

19

Table of Contents

million for the first nine months of 2002 as compared to $13.8 million for the corresponding period in 2001. The increase was primarily due to ongoing cost reduction programs and increased production volumes.

Extraordinary Loss, net of tax. The Company recognized a net of tax loss of $3.6 million during the first nine months of 2002 in connection with the early extinguishment of debt related to the Company’s debt refinancing.

Cumulative Effect of Accounting Change, net of tax. In accordance with the transition provisions of SFAS 142, the Company completed the two-step transitional goodwill impairment analysis. As a result, the Company recorded as a cumulative effect of accounting change, a non-cash charge of $69.8 million, net of tax, to write off a portion of the carrying value of goodwill.

Three Months Ended September 30, 2002 Compared To Three Months Ended September 30, 2001

Net Sales. Net sales for the quarter ended September 30, 2002 increased by $22.1 million, or 16.2%, to $158.4 million from $136.4 million for the corresponding period in 2001. Sales revenues for the third quarter ended September 30, 2002 were favorably impacted by increased North American light and commercial vehicle production as well as new business awards.

Sales for the quarter ended September 30, 2002 in North America increased $20.0 million to $137.1 million from $117.1 million for the corresponding period in 2001. North American sales accounted for 86.5% of total sales for the third quarter ended September 30, 2002 compared with 85.9% for the corresponding period in 2001. Sales for the third quarter of 2002 outside North America increased by $2.1 million to $21.3 million from $19.2 million for the corresponding period in 2001. Sales outside North America accounted for 13.5% of total sales for the third quarter of 2002 compared with 14.1% for the corresponding period in 2001.

Net sales for the Vehicle Management & Power Distribution operating segment were $69.5 million for the third quarter of 2002 as compared to $57.0 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase. Net sales for the Control Devices operating segment were $92.7 million for the third quarter of 2002 as compared to $82.0 million for the corresponding period in 2001. New business and increased production volumes on existing programs accounted for the increase.

Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2002 increased by $12.7 million, or 12.0%, to $118.8 million from $106.1 million for the corresponding period in 2001. As a percentage of sales, cost of goods sold decreased to 75.0% from 77.8% for the third quarter of 2002 and 2001, respectively. The improvement as a percent of sales was primarily attributable to ongoing cost reduction programs and increased production volumes.

Selling, General and Administrative Expenses . SG&A expenses decreased by $2.0 million to $23.8 million in the third quarter of 2002 from $25.8 for the corresponding period in 2001. As a percentage of sales, SG&A expenses decreased to 15.0% for the third quarter of 2002 from 18.9% for the corresponding period in 2001. The decrease was primarily attributable to the Company’s adopting the non-amortization of goodwill provisions of SFAS 142 on January 1, 2002. Goodwill amortization expense for the third quarter of 2001 was $2.5 million. Excluding the impact of goodwill amortization expense, SG&A increased by $0.5 million, or 2.1%, in the third quarter of 2002.

Interest Expense, net. Net interest expense for the third quarter of 2002 increased by $2.2 million to $9.4 million from $7.2 million in the corresponding period of 2001. The increase was primarily attributable to an increase in the effective rate of interest resulting from the debt refinancing.

20

Table of Contents

Other Expense, net. Other expense, which primarily represented equity losses of unconsolidated subsidiaries, was $0.3 million for the third quarter of 2001 and was predominately the result of foreign currency fluctuations.

Income (Loss) Before Income Taxes. As a result of the foregoing, income (loss) before income taxes increased to income of $6.4 million from a loss of $3.0 million for the third quarter of 2002 and 2001, respectively.

Provision (Benefit) for Income Taxes. The Company recognized a provision for income taxes of $2.2 and a benefit for income taxes of $1.2 million for federal, state and foreign income taxes for the third quarter of 2002 and 2001, respectively.

Net Income (Loss). As a result of the foregoing, net income increased by $6.0 million to $4.2 million of income for the third quarter of 2002 from a $1.8 million loss for the corresponding period in 2001.

Net income was $0.5 million for the Vehicle Management & Power Distribution operating segment for the third quarter of 2002, as compared to a net loss of $5.5 million for the corresponding period in 2001. The increase in net income was primarily due to ongoing cost reduction programs and increased production volumes. Net income for the Control Devices operating segment remained steady at $3.7 million for the third quarter of 2002 and 2001.

Liquidity and Capital Resources

          Net cash provided by operating activities was $68.0 million and $32.6 million for the nine months ended September 30, 2002 and 2001, respectively. The increase in operating cash flow was primarily attributable to lower working investment and higher operating income.

          Net cash used by investing activities was $9.6 million and $20.6 million for the nine months ended September 30, 2002 and 2001, respectively, and primarily related to capital expenditures. Lower capital expenditures were the predominant factor behind the reduction.

          Net cash used by financing activities was $34.1 million and $13.2 million for the nine months ended September 30, 2002 and 2001, respectively. The $20.9 million increase was due to higher debt repayment rates and debt issuance costs associated with our debt refinancing. In the third quarter of 2002, the Company prepaid $30.0 million of its $100.0 million term debt.

          The Company has a new $200.0 million credit agreement (of which $69.5 million was outstanding at September 30, 2002) with a bank group. The credit agreement has the following components: a $100.0 million revolving facility (of which $97.8 million is currently available) including a $10.0 million swing line facility, and a $100.0 million term facility. The revolving facility expires on April 30, 2007 and requires a commitment fee of 0.375% to 0.500% on the unused balance as well as a utilization fee of 0.125% to 0.250% when the unutilized balance equals or exceeds 50.0% of the total revolving commitment. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.50% to 1.50% or (ii) LIBOR plus a margin of 2.00% to 3.00%, depending upon the Company’s ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined. Interest on the swing line facility is payable monthly at the same rate as the revolving facility. The term facility expires on April 30, 2008. Interest is payable quarterly at either (i) the prime rate plus 1.75% or (ii) LIBOR plus 3.25%. The Company has the right to prepay any of the above mentioned loans, in whole or in part, without premium or penalty. As mentioned above, during the third quarter of 2002, the Company prepaid $30.0 million of the term facility. The Company was in compliance with its covenants as of September 30, 2002.

          On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes, the proceeds of which were used to repay existing debt. The $200.0 million notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. Interest is payable on May 1 and November 1 of each year.

21

Table of Contents

On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.

          The following table summarizes the Company’s cash outflows resulting from financial contracts and commitments:

            Less than   1 - 3   4 - 5   After 5
     Contractual Obligations:     Total     1 year   years   years   years
   
   
   
   
   
Long-Term Debt     $273,114     $   890     $6,034     $2,190     $264,000
Capital Lease Obligations     1,713     991     722     --     --
Operating Leases     10,688     3,262     5,831     828     767
     
   
   
   
   
Total Contractual Cash                              
Obligations
     $285,515     $5,143     $12,587     $3,018     $264,767
     
   
   
   
   

          Management believes that cash flows from operations and the availability of funds from the Company’s credit facilities and senior notes will provide sufficient liquidity to meet the Company’s growth and operating needs.

Inflation and International Presence

          Management believes that the Company’s operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes they are not significantly exposed to adverse economic conditions.

Forward-Looking Statements

     Portions of this report may “contain;forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company’s (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words“will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:

  •      the loss of a major customer;
  •     a decline in automotive, medium- and heavy-duty truck or agricultural vehicle production;
  •     the failure to achieve successful integration of any acquired company or business;
  •     a decline in general economic conditions in any of the various countries in which the Company operates;
  •     labor disruptions at our facilities or at any of our significant customers or suppliers;
  •     the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis;
  •     our significant amount of debt and the restrictive covenants contained in our credit facility;
  •     customer acceptance of new products;
  •     capital availability or costs, including changes in interest rates or market perceptions of the Company;
  •      changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
  •     the impact of laws and regulations, including environmental laws and regulations; and
  •     the occurrence or non-occurrence of circumstances beyond our control.

22

Table of Contents

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

          The Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. To reduce exposures to market risks resulting from fluctuations in interest rates, the Company uses a combination of variable and fixed rate debt. At September 30, 2002, approximately 26.0% of the Company’s debt was variable rate debt. The Company believes that a 1.0% increase or decrease in the interest rate on variable rate debt could affect annual interest expense by approximately $0.7 million.

          The Company’s risks related to commodity price and foreign currency exchange risks have historically not been material. The Company does not expect the effects of these risks to be material in the future based on current operating and economic conditions in the countries and markets in which it operates. Therefore, a 10.0% change in the value of the U.S. dollar would not significantly affect the Company’s financial position.

ITEM 4.   CONTROLS AND PROCEDURES

          As of September 30, 2002, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2002. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002.

23

Table of Contents

PART II. OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

In the ordinary course of business, the Company is involved in various legal proceedings, workers’ compensation and product liability disputes.  The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company.

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS

             None.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

             None.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

             None.

ITEM 5.     OTHER INFORMATION

             None.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits  
     
  None.  
     
(b) Reports on Forms 8-K
     
  1. On August 14, 2002, the Company filed a Current Report on Form 8-K reporting the Chief Executive Officer and Chief Financial Officer’s certification of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

24

Table of Contents

 

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: November 14, 2002                /s/ Cloyd J. Abruzzo
   
  Cloyd J. Abruzzo
  President and Chief Executive Officer
  (Principal Executive Officer)
   
Date: November 14, 2002                /s/ Kevin P. Bagby
   
  Kevin P. Bagby
  Vice President and Chief Financial Officer
  (Principal Financial and Chief
  Accounting Officer)

25

Table of Contents

 

CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES–OXLEY ACT OF 2002

I, Cloyd J. Abruzzo, President and Chief Executive Officer, of Stoneridge, Inc. (the “Company”), certify that:

   
(1) I have reviewed this quarterly report on Form 10-Q of the Company;
   
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
   
(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
   
  (a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   
  (b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
   
  (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
   
(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:
   
  (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
   
  (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
   
(6) The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/S/ Cloyd J. Abruzzo

Cloyd J. Abruzzo, President and Chief Executive Officer
November 14, 2002

26

Table of Contents

I, Kevin P. Bagby, Vice-President and Chief Financial Officer, of Stoneridge, Inc. (the “Company”), certify that:

   
(1) I have reviewed this quarterly report on Form 10-Q of the Company;
   
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
   
(4) The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
   
  (d) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   
  (e) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
   
  (f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
   
(5) The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors:
   
  (c) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
   
  (d) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and
   
(6) The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/S/ Kevin P. Bagby

Kevin P. Bagby, Vice-President and Chief Financial Officer
November 14, 2002

27