Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FORM 10-Q

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

For the quarter ended June 30, 20182019

Commission file number: 001-13337

STONERIDGE INC.INC

(Exact name of registrant as specified in its charter)

Ohio

34-1598949

Ohio

34-1598949

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

39675 MacKenzie Drive, Suite 400, Novi, Michigan

48377

(Address of principal executive offices)

(Zip Code)

(248) 489-9300
Registrant's

(248) 489-9300

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Common Shares, without par valueSRINew York Stock Exchange

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.

xYes¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

xYes¨No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨

Accelerated filer  x

Non-accelerated filer  ¨

Smaller reporting company¨

Emerging growth company¨

(Do not check if a smaller reporting 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).¨YesxNo

The number of Common Shares, without par value, outstanding as of July 27, 201825, 2019 was 28,482,746.27,381,333.

1

Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

Page

INDEX

Page

PART I–FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 20182019 (Unaudited) and December 31, 20172018

3

4

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 20182019 and 20172018

4

5

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 20182019 and 20172018

5

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 20182019 and 20172018

6

7

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

9

Item 2.

Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

27

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

43

Item 4.

Controls and Procedures

37

43

PART II–OTHER INFORMATION

44

Item 1.

Legal Proceedings

38

44

Item 1A.

Risk Factors

38

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

44

Item 3.

Defaults Upon Senior Securities

38

44

Item 4.

Mine Safety Disclosures

38

45

Item 5.

Other Information

38

45

Item 6.

Exhibits

39

46

Signatures

40

47

1

2

Table of Contents

Forward-Looking Statements

Portions of this quarterly 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, our directors or officers with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition or divestiture strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) expectations related to current and future market conditions.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 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 reduced purchases, loss or bankruptcy of a major customer or supplier;
·the costs and timing of business realignment, facility closures or similar actions;
·a significant change in automotive, commercial, off-highway, motorcycle or agricultural vehicle production;
·competitive market conditions and resulting effects on sales and pricing;
·the impact on changes in foreign currency exchange rates on sales, costs and results, particularly the Argentinian peso, Brazilian real, Chinese renminbi, euro, Mexican peso and Swedish krona;
·our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
·customer acceptance of new products;
·our ability to successfully launch/produce products for awarded business;
·adverse changes in laws, government regulations or market conditions, including tariffs, affecting our products or our customers’ products;
·our ability to protect our intellectual property and successfully defend against assertions made against us;
·liabilities arising from warranty claims, product recall or field actions, product liability and legal proceedings to which we are or may become a party, or the impact of product recall or field actions on our customers;
·labor disruptions at our facilities or at any of our significant customers or suppliers;
·the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis, including the impact of potential tariffs and trade considerations on their operations and output;
·the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving credit facility;
·capital availability or costs, including changes in interest rates or market perceptions;
·the failure to achieve the successful integration of any acquired company or business;
·risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber attackcyber-attack and other similar disruptions; and
·those items described in Part I, Item IA (“Risk Factors”) of the Company’s 2017 2018 Form 10-K.10-K.

TheIn addition, 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.

2

3

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONERIDGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEETS

  June 30,  December 31, 
(in thousands) 2018  2017 
  (Unaudited)    
ASSETS        
         
Current assets:        
Cash and cash equivalents $58,965  $66,003 
 Accounts receivable, less reserves of $1,106 and $1,109, respectively  147,729   142,438 
Inventories, net  80,232   73,471 
Prepaid expenses and other current assets  29,056   21,457 
Total current assets  315,982   303,369 
         
Long-term assets:        
Property, plant and equipment, net  111,245   110,402 
Intangible assets, net  66,006   75,243 
Goodwill  37,389   38,419 
Investments and other long-term assets, net  30,024   31,604 
Total long-term assets  244,664   255,668 
Total assets $560,646  $559,037 
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
         
Current liabilities:        
Current portion of debt $3,184  $4,192 
Accounts payable  84,461   79,386 
Accrued expenses and other current liabilities  60,358   52,546 
Total current liabilities  148,003   136,124 
         
Long-term liabilities:        
Revolving credit facility  110,000   121,000 
Long-term debt, net  1,790   3,852 
Deferred income taxes  17,767   18,874 
Other long-term liabilities  25,040   35,115 
Total long-term liabilities  154,597   178,841 
         
Shareholders' equity:        
Preferred Shares, without par value, 5,000 shares authorized, none issued  -   - 
Common Shares, without par value, 60,000 shares authorized,        
28,966 and 28,966 shares issued and 28,483 and 28,180 shares outstanding at        
June 30, 2018 and December 31, 2017, respectively, with no stated value  -   - 
Additional paid-in capital  228,856   228,486 
Common Shares held in treasury, 483 and 786 shares at June 30, 2018        
and December 31 2017, respectively, at cost  (8,911)  (7,118)
Retained earnings  120,552   92,264 
Accumulated other comprehensive loss  (82,451)  (69,560)
Total shareholders' equity  258,046   244,072 
Total liabilities and shareholders' equity $560,646  $559,037 

June 30,

December 31,

(in thousands)

    

2019

    

2018

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

51,503

$

81,092

Accounts receivable, less reserves of $1,592 and $1,243, respectively

151,687

139,076

Inventories, net

100,751

79,278

Prepaid expenses and other current assets

32,148

20,731

Total current assets

336,089

320,177

Long-term assets:

Property, plant and equipment, net

116,954

112,213

Intangible assets, net

58,890

62,032

Goodwill

36,377

36,717

Operating lease right-of-use asset

18,970

-

Investments and other long-term assets, net

28,767

28,380

Total long-term assets

259,958

239,342

Total assets

$

596,047

$

559,519

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Current portion of debt

$

869

$

1,533

Accounts payable

100,659

87,894

Accrued expenses and other current liabilities

61,987

57,880

Total current liabilities

163,515

147,307

Long-term liabilities:

Revolving credit facility

103,500

96,000

Long-term debt, net

732

983

Deferred income taxes

15,042

14,895

Operating lease long-term liability

14,565

-

Other long-term liabilities

17,194

17,068

Total long-term liabilities

151,033

128,946

Shareholders' equity:

Preferred Shares, without par value, 5,000 shares authorized, none issued

-

-

Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 27,367 and 28,488 shares outstanding at June 30, 2019 and December 31, 2018, respectively, with no stated value

-

-

Additional paid-in capital

223,831

231,647

Common Shares held in treasury, 1,599 and 478 shares at June 30, 2019 and December 31, 2018, respectively, at cost

(50,689)

(8,880)

Retained earnings

195,672

146,251

Accumulated other comprehensive loss

(87,315)

(85,752)

Total shareholders' equity

281,499

283,266

Total liabilities and shareholders' equity

$

596,047

$

559,519

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

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

  Three months ended  Six months ended 
  June 30,  June 30, 
(in thousands, except per share data) 2018  2017  2018  2017 
             
Net sales $220,602  $209,111  $446,532  $413,422 
                 
Costs and expenses:                
Cost of goods sold  153,184   145,697   311,145   288,857 
Selling, general and administrative  35,256   35,704   72,517   69,970 
Design and development  12,981   12,034   26,842   23,755 
                 
Operating income  19,181   15,676   36,028   30,840 
                 
Interest expense, net  1,170   1,518   2,524   2,928 
Equity in earnings of investee  (665)  (555)  (1,186)  (735)
Other expense (income), net  (264)  605   (863)  795 
                 
Income before income taxes  18,940   14,108   35,553   27,852 
                 
Provision for income taxes  3,820   5,189   7,053   9,760 
                 
Net income  15,120   8,919   28,500   18,092 
                 
Net loss attributable to noncontrolling interest  -   (100)  -   (130)
                 
Net income attributable to Stoneridge, Inc. $15,120  $9,019  $28,500  $18,222 
                 
Earnings per share attributable to Stoneridge, Inc.:                
Basic $0.53  $0.32  $1.01  $0.65 
Diluted $0.52  $0.32  $0.99  $0.64 
                 
Weighted-average shares outstanding:                
Basic  28,449   28,133   28,349   28,026 
Diluted  28,978   28,517   28,907   28,531 

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

4

4

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

STONERIDGE, INC.

  Three months ended  Six months ended 
  June 30,  June 30. 
(in thousands) 2018  2017  2018  2017 
             
Net income $15,120  $8,919  $28,500  $18,092 
Less: Net loss attributable to noncontrolling interest  -   (100)  -   (130)
Net income attributable to Stoneridge, Inc.  15,120   9,019   28,500   18,222 
                 
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.:                
Foreign currency translation  (17,421)  6,276   (13,527)  9,339 
Unrealized gain (loss) on derivatives(1)  (159)  (7)  636   310 
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.  (17,580)  6,269   (12,891)  9,649 
                 
Comprehensive income (loss) attributable to Stoneridge, Inc. $(2,460) $15,288  $15,609  $27,871 
                 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(1)Net of tax benefit of $(41) and $(3) for the three months ended June 30, 2018 and 2017, respectively. Net of tax expense of $171 and $167 for the six months ended June 30, 2018 and 2017, respectively.

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,

(in thousands, except per share data)

2019

    

2018

2019

    

2018

Net sales

$

222,241

$

220,602

$

440,538

$

446,532

Costs and expenses:

Cost of goods sold

165,414

153,184

322,858

311,145

Selling, general and administrative

27,522

35,256

63,110

72,517

Gain on disposal of non-core products, net

(33,921)

-

(33,599)

-

Design and development

14,040

12,981

27,284

26,842

Operating income

49,186

19,181

60,885

36,028

Interest expense, net

1,001

1,170

2,004

2,524

Equity in earnings of investee

(548)

(665)

(912)

(1,186)

Other income, net

(97)

(264)

(529)

(863)

Income before income taxes

48,830

18,940

60,322

35,553

Provision for income taxes

9,066

3,820

10,901

7,053

Net income

$

39,764

$

15,120

$

49,421

$

28,500

Earnings per share:

Basic

$

1.43

$

0.53

$

1.75

$

1.01

Diluted

$

1.41

$

0.52

$

1.72

$

0.99

Weighted-average shares outstanding:

Basic

27,887

28,449

28,208

28,349

Diluted

28,294

28,978

28,716

28,907

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

5

5

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,

(in thousands)

2019

2018

2019

2018

Net income

$

39,764

$

15,120

$

49,421

$

28,500

Other comprehensive (loss) income, net of tax:

Foreign currency translation

2,311

(17,421)

(1,493)

(13,527)

Unrealized (loss) gain on derivatives (1)

(112)

(159)

(70)

636

Other comprehensive (loss) income, net of tax

2,199

(17,580)

(1,563)

(12,891)

Comprehensive income (loss)

$

41,963

$

(2,460)

$

47,858

$

15,609

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(1)
(Unaudited)Net of tax benefit of $(30) and $(41) for the three months ended June 30, 2019 and 2018, respectively. Net of tax expense (benefit) of $(19) and $171 for the six months ended June 30, 2019 and 2018, respectively.

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

Six months ended June 30, (in thousands) 2018  2017 
       
OPERATING ACTIVITIES:        
Net income $28,500  $18,092 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  11,535   10,538 
Amortization, including accretion of deferred financing costs  3,503   3,200 
Deferred income taxes  1,765   5,450 
Earnings of equity method investee  (1,186)  (735)
Gain on sale of fixed assets  (18)  (4)
Share-based compensation expense  2,838   4,065 
Tax benefit related to share-based compensation expense  (879)  (758)
Change in fair value of earn-out contingent consideration  1,417   2,347 
Changes in operating assets and liabilities, net of effect of business combination:        
Accounts receivable, net  (11,594)  (13,494)
Inventories, net  (10,610)  (6,739)
Prepaid expenses and other assets  (8,417)  (4,174)
Accounts payable  8,678   11,675 
Accrued expenses and other liabilities  3,379   (2,442)
   Net cash provided by operating activities  28,911   27,021 
         
INVESTING ACTIVITIES:        
Capital expenditures  (16,845)  (15,167)
Proceeds from sale of fixed assets  41   20 
Insurance proceeds for fixed assets  1,403   - 
Business acquisition, net of cash acquired  -   (77,538)
   Net cash used for investing activities  (15,401)  (92,685)
         
FINANCING ACTIVITIES:        
Acquisition of noncontrolling interest, including transaction costs  -   (1,796)
Revolving credit facility borrowings  26,500   84,000 
Revolving credit facility payments  (37,500)  (19,000)
Proceeds from issuance of debt  273   1,901 
Repayments of debt  (2,459)  (6,174)
Other financing costs  -   (61)
Repurchase of Common Shares to satisfy employee tax withholding  (4,242)  (2,207)
   Net cash (used for) provided by financing activities  (17,428)  56,663 
         
Effect of exchange rate changes on cash and cash equivalents  (3,120)  2,832 
Net change in cash and cash equivalents  (7,038)  (6,169)
Cash and cash equivalents at beginning of period  66,003   50,389 
         
Cash and cash equivalents at end of period $58,965  $44,220 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $2,679  $2,755 
Cash paid for income taxes, net $7,967  $3,424 

6

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six months ended June 30,  (in thousands)

    

2019

    

2018

    

OPERATING ACTIVITIES:

Net income

$

49,421

$

28,500

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Depreciation

11,819

11,535

Amortization, including accretion and write-off of deferred financing costs

3,464

3,503

Deferred income taxes

3,804

1,765

Earnings of equity method investee

(912)

(1,186)

Gain on sale of fixed assets

(26)

(18)

Share-based compensation expense

3,594

2,838

Tax benefit related to share-based compensation expense

(752)

(879)

Gain on disposal of non-core products, net

(33,599)

-

Change in fair value of earn-out contingent consideration

921

1,417

Changes in operating assets and liabilities, net of effect of business combination:

Accounts receivable, net

(13,440)

(11,594)

Inventories, net

(21,798)

(10,610)

Prepaid expenses and other assets

(9,678)

(8,417)

Accounts payable

13,604

8,678

Accrued expenses and other liabilities

242

3,379

Net cash provided by operating activities

6,664

28,911

INVESTING ACTIVITIES:

Capital expenditures

(17,479)

(16,845)

Proceeds from sale of fixed assets

49

41

Insurance proceeds for fixed assets

-

1,403

Proceeds from disposal of non-core products

34,386

-

Investment in venture capital fund

(1,200)

-

Net cash provided by (used for) investing activities

15,756

(15,401)

FINANCING ACTIVITIES:

Revolving credit facility borrowings

55,000

26,500

Revolving credit facility payments

(47,500)

(37,500)

Proceeds from issuance of debt

55

273

Repayments of debt

(999)

(2,459)

Earn-out consideration cash payment

(3,394)

-

Other financing costs

(873)

-

Common Share repurchase program

(50,000)

-

Repurchase of Common Shares to satisfy employee tax withholding

(3,209)

(4,242)

Net cash used for financing activities

(50,920)

(17,428)

Effect of exchange rate changes on cash and cash equivalents

(1,089)

(3,120)

Net change in cash and cash equivalents

(29,589)

(7,038)

Cash and cash equivalents at beginning of period

81,092

66,003

Cash and cash equivalents at end of period

$

51,503

$

58,965

Supplemental disclosure of cash flow information:

Cash paid for interest

$

2,198

$

2,679

Cash paid for income taxes, net

$

7,100

$

7,967

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

6

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, 2017

 

28,180

 

786

 

$

228,486

 

$

(7,118)

 

$

92,264

 

$

(69,560)

 

$

244,072

Net income

 

 

 

 

 

13,380

 

 

13,380

Unrealized gain on derivatives, net

 

 

 

 

 

 

795

 

795

Currency translation adjustments

 

 

 

 

 

 

3,894

 

3,894

Issuance of Common Shares

 

446

 

(446)

 

 

 

 

 

Repurchased Common Shares for treasury

 

(136)

 

136

 

 

(1,387)

 

 

 

(1,387)

Share-based compensation

(925)

(925)

Cumulative effect of an accounting change

 

 

 

 

 

(212)

 

 

(212)

BALANCE MARCH 31, 2018

28,490

476

$

227,561

$

(8,505)

$

105,432

$

(64,871)

$

259,617

BALANCE , MARCH 31, 2018

 

28,490

 

476

 

$

227,561

 

$

(8,505)

 

$

105,432

 

$

(64,871)

 

$

259,617

Net income

 

 

 

 

 

15,120

 

 

15,120

Unrealized gain on derivatives, net

 

 

 

 

 

 

(159)

 

(159)

Currency translation adjustments

 

 

 

 

 

 

(17,421)

 

(17,421)

Issuance of Common Shares

 

11

 

(11)

 

 

 

 

 

Repurchased Common Shares for treasury

 

(18)

 

18

 

 

(406)

 

 

 

(406)

Tax benefit from share based compensation transactions

 

 

 

 

 

 

 

Share-based compensation

1,295

1,295

BALANCE JUNE 30, 2018

28,483

483

$

228,856

$

(8,911)

$

120,552

$

(82,451)

$

258,046

BALANCE DECEMBER 31, 2018

 

28,488

 

478

 

$

231,647

 

$

(8,880)

 

$

146,251

 

$

(85,752)

 

$

283,266

Net income

 

 

 

 

 

9,657

 

 

9,657

Unrealized gain on derivatives, net

 

 

 

 

 

 

42

 

42

Currency translation adjustments

 

 

 

 

 

 

(3,804)

 

(3,804)

Issuance of Common Shares

 

305

 

(305)

 

 

 

 

 

Repurchased Common Shares for treasury

 

(98)

 

98

 

 

(1,883)

 

 

 

(1,883)

Share-based compensation

480

480

BALANCE MARCH 31, 2019

 

28,695

 

271

$

232,127

$

(10,763)

$

155,908

$

(89,514)

$

287,758

BALANCE MARCH 31, 2019

 

28,695

 

271

 

$

232,127

 

$

(10,763)

 

$

155,908

 

$

(89,514)

 

$

287,758

Net income

 

 

 

 

 

39,764

 

 

39,764

Unrealized gain on derivatives, net

 

 

 

 

 

 

(112)

 

(112)

Currency translation adjustments

 

 

 

 

 

 

2,311

 

2,311

Issuance of Common Shares

 

31

 

(31)

 

 

 

 

 

Repurchased Common Shares for treasury

 

(9)

 

9

 

 

74

 

 

 

74

Common Share repurchase program

 

(1,350)

 

1,350

 

(10,000)

 

(40,000)

 

 

 

(50,000)

Share-based compensation

1,704

1,704

BALANCE JUNE 30, 2019

 

27,367

 

1,599

$

223,831

$

(50,689)

$

195,672

$

(87,315)

$

281,499

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

8

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)(Unaudited)

(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'sSEC’s rules and regulations. The results of operations for the three and six months ended June 30, 20182019 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 2017 Company’s 2018 Form 10-K. 10K.

On January 31, 2017,The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the Company acquired Exploitatiemaatschappij Berghaaf B.V. (“Orlaco”),three and six months ended June 30, 2019 and 2018 has been determined to be an electronics business which designs, manufacturesunconsolidated entity, and sells camera-based vision systems, monitors and related products. The acquisition wastherefore is accounted for as a business combination, and accordingly,under the equity method of accounting based on the Company’s condensed consolidated financial statements herein include the results of Orlaco from the acquisition date to June 30, 2018. See Note 4 to the condensed consolidated financial statements for additional details regarding the Orlaco acquisition.

The Company had a 74% controlling interest49% ownership in PST Electronica Ltda. (“PST”) from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26% noncontrolling interest in PST, which was accounted for as an equity transaction. As such, PST is now a wholly owned subsidiary as of May 16, 2017. See Note 15 to the condensed consolidated financial statements for additional details regarding the acquisition of PST’s noncontrolling interest.

Also, see Note 2 for the impact of the adoption of various accounting standards on the condensed consolidated financial statements herein.

MSIL.

(2) Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In January 2017,2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, “Clarifying the Definition of a Business”.  It revises the definition of a business and provides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. This guidance was effective for annual periods beginning after December 15, 2017.  The Company adopted this standard on January 1, 2018 which did not have a material impact on its condensed consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory (Topic 740)”. This guidance requires that the tax effects of all intra-entity sales of assets other than inventory be recognized in the period in which the transaction occurs. The Company adopted this standard on January 1, 2018, which did not have a material impact on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)”, which provides guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows in order to reduce diversity in practice.  This ASU was effective for interim and annual periods beginning after December 15, 2017. The Company adopted this standard as of January 1, 2018, which did not have a material impact on its condensed consolidated financial statements.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and related amendments, which is the new comprehensive revenue recognition standard (collectively known as Accounting Standard Codification (“ASC”) 606) that has superseded existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Under the modified retrospective method, the Company would have recognized the cumulative effect of initially applying the standard as an adjustment to opening retained earnings at the date of initial application; however, the Company did not have any material adjustments as of the date of the adoption. The Company does not expect the adoption of ASC 606 to have a material impact on its results of operations on an ongoing basis; however, the Company has expanded its disclosures consistent with the requirements of the new standard and the Company will continue to evaluate new contracts to apply the framework of ASC 606. In particular, the Company will evaluate new contracts with customers analyzing the impact, if any, on revenue from the sale of production parts, particularly in regards to material rights, variable consideration and the impact of termination clauses on the timing of revenue recognition. The majority of our revenue continues to be recognized when products are shipped from our manufacturing facilities. The Company has not changed how it accounts for reimbursable pre-production costs, currently accounted for as a reduction of costs incurred. Refer to Note 3 for the expanded revenue disclosures.

Accounting Standards Not Yet Adopted

In January 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance gives entities the option to reclassify to retained earnings the tax effects resulting from the enactment of Tax Cuts and Jobs Act related to items in accumulated other comprehensive income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance iswas effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Tax Legislation was enacted. The Company will adoptadopted this standard as ofon January 1, 2019, which isdid not expected to have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted this standard as of January 1, 2019 using the modified retrospective approach and elected the transition option to use the effective date January 1, 2019, as the date of initial application. The Company did not adjust its comparative period financial statements for effects of the ASU 2016-02, or make the new required lease disclosures for periods before the effective date. The Company recognized its cumulative effect transition adjustment as of the effective date. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard. The impact of the adoption resulted in the recognition of right-of-use (“ROU”) assets and lease liabilities on the condensed consolidated balance sheet of $20,618 and $20,856, respectively, as of January 1, 2019. The standard did not have a material impact on the Company’s condensed consolidated results of operations and cash flows upon adoption.

9

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019, and early adoption is permitted for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of its pending adoption of ASU 2016-13 on the consolidated financial statements. The Company will adopt this standard as of January 1, 2020 and it is not expected to have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability.  The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company expects to adopt this standard as of January 1, 2019.  The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. The Company continues to evaluate the impact of adopting this standard on its condensed consolidated financial statements, which will require right of use assets and lease liabilities to be recorded in the condensed consolidated balance sheet for operating leases.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

(3) Revenue

The Company adopted ASC 606 using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning after January 1, 2018 are presented under ASC 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s historical accounting policy for revenue recognition prior to the adoption of ASC 606. The Company did not record a cumulative adjustment related to the adoption of ASC 606, and the effects of the adoption were not significant.

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.

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 sensors, actuators, valves and switches. We sell these products principally to the automotive market in the North American, European, and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in our North America and European markets.regions. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“tier oneTier 1 supplier”).

Electronics.Our Electronics segment designs and manufactures electronic instrument clusters, electronic control units, and other driver information systems, and includes the acquired Orlaco business, which designs and manufactures camera-based vision systems, monitors and related products. These products are sold principally to the commercial vehicle market primarily through our OEM and aftermarket channels in the North American and European regions, and to a lesser extent, the Asia Pacific region. The camera-based vision systems, monitors and related products are sold principally to the off-highway vehicle market in the North American and European regions.

10

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

PST.Our PST segment primarily serves the South American marketregion and specializes in the design, manufacture and sale of in-vehicle audio and video devices, electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services primarily for the automotive and motorcycle markets. PST sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

In addition, monitoring services and tracking devices are sold directly to corporate and individual consumers.

The following tables disaggregate our revenue by reportable segment and geographical location(1)for the periods ended June 30, 20182019 and 2017:2018:

Control Devices

Electronics

PST

Consolidated

Three months ended June 30

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

Net Sales:

  

  

  

  

  

  

  

  

North America

$

98,066

$

98,564

$

25,227

$

22,321

$

-

$

-

$

123,293

$

120,885

South America

 

-

 

-

 

-

 

-

 

16,614

 

20,333

 

16,614

 

20,333

Europe

 

5,456

 

3,669

 

64,798

 

67,411

 

-

 

-

 

70,254

 

71,080

Asia Pacific

 

10,545

 

7,723

 

1,535

 

581

 

-

 

-

 

12,080

 

8,304

Total net sales

$

114,067

$

109,956

$

91,560

$

90,313

$

16,614

$

20,333

$

222,241

$

220,602

Three months ended June 30 Control Devices  Electronics  PST  Consolidated 
Net Sales: 2018  2017  2018  2017  2018  2017  2018  2017 
North America $98,564  $105,485  $22,321  $16,002  $-  $-  $120,885  $121,487 
South America  -   -   -   -   20,333   23,500   20,333   23,500 
Europe  3,669   1,939   67,411   55,258   -   -   71,080   57,197 
Asia Pacific  7,723   6,577   581   350   -   -   8,304   6,927 
Total net sales $109,956  $114,001  $90,313  $71,610  $20,333  $23,500  $220,602  $209,111 

Six months ended June 30 Control Devices  Electronics  PST  Consolidated 
Net Sales: 2018  2017  2018  2017  2018  2017  2018  2017 
North America $203,007  $216,006  $42,307  $28,867  $-  $-  $245,314  $244,873 
South America  -   -   -   -   40,878   45,133   40,878   45,133 
Europe  6,560   3,648   135,955   105,332   -   -   142,515   108,980 
Asia Pacific  15,746   13,220   2,079   1,216   -   -   17,825   14,436 
Total net sales $225,313  $232,874  $180,341  $135,415  $40,878  $45,133  $446,532  $413,422 

Control Devices

Electronics

PST

Consolidated

Six months ended June 30

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

Net Sales:

  

  

  

  

  

  

  

  

North America

$

194,786

$

203,007

$

47,874

$

42,307

$

-

$

-

$

242,660

$

245,314

South America

 

-

 

-

 

-

 

-

 

33,946

 

40,878

 

33,946

 

40,878

Europe

 

9,868

 

6,560

 

131,740

 

135,955

 

-

 

-

 

141,608

 

142,515

Asia Pacific

 

19,532

 

15,746

 

2,792

 

2,079

 

-

 

-

 

22,324

 

17,825

Total net sales

$

224,186

$

225,313

$

182,406

$

180,341

$

33,946

$

40,878

$

440,538

$

446,532

(1)(1)Company sales based on geographic location are where the sale originates not where the customer is located.

Performance Obligations

For OEM and tier oneTier 1 supplier customers, the Company typically enters into contracts with its customers to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts.  The majority of the parts sold to OEM and tier one suppliersTier 1 supplier customers are specifically customized to the specific customer, with the exception of off-highway products that are common across all customers. The transaction price is equal to the contracted price per part and there is no expectation of material variable consideration in the transaction price. For most customer contracts, the Company does not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer; therefore, the Company recognizes revenue at the point in time it satisfies a performance obligation by transferring control of a part to the customer. Certain customer contracts contain an enforceable right to payment if the customer terminates the contract for convenience and therefore are recognized over time using the cost to complete input method.

11

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our aftermarket products are focused on meeting the demand for repair and replacement parts, compliance parts and accessories and are sold primarily to aftermarket distributors and mass retailers in our South American, European and North American markets. Aftermarket products have one type of performance obligation which is the delivery of aftermarket parts and spare parts.  For aftermarket customers, the Company typically has standard terms and conditions for all customers.  In addition, aftermarket products have alternative use as they can be sold to multiple customers. Revenue for aftermarket part production contracts is recognized at a point in time when the control of the parts transfer to the customer which is based on the shipping terms.  Aftermarket contracts may include variable consideration related to discounts and rebates and is included in the transaction price upon recognizing the product revenue.

 

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

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 PST 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 no material contract assets, contract liabilities or capitalized contract acquisition costs as of June 30, 2019 and December 31, 2018.

(4) Acquisition of Orlaco

On January 31, 2017, Stoneridge B.V., an indirect wholly-owned subsidiary of Stoneridge, Inc., entered into and closed an agreement to acquire Orlaco. Orlaco designs, manufactures and sells camera-based vision systems, monitors and related electronic products primarily to the heavy off-road machinery, commercial vehicle, lifting crane and warehousing and logistics industries.  Stoneridge and Orlaco jointly developed the MirrorEye mirror replacement system, which is a system solution to improve the safety and fuel economy of commercial vehicles.  The MirrorEye system integrates Orlaco’s vision processing technology and Stoneridge’s driver information capabilities as well as the combined software capabilities of both businesses. The acquisition of Orlaco enhances our Electronics segment’s global technical capabilities in vision systems and facilitates entry into new markets.

The aggregate consideration for the Orlaco acquisition on January 31, 2017 was €74,939 ($79,675), which included customary estimated adjustments to the purchase price. The Company is required to pay an additional amount up to €7,500 ($8,762) as contingent consideration (“earn-out consideration”) if certain performance targets are achieved during the first two years.

The acquisition date fair value of the total consideration transferred consisted of the following:

Cash $79,675 
Fair value of earn-out consideration and other adjustments  4,208 
Total purchase price $83,883 

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

Refer to the Company’s 2017 Form 10-K for additional information on the acquisition including the fair value of assets acquired and liabilities assumed on the acquisition date and the fair value measurement methods and classifications.

The Company recognized $41 and $1,259 of acquisition related costs in the condensed consolidated statement of operations as a component of selling, general and administrative (“SG&A”) expense for the three and six months ended June 30, 2017, respectively. There were no acquisition related costs for the three and six months ended June 30, 2018.

Included in the Company's statement of operations for the three months ended June 30, 2017 are post-acquisition sales of $17,313 and net loss of $(547) related to Orlaco which are included in the results of the Electronics segment. Post-acquisition sales of $28,454 and net income of $45 were included in the Company’s statement of operations for the six months ended June 30, 2017. The Company’s statement of operations for the three and six months ended June 30, 2017 included $657 and $1,636, respectively, of expense in cost of goods sold (“COGS”) associated with the step-up of the Orlaco inventory to fair value. The Company’s statement of operations for the six months ended June 30, 2018 included $369 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. There was no fair value adjustment for the earn-out consideration for three months ended June 30, 2018 due to the earn-out liability being capped in the first quarter of 2018. The Company’s statement of operations for the three and six months ended June 30, 2017 included $2,103 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. See Note 6 for the fair value and foreign currency adjustments of the earn-out consideration.

The following unaudited pro forma information reflects the Company’s condensed consolidated results of operations as if the acquisition had taken place on January 1, 2017. The unaudited pro forma information is not necessarily indicative of the results of operations that the Company would have reported had the transaction actually occurred at the beginning of these periods, nor is it necessarily indicative of future results.

  Six months ended 
  June 30, 
  2017 
    
Net sales $418,452 
Net income attributable to Stoneridge, Inc. and subsidiaries $18,326 

The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are directly related to the business combination and are factually supportable. These adjustments include, but are not limited to, depreciation and amortization related to fair value adjustments to property, plant, and equipment and finite-lived intangible assets. Also, an adjustment has been made for management fees expensed by Orlaco.

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

(5) 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 consisted of the following:

June 30,

December 31,

    

2019

    

2018

Raw materials

$

60,951

$

54,382

Work-in-progress

5,447

4,710

Finished goods

34,353

20,186

Total inventories, net

$

100,751

$

79,278

  June 30,  December 31, 
  2018  2017 
Raw materials $51,806  $47,588 
Work-in-progress  4,991   5,806 
Finished goods  23,435   20,077 
Total inventories, net $80,232  $73,471 

Inventory valued using the FIFO method was $63,136$85,263 and $54,837$64,745 at June 30, 20182019 and December 31, 2017,2018, respectively. Inventory valued using the average cost method was $17,096$15,488 and $18,634$14,533 at June 30, 20182019 and December 31, 2017,2018, respectively.

12

Table of Contents

STONERIDGE, INC.

(6)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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.

Derivative Instruments and Hedging Activities

On June 30, 2018,2019, the Company had open foreign currency forward contracts which are used solely for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company'sCompany’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 and fair value hedges to manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The currenciesCompany hedged bythe Mexican peso currency during the first six months of 2019 and, during 2018, the Company during 2018 and 2017 includedhedged the euro and Mexican peso.peso currencies. In addition, the Company hedged the U.S. dollar against the Swedish krona and euro on behalf of its European subsidiaries in 2018.

These forward contracts were executed to hedge forecasted transactions and certain transactions have been accounted for as cash flow hedges. As such, the effective portion of the unrealized gain or loss was deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive loss. 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.

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

In certain instances, the foreign currency forward contracts do 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'sCompany’s condensed consolidated statement of operations as a component of other expense (income),income, net.

The Company'sCompany’s foreign currency forward contracts offset a portion of the gains and losses on the underlying foreign currency denominated transactions as follows:

Euro-denominated Foreign Currency Forward Contract

At June 30, 20182019 and December 31, 2017, the Company held2018, there were no foreign currency forward contracts with underlying notional amounts of $920 and $1,486, respectively, to reduceentered into as the exposure related to the Company's euro-denominated intercompany loans. The current contract expireswas settled in June 2019.December 2018. The euro-denominated foreign currency forward contract was not designated as a hedging instrument. The Company recognized a gain of $62$62 and a loss of $108$42, respectively, for the three and six months ended June 30, 2018 and 2017, respectively, in the condensed consolidated statements of operations as a component of other expense,income, net related to the euro-denominated contract. For the six months ended June 30, 2018 and 2017, the Company recognized a gain

13

Table of $42 and a loss of $128, respectively, related to this contract.Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedges

The Company entered into on behalf of one of its European Electronics subsidiaries, whose functional currency is the Swedish krona, U.S. dollar-denominated currency contracts with a notional amount at June 30, 2018 of $3,800 which expireexpired ratably on a monthly basis from JulyFebruary 2018 through December 2018. There were no such contracts at June 30, 2019 or December 31, 2017.

2018.

The Company entered into on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, U.S. dollar-denominated currency contracts with a notional amount at June 30, 2018 of $1,000 which expireexpired ratably on a monthly basis from JulyFebruary 2018 through December 2018. There were no such contracts at June 30, 2019 or December 31, 2017.2018.

The Company evaluated the effectiveness of the U.S. dollar-denominated foreign currency forward contracts held as of June 30, 2018 and concluded that the hedges were highly effective.

Mexican Peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedge

The Company holds Mexican peso-denominated foreign currency forward contracts with notional amounts at June 30, 20182019 of $9,397$2,953 which expire ratably on a monthly basis from July 20182019 through December 2018,2019, compared to a notional amount of $9,143$9,017 at December 31, 2017. 

2018.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of June 30, 20182019 and December 31, 20172018 and concluded that the hedges were highly effective.

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,

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

Derivatives designated as hedging instruments:

Cash flow hedges:

Forward currency contracts

$

2,953

$

9,017

$

281

$

370

$

-

$

-

     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, 
  2018  2017  2018  2017  2018  2017 
Derivatives designated as hedging instruments:           
Cash flow hedges:                        
Forward currency contracts $14,197  $9,143  $586  $      -  $-  $221 
Derivatives not designated as hedging instruments:                        
Forward currency contracts $920  $1,486  $-  $-  $6  $48 

(A)Notional amounts represent the gross contract of the derivatives outstanding in U.S. dollars.

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

Gross amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the three months ended June 30 are as follows:

Gain reclassified from

Gain recorded in other

other comprehensive income

comprehensive income (loss)

(loss) into net income (A)

    

2019

    

2018

    

2019

    

2018

Derivatives designated as cash flow hedges:

Forward currency contracts

$

157

$

24

$

299

$

224

     Gain reclassified from 
  Gain recorded in other  other comprehensive income 
  comprehensive income (loss)  (loss) into net income(A) 
  2018  2017  2018  2017 
Derivatives designated as cash flow hedges:            
Forward currency contracts $24  $145  $224  $155 

Gross amounts recorded for the cash flow hedges in other comprehensive income (loss) and in net income for the six months ended June 30 are as follows:

Gains reclassified from

Gain recorded in other

other comprehensive income

comprehensive income (loss)

(loss) into net income (A)

    

2019

    

2018

    

2019

    

2018

Derivatives designated as cash flow hedges:

Forward currency contracts

$

426

$

1,182

$

515

$

375

14

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STONERIDGE, INC.

     Gain reclassified from 
  Gain recorded in other  other comprehensive income 
  comprehensive income (loss)  (loss) into net income(A) 
  2018  2017  2018  2017 
Derivatives designated as cash flow hedges:            
Forward currency contracts $1,182  $661  $375  $184 
                 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(A)Gains reclassified from other comprehensive income (loss) into net income were recognized in cost of goods sold (“COGS”) in the Company'sCompany’s condensed consolidated statements of operations.

The net deferred gain of $586$281 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the condensed consolidated statements of operations through December 2018.  

2019.

Fair Value Measurements

The Company’s assets and liabilities are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency contracts, inputs include foreign currency exchange rates. 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,

2019

2018

Fair values estimated using

Level 1

Level 2

Level 3

    

Fair value

    

inputs

    

inputs

    

inputs

    

Fair value

Financial assets carried at fair value:

Forward currency contracts

$

281

$

-

$

281

$

-

$

370

Total financial assets carried at fair value

$

281

$

-

$

281

$

-

$

370

Financial liabilities carried at fair value:

Earn-out consideration

$

11,057

$

-

$

-

$

11,057

$

18,672

Total financial liabilities carried at fair value

$

11,057

$

-

$

-

$

11,057

$

18,672

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

           June 30,
2018
  December 31,
2017
 
     Fair values estimated using    
     Level 1  Level 2  Level 3    
  Fair value  inputs  inputs  inputs  Fair value 
Financial assets carried at fair value:               
Forward currency contracts $586  $-  $586  $-  $- 
Total financial assets carried at fair value $586  $-  $586  $-  $- 
                     
Financial liabilities carried at fair value:                    
Forward currency contracts $6  $-  $6  $-  $269 
Earn-out consideration  20,046   -   -   20,046   20,746 
Total financial liabilities carried at fair value $20,052  $-  $6  $20,046  $21,015 
                     

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.

    

Orlaco

    

PST

    

Total

Balance at December 31, 2018

$

8,602

$

10,070

$

18,672

Change in fair value

-

921

921

Foreign currency adjustments

(128)

66

(62)

Earn-out consideration cash payment

(8,474)

-

(8,474)

Balance at June 30, 2019

$

-

$

11,057

$

11,057

  Orlaco  PST  Total 
Balance at December 31, 2017 $8,637  $12,109  $20,746 
Change in fair value  369   1,048   1,417 
Foreign currency adjustments  (244)  (1,873)  (2,117)
Balance at June 30, 2018 $8,762  $11,284  $20,046 

15

  Orlaco  PST  Total 
Balance at December 31, 2016 $-  $-  $- 
Fair value on acquisition date  3,243   10,400   13,643 
Change in fair value  2,103   244   2,347 
Foreign currency adjustments  224   (637)  (413)
Balance at June 30, 2017 $5,570  $10,007  $15,577 

Table of Contents

The earn-out consideration obligations related to Orlaco and PST are recorded within other current liabilities and other long-term liabilities, respectively, in the condensed consolidated balance sheet as of June 30, 2018.STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The fair value for the Orlaco earn-out consideration is based on a Monte Carlo simulation utilizing forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return. (Unaudited)

    

Orlaco

    

PST

    

Total

Balance at December 31, 2017

$

8,637

$

12,109

$

20,746

Change in fair value

369

1,048

1,417

Foreign currency adjustments

(244)

(1,873)

(2,117)

Balance at June 30, 2018

$

8,762

$

11,284

$

20,046

The Company will be required to pay the PST earn-out consideration, which is not capped, based on PST’s financial performance in either 2020 or 2021. The fair value of the PST earn-out consideration is based on discounted cash flows utilizing forecasted EBITDA in 2020 and 2021.

2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The increaseearn-out consideration obligation related to PST is recorded within other long-term liabilities in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018. The fair value of the Orlaco earn-out consideration was based on a Monte Carlo simulation utilizing forecasted earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return. The earn-out consideration obligation related to Orlaco was recorded within other current liabilities in the consolidated balance sheet as of December 31, 2018. The change in fair value of the earn-out considerations are recorded within selling, general and administrative (“SG&A”) expense in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018.

The earn-out consideration obligation related to Orlaco of $8,474 was paid in March 2019 and recorded in the condensed consolidated statement of cash flows within operating and financing activities in the amounts of $5,080 and $3,394, respectively, for the six months ended June 30, 2019.

The Orlaco acquisition is primarilyearn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018 due to actual performance exceeding forecasted performance as well asand remained at the capped amount until it was paid out in March 2019. The net increase in fair value of the earn-out consideration for PST was due to the reduced time from the current period end to the payment date, partially offset by foreign currency translation. The Orlaco earn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018. The decrease in fair value of earn-out consideration for PST was due to foreign currency translation partially offset by the reduced time from the current period end to the payment date. The fair value of the Orlaco and PST earn-out consideration is based on forecasted EBITDA during the performance periods. The fair value adjustments of Orlaco and PST are recorded in SG&A in the condensed consolidated statements of operations. The foreign currency impact for the PST earn-out considerationconsiderations is included in other (income) expense, (income), net in the condensed consolidated statements of operations.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the six months ended June 30, 2018.2019.

Except for the fair value of assets acquired and liabilities assumed related to the Orlaco acquisition discussed in the Company’s 2017 Form 10-K, there were no non-recurring fair value measurements for the periods presented.

(7)(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 $1,434$2,046 and $1,726$1,434 for the three months ended June 30, 20182019 and 2017,2018, respectively. For the six months ended June 30, 20182019 total share-based compensation was $2,838$3,594 compared to $4,065$2,838 for the six months ended June 30, 2017.2018. The three and six months ended June 30, 2019 included accelerated expense associated with the retirement of eligible employees of $503, respectively. The three and six months ended June 30, 2018 also included theincome for forfeiture of certain grants associated with employee resignations. The three and six months ended June 30, 2017 included the accelerated expense associated with the retirement

16

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STONERIDGE, INC.

(8)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(7) Debt

Debt consisted of the following at June 30, 20182019 and December 31, 2017:2018:

 June 30, December 31, Interest rates at 
 2018  2017  June 30, 2018 Maturity

June 30,

December 31,

Interest rates at

    

2019

    

2018

    

June 30, 2019

    

Maturity

Revolving Credit Facility         

Credit Facility $110,000  $121,000  3.04% - 3.15% September 2021

$

103,500

$

96,000

3.28% - 3.45%

June 2024

         

Debt         

PST short-term obligations  1,056   -  11.26% March 2019

322

989

6.00%

December 2019

PST long-term notes  3,915   8,016  9.0% - 11.64% 2019-2021

1,279

1,527

7.00%

November 2021

Other  3   28   
Total debt  4,974   8,044  

1,601

2,516

Less: current portion  (3,184)  (4,192) 

(869)

(1,533)

Total long-term debt, net $1,790  $3,852  

$

732

$

983

Revolving Credit Facility

On November 2, 2007, the Company entered into an asset-based credit facility, which permits borrowing up to a maximum level of $100,000. The Company entered into an Amended and Restated Credit and Security Agreement and a Second Amended and Restated Credit and Security Agreement on September 20, 2010 and December 1, 2011, respectively.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

On September 12, 2014, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Agreement” or “Credit Facility”). The Amended Agreement providesprovided for a $300,000 revolving credit facility, which replaced the Company’s existing $100,000 asset-based credit facility and includesincluded a letter of credit subfacility, swing line subfacility and multicurrency subfacility.

On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the “2019 Credit Facility”). The 2019 Credit Facility provides for a $400,000 senior secured revolving credit facility and it replaced and superseded the Amended Agreement alsoAgreement. The 2019 Credit Facility has an accordion feature which allows the Company to increase the availability by up to $80,000$150,000 upon the satisfaction of certain conditions.conditions and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The Amended Agreement extended the2019 Credit Facility has a termination date to September 12,of June 5, 2024. In the second quarter of 2019, from December 1, 2016. On March 26, 2015, the Company entered into Amendment No. 1 to the Amended Agreement which modified the definitioncapitalized $1,183 of Consolidated EBITDA to allow for the add back of cash premiums and other non-cash charges related to the amendment and restatement of the Amended Agreement and the early extinguishment of the Company’s 9.5% Senior Secured Notes. Consolidated EBITDA is used in computing the Company’s leverage ratio and interest coverage ratio which are covenants within the Amended Agreement. On February 23, 2016, the Company entered into Amendment No. 2 to the Amended Agreement which amended and waived any default or potential defaults with respect to the pledgingdeferred financing costs as collateral additional shares issued by a wholly owned subsidiary and newly issued shares associated with the formation of a new subsidiary. On August 12, 2016, the Company entered into Amendment No. 3 to the Amended Agreement which extended of the expiration date of the Agreement by two years to September 12, 2021, increased the borrowing sub-limit for the Company’s foreign subsidiaries by $30,000 to $80,000, increased the basket of permitted loans and investments in foreign subsidiaries by $5,000 to $30,000, and provided additional flexibility to the Company for certain permitted corporate transactions involving its foreign subsidiaries as defined in the Agreement. As a result of Amendment No. 3 toentering into the Amended Agreement,2019 Credit Facility. In connection with the 2019 Credit Facility, the Company capitalizedwrote off a portion of the previously recorded deferred financing costs of $339, which will be amortized over$275 in interest expense, net during the remaining term of the Credit Facility. On Januarythree months ended June 30, 2017, the Company entered into Consent and Amendment No. 4 to the Amended Agreement which amended certain definitions, schedules and exhibits of the Credit Facility, consented to a Dutch Reorganization, and consented to the Orlaco acquisition. As a result of Amendment No. 4 to the Amended Agreement, the Company capitalized deferred financing costs of $61, which will be amortized over the remaining term of the Credit Facility.

2019. Borrowings under the Amended Agreement2019 Credit Facility bear interest at either the Base Rate as defined, or the LIBOR Rate,rate, at the Company’s option, plus the applicable margin as set forth in the Amended Agreement.2019 Credit Facility. The Company is also subject to a commitment fee ranging from 0.20% to 0.35% based on the Company’s leverage ratio. The Amended Agreement requires2019 Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio of 3.00 to 1.00, and more than a minimum interest coverage ratioratio.

17

Table of 3.50 to 1.00Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The 2019 Credit Facility contains customary affirmative covenants and places a maximum annual limit on capital expenditures.representations. The Amended Agreement2019 Credit Facility also contains other affirmative andcustomary negative covenants, which, among other things, are subject to certain exceptions, including restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The 2019 Credit Facility contains customary events of default, that aresubject to customary for credit arrangementsthresholds and exceptions, including, among other things, (i) non-payment of this type includingprincipal 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, which place restrictions and/(iv) cross default of other debt, final judgments and other adverse orders in excess of $30,000, (v) any loan document shall cease to be a legal, valid and binding agreement, (vi) certain uninsured losses or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends.proceedings against assets with a value in excess of $30,000, (vii) ERISA events, (viii) a change of control, or (ix) bankruptcy or insolvency proceedings.

Borrowings outstanding on the 2019 Credit Facility and the Amended Agreement as applicable, were $110,000$103,500 and $121,000$96,000 at June 30, 20182019 and December 31, 2017,2018, respectively. Borrowings decreased under the Credit Facility due to voluntary principal repayments.

The Company was in compliance with all Credit Facilitycredit facility covenants at June 30, 20182019 and December 31, 2017.2018.

The Company also has outstanding letters of credit of $2,008$1,815 at both June 30, 20182019 and December 31, 2017.2018.

Debt

PST maintains several short-term obligations and long-term notes used for working capital purposes which have fixed or variable interest rates. The weighted-average interest rates of short term and long-term debt of PST at June 30, 20182019 was 11.30%6.0% and 10.03%7.0%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments on PST debt at June 30, 20182019 are as follows: $3,181 from July 2018 through June 2019, $806$869 from July 2019 through June 2020, $258 from July 2020 through December 2019, $513 in 2020 and $471$474 in 2021. PST was in compliance with all debt covenants at June 30, 2018 and December 31, 2017.

The Company'sCompany’s wholly-owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary'ssubsidiary’s bank account up to a maximum level of 20,000 Swedish krona, or $2,236$2,155 and $2,439,$2,259, at June 30, 20182019 and December 31, 2017,2018, respectively. At June 30, 20182019 and December 31, 2017,2018, there was no balance outstanding on this overdraft credit line.

The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of 60,000 Chinese yuan, or $8,740 at June 30, 2019. At June 30, 2019 and December 31, 2018, there was no balance outstanding on these credit lines.

The Company was in compliance with all debt covenants at June 30, 2019 and December 31, 2018.

(8) Leases

The Company has various cancelable and noncancelable leased assets within our three operating segments, including Control Devices, Electronics and PST, which include certain properties, vehicles and equipment of which are all classified as operating leases. Payments for these leases are generally fixed; however, several of our leases are composed of variable lease payments including index-based payments or inflation-based payments based on a Consumer Price Index (“CPI”) or other escalators. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

18

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Under Leases (Topic 842), the Company determines an arrangement is a lease when we have the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Other than the leases that we have already identified, we are not aware of any material leases that have not yet commenced. For leases that have a calculated lease term of 12 months or less and do not include an option to purchase the underlying asset which we are reasonably certain to exercise, the Company has made the policy election to not apply the recognition requirements in Leases (Topic 842). For these short-term leases, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

For the leases identified, ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company used the calculated incremental borrowing rate based on the information available at the implementation date, and going forward at the commencement date, in determining the present value of lease payments. The Company will use the implicit rate when readily determinable. The ROU asset includes the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The Company’s lease terms may include options to extend or terminate the lease and such options are included in the lease term when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease expenses are recognized within COGS, SG&A and design and development (“D&D”) costs in the condensed consolidated statements of operations. The Company has made the policy election to account for lease and non-lease components as a single lease component for all of its leases.

As a result of the Company’s election to apply the modified retrospective transition method at the effective date of the standard, information prior to January 1, 2019 has not been restated and continues to be reported under the accounting standards in effect for the period (ASC Topic 840).

The components of lease expense are as follows:

Three months ended

June 30, 2019

Operating lease cost

$

1,433

Short-term lease cost

142

Variable lease cost

84

Total lease cost

$

1,659

Balance Sheet information related to leases is as follows:

As of June 30, 2019

Assets:

Operating lease right-of-use assets

$

18,970

Liabilities:

Operating lease current liability, included in other current liabilities

4,576

Operating lease long-term liability

14,565

Total leased liabilities

$

19,141

19

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Maturities of operating lease liabilities are as follows:

As of June 30, 2019

Year ending December 31,

2019 (1)

$

2,662

2020

4,767

2021

4,133

2022

3,178

2023

3,148

Thereafter

4,422

Total future minimum lease payments

$

22,310

Less: imputed interest

(3,169)

Total lease liabilities

$

19,141

(1) For the remaining six months

Weighted-average remaining lease term and discount rate is as follows:

As of June 30, 2019

Weighted-average remaining lease term (in years)

Operating leases

5.16

Weighted-average discount rate

Operating leases

5.78

%

Other information:

Six months ended

June 30, 2019

Operating cash flows:

Cash paid related to operating lease obligations

$

2,212

Non-cash activity:

Right-of-use assets obtained in exchange for operating lease obligations

$

243

(9) Earnings Per Share

Basic earnings per share was computed by dividing net 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. The weighted-average dilutive Common Shares calculation excludes the excess tax benefit from the treasury stock method for the three and six months ended June 30, 2018 and 2017.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

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, 

    

2019

    

2018

    

2019

    

2018

Basic weighted-average Common Shares outstanding

27,887,157

28,449,303

28,208,229

28,349,362

Effect of dilutive shares

406,390

528,444

507,496

557,995

Diluted weighted-average Common Shares outstanding

28,293,547

28,977,747

28,715,725

28,907,357

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Basic weighted-average Common Shares outstanding  28,449,303   28,133,432   28,349,362   28,025,805 
Effect of dilutive shares  528,444   384,010   557,995   504,874 
Diluted weighted-average Common Shares outstanding  28,977,747   28,517,442   28,907,357   28,530,679 

20

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

There were no performance-based restricted Common Shares outstanding at June 30, 2018 or 2017. There were662,509 and 614,670 and 753,150 performance-based right to receive Common Shares outstanding at June 30, 20182019 and 2017,2018, respectively. The right to receive Common Shares are included in the computation of diluted earnings per share based on the number of Common Shares that would be issuable if the end of the quarter were the end of the contingency period.

(10)  Changes inEquity and Accumulated Other Comprehensive Loss

Common Share Repurchase

On October 26, 2018, the Company’s Board of Directors authorized the Company to repurchase up to $50,000 of Common Shares. Thereafter, on May 7, 2019, the Company entered into a Master Confirmation (the “Master Confirmation”) and a Supplemental Confirmation, together with the Master Confirmation, the Accelerated Share Repurchase Agreement (“ASR Agreement”), with Citibank N.A. (the “Bank”) to purchase Company Common Shares for a payment of $50,000 (the “Prepayment Amount”). Under the terms of the ASR Agreement, on May 7, 2019, the Company paid the Prepayment Amount to the Bank and received on May 8, 2019 an initial delivery of 1,349,528 Company Common Shares, which is approximately 80% of the total number of Company Common Shares expected to be repurchased under the ASR Agreement based on the closing price of the Company’s Common Shares on May 7, 2019. These Common Shares became treasury shares and were recorded as a $40,000 reduction to shareholder’s equity. The remaining $10,000 of the Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares. The Company excluded the potential share impact of the remaining shares from the computation of diluted earnings per share as these Common Shares are anti-dilutive.

At final settlement, the Bank may be required to deliver additional Common Shares to the Company, or, under certain circumstances, the Company may be required to deliver Common Shares or may elect to make a cash payment to the Bank, based generally on the average of the daily volume-weighted average prices of the Company’s Common Shares during a term set forth in the ASR Agreement. The ASR Agreement contains provisions customary for agreements of this type, including provisions for adjustments to the transaction terms, the circumstances generally under which the ASR Agreement may be accelerated, extended or terminated early by Componentthe Bank and various acknowledgments, representations and warranties made by the parties to one another. The ASR Agreement expires on May 8, 2020.

Accumulated Other Comprehensive Loss

 

Changes in accumulated other comprehensive loss for the three months ended June 30, 20182019 and 20172018 were as follows:

Foreign

Unrealized

currency

gain (loss)

    

translation

    

on derivatives

Total

Balance at April 1, 2019

$

(89,848)

$

334

$

(89,514)

Other comprehensive income before reclassifications

2,311

123

2,434

Amounts reclassified from accumulated other comprehensive loss

-

(235)

(235)

Net other comprehensive (loss) income, net of tax

2,311

(112)

2,199

Balance at June 30, 2019

$

(87,537)

$

222

$

(87,315)

Balance at April 1, 2018

$

(65,523)

$

652

$

(64,871)

Other comprehensive (loss) income before reclassifications

(17,421)

19

(17,402)

Amounts reclassified from accumulated other comprehensive loss

-

(178)

(178)

Net other comprehensive (loss) income, net of tax

(17,421)

(159)

(17,580)

Balance at June 30, 2018

$

(82,944)

$

493

$

(82,451)

  Foreign  Unrealized    
  currency  gain (loss)    
  translation  on derivatives  Total 
Balance at April 1, 2018 $(65,523) $652  $(64,871)
             
Other comprehensive loss before reclassifications  (17,421)  19   (17,402)
Amounts reclassified from accumulated other            
comprehensive loss  -   (178)  (178)
Net other comprehensive loss, net of tax  (17,421)  (159)  (17,580)
Balance at June 30, 2018 $(82,944) $493  $(82,451)
             
Balance at April 1, 2017 $(64,832) $299  $(64,533)
             
Other comprehensive income before reclassifications  6,276   94   6,370 
Amounts reclassified from accumulated other            
comprehensive loss  -   (101)  (101)
Net other comprehensive income (loss), net of tax  6,276   (7)  6,269 
Reclassification of foreign currency translation associated with noncontrolling interest acquired  (16,995)  -   (16,995)
Balance at June 30, 2017 $(75,551) $292  $(75,259)

19

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)(Unaudited)

(Unaudited)

Changes in accumulated other comprehensive loss for the six months ended June 30, 20182019 and 20172018 were as follows:

  Foreign  Unrealized    
  currency  gain (loss)    
  translation  on derivatives  Total 
Balance at January 1, 2018 $(69,417) $(143) $(69,560)
             
   Other comprehensive income (loss) before reclassifications  (13,527)  933   (12,594)
Amounts reclassified from accumulated other            
comprehensive loss  -   (297)  (297)
Net other comprehensive income (loss), net of tax  (13,527)  636   (12,891)
Balance at June 30, 2018 $(82,944) $493  $(82,451)
             
Balance at January 1, 2017 $(67,895) $(18) $(67,913)
             
   Other comprehensive income before reclassifications  9,339   430   9,769 
Amounts reclassified from accumulated other            
comprehensive loss  -   (120)  (120)
Net other comprehensive income, net of tax  9,339   310   9,649 
Reclassification of foreign currency translation associated with noncontrolling interest acquired  (16,995)  -   (16,995)
Balance at June 30, 2017 $(75,551) $292  $(75,259)

Foreign

Unrealized

currency

gain (loss)

    

translation

    

on derivatives

    

Total

Balance at January 1, 2019

$

(86,044)

$

292

$

(85,752)

Other comprehensive (loss) income before reclassifications

(1,493)

336

(1,157)

Amounts reclassified from accumulated other comprehensive loss

-

(406)

(406)

Net other comprehensive (loss) income, net of tax

(1,493)

(70)

(1,563)

Balance at June 30, 2019

(87,537)

$

222

$

(87,315)

Balance at January 1, 2018

$

(69,417)

$

(143)

$

(69,560)

Other comprehensive (loss) income before reclassifications

(13,527)

933

(12,594)

Amounts reclassified from accumulated other comprehensive loss

-

(297)

(297)

Net other comprehensive (loss) income, net of tax

(13,527)

636

(12,891)

Balance at June 30, 2018

$

(82,944)

$

493

$

(82,451)

(11) Commitments and Contingencies

In the ordinary course of business, the Company isFrom time to time we are subject to a broad rangevarious legal actions and claims incidental to our business, including those arising out of claims and legal proceedings that relate to contractual allegations,breach of contracts, product warranties, product liability, tax audits, patent infringement, employment-relatedregulatory matters and environmentalemployment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimable.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 condensed consolidated results of operations or financial position.

As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at 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 and six months ended June 30, 20182019 and 2017,2018, environmental remediation costs incurred were immaterial. At June 30, 20182019 and December 31, 2017,2018, the Company accrued a remaining undiscounted liability of $157$85 and $265,$111, respectively, related to future remediation costs. At June 30, 2018 and December 31, 2017, $157 and $253, respectively,costs which were recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets while the remaining amount was recorded as a component of other long-term liabilities.sheets. Costs associated with the recorded liability will be incurred to complete the groundwater remediation, with the balance relating to monitoring costs to be incurred over multiple years. The recorded liability is based on assumptions in the remedial action plan. Although the Company sold the Sarasota facility and related property in December 2011, the liability to remediate the site contamination remains the responsibility of the Company. Due to the ongoing site remediation, the Company is currently required to maintain a $1,489 letter of credit for the benefit of the buyer.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

The Company’s PST subsidiary has civil, labor and other non-income tax contingencies 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$28,70019,100 ($7,400)5,000) and R$33,80029,700 ($10,200)7,600) at June 30, 20182019 and December 31, 2017,2018, respectively. An unfavorable outcome on these contingencies could result in significant cost to the Company and adversely affect its results of operations.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Insurance Recoveries

The Company incurred losses and incremental costs related to the damage to assets caused by a storm at its Mexican production facility in the fourth quarter of 2016 and is pursuingpursued recovery of such costs under applicable insurance policies. Anticipated proceeds from insurance recoveries related to losses and incremental costs that have been incurred (“loss recoveries”) are recognized when receipt is probable. Anticipated proceeds from insurance recoveries in excess of the net book value of damaged property, plant and equipment (“insurance gain contingencies”) are recognized when all contingencies related to the claim have been resolved.

Loss recoveries related to the damage of inventory and incremental costs included in costs of sales were not significant for the three months and six months ended June 30, 20182019 and 2017,2018, respectively. There were no loss recoveries and insurance gain contingencies recognized in the three and six months ended June 30, 20182019 and 20172018 related to the damage of property, plant and equipment included within SG&A expense. As of December 31, 2017, the Company had confirmation of the open insurance claim and recorded a receivable of $1,644. The cash payment was subsequently collected in January 2018. Cash proceeds related to the damage of inventory and incremental costs were $241 and $500 for the six months ended June 30, 2018 and 2017, respectively, and are included in cash flows from operating activities at June 30, 2018.activities. Cash proceeds related to the damage of property, plant and equipment of $1,403 for the six months ended June 30, 2018, arewere included in cash flows from investing activities at June 30, 2018.activities. There were no cash proceeds received during the threesix months ended June 30, 2018.2019.

Product Warranty and Recall

Amounts accrued for product warranty and recall claims are established based on the Company'sCompany’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 including insurance coverage. 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 or beyond what the Company may recover from its suppliers. The current portion of product warranty and recall is included as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets. Product warranty and recall included $3,261$3,132 and $3,112$3,283 of a long-term liability at June 30, 20182019 and December 31, 2017,2018, respectively, which is included as a component of other long-term liabilities in the condensed consolidated balance sheets.

The following provides a reconciliation of changes in product warranty and recall liability:

Six months ended June 30, 

    

2019

    

2018

Product warranty and recall at beginning of period

$

10,494

$

9,979

Accruals for warranties established during period

3,506

2,791

Aggregate changes in pre-existing liabilities due to claim developments

1,687

1,569

Settlements made during the period

(4,442)

(2,876)

Foreign currency translation

(189)

(525)

Product warranty and recall at end of period

$

11,056

$

10,938

Six months ended June 30 2018  2017 
Product warranty and recall at beginning of period $9,978  $9,344 
Accruals for products shipped during period  2,791   3,233 
Assumed warranty liability related to Orlaco  -   1,462 
Aggregate changes in pre-existing liabilities due to claim developments  1,569   1,202 
Settlements made during the period  (2,876)  (6,922)
Foreign currency translation  (524)  219 
Product warranty and recall at end of period $10,938  $8,538 

21

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

((Unaudited)

Brazilian Indirect Tax

In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in thousands, except per share data, unless otherwise indicated)the calculation of federal gross receipts taxes. The decision reduced PST’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on PST’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $6,473 as a reduction to SG&A expense which is inclusive of related interest income of $2,392, net of applicable professional fees of $990 in the three and six months ended June 30, 2019. Timing of realization of these recoveries is dependent upon the timing of administrative approvals and generation of federal tax liabilities eligible for offset.

(Unaudited)

(12) Business Realignment and Restructuring

On January 10, 2019, the Company committed to a restructuring plan that will result in the closure of the Canton, Massachusetts facility (“Canton Facility”) which is expected by March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”).  Company management informed employees at the Canton Facility of this restructuring decision on January 11, 2019.  This restructuring action will result in the closure of the Canton facility and the termination of the employment of Canton Facility employees.  The estimated costs for the Canton Restructuring include employee severance and termination costs, contract terminations costs, professional fees, the non-cash write-off of impaired fixed assets and other related costs. 

The Company recognized expense of $3,443 and $5,668, respectively, for the three and six months ended June 30, 2019 as a result of these actions for employee termination benefits and other restructuring related costs. For the three months ended June 30, 2019 severance and other restructuring related costs of $2,354, $280 and $809 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations.  For the six months ended June 30, 2019 severance and other related restructuring costs of $3,606, $475 and $1,587 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. The estimated additional cost of the Canton Facility restructuring plan, that will impact the Control Devices segment, is between $2,700 and $3,900 and will be incurred through 2020.

The expenses for the 2019 Canton Restructuring that relate to the Control Devices reportable segment include the following:

Accrual as of

2019 Charge

Utilization

Accrual as of

January 1, 2019

to Expense

Cash

Non-Cash

June 30, 2019

Employee termination benefits

$

-

$

4,603

$

(459)

$

-

$

4,144

Other related costs

-

1,065

(1,065)

-

-

Total

$

-

$

5,668

$

(1,524)

$

-

$

4,144

In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations.  The Company recognized expense of $96 and $312, respectively, for the three and six months ended June 30, 2019 as a result of these actions for severance, contract termination costs, accelerated depreciation of fixed assets and other related costs.  Electronics segment restructuring costs were recognized in SG&A in the condensed consolidated statement of operations for the three and six months ended June 30, 2019. The Company expects to incur approximately $760 of additional restructuring costs related to these actions through 2020.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The expenses for the 2019 restructuring activities that relate to the Electronics reportable segment include the following:

Accrual as of

2019 Charge

Utilization

Accrual as of

January 1, 2019

to Expense

Cash

Non-Cash

June 30, 2019

Employee termination benefits

$

520

$

(30)

$

(441)

$

3

$

52

Accelerated depreciation

-

195

-

(195)

-

Contract termination costs

17

27

(44)

-

-

Other related costs

119

120

(239)

-

-

Total

$

656

$

312

$

(724)

$

(192)

$

52

In addition to the specific restructuring activities, the Company regularly evaluates the performance of its businesses and cost structures, including personnel, and makes necessary changes thereto in order to optimize its results. The Company also evaluates the required skill sets of its personnel and periodically makes strategic changes. As a consequence of these actions, the Company incurs severance related costs which are referred to as business realignment charges.

Business realignment charges by reportable segment were as follows:

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Control Devices(A) $128  $-  $128  $- 
Electronics(B)  295   56   295  56 
PST(C)  97   267   319   438 
Total business realignment charges $520  $323  $742  $494 

Three months ended

Six months ended

June 30,

June 30,

    

2019

    

2018

2019

    

2018

Control Devices (A)

$

27

$

128

$

549

$

128

Electronics (B)

-

295

-

295

PST (C)

-

97

-

319

Unallocated Corporate (D)

-

-

613

-

Total business realignment charges

$

27

$

520

$

1,162

$

742

(A)Severance costs for the three months ended June 30, 2019 related to COGS were $27. Severance costs for the six months ended June 30, 2019 related to SG&A, D&D and COGS were $512, $10 and $27, respectively. Severance costs for the three and six months ended June 30, 2018 related to design and developement (“D&D”)&D were $128.

(B)Severance costs for the three and six months ended June 30, 2018 related to SG&A were $295. Severance costs for the three and six months ended June 30, 2017 related to COGS were $56.

(C)Severance costs for the three and six months ended June 30, 2018 related to SG&A were $71 and $293, respectively. Severance costs for the three and six months ended June 30, 2018 related to COGS were $26. Severance costs for the three months ended June 30, 2017 related to COGS and SG&A were $248 and $19, respectively.
(D)Severance costs for the six months ended June 30, 20172019 related to COGS and SG&A were $338 and $100, respectively.$613.

Business realignment charges classified by statement of operations line item were as follows:

Three months ended

Six months ended

June 30,

June 30,

    

2019

    

2018

2019

    

2018

Cost of goods sold

$

27

$

26

$

27

$

26

Selling, general and administrative

-

366

1,125

588

Design and development

-

128

10

128

Total business realignment charges

$

27

$

520

$

1,162

$

742

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Cost of goods sold $26  $304  $26  $394 
Selling, general and administrative  366   19   588   100 
Design and Development  128   -   128   - 
Total business realignment charges $520  $323  $742  $494 

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(13) Income Taxes

The Company recognized income tax expense of $3,820$9,066 and $5,189$3,820 for U.S. federal, state and foreign income taxes for the three months ended June 30, 20182019 and 2017,2018, respectively. The decreaseincrease in income tax expense for the three months ended June 30, 20182019 compared to the same period for 20172018 was primarily related to the impactsale of the Tax Cuts and Jobs Act (“Tax Legislation”) enacted in the United StatesNon-core Products on December 22, 2017.April 1, 2019. The effective tax rate decreased to 18.6% in the second quarter of 2019 from 20.2% in the second quarter of 2018 from 36.8% inprimarily due to the impact of certain tax incentives, which did not impact the second quarter of 2017 primarily due the impact of the Tax Legislation compared to the same period in 2017.

2018.

The Company recognized income tax expense of $7,053$10,901 and $9,760$7,053 for U.S. federal, state and foreign income taxes for the six months ended June 30, 20182019 and 2017,2018, respectively. The decreaseincrease in income tax expense for the six months ended June 30, 20182019 compared to the same period for 20172018 was primarily related to the impactsale of the Tax Legislation.Non-core Products on April 1, 2019. The effective tax rate decreased to18.1% in the first half of 2019 from 19.8% in the first half of 2018 from 35.0% indue to the impact of certain tax incentives, which did not impact the first half of 2017 primarily due the impact of the Tax Legislation compared to the same period in 2017.

2018.

The Company has recognized the estimated impact of the Tax Legislation toconcluded that it is reasonably possible that its 2018 tax position in its estimated annual effective tax rate (“EAETR”) calculation. The Company continues to examine the potential impact of certain provisions of the Tax Legislation that could affect its 2018 EAETR, including the provisions related to global intangible low-taxedfuture provision for income (“GILTI”), foreign derived intangible income (“FDII”) and the base erosion and anti-abuse tax (“BEAT”). Accordingly, the Company's 2018 EAETR may change in subsequent interim periods as additional analysis is completed.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

The Tax Legislation significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, imposing a base erosion and anti-abuse tax, and imposing a tax on global intangible low taxed income. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company continues to analyze certain aspects of the Tax Legislation and refine its assessment, the ultimate impact of the Tax Legislation may differ from these estimates due to continued analysis or further regulatory guidance thattaxes may be issued as a result ofsignificantly impacted by changes to valuation allowance in certain countries within the Tax Legislation.

following twelve months.

(14) Segment Reporting

Operating segments are defined as components of an enterprise that are evaluated regularly by the Company'sCompany’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company'sCompany’s chief operating decision maker is the Chief Executive Officer.

The Company has three reportable segments, Control Devices, Electronics and PST, which also represent its operating segments. The Control Devices reportable segment produces sensors, switches, valves and actuators. The Electronics reportable segment produces electronic instrument clusters, electronic control units, and other driver information systems and includes the Orlaco business which designs and manufactures camera-based vision systems, monitors and related products using its vision processing technology.products. The PST reportable segment designs and manufactures electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices.

The accounting policies of the Company'sCompany’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company's 2017 Company’s 2018 Form 10-K.10K. The Company'sCompany’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 three reportable operating segments and includes adjustments for unallocated corporate costs and intercompany eliminations, where applicable. Such costs and eliminations do not meet the requirements for being classified as an operating segment. Corporate costs include various support functions, such as corporate accounting/finance, executive administration, human resources, information technology corporate finance, legal, executive administration and human resources.legal.

23

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)(Unaudited)

(Unaudited)

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

Three months ended

Six months ended

June 30, 

June 30,

    

2019

    

2018

    

2019

    

2018

Net Sales:

Control Devices

$

114,067

$

109,956

$

224,186

$

225,313

Inter-segment sales

2,078

2,481

3,939

4,662

Control Devices net sales

116,145

112,437

228,125

229,975

Electronics (D)

91,560

90,313

182,406

180,341

Inter-segment sales

10,325

9,771

19,047

20,243

Electronics net sales

101,885

100,084

201,453

200,584

PST

16,614

20,333

33,946

40,878

Inter-segment sales

-

-

6

2

PST net sales

16,614

20,333

33,952

40,880

Eliminations

(12,403)

(12,252)

(22,992)

(24,907)

Total net sales

$

222,241

$

220,602

$

440,538

$

446,532

Operating Income (Loss):

Control Devices

$

44,367

$

17,160

$

56,315

$

35,039

Electronics

7,555

8,276

16,586

16,156

PST

6,414

735

7,084

885

Unallocated Corporate (A)

(9,150)

(6,990)

(19,100)

(16,052)

Total operating income

$

49,186

$

19,181

$

60,885

$

36,028

Depreciation and Amortization:

Control Devices

$

3,197

$

2,897

$

6,291

$

5,692

Electronics

2,510

2,252

4,907

4,543

PST

1,695

1,740

3,220

4,245

Unallocated Corporate

216

199

429

396

Total depreciation and amortization (B)

$

7,618

$

7,088

$

14,847

$

14,876

Interest (Income) Expense, net:

Control Devices

$

195

$

18

$

377

$

37

Electronics

63

23

119

57

PST

(59)

194

49

532

Unallocated Corporate

802

935

1,459

1,898

Total interest expense, net

$

1,001

$

1,170

$

2,004

$

2,524

Capital Expenditures:

Control Devices

$

4,042

$

3,312

$

7,534

$

9,058

Electronics

3,356

1,394

7,094

4,167

PST

805

696

1,624

1,955

Unallocated Corporate(C)

592

938

1,227

1,665

Total capital expenditures

$

8,795

$

6,340

$

17,479

$

16,845

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Net Sales:                
Control Devices $109,956  $114,001  $225,313  $232,874 
Inter-segment sales  2,481   1,368   4,662   2,151 
Control Devices net sales  112,437   115,369   229,975   235,025 
Electronics(D)  90,313   71,610   180,341   135,415 
Inter-segment sales  9,771   10,223   20,243   21,579 
Electronics net sales  100,084   81,833   200,584   156,994 
PST  20,333   23,500   40,878   45,133 
Inter-segment sales  -   -   2   - 
PST net sales  20,333   23,500   40,880   45,133 
                 
Eliminations  (12,252)  (11,591)  (24,907)  (23,730)
Total net sales $220,602  $209,111  $446,532  $413,422 
Operating Income (Loss):                
Control Devices $17,160  $19,924  $35,039  $39,008 
Electronics(D)  8,276   2,814   16,156   8,371 
PST  735   1,123   885   1,702 
Unallocated Corporate(A)  (6,990)  (8,185)  (16,052)  (18,241)
Total operating income $19,181  $15,676  $36,028  $30,840 
Depreciation and Amortization:                
Control Devices $2,897  $2,687  $5,692  $5,386 
Electronics(D)  2,252   2,241   4,543   3,811 
PST  1,740   2,096   4,245   4,184 
Unallocated Corporate  199   96   396   195 
Total depreciation and amortization(B) $7,088  $7,120  $14,876  $13,576 
Interest Expense, net:                
Control Devices $18  $11  $37  $65 
Electronics  23   6   57   44 
PST  194   532   532   1,104 
Unallocated Corporate  935   969   1,898   1,715 
Total interest expense, net $1,170  $1,518  $2,524  $2,928 
Capital Expenditures:                
Control Devices $3,312  $4,347  $9,058  $7,795 
Electronics(D)  1,394   1,684   4,167   4,034 
PST  696   1,041   1,955   1,925 
Unallocated Corporate(C)  938   830   1,665   1,413 
Total capital expenditures $6,340  $7,902  $16,845  $15,167 

24

27

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)(Unaudited)

June 30, 

December 31, 

    

2019

    

2018

Total Assets:

Control Devices

$

189,725

$

175,708

Electronics

277,961

265,838

PST

90,707

81,002

Corporate (C)

360,870

359,837

Eliminations

(323,216)

(322,866)

Total assets

$

596,047

$

559,519

(Unaudited)

  June 30,  December 31, 
  2018  2017 
Total Assets:        
Control Devices $175,649  $164,632 
Electronics  268,619   252,324 
PST  84,313   100,382 
Corporate(C)  350,203   377,657 
Eliminations  (318,138)  (335,958)
Total assets $560,646  $559,037 

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,

    

2019

    

2018

    

2019

    

2018

Net Sales:

North America

$

123,293

$

120,885

$

242,660

$

245,314

South America

16,614

20,333

33,946

40,878

Europe and Other

82,334

79,384

163,932

160,340

Total net sales

$

222,241

$

220,602

$

440,538

$

446,532

  Three months ended  Six months ended 
  June 30,  June 30, 
  2018  2017  2018  2017 
Net Sales:                
North America $120,885  $121,487  $245,314  $244,873 
South America  20,333   23,500   40,878   45,133 
Europe and Other(D)  79,384   64,124   160,340   123,416 
Total net sales $220,602  $209,111  $446,532  $413,422 

  June 30,  December 31, 
  2018  2017 
Long-term Assets:        
North America $88,952  $89,997 
South America  47,824   58,989 
Europe and Other  107,888   106,682 
Total long-term assets $244,664  $255,668 

June 30, 

December 31, 

    

2019

    

2018

Long-term Assets:

North America

$

92,596

$

86,763

South America

44,220

45,408

Europe and Other

123,142

107,171

Total long-term assets

$

259,958

$

239,342

(A)Unallocated Corporate expenses include, among other items, accounting/finance, legal, human resources, and information technology and legal costs andas 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, information technology assets, equity investments and investments in subsidiaries.
(D)The amount for the six months ended June 30, 2017 includes five months of activity from the acquisition date of January 31, 2017 related to Orlaco which is disclosed in Note 4.

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Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise indicated)

(Unaudited)

(Unaudited)

(15) Investments

Minda Stoneridge Instruments Ltd.

The Company has a 49% equity interest in Minda Stoneridge Instruments Ltd. (“Minda”MSIL”), a company based in India that manufactures electronics, instrumentation equipment and sensors primarily for the motorcycle, and commercial vehicle and automotive markets. The investment is accounted for under the equity method of accounting. The Company'sCompany’s investment in Minda,MSIL, recorded as a component of investments and other long-term assets, net on the condensed consolidated balance sheets, was $10,572$12,396 and $10,131$11,288 at June 30, 20182019 and December 31, 2017,2018, respectively. Equity in earnings of MindaMSIL included in the condensed consolidated statements of operations was $665$548 and $555,$665, for the three months ended June 30, 20182019 and 2017,2018, respectively. Equity in earnings of MindaMSIL included in the condensed consolidated statements of operations was $1,186$912 and $735,$1,186, for the six months ended June 30, 20182019 and 2017,2018, respectively.

PST Eletrônica Ltda.

The Company had a 74% controlling interest in PST from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26% noncontrolling interest in PST for $1,500 in cash along with earn-out consideration. ThePST. As part of the acquisition agreement, the Company will be required to pay additional earn-out consideration, which is not capped, based on PST’s financial performance in either 2020 or 2021. The preliminary estimated fair value of the earn-out consideration as of the acquisition date was $10,180 and was based on discounted cash flows utilizing forecasted EBITDA in 2020 and 2021. The Company’s statement of operations for the three and six months ended June 30, 2018 included $513 and $1,048, respectively, of expense for the fair value adjustment for earn-out consideration in SG&A expenses. The Company’s statement of operations for the three and six months ended June 30, 2017 included $244 of expense for the fair value adjustment for earn-out consideration in SG&A expenses. See Note 65 for the fair value and foreign currency adjustments of the earn-out consideration. This fair value measurement is classified within Level 3 ofconsideration for the fair value hierarchy. The transaction was accounted for as an equity transaction,current and therefore no gain or loss was recognized in the statement of operations or comprehensive income. The noncontrolling interest balance on the May 16, 2017 acquisition date was $14,458, of which $31,453 and ($16,995) was related to the carrying value of the investment and foreign currency translation, respectively, and accordingly these amounts were reclassified to additional paid-in capital and accumulated other comprehensive loss, respectively.

The following table sets forth a summary of the change in noncontrolling interest in 2017:

  Three months ended  Six months ended 
  June 30,  June 30, 
  2017  2017 
Noncontrolling interest at beginning of period $14,489  $13,762 
Net loss  (100)  (130)
Foreign currency translation  69   826 
Comprehensive income (loss)  (31)  696 
Acquisition of noncontrolling interest  (14,458)  (14,458)
Noncontrolling interest at end of period $-  $- 

prior periods.

PST has dividends payable to former noncontrolling interest holders of R$22,74923,783 Brazilian real ($5,868)6,175) and R$22,33023,204 Brazilian real ($6,742)5,980) as of June 30, 20182019 and December 31, 2017,2018, respectively. The dividends payable balance at June 30, 2018 includes R$580 Brazilian real ($150) and R$419 Brazilian real ($108) in monetary correction for the year to datesix months ended June 30, 2019 and 2018, period.respectively. The dividend is payable on or before January 1, 2020, and is subject to monetary correction based on the Brazilian consumer priceNational Extended Consumer Price inflation index.index (“IPCA”). The dividend payable related to PST is recorded within other long-termcurrent liabilities on the condensed consolidated balance sheet.

Other Investments

In December 2018, the Company entered into an agreement to make a $10,000 investment in a fund managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology which is accounted for in accordance with ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10)”. This investment does not have a readily determinable fair value and is measured at cost, less impairments, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. The Company’s $10,000 investment in the Autotech fund will be contributed over the expected ten-year life of the fund. The Company contributed $1,200 to the Autotech fund during the six months ended June 30, 2019. The Autotech investment recorded in investments and other long-term assets in the condensed consolidated balance sheets was $1,653 and $437 as of June 30, 2019 and December 31, 2018, respectively.

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Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(16) Disposal of Non-Core Products

On April 1, 2019, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40,000 (subject to a post-closing inventory adjustment) and the assumption of certain liabilities, the Company and SCD sold to SMP, product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, and administrative and support services to SMP on a short-term basis. The products related to the Non-core Products are currently manufactured in Juarez, Mexico and Canton, Massachusetts, and include ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components.

During the three months ended June 30, 2019 the Company’s Control Devices segment recognized net sales and costs of goods sold of $4,160 and $2,775, respectively, for the one-time sale of Non-core Product finished goods inventory and a gain on disposal of $33,921 for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs. During the three months ended March 31, 2019, the Company recognized transaction costs associated with the disposal of Control Devices’ Non-core Products of $322.

During the three months ended June 30, 2019, the Company received $675 for services provided pursuant to the transition services agreement which was recognized as a reduction in SG&A. The Company produced and sold Non-core finished goods inventory at cost to SMP of $9,054 pursuant to the contract manufacturing agreement which was recognized as both net sales and cost of goods sold.

Non-core Products net sales, including sales of $9,054 to SMP pursuant to the contract manufacturing agreement, and operating income was $13,214 and $3,373, for the three months ended June 30, 2019, respectively, and $11,249 and $2,317, for the three months ended June 30, 2018, respectively. Non-core Products net sales and operating income was $24,310 and $3,373, for the six months ended June 30, 2019, respectively, and $23,129 and $4,725, for the six months ended June 30, 2018, respectively.

30

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 components, modules and systems primarily for the automotive, commercial, off-highway, motorcycle and agricultural vehicle markets.

On January 31, 2017,The following discussion and analysis should be read in conjunction with the Company acquired Exploitatiemaatschappij Berghaaf B.V. (“Orlaco”). As such, the Company’s condensed consolidated financial statements herein include the results of Orlaco from the acquisition date to June 30, 2018. On May 16, 2017, the Company also acquired the remaining 26% noncontrolling interest in PST.and notes related thereto and other financial information included elsewhere herein.

Segments

We are organized by products produced and markets served. Under this structure, our continuing operations have been reported utilizingusing the following segments:

Control Devices.This segment includes results of operations that manufacture sensors, switches, valves and actuators.

Electronics.This segment producesincludes results of operations from the production of electronic instrument clusters, electronic control units, and other driver information systems, and includes the Orlaco business, which designs and manufactures camera-based vision systems, monitors and related products using its vision processing technology.

products.

PST.This segment includes results of operations that design and manufacture electronic vehicle alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices.

Second Quarter Overview

The Company had net income of $39.8 million, or $1.41 per diluted share, for the three months ended June 30, 2019.

Net income attributable to Stoneridge, Inc. of $39.8 million, or $1.41 per diluted share, for the three months ended June 30, 2019, increased by $24.7 million, or $0.89 per diluted share, from $15.1 million, or $0.52 per diluted share, for the three months ended June 30, 2018 increased by $6.1due to the gain on disposal of Control Devices’ Non-core Products of $33.9 million, or $0.95 per diluted share, and the recovery of Brazilian indirect taxes of $6.5 million, or $0.20 per diluted share, from $9.0offset by an increase in restructuring costs of $3.0 million, or $0.32$0.10 per diluted share, formostly related to our previously announced closure of our Canton facility (“Canton Restructuring”). Pursuant to the three months ended June 30, 2017. The Electronics segment’s higher sales resulted inCompany’s Common Share repurchase program, we purchased 1,349,528 outstanding Common Shares on May 8, 2019 which increased operating income of $5.5 million.  In addition, income tax expense decreasedearnings per share by $1.4 million as a result of the Tax Cuts and Jobs Act (“Tax Legislation”) enacted in the fourth quarter of 2017. 

reducing 2019 diluted weighted-average shares outstanding.

Net sales increased by $11.5$1.6 million, or 5.5%0.7%, while our operating income increased by $30.0 million, or 156.4%.

Our Control Devices segment net sales increased by 3.7% primarily due to the one-time sale of Non-core Products and higher sales volume in our China automotive market which was offset by decreased sales volume in the North American automotive market due to certain program volume reductions. Segment gross margin decreased due to Canton Restructuring costs and higher material and warranty costs. Excluding the gain on disposal of Non-core Products, segment operating income decreased by 39.1% relative to the second quarter of 2018.

Our Electronics segment net sales increased by 1.4% primarily due to an increase in North American commercial vehicle and off-highway product sales. Segment gross margin decreased due to higher sales being offset by an unfavorable product mix and higher material costs for electronic components. Operating income for the segment decreased by 8.7% relative to the second quarter of 2018 due to lower gross margin.

Our PST segment net sales decreased by 18.3% due to lower volumes for our Argentina aftermarket channel, alarm and audio products as well as lower monitoring products and service revenues. This decrease was offset by favorable foreign currency translation and higher volumes for our OEM and factory authorized dealer installer products. Segment gross margin declined due to the reduction in sales partially offset by lower overhead costs.  Operating income increased compared to the second quarter of 20172018 primarily due to higher sales in our Electronics segment partiallylower SG&A expenses from the recovery of Brazilian indirect taxes of $6.5 million.

31

In the second quarter of 2019, SG&A expenses decreased by $7.7 million mostly due to PST’s recovery of Brazilian indirect taxes of $6.5 million and Control Devices transitional service cost reimbursement of $0.7 million associated with the disposal of its Non-core Products offset by a decrease in sales in our Control Devices and PST segments. The increase in sales in our Electronics segment was due to an increase in sales volume in our Europeanrestructuring and North American commercial vehiclebusiness realignment costs for the Canton Restructuring of $0.3 million and off-highway vehicle products. The decrease in sales in our Control Devices segment was primarily due to certain program volume reductions in the North American automotive market. Also, PST sales decreased slightly due to lower audio product sales partially offset by new product sales in our factory authorized dealer installers and higher monitoring product and service revenues.

accelerated share-based compensation expense associated with a retirement of $0.5 million.

At June 30, 20182019 and December 31, 2017,2018, we had cash and cash equivalents balances of $59.0$51.5 million and $66.0$81.1 million, respectively. The decrease duringin cash and cash equivalents in the first half of 20182019 was primarily due to the repaymentrepurchase of outstanding debtour Common Shares and capital expenditures being partially offset bylower cash flows from operations.operations as well as the cash payment of the Orlaco earn-out consideration which were offset by proceeds from the disposal of Non-core Products and net borrowings on the 2019 Credit Facility. At June 30, 20182019 and December 31, 20172018, we had $110.0$103.5 million and $121.0$96.0 million, respectively, in borrowings outstanding on our $300.0 million Credit Facility. The decrease in the 2019 Credit Facility balance duringand the first half of 2018 was the result of voluntary principal repayments.Amended Agreement, as applicable.

27

Outlook

Outlook

In the first half of 2018, the Company continued to drive financial performance through top-line growth in our Electronics segment including the Orlaco business which continues to contribute to the growth in our Electronics segment.  The Company continued to implement operating efficiency improvements which contributed to higher, sustainable long-term margins in all our segments.  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.

The North American automotive market is expected to increase 0.1 million production unitsdecrease slightly from 2018 to 17.216.6 million units in 2018, however, based2019. Based on our product mix, the Company expects sales volumes in our Control Devices segment to be consistent with the prior year.

The North American commercial vehicle market increased in 20172018 and we expect it to increase againslightly in 2018.2019. We also expect the European commercial vehicle market in 2019 to increase inremain at approximately the same level with 2018.

Our PST segment revenues and operating performance in the first halfsecond quarter of 2019 decreased compared to the second quarter of 2018, was consistent with the first half of 2017,mostly due to the stabilization oflower volumes in most Brazilian served markets as well as the Brazilian economy andcontinued decline in the automotive and consumer markets we serve.Argentinian economy. In July 2018,2019, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow 1.8%0.8% in 20182019 and 2.5%2.2% in 2019. As the Brazilian economy remains relatively stable, we2020. We expect our served market channels to remain consistent except for our audio products which have had lower demandimprove with improvements in 2018 compared to the prior year.Brazilian economy. Our financial performance in our PST segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.

Trade actions initiated by the U.S. imposing tariffs on imports have been met with retaliatory tariffs by other countries, adding a level of uncertainty to the global economic environment. These and other actions are likely to impact trade polices with other countries and the overall global economy.economy which could adversely impact our results of operations.

Other Matters

As a result of the impact of the Tax Legislation enacted in the fourth quarter of 2017, our effective tax rate will be lower in 2018 as compared to 2017.

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 PST 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 weakened against the Swedish krona, euro and Brazilian real in 2017 favorably impacting our material costs and our reported results. The U.S. Dollar strengthened against the Swedish krona, euro, and Brazilian real and Argentinian peso in 2019 and 2018, unfavorably impacting our material costs and reported results.

In January 2019, we committed to a restructuring plan that will result in the closure of our Canton, Massachusetts facility (“Canton Facility”) by the end of 2019 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). This restructuring action will result in the closure of the Canton facility and the termination of the employment of Canton Facility employees.  The estimated costs for the Canton Restructuring include employee severance and termination costs, contract termination costs, professional fees, the non-cash write-off of impaired fixed assets and other related costs.  We recognized $3.4 million of expense as a result of these actions during the three months ended June 30, 2019. We expect to incur additional costs related to the Canton Restructuring of $2.7 million to $3.9 million through December 2020.

32

On April 1, 2019, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40.0 million (subject to a post-closing inventory adjustment) and the assumption of certain liabilities, the Company and SCD sold to SMP product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis. The products related to the Non-core Products are currently manufactured in Juarez, Mexico and Canton, Massachusetts, and include ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components. During the three months ended June 30, 2019 the Company’s Control Devices segment recognized net sales and costs of goods sold of $4.2 million and $2.8 million, respectively, for the one-time sale of finished goods inventory and a gain on disposal of $33.9 million for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs.

On October 26, 2018 the Company announced a Board approved repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019 we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares and were recorded as a $40.0 million reduction to shareholder’ equity. The remaining $10.0 million of the initial payment was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares. The number of shares to be ultimately purchased by the Company will be determined based on the volume weighted-average price of our Common Shares during the terms of the transaction, minus an agreed upon discount between the parties. The program is expected to be completed by May 8, 2020.

In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduced PST’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on PST’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $6.5 million as a reduction to SG&A expense which is inclusive of related interest income of $2.4 million, net of applicable professional fees of $1.0 million in the three and six months ended June 30, 2019. Timing of realization of these recoveries is dependent upon the timing of administrative approvals and generation of federal tax liabilities eligible for offset.

In the fourth quarter of 2018, we undertook business realignment actions for our Electronics segment affecting our European Aftermarket business and China operations.  For the three months ended June 30, 2019, we recognized expense of $0.1 million as a result of these actions for related costs and non-cash accelerated depreciation. We expect to incur additional costs related to the Electronics segment restructuring actions of $0.8 million through 2020.

In addition, 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.

Because of the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which to date has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.

28

33

Three Months Ended June 30, 20182019 Compared to Three Months Ended June 30, 2017

2018

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,

    

2019

    

2018

    

(decrease)

Net sales

$

222,241

    

100.0

%  

$

220,602

    

100.0

%  

$

1,639

Costs and expenses:

Cost of goods sold

165,414

74.4

153,184

69.4

12,230

Selling, general and administrative

27,522

12.4

35,256

16.0

(7,734)

Gain on disposal of non-core products, net

(33,921)

(15.3)

-

-

(33,921)

Design and development

14,040

6.2

12,981

5.9

1,059

Operating income

49,186

22.3

19,181

8.7

30,005

Interest expense, net

1,001

0.5

1,170

0.5

(169)

Equity in earnings of investee

(548)

(0.2)

(665)

(0.3)

117

Other income, net

(97)

-

(264)

(0.1)

(167)

Income before income taxes

48,830

22.0

18,940

8.6

29,890

Provision for income taxes

9,066

4.1

3,820

1.7

5,246

Net income

$

39,764

17.9

%  

$

15,120

6.9

%  

$

24,644

              Dollar 
              increase / 
Three months ended June 30    2018     2017  (decrease) 
Net sales $220,602   100.0% $209,111   100.0% $11,491 
Costs and expenses:                    
Cost of goods sold  153,184   69.4   145,697   69.7   7,487 
Selling, general and administrative  35,256   16.0   35,704   17.1   (448)
Design and development  12,981   5.9   12,034   5.8   947 
                     
Operating income  19,181   8.7   15,676   7.4   3,505 
Interest expense, net  1,170   0.5   1,518   0.7   (348)
Equity in earnings of investee  (665)  (0.3)  (555)  (0.3)  (110)
Other expense (income), net  (264)  (0.1)  605   0.3   (869)
Income before income taxes  18,940   8.6   14,108   6.7   4,832 
                     
Provision for income taxes  3,820   1.7   5,189   2.5   (1,369)
                     
Net income  15,120   6.9   8,919   4.2   6,201 
Net loss attributable to                    
noncontrolling interest  -   -   (100)  (0.1)  100 
Net income attributable to Stoneridge, Inc. $15,120   6.9% $9,019   4.3% $6,101 

Net Sales.Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):

Dollar

increase /

Percent

Three months ended June 30,

2019

    

2018

    

(decrease)

    

increase

 

Control Devices

$

114,067

    

51.3

%  

$

109,956

    

49.9

%  

$

4,111

3.7

%

Electronics

91,560

41.2

90,313

40.9

1,247

1.4

PST

16,614

7.5

20,333

9.2

(3,719)

(18.3)

Total net sales

$

222,241

100.0

%  

$

220,602

100.0

%  

$

1,639

0.7

%

Our Control Devices segment net sales increased primarily due to the one-time sale of Non-core Product inventory of $4.2 million as well as an increase in sales volume in our China automotive of $3.1 million and European and North American commercial vehicle markets of $3.1 million and $0.6 million, respectively. This increase was partially offset by decreased sales volume in the North American automotive market of $3.3 million due to certain program volume reductions and unfavorable foreign currency translation of $0.5 million.

Our Electronics segment net sales increased slightly primarily due to an increase in sales volume in our North American commercial vehicle market of $2.4 million and increased sales of North American off-highway vehicle products of $0.7 million, respectively. This increase was mostly offset by a decrease in sales volume in our European commercial vehicle products of $1.7 million, an unfavorable foreign currency translation of $0.1 million and unfavorable pricing of $0.2 million on products nearing the end of product life.

              Dollar  Percent 
              increase /  increase / 
Three months ended June 30    2018     2017  (decrease)  (decrease) 
Control Devices $109,956   49.9% $114,001   54.5% $(4,045)  (3.5)%
Electronics  90,313   40.9   71,610   34.3   18,703   26.1%
PST  20,333   9.2   23,500   11.2   (3,167)  (13.5)%
Total net sales $220,602   100.0% $209,111   100.0% $11,491   5.5%

Our PST segment net sales decreased due to lower volumes for our Argentina aftermarket channel, alarm and audio products as well as lower monitoring products and service revenues. This decrease was offset by favorable foreign currency translation that increased sales by $2.7 million and higher volumes for our OEM and factory authorized dealer installers products.

34

Net sales by geographic location are summarized in the following table (in thousands):

Dollar

increase /

Percent

Three months ended June 30,

    

2019

    

2018

    

(decrease)

    

increase

 

North America

$

123,293

    

55.5

%  

$

120,885

    

54.8

%  

$

2,408

2.0

%

South America

16,614

7.5

20,333

9.2

(3,719)

(18.3)

Europe and Other

82,334

37.0

79,384

36.0

2,950

3.7

Total net sales

$

222,241

100.0

%  

$

220,602

100.0

%  

$

1,639

0.7

%

The increase in North American net sales was primarily attributable to the one-time sale of Control Devices’ Non-core Product inventory of $4.2 million and increased sales volume in our Electronics segment North American commercial vehicle and off-highway markets of $2.4 million and $0.7 million, respectively, offset by a decrease in sales volume in our North American automotive market of $3.3 million resulting from certain program volume reductions. The decrease in net sales in South America was primarily due to lower volumes for our Argentina aftermarket channel, alarm and audio products as well as lower monitoring service revenues. This decrease was offset by favorable foreign currency translation that increased sales by $2.7 million and higher volumes for our OEM and factory authorized dealer installer products. The increase in net sales in Europe and Other was primarily due to an increase in sales volume in our China automotive market of $3.1 million as well as an increase in our commercial vehicle market of $1.1 million. This increase was partially offset by a decrease in sales volume in our European off-highway vehicle market of $0.8 million. Additionally, Europe and Other sales were unfavorably impacted by foreign currency translation of $0.1 million and unfavorable pricing of $0.2 million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased from the second quarter of 2018 and our gross margin decreased from 30.6% in the second quarter of 2018 to 25.6% in the second quarter of 2019. Our material cost as a percentage of net sales increased by 2.4% to 53.7% in the second quarter of 2019 compared to 51.3% in the second quarter of 2018. Direct material costs in our Control Devices segment was negatively impacted by adverse product mix and purchase price variances while our Electronics segment was negatively impacted by unfavorable product mix and higher material costs for electronic components offset by a lower adverse impact of U.S. denominated material purchases at non-U.S. based operations. Overhead as a percentage of net sales increased by 2.0% to 15.2% for the second quarter of 2019 compared to 13.2% for the second quarter of 2018 primarily due to the Canton Restructuring costs of $2.4 million and higher warranty expenses in our Control Devices segment.

Our Control Devices segment gross margin decreased due to higher overhead costs primarily from Canton Restructuring costs of $2.4 million, higher warranty costs and an increase in direct material costs due to an unfavorable product mix and adverse purchase price variances.

Our Electronics segment gross margin decreased primarily due to an unfavorable product mix and higher material costs for electronic components offsetting the impact of slightly higher sales.

Our PST segment gross margin decreased due to lower sales offset by reductions in overhead costs.

Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $7.7 million compared to the second quarter of 2018 primarily due to PST’s recovery of Brazilian indirect taxes of $6.5 million and lower selling costs, Control Devices transitional service cost reimbursement of $0.7 million associated with the disposal of its Non-core Products and decreases in Electronics wages offset by higher wages and accelerated share-based compensation expense associated with a retirement of $0.5 million at Unallocated corporate. This decrease was also partially offset by an increase in restructuring and business realignment costs for Canton Restructuring costs of $0.4 million during the current quarter.

35

Gain on Disposal of Non-core Products, net. The gain on disposal for the three months ended June 30, 2019 relates to the disposal of Control Devices’ Non-core Products.

Design and Development (“D&D”). D&D costs increased by $1.1 million primarily due to higher D&D costs in our Control Devices segment for Canton Restructuring related costs of $0.8 million and in our unallocated corporate segment for the establishment of the chief technology office. Consolidated customer reimbursement for development projects increased $0.8 million during the second quarter of 2019.

Operating Income. Operating income (loss) is summarized in the following table by reportable segment (in thousands):

Dollar

Percent

    

    

    

increase /

    

increase /

Three months ended June 30,

2019

2018

(decrease)

(decrease)

 

Control Devices

$

44,367

$

17,160

$

27,207

158.5

%

Electronics

7,555

8,276

(721)

(8.7)

PST

6,414

735

5,679

772.7

Unallocated corporate

(9,150)

(6,990)

(2,160)

(30.9)

Operating income

$

49,186

$

19,181

$

30,005

156.4

%

Our Control Devices segment operating income increased due to the one-time gain on disposal of Non-core Products offset by higher costs for Canton Restructuring as well as higher material and warranty costs.

Our Electronics segment operating income decreased primarily due to higher direct material costs offset by higher sales and lower SG&A costs.

Our PST segment operating income increased due to the recovery of Brazilian indirect taxes of $6.5 million and lower SGA expenses offset by lower sales volumes.

Our unallocated corporate operating loss increased primarily from higher wages and accelerated share-based compensation expense associated with a retirement of $0.5 million during the current quarter.

Operating income by geographic location is summarized in the following table (in thousands):

Dollar

Percent

    

    

    

increase /

    

increase /

 

Three months ended June 30,

2019

2018

(decrease)

(decrease)

North America

$

35,209

$

9,900

$

25,309

255.6

%

South America

6,414

735

5,679

772.7

Europe and Other

7,563

8,546

(983)

(11.5)

Operating income

$

49,186

$

19,181

$

30,005

156.4

%

Our North American operating results increased due to the gain on disposal related to Non-core Products and higher sales volume in the North American commercial vehicle and off-highway markets offset by lower sales in our automotive market as well as higher SG&A and D&D costs. The increase in operating income in South America was primarily due to the recovery of Brazilian indirect taxes, lower SG&A, overhead and material costs offset by lower sales volumes. Our operating results in Europe and Other decreased due to lower sales in our European off-highway market and higher material costs offset by higher sales in our commercial vehicle market.

36

Interest Expense, net. Interest expense, net decreased by $0.2 million compared to the prior year second quarter primarily due to lower interest expense on our revolving credit facilities offset by the write-off of deferred financing fees as a result of refinancing the 2019 Credit Facility.

Equity in Earnings of Investee. Equity earnings for MSIL were $0.5 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively. The decrease compared to the prior period is primarily due to lower gross margin from lower sales volume in served markets as well as unfavorable changes in foreign currency exchange rates.

Other Income, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other income, net on the condensed consolidated statement of operations. Other income, net decreased by $0.2 million to $0.1 million in the second quarter of 2019 compared to other income, net of $0.3 million for the second quarter of 2018 primarily due to lower foreign currency transaction gains in our Electronics segment.

Provision for Income Taxes. We recognized income tax expense of $9.1 million and $3.8 million for federal, state and foreign income taxes for the second quarter of 2019 and 2018, respectively. The increase in income tax expense for the three months ended June 30, 2019 compared to the same period for 2018 was primarily due to the sale of Non-core Products on April 1, 2019. The effective tax rate decreased to 18.6% in the second quarter of 2019 from 20.2% in the second quarter of 2018 primarily due to the impact of certain tax incentives, which did not impact the second quarter of 2018.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

Dollar

increase /

Six months ended June 30, 

    

2019

    

2018

    

(decrease)

Net sales

$

440,538

    

100.0

%  

$

446,532

    

100.0

%  

$

(5,994)

Costs and expenses:

Cost of goods sold

322,858

73.3

311,145

69.7

11,713

Selling, general and administrative

63,110

14.3

72,517

16.2

(9,407)

Gain on disposal of non-core products, net

(33,599)

(7.6)

-

-

(33,599)

Design and development

27,284

6.2

26,842

6.0

442

Operating income

60,885

13.8

36,028

8.1

24,857

Interest expense, net

2,004

0.4

2,524

0.6

(520)

Equity in earnings of investee

(912)

(0.2)

(1,186)

(0.3)

274

Other income, net

(529)

(0.1)

(863)

(0.2)

334

Income before income taxes

60,322

13.7

35,553

8.0

24,769

Provision for income taxes

10,901

2.5

7,053

1.6

3,848

Net income

$

49,421

11.2

%  

$

28,500

6.4

%  

$

20,921

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, 

    

2019

    

2018

    

(decrease)

    

(decrease)

 

Control Devices

$

224,186

    

50.9

%  

$

225,313

    

50.4

%  

$

(1,127)

(0.5)

%

Electronics

182,406

41.4

180,341

40.4

2,065

1.1

%

PST

33,946

7.7

40,878

9.2

(6,932)

(17.0)

%

Total net sales

$

440,538

100.0

%  

$

446,532

100.0

%  

$

(5,994)

(1.3)

%

37

Our Control Devices segment net sales decreased primarily as a result of decreased sales volume in the North American automotive market of $8.3$10.8 million as a result ofdue to certain program volume reductions partially offset by an increase in sales volume in commercial vehicle, China automotive and favorableunfavorable foreign currency translation of $3.2$1.0 million $0.9partially offset by the one-time sale of Non-core Product inventory of $4.2 million as well as sales volume increases in our European and North American commercial vehicle and China automotive markets of $2.5 million and $0.5$4.3 million, respectively.

Our Electronics segment net sales increased primarily due to an increase in sales volume in our European and North American commercial vehicle products of $7.4$4.9 million and $5.7 million, respectively, and increased sales of European and North American off-highway vehicle products of $3.0$4.0 million and $0.7$1.0 million, respectively, as well as favorablerespectively. This increase was offset by an unfavorable foreign currency translation of $2.4 million. This increase was partially offset by$7.2 million and unfavorable pricing of $0.9$0.4 million on products nearing the end of product life.

29

Our PST segment net sales decreased primarily due to a lower volumes infor our audio product markets as well as anArgentina aftermarket channel, alarm products, monitoring products and service revenues and unfavorable foreign currency translation that decreased sales by $2.6 million, or 10.9%.$0.1 million. This reductiondecrease was partially offset by a slight increase in sales of new products tohigher volumes for our OEM and factory authorized dealer installers and monitoring product and service revenues.

installer products.

Net sales by geographic location are summarized in the following table (in thousands):

Dollar

Percent

increase /

increase /

Six months ended June 30, 

    

2019

    

2018

    

(decrease)

    

(decrease)

 

North America

$

242,660

    

55.1

%  

$

245,314

    

54.9

%  

$

(2,654)

(1.1)

%

South America

33,946

7.7

40,878

9.2

(6,932)

(17.0)

%

Europe and Other

163,932

37.2

160,340

35.9

3,592

2.2

%

Total net sales

$

440,538

100.0

%  

$

446,532

100.0

%  

$

(5,994)

(1.3)

%

     Dollar  Percent 
     increase /  increase / 
Three months ended June 30    2018     2017  (decrease)  (decrease) 
North America $120,885   54.8% $121,487   58.1% $(602)  (0.5)%
South America  20,333   9.2   23,500   11.2   (3,167)  (13.5)%
Europe and Other  79,384   36.0   64,124   30.7   15,260   23.8%
Total net sales $220,602   100.0% $209,111   100.0% $11,491   5.5%

The slight decrease in North American net sales was primarily attributable to a decrease in sales volume in our North American automotive market of $8.4$10.7 million resulting from certain program volume reductions which were partially offset by the one-time sale of Non-core Product inventory of $4.2 million as well as increased sales volume in our North American commercial vehicle and off-highway markets of $7.0$3.7 million and $0.7$1.0 million, respectively. The decrease in net sales in South America was primarily due to a decrease in audio product sales volume as well as anlower volumes for our Argentina aftermarket channel, alarm products, monitoring products and service revenues and unfavorable foreign currency translation that decreased sales by $2.6 million, or 10.9%, partially$0.1 million. This decrease was offset by a slight increase of new products tohigher volumes for our OEM and factory authorized dealer installers and monitoring product and service revenues.installer products. The increase in net sales in Europe and Other was primarily due to the increase in our European off-highway and commercial vehicle and European off-highway markets of $9.4$4.0 million and $3.0$3.1 million, respectively, as well as an increase in sales volume in our China automotive market of $0.9$4.3 million. Additionally, Europe and Other sales were favorablyunfavorably impacted by foreign currency translation of $2.9$7.2 million offset byand unfavorable pricing of $0.8$0.4 million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 5.1% primarily relatedcompared to an increase in net sales. Ourthe first half of 2018 and our gross margin improved by 0.3% to 30.6% fordecreased from 30.3% in the second quarterfirst half of 2018 compared to 30.3% for26.7% in the second quarterfirst half of 2017.2019. Our material cost as a percentage of net sales increased by 0.6%1.7% to 53.0% in the first half of 2019 compared to 51.3% forin the first quarterhalf of 2018 compared to 50.7% for the second quarter of 2017. The lower direct material costs as a percentage of net sales in our Electronics and PST segments resulted from favorable product mix. The higher direct2018. Direct material costs in our Control Devices segment resulted from unfavorablewas negatively impacted by adverse product mix.mix and purchase price variances while our Electronics segment was negatively impacted by adverse product mix and higher material costs for electronic components offset by a lower adverse impact of U.S. denominated material purchases at non-U.S. based operations. Overhead as a percentage of net sales decreasedincreased by 0.9%1.6% to 13.2%15.0% for the first half of 2019 compared to 13.4% for the second quarter of 2018 comparedprimarily due to 14.1% for the second quarterCanton Restructuring costs of 2017.

$3.6 million and higher warranty expenses in our Control Devices segment.

Our Control Devices segment gross margin improved slightlydecreased due to a decreaselower sales, higher overhead costs primarily from Canton Restructuring costs of $3.6 million and higher warranty costs as well as an increase in overhead as a percentagedirect material costs due to an unfavorable product mix and adverse purchase price variances.

38

Our Electronics segment gross margin increaseddecreased primarily due to lower directunfavorable product mix and higher material labor and overhead costs as a percentage of sales as well asfor electronic components offsetting higher sales, a reduction in the adverse effect of U.S denominated material purchases at non-U.S. based operations and a favorable mix related to Orlaco product sales.

lower warranty costs.

Our PST segment gross margin improved due to a favorableincreased as reductions in overhead costs offset lower sales mix related to higher monitoring service fees and lower audio products which resulted in lower direct material costs as a percentage of sales.

volume.

Selling, General and Administrative (“SG&A”).SG&A expenses decreased by $0.4$9.4 million compared to the second quarterfirst half of 20172018 primarily due to a decrease in PST SG&A costs from the recovery of Brazilian indirect taxes of $6.5 million and lower wages and lower professional services. Electronics SG&A expense decreased due to a reduction in expense of the fair value adjustment for the Orlaco earn-out consideration of $2.1$0.4 million due to the earn-out consideration being capped in the first quarter 2018. This was offset by higher wages and direct support charges for procurement support in our Control Devices segment as well as higher business realignment charges of $0.3 million in the Electronics and PST segments. PST SG&A costs decreased during the current period due to lower wages and fringe benefit costswages. These decreases were partially offset by expense foran increase in consolidated restructuring and business realignment costs of $1.3 million during the fair valuefirst half of earn-out consideration of $0.5 million.2019. Control Devices SG&A costs increased primarily due to Canton Restructuring related costs. Unallocated corporate SG&A costs decreasedincreased primarily due to accelerated share-based compensation expense associated with retirement of $0.5 million, business realignment costs of $0.6 million and higher allocationwages.

Gain on Disposal of direct support costs to operating segmentsNon-core Products, net. The gain on disposal for procurement and manufacturing support duethe six months ended June 30, 2019 relates to the centralizationdisposal of these activities which were partially offset by higher professional service costs.

30

Control Devices’ Non-core Products.

Design and Development (“D&D”).D&D costs increased by $0.9$0.4 million primarily due to higher D&D costs in our Control Devices segment related to program launches.

for Canton Restructuring severance expense of $1.6 million and in our unallocated corporate segment for the establishment of the chief technology office partially offset by lower D&D costs in our Electronics segment from reductions in consulting fees and higher customer reimbursements. Consolidated customer reimbursement for development projects increased $0.6 million in 2019.

Operating Income.Operating income (loss) is summarized in the following table by reportable segment (in thousands):

Dollar

Percent

increase /

increase /

Six months ended June 30, 

    

2019

    

2018

    

(decrease)

    

(decrease)

 

Control Devices

$

56,315

$

35,039

$

21,276

60.7

%

Electronics

16,586

16,156

430

2.7

%

PST

7,084

885

6,199

700.5

%

Unallocated corporate

(19,100)

(16,052)

(3,048)

(19.0)

%

Operating income

$

60,885

$

36,028

$

24,857

69.0

%

        Dollar  Percent 
        increase /  increase / 
Three months ended June 30 2018  2017  (decrease)  (decrease) 
Control Devices $17,160  $19,924  $(2,764)  (13.9)%
Electronics  8,276   2,814   5,462   194.1%
PST  735   1,123   (388)  (34.6)%
Unallocated corporate  (6,990)  (8,185)  1,195   14.6%
Operating income $19,181  $15,676  $3,505   22.4%

Our Control Devices segment operating income decreased primarilyincreased due to lower sales,the gain on disposal of Non-core Products offset by higher SG&A expenses relatedrestructuring costs due to direct support charges for procurement and manufacturing supportthe Canton Restructuring, higher warranty costs and higher D&D costs partially related to program launches.

Our Electronics segment operating income increased primarily due to the higher sales, and lower SG&A expenses, primarily due to no expense incurred for the fair value of earn-out consideration this quarter as compared to $2.1 million of expense in the second quarter of the prior year. This was offset byand D&D costs offsetting higher allocated direct support costs from unallocated corporate for procurement and manufacturing activities.

material costs.

Our PST segment operating income decreasedincreased primarily due to the recovery of Brazilian indirect taxes, lower SG&A and overhead costs partially offset by a decrease in sales partially offset by lower SG&A costs.

sales.

Our unallocated corporate operating loss decreasedincreased primarily due to higher allocations of direct support costs to operating segments for procurement and manufacturing activities due to the centralization of these activities which were offset by higher professional fees.business realignment costs of $0.6 million, accelerated share-based compensation expense associated with a retirement of $0.5 million and higher wages.

39

Operating income by geographic location is summarized in the following table (in thousands):

Dollar

Percent

Six months ended June 30, 

    

2019

    

2018

    

increase

    

increase

North America

$

36,782

$

18,193

$

18,589

102.2

%

South America

7,084

885

6,199

700.5

%

Europe and Other

17,019

16,950

69

0.4

%

Operating income

$

60,885

$

36,028

$

24,857

69.0

%

        Dollar  Percent 
        increase /  increase / 
Three months ended June 30 2018  2017  (decrease)  (decrease) 
North America $9,900  $11,447  $(1,547)  (13.5)%
South America  735   1,123   (388)  (34.6)%
Europe and Other  8,546   3,106   5,440   175.1%
Operating income $19,181  $15,676  $3,505   22.4%

Our North American operating results decreasedincreased primarily due to lowerthe gain on disposal of Non-core Products and higher sales volume in the North American commercial vehicle and off-highway markets. This increase was offset by lower sales in our automotive market, Canton Restructuring costs as well as higher SG&A costs, which were partially offset by increased sales volume in the commercial vehicle and off-highway markets.D&D costs. The decreaseincrease in operating income in South America was primarily due a decrease in product sales offset byto the recovery of Brazilian indirect taxes, lower SG&A and overhead costs and slightly higher sales and gross profit from a favorable sales mix or of higher monitoring services and new products sold to our factory authorized dealer installers.offsetting lower sales. Our operating results in Europe and Other increased due to higher sales in our European off-highway and commercial vehicle and European off-highway markets which were partially offset by higher D&D and material and labor costs.

Interest Expense, net. Interest expense, net decreased by $0.3$0.5 million compared to the prior year second quarterfirst half primarily due to lower PST interest expense on our revolving credit facilities offset by the write-off of deferred financing fees as a result of refinancing the decrease in outstanding debt balance.

31

2019 Credit Facility.

Equity in Earnings of Investee. Equity earnings for MindaMSIL were $0.7$0.9 million and $0.6$1.2 million for the threesix months ended June 30, 20182019 and 2017,2018, respectively. The increasedecrease compared to the prior period wasis primarily due to higherlower gross margin from lower sales which was offset by anvolumes in served markets as well as unfavorable changechanges in foreign currency exchange rates.

Other (Income) Expense,Income, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other expense (income),income, net on the condensed consolidated statement of operations. Other expense,income, net decreased by $0.9$0.4 million to $0.5 million in the first half of 2019 compared to other income, net of $0.3 million in second quarter of 2018 compared to other expense of $0.6$0.9 million for the second quarterfirst half of 20172018 primarily due to a favorable change inlower foreign currency exchange ratestransaction gains in our PST and Electronics segments which was offset by an unfavorable change in foreign currency exchange rates in our unallocated corporate segment.

Provision for Income Taxes.We recognized income tax expense of $3.8$10.9 million and $5.2 million for federal, state and foreign income taxes for the second quarter of 2018 and 2017, respectively. The decrease in income tax expense for the three months ended June 30, 2018 compared to the same period for 2017 was primarily due to Tax Legislation enacted in the fourth quarter of 2017. The effective tax rate decreased to 20.2% in the second quarter of 2018 from 36.8% in the second quarter of 2017 primarily due to the Tax Legislation.

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

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    2018     2017  (decrease) 
Net sales $446,532   100.0% $413,422   100.0% $33,110 
Costs and expenses:                    
Cost of goods sold  311,145   69.7   288,857   69.9   22,288 
Selling, general and administrative  72,517   16.2   69,970   16.9   2,547 
Design and development  26,842   6.0   23,755   5.7   3,087 
                     
Operating income  36,028   8.1   30,840   7.5   5,188 
Interest expense, net  2,524   0.6   2,928   0.7   (404)
Equity in earnings of investee  (1,186)  (0.3)  (735)  (0.2)  (451)
Other expense (income), net  (863)  (0.2)  795   0.2   (1,658)
Income before income taxes  35,553   8.0   27,852   6.8   7,701 
Provision for income taxes  7,053   1.6   9,760   2.4   (2,707)
Net income  28,500   6.4   18,092   4.4   10,408 
                     
Net loss attributable to                    
noncontrolling interest  -   -   (130)  -   130 
Net income attributable to Stoneridge, Inc. $28,500   6.4% $18,222   4.4% $10,278 

32

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    2018     2017  

(decrease)

  

(decrease)

 
Control Devices $225,313   50.4% $232,874   56.3% $(7,561)  (3.2)%
Electronics  180,341   40.4   135,415   32.8   44,926   33.2%
PST  40,878   9.2   45,133   10.9   (4,255)  (9.4)%
Total net sales $446,532   100.0% $413,422   100.0% $33,110   8.0%

Our Control Devices segment net sales decreased primarily as a result of decreased sales volume in the North American automotive market of $16.6 million as a result of certain program volume reductions partially offset by an increase in sales volume in commercial vehicle, China automotive and favorable foreign currency translation of $6.5 million, $1.9 million and $1.1 million, respectively.

Our Electronics segment net sales increased primarily due to an increase in sales volume in our European and North American commercial vehicle products of $12.6 million and $10.6 million, respectively, and increased sales of European and North American off-highway vehicle products of $11.2 million and $2.9 million, respectively, as well as favorable foreign currency translation of $8.5 million. This increase was partially offset by unfavorable pricing of $1.8 million on products nearing the end of product life.

Our PST segment net sales decreased primarily due to lower volumes for our audio products as well as an unfavorable foreign currency translation that decreased sales by $3.3 million, or 7.3%. This reduction was partially offset by an increase in sales of new products to our factory authorized dealer installers and monitoring product and service revenues.

Net sales by geographic location are summarized in the following table (in thousands):

     Dollar  Percent 
              increase /  increase / 
Six months ended June 30    2018     2017  (decrease)  

(decrease)

 
North America $245,314   54.9% $244,873   59.2% $441   0.2%
South America  40,878   9.2   45,133   10.9   (4,255)  (9.4)%
Europe and Other  160,340   35.9   123,416   29.9   36,924   29.9%
Total net sales $446,532   100.0% $413,422   100.0% $33,110   8.0%

The slight increase in North American net sales was primarily attributable to increased sales volume in our North American commercial vehicle and off-highway markets of $13.9 million and $2.9 million, respectively which was offset by a decrease in sales volume in our North American automotive of $16.6 million resulting from certain program volume reductions. The decrease in net sales in South America was primarily due to a decrease in audio product sales volume as well as an unfavorable foreign currency translation that decreased sales by $3.3 million, or 7.3%, partially offset by a slight increase in sales of new products to our factory authorized dealer installers and monitoring product and service revenues. The increase in net sales in Europe and Other was primarily due to the increase in our European commercial vehicle and European off-highway markets of $16.3 million and $11.2 million, respectively as well as an increase in sales volume in our China automotive market of $1.9 million. Additionally, Europe and Other sales were favorably impacted by foreign currency translation of $9.5 million offset by unfavorable pricing of $1.8 million on products nearing the end of product life.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 7.7% and our gross margin improved by 0.2% to 30.3% for the first half of 2018 compared to 30.1% for the first half of 2017. Our material cost as a percentage of net sales increased by 0.6% to 51.3% for the first half of 2018 compared to 50.7% for the first half of 2017. The higher direct material costs in our Control Devices segment resulted from unfavorable product mix. The lower direct material costs as a percentage of net sales in our Electronics and PST segment resulted from favorable product mix. Overhead as a percentage of net sales decreased by 0.9% to 13.4% for the first half of 2018 compared to 14.3% for the first half of 2017.

33

Our Control Devices segment gross margin remained consistent despite lower sales primarily due to a decrease in overhead.

Our Electronics segment gross margin increased primarily due to higher sales and lower direct material costs as a percentage of sales primarily related to a favorable mix of Orlaco product sales.

Our PST segment gross margin improved due to a favorable sales mix related to higher monitoring service fees and lower audio products which resulted in lower direct material costs as a percentage of sales.

Selling, General and Administrative. SG&A expenses increased by $2.5 million compared to the first half of 2017 primarily due to higher costs in our Electronics segment due to higher wages and fringe benefits, professional service costs and direct support charges for procurement support. In addition, there were higher business realignment charges of $0.5 million in our Electronics and PST segments compared to the first half of 2017. These were partially offset by a decrease in expense for the fair value of the Orlaco earn-out consideration of $1.7 million. Control Devices SG&A costs also increased due to higher wages and direct support charges for procurement support. PST SG&A costs decreased slightly during the current period due to lower wages and professional service costs which were mostly offset by expense for the fair value of earn-out consideration of $1.0 million during the first half of 2018. Unallocated corporate SG&A costs decreased primarily due to higher allocation of direct support costs to operating segments for procurement and manufacturing support due to the centralization of these activities as well as lower incentive compensation costs which were partially offset by higher professional service costs.

Design and Development.D&D costs increased by $3.1 million primarily due to higher D&D costs in our Electronics and Control Devices segments related to program launches, investment in development activities and lower customer reimbursements.

Operating Income. Operating income (loss) is summarized in the following table by reportable segment (in thousands):

        Dollar  Percent 
        increase /  increase / 
Six months ended June 30 2018  2017  (decrease)  (decrease) 
Control Devices $35,039  $39,008  $(3,969)  (10.2)%
Electronics  16,156   8,371   7,785   93.0%
PST  885   1,702   (817)  (48.0)%
Unallocated corporate  (16,052)  (18,241)  2,189   12.0%
Operating income $36,028  $30,840  $5,188   16.8%

Our Control Devices segment operating income decreased primarily due to lower sales and higher SG&A and D&D costs partially related to program launches.

Our Electronics segment operating income increased primarily due to the higher sales offset by higher SG&A as well as higher D&D related to product launch and development activities.

Our PST segment operating income decreased primarily due to a decrease in sales as well as the additional expense for the fair value of earn-out consideration of $1.0 million during the first half of 2018.

Our unallocated corporate operating loss decreased primarily due to higher allocations of direct support costs to operating segments for procurement and manufacturing activities due to the centralization of these activities as well as lower incentive compensation costs which were offset by higher professional service costs.

34

Operating income by geographic location is summarized in the following table (in thousands):

        Dollar  Percent 
        increase /  increase / 
Six months ended June 30 2018  2017  (decrease)  (decrease) 
North America $18,193  $20,897  $(2,704)  (12.9)%
South America  885   1,702   (817)  (48.0)%
Europe and Other  16,950   8,241   8,709   105.7%
Operating income $36,028  $30,840  $5,188   16.8%

Our North American operating results decreased primarily due to lower sales volume in the North American automotive market as well as higher SG&A and D&D costs, which were partially offset by increased sales volume in the commercial vehicle and off-highway markets. The decrease in operating income in South America was primarily due a decrease in audio product sales offset by slightly higher sales and gross profit from a favorable sales mix of higher monitoring services and new products sold to our factory authorized dealer installers. Our operating results in Europe and Other increased due to higher sales in our European commercial vehicle and off-highway markets which were partially offset by higher D&D costs.

Interest Expense, net. Interest expense, net decreased by $0.4 million compared to the prior year first half primarily due to lower PST interest expense as a result of the decrease in outstanding debt balance.

Equity in Earnings of Investee. Equity earnings for Minda were $1.2 million and $0.7 million for the six months ended June 30, 2018 and 2017, respectively. The increase compared to the prior period was due to higher sales which was offset by an unfavorable change in foreign currency exchange rates.

Other (Income) Expense, net. We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other expense (income), net on the condensed consolidated statement of operations. Other expense net decreased by $1.7 million to other income of $0.9 million in first half of 2018 compared to other expense of $0.8 million for the first half of 2017 primarily due to a favorable change in foreign currency exchange rates in our Electronics segment.

Provision for Income Taxes. We recognized income tax expense of $7.1 million and $9.8 million for federal, state and foreign income taxes for the first half of 20182019 and 2017,2018, respectively. The decreaseincrease in income tax expense for the six months ended June 30, 20182019 compared to the same period for 20172018 was primarily due to Tax Legislation enacted in the fourth quartersale of 2017.Non-core Products on April 1, 2019. The effective tax rate decreased to 18.1% in the first half of 2019 from 19.8% in the first half of 2018 from 35.0% inprimarily due to the impact of certain tax incentives, which did not impact the first half of 2017 primarily due to the Tax Legislation.2018.

Liquidity and Capital Resources

Summary of Cash Flows:

Summary of Cash Flows:

Six months ended June 30

    

2019

    

2018

    

Net cash provided by (used for):

Operating activities

$

6,664

$

28,911

Investing activities

15,756

(15,401)

Financing activities

(50,920)

(17,428)

Effect of exchange rate changes on cash and cash equivalents

(1,089)

(3,120)

Net change in cash and cash equivalents

$

(29,589)

$

(7,038)

Six months ended June 30, (in thousands) 2018  2017 
Net cash provided by (used for):        
Operating activities $28,911  $27,021 
Investing activities  (15,401)  (92,685)
Financing activities  (17,428)  56,663 
Effect of exchange rate changes on cash and cash equivalents  (3,120)  2,832 
Net change in cash and cash equivalents $(7,038) $(6,169)

35

40

Cash provided by operating activities increased slightlydecreased compared to the first half of 20172018 primarily due to an increase inthe lower net income being offset byexcluding the gain on disposal related to Control Devices’ Non-core Products and a higher use of cash to fund working capital levels. This decrease includes a portion of the cash payment of the Orlaco earn-out consideration obligation of $5.0 million during the first half of 2019. The higher working capital levels mostly relate to higher inventory levels for bank builds attributable to the Canton Restructuring activities and the disposal of Non-core Products. Our receivable terms and collections rates have remained consistent between periods presented.

Net cash provided by investing activities increased compared to 2018 due to the cash proceeds received from the disposal of Control Devices’ Non-core products related offset by 2019 investments in the Autotech venture capital fund and insurance proceeds received in 2018.

Net cash used for investingfinancing activities decreased primarilyincreased due to the business acquisitionrepurchase of Orlaco inCommon Shares during the first halfsecond quarter of 2017 and insurance proceeds received in the first half of 2018. This was partially2019 offset by higher capital expenditures.

Net cash provided by financing activities decreased primarily due to the significant decrease in borrowing activity on ournet Credit Facility as we borrowed $77.3 million to fund the acquisition of the Orlaco business in the first quarter of 2017, which was partially offset by an increase in voluntary principal repayments of our Credit Facility and PST debt obligations in the first half of 2018.

borrowings.

As outlined in Note 87 to our condensed consolidated financial statements, ourthe 2019 Credit Facility increased our borrowing capacity by $100.0 million and permits borrowing up to a maximum level of $300.0$400.0 million which includes an accordion feature which allows the Company to increase the availability by up to $80.0$150.0 million upon the satisfaction of certain conditions. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through September 2021.June 2024. The 2019 Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The 2019 Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The 2019 Credit Facility had an outstanding balance of $110.0$103.5 million at June 30, 2018.2019. The Company was in compliance with all covenants at June 30, 2018.2019. The covenants included in our2019 Credit Facility to date have not and are not expected to limit our financing flexibility. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.

PST maintains several short-term and long-term loans used for working capital purposes. At June 30, 2018,2019, there was $5.0$1.6 million of PST debt outstanding. Scheduled principal repayments on PST debt at June 30, 20182019 were as follows: $3.2 million from July 2018 to June 2019, $0.8$0.9 million from July 2019 to December 2019, $0.5June 2020, $0.2 million infrom July 2020 to December 2020 and $0.5 million in both 2021.

The Company'sCompany’s wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary'ssubsidiary’s bank account up to a maximum level of 20.0 million Swedish krona, or $2.2 million, at June 30, 2018.2019. At June 30, 2019, there was no balance outstanding on this overdraft credit line.

The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of 60.0 million Chinese yuan, or $8.7 million at June 30, 2019. At June 30, 2019 and December 31, 2018, there was no balance outstanding on thisthese credit line.

lines.

Although the Company'sCompany’s notes and credit facilities contain various covenants, the Company has not experienced a violation which would limit or preclude their use or accelerate the maturity and does not expect these covenants to restrict our financing flexibility. The Company has been and expects to continue to remain in compliance with these covenants during the term of the notescredit facilities and credit facilities.loans.

41

On October 26, 2018, the Company’s Board of Directors authorized the Company to repurchase up to $50.0 million of Common Shares. Thereafter on May 7, 2019, the Company entered into a Master Confirmation (the “Master Confirmation”) and a Supplemental Confirmation, together with the Master Confirmation, the Accelerated Share Repurchase Agreement (“ASR Agreement”), with Citibank N.A. (the “Bank”) to purchase Company Common Shares for a payment of $50.0 million (the “Prepayment Amount”). Under the terms of the ASR Agreement, on May 7, 2019, the Company paid the Prepayment Amount to the Bank and received on May 8, 2019 an initial delivery of 1,349,528 Company Common Shares, which is approximately 80% of the total number of Company Common Shares expected to be repurchased under the ASR Agreement based on the closing price of the Company’s Common Shares on May 7, 2019. These Common Shares received became treasury shares and were recorded as a $40.0 million reduction to shareholder’s equity. The remaining $10.0 million of the Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares.

In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology.  The Company’s $10.0 million investment in the Autotech fund will be contributed over the expected ten-year life of the fund.  The Company contributed $1.7 million to the Autotech fund through June 30, 2019.

PST has dividends payable to former noncontrolling interest holders of R$23.8 million Brazilian real ($6.2 million) and R$23.2 million Brazilian real ($6.0 million) as of June 30, 2019 and December 31, 2018, respectively. The dividends payable balance includes R$0.6 million Brazilian real ($0.2 million) and R$0.4 million Brazilian real ($0.1 million) in monetary correction for the six months ended June 30, 2019 and 2018, respectively. The dividend is payable on or before January 1, 2020, and is subject to monetary correction based on the Brazilian National Extended Consumer Price inflation index (“IPCA”).

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 65 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, 2018,2019, we had a cash and cash equivalents balance of approximately $59.0$51.5 million, all of which was held in foreign locations. The decrease in cash and cash equivalents from $66.0$81.1 million at December 31, 20172018 was primarily due to the voluntary principal repaymentsrepurchase of outstanding debtour Common Shares and capital expenditures partially offset bylower cash flows from operations.operations as well as the cash payment of the Orlaco earn-out consideration which were offset by proceeds from the disposal of Non-core Products and net borrowings on the 2019 Credit Facility.

Commitments and Contingencies

See Note 11 to the condensed consolidated financial statements for disclosures of the Company’s commitments and contingencies.

36

Seasonality

Our Control Devices and Electronics segments are not typically affected by seasonality, however the demand for our PST segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.

42

Critical Accounting Policies and Estimates

The Company'sCompany’s critical accounting policies, which include management'smanagement’s best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company's 2017 Company’s 2018 Form 10-K.10K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management'sManagement’s Discussion and Analysis of the Company's 2017 Company’s 2018 Form 10-K10K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates.There have been no significantmaterial changes in our significant accounting policies or critical accounting estimates during the second quarter of 2018.2019, with the exception of lease accounting. See Note 3, “Revenue,8, “Leases,” to the condensed consolidated financial statements in this Form 10-Q for the updated revenue recognitionlease accounting policy adopted in the first quarter of 2018.

2019.

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 2017 2018 Form 10-K.10K.

Inflation and International Presence

Given the current economic conditions of countries and recent fluctuations in certainBy 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 a negative changean 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 commodity price and foreign currency exchange rate risks.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk presented within Part II, Item 7A of the Company's 2017 Company’s 2018 Form 10-K.10K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of June 30, 2018,2019, an evaluation was performed under the supervision and with the participation of the Company'sCompany’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures. Based on that evaluation, the Company'sCompany’s management, including the PEO and PFO, concluded that the Company'sCompany’s disclosure controls and procedures were effective as of June 30, 2018.

2019.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company'sCompany’s internal control over financial reporting during the three months ended June 30, 20182019 that materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.

37

43

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. 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, and other tax contingencies in our PST segment for which we believe the likelihood of loss is reasonably possible, but not probable, although these claims might take years to resolve. In addition, we are subject to litigation regarding patent infringement. We are also subject to the risk of exposure to product liability claims in the event that the failure of any of our products causes personal injury or death to users of our products as well as product warranty and recall claims. There can be no assurance that we will not experience any material losses related to product liability, warranty or recall 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. 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 2017 Company’s 2018 Form 10-K.10K.

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, 2018. These shares2019. There were 9,121 Common Shares delivered to us by employees as payment for withholding taxes due upon vesting of performance share awards.awards and share unit awards during the three months ended June 30, 2019.

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 (1)

    

or programs

4/1/19-4/30/19

1,652

$

31.43

N/A

(1)

5/1/19-5/31/19

1,356,924

29.63

1,349,528

(1)

6/1/19-6/30/19

73

29.39

N/A

(1)

Total

1,358,649

Period Total number of shares purchased  Average price paid per share  Total number of shares purchased as part of publicly announced plans or programs  Maximum number of shares that may yet be purchased under the plans or programs 
4/1/18-4/30/18  14,171  $27.32   N/A   N/A 
5/1/18-5/31/18  2,061   28.98   N/A   N/A 
6/1/18-6/30/18  1,361   33.94   N/A   N/A 
Total  17,593             

(1)On October 26, 2018 we announced a Board approved repurchase program authorizing the Company to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019 the Company announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares and were recorded as a $40.0 million reduction to shareholders’ equity. The remaining $10.0 million of the initial payment was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares. The number of shares to be ultimately purchased by the Company will be determined based on the volume weighted average price of our Common Shares during the terms of the transaction, minus an agreed upon discount between the parties. The program is expected to be completed by May 8, 2020.

Item 3. Defaults Upon Senior Securities

None.

44

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None

None.

38

45

Item 6. Exhibits

Exhibit

Number

    

Exhibit

10.1

2.1

Amended and Restated 2018 Directors’ Restricted Shares Plan of Stoneridge, Inc.Asset Purchase Agreement, dated April 1, 2019 (incorporated by reference to Exhibit 99.12.1 to the Company’s Current Report on Form 8-K filed on April 5, 2019).

10.1

Accelerated Share Repurchase Agreement, dated May 7, 2019, between Stoneridge, Inc. and Citibank (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 16, 2018)8, 2019).

31.1

10.2

Fourth Amended and Restated Credit Agreement, dated June 5, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 7, 2019).

31.1

Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2

Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.herewith.

32.1

Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.herewith.

32.2

Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.herewith.

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 LabelsTaxonomy Extension Label Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

39

46

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.

STONERIDGE, INC.

Date:  August 1, 2018July 31, 2019

/s/ Jonathan B. DeGaynor

Jonathan B. DeGaynor

President, and Chief Executive Officer and Director

(Principal Executive Officer)

Date:  August 1, 2018July 31, 2019

/s/ Robert R. Krakowiak

Robert R. Krakowiak

Executive Vice President, Chief Financial Officer and Treasurer

(Principal Financial Officer)

40

47