Stoneridge 10Q 2021 Q1 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended March 31, 2021

Commission file number: 001-13337

STONERIDGE INC

(Exact name of registrant as specified in its charter)


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 telephone number, including area code

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

Common Shares, without par value SRI New 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.

☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒Yes ☐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 ☒	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐Yes ☒No

The number of Common Shares, without par value, outstanding as of April 23, 2021 was 27,163,410.

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STONERIDGE, INC. AND SUBSIDIARIES


INDEX		Page
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020	4
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2021 and 2020	5
	Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended March 31, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2021 and 2020	7
	Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2021 and 2020	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

PART II–OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40

Signatures		41

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Forward-Looking Statements

Portions of this report on Form 10-Q contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and may include statements regarding the intent, belief or current expectations of the Company, with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) operational expectations. Forward-looking statements may be identified by the words “will,” “may,” “should,” “designed to,” “believes,” “plans,” “projects,” “intends,” “expects,” “estimates,” “anticipates,” “continue,” and similar words and expressions. The forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:

●

the impact of COVID-19, or other future pandemics, on the global economy, and on our customers, suppliers, employees, business and cash flows;

●

the reduced purchases, loss or bankruptcy of a major customer or supplier;

●

the costs and timing of business realignment, facility closures or similar actions;

●

a significant change in automotive, commercial, off-highway, motorcycle or agricultural vehicle production;

●

competitive market conditions and resulting effects on sales and pricing;

●

the impact on changes in foreign currency exchange rates on sales, costs and results, particularly the Argentinian peso, Brazilian real, Chinese renminbi, euro, Mexican peso and Swedish krona;

●

our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;

●

customer acceptance of new products;

●

our ability to successfully launch/produce products for awarded business;

●

adverse changes in laws, government regulations or market conditions, including tariffs, affecting our products or our customers’ products;

●

our ability to protect our intellectual property and successfully defend against assertions made against us;

●

liabilities arising from warranty claims, product recall or field actions, product liability and legal proceedings to which we are or may become a party, or the impact of product recall or field actions on our customers;

●

labor disruptions at our facilities or at any of our significant customers or suppliers;

●

business disruptions due to natural disasters or other disasters outside our control;

●

the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis, including the impact of potential tariffs and trade considerations on their operations and output;

●

the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving credit facility;

●

capital availability or costs, including changes in interest rates or market perceptions;

●

the failure to achieve the successful integration of any acquired company or business;

●

risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber-attack and other similar disruptions; and

●

the items described in Part I, Item IA (“Risk Factors”) in the Company’s 2020 Form 10-K.

In 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.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONERIDGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,		December 31,
(in thousands)	2021		2020
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	60,508	$	73,919
Accounts receivable, less reserves of $1,186 and $817, respectively		149,709		136,745
Inventories, net		95,439		90,548
Prepaid expenses and other current assets		37,450		33,452
Total current assets		343,106		334,664
Long-term assets:
Property, plant and equipment, net		114,258		119,324
Intangible assets, net		52,940		55,394
Goodwill		37,545		39,104
Operating lease right-of-use asset		17,389		18,944
Investments and other long-term assets, net		56,239		53,978
Total long-term assets		278,371		286,744
Total assets	$	621,477	$	621,408

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt	$	5,182	$	7,673
Accounts payable		88,907		86,103
Accrued expenses and other current liabilities		50,582		52,272
Total current liabilities		144,671		146,048
Long-term liabilities:
Revolving credit facility		153,500		136,000
Deferred income taxes		11,985		12,935
Operating lease long-term liability		14,162		15,434
Other long-term liabilities		12,487		14,357
Total long-term liabilities		192,134		178,726
Shareholders' equity:
Preferred Shares, without par value, 5,000 shares authorized, NaN issued		-		-
Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 27,162 and 27,006 shares outstanding at March 31, 2021 and December 31, 2020, respectively, with 0 stated value		-		-
Additional paid-in capital		228,832		234,409
Common Shares held in treasury, 1,804 and 1,960 shares at March 31, 2021 and December 31, 2020, respectively, at cost		(56,090)		(60,482)
Retained earnings		212,472		212,342
Accumulated other comprehensive loss		(100,542)		(89,635)
Total shareholders' equity		284,672		296,634
Total liabilities and shareholders' equity	$	621,477	$	621,408

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


Three months ended March 31 (in thousands, except per share data)	2021		2020

Net sales	$	193,795	$	182,966
Costs and expenses:
Cost of goods sold		147,709		137,569
Selling, general and administrative		29,376		29,503
Design and development		14,651		12,235
Operating income		2,059		3,659
Interest expense, net		1,766		1,030
Equity in earnings of investee		(614)		(457)
Other expense (income), net		358		(1,617)
Income before income taxes		549		4,703
Provision for income taxes		419		1,213
Net income	$	130	$	3,490

Earnings per share:
Basic	$	0.00	$	0.13
Diluted	$	0.00	$	0.13
Weighted-average shares outstanding:
Basic		27,017		27,232
Diluted		27,486		27,591

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


Three months ended March 31 (in thousands)		2021	2020

Net income	$	130	$	3,490

Other comprehensive loss, net of tax:
Foreign currency translation		(10,778)		(17,119)
Unrealized loss on derivatives ⁽¹⁾		(129)		(3,655)
Other comprehensive loss, net of tax		(10,907)		(20,774)

Comprehensive loss	$	(10,777)	$	(17,284)

(1)	Net of tax benefit of $(35) and $(972) for the three months ended March 31, 2021 and 2020, respectively.

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


Three months ended March 31 (in thousands)	2021		2020

OPERATING ACTIVITIES:
Net income	$	130	$	3,490
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		7,068		6,650
Amortization, including accretion and write-off of deferred financing costs		1,513		1,429
Deferred income taxes		(1,609)		76
Earnings of equity method investee		(614)		(418)
(Gain) loss on sale of fixed assets		(37)		131
Share-based compensation expense		1,162		1,372
Excess tax (benefit) deficiency related to share-based compensation expense		(319)		17
Gain on disposal of business, net		(739)		-
Change in fair value of earn-out contingent consideration		72		(633)
Changes in operating assets and liabilities:
Accounts receivable, net		(15,953)		(3,730)
Inventories, net		(7,282)		(5,838)
Prepaid expenses and other assets		(4,744)		(3,702)
Accounts payable		6,725		2,327
Accrued expenses and other liabilities		(2,439)		(7,733)
Net cash used for operating activities		(17,066)		(6,562)

INVESTING ACTIVITIES:
Capital expenditures, including intangibles		(7,718)		(7,140)
Proceeds from sale of fixed assets		155		8
Proceeds from disposal of business, net		1,050		-
Investment in venture capital fund, net		(399)		-
Net cash used for investing activities		(6,912)		(7,132)

FINANCING ACTIVITIES:
Revolving credit facility borrowings		20,500		71,500
Revolving credit facility payments		(3,000)		(36,500)
Proceeds from issuance of debt		11,434		1,958
Repayments of debt		(13,763)		(2,077)
Common Share repurchase program		-		(4,995)
Repurchase of Common Shares to satisfy employee tax withholding		(2,347)		(1,687)
Net cash provided by financing activities		12,824		28,199

Effect of exchange rate changes on cash and cash equivalents		(2,257)		(2,603)
Net change in cash and cash equivalents		(13,411)		11,902
Cash and cash equivalents at beginning of period		73,919		69,403

Cash and cash equivalents at end of period	$	60,508	$	81,305

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,652	$	1,150
Cash paid for income taxes, net	$	3,742	$	1,832

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

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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, 2019	27,408	1,558	$	225,607	$	(50,773)	$	206,542	$	(91,472)	$	289,904
Net income	—	—		—		—		3,490		—		3,490
Unrealized loss on derivatives, net	—	—		—		—		—		(3,655)		(3,655)
Currency translation adjustments	—	—		—		—		—		(17,119)		(17,119)
Issuance of Common Shares	267	(267)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(75)	75		—		4,769		—		—		4,769
Common Share repurchase program	(607)	607		10,000		(14,995)		—		—		(4,995)
Share-based compensation, net	—	—		(5,101)		—		—		—		(5,101)
BALANCE MARCH 31, 2020	26,993	1,973	$	230,506	$	(60,999)	$	210,032	$	(112,246)	$	267,293

BALANCE DECEMBER 31, 2020	27,006	1,960	$	234,409	$	(60,482)	$	212,342	$	(89,635)	$	296,634
Net income	—	—		—		—		130		—		130
Unrealized loss on derivatives, net	—	—		—		—		—		(129)		(129)
Currency translation adjustments	—	—		—		—		—		(10,778)		(10,778)
Issuance of Common Shares	224	(224)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(68)	68		—		4,392		—		—		4,392
Share-based compensation, net	—	—		(5,577)		—		—		—		(5,577)
BALANCE MARCH 31, 2021	27,162	1,804	$	228,832	$	(56,090)	$	212,472	$	(100,542)	$	284,672

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three months ended March 31, 2021 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 2020 Form 10-K.

The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the three months ended March 31, 2021 and 2020 has been determined to be an unconsolidated entity, and therefore is accounted for under the equity method of accounting based on the Company’s 49% ownership in MSIL.

(2) Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard prospectively as of January 1, 2020 using the modified retrospective basis. The impact of the adoption was a reduction to deferred tax liabilities and an increase to retained earnings of $13,750 on the condensed consolidated balance sheet as of December 31, 2020. The adoption of this standard did not have an impact on the Company’s condensed consolidated results of operations and cash flows.

In August 2018, the FASB issued ASU 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this standard prospectively as of January 1, 2020 and it did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The guidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the disclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s condensed consolidated financial statements.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held and requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. ASU 2016-13 is effective for public business entities for annual periods beginning after December 15, 2019. The guidance allows for various methods for measuring expected credit losses. The Company has elected to apply a historical loss rate based on historical write-offs by region, adjusted for current economic conditions and forecasts about future economic conditions that are reasonable and supportable. The Company adopted this standard as of January 1, 2020 and it did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance in ASU 2020-04 provides temporary optional expedient and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”) (also known as the “reference rate reform”). The guidance allows companies to elect not to apply certain modification accounting requirements to contracts affected by the reference rate reform, if certain criteria are met. The guidance will also allow companies to elect various optional expedients which would allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The Company is currently evaluating the impact of this ASU on the Company’s consolidated financial statements. As of March 31, 2021, the Company has not yet had contracts modified due to rate reform.

(3) Revenue

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. The expected costs associated with our base warranties continue to be recognized as expense when the products are sold. Customer returns only occur if products do not meet the specifications of the contract and are not connected to any repurchase obligations of the Company.

The Company does not have any financing components or significant payment terms as payment occurs shortly after the point of sale. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. Amounts billed to customers related to shipping and handling costs are included in net sales in the condensed consolidated statements of operations. Shipping and handling costs associated with outbound freight after control over a product is transferred to the customer are accounted for as a fulfillment cost and are included in cost of sales.

Revenue by Reportable Segment

Control Devices. Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as actuators, sensors, switches and connectors. We sell these products principally to the automotive market in the North American, European, and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in the North American, European and Asia Pacific regions. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“Tier 1 supplier”).

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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

Stoneridge Brazil. Our Stoneridge Brazil segment primarily serves the South American region and specializes in the design, manufacture and sale of vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions. Stoneridge Brazil sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, directly to OEMs and through mass merchandisers. In addition, monitoring services and tracking devices are sold directly to corporate customers and individual consumers.

The following tables disaggregate our revenue by reportable segment and geographical location⁽¹⁾for the three months ended March 31, 2021 and 2020:


	Control Devices				Electronics				Stoneridge Brazil				Consolidated
Three months ended March 31	2021		2020		2021		2020		2021		2020		2021		2020
Net Sales:
North America	$	76,129	$	80,410	$	20,405	$	19,441	$	-	$	-	$	96,534	$	99,851
South America		-		-		-		-		11,407		14,570		11,407		14,570
Europe		6,790		7,388		61,005		51,306		-		-		67,795		58,694
Asia Pacific		16,699		9,052		1,360		799		-		-		18,059		9,851
Total net sales	$	99,618	$	96,850	$	82,770	$	71,546	$	11,407	$	14,570	$	193,795	$	182,966

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

Performance Obligations

For OEM and Tier 1 supplier customers, the Company typically enters into contracts to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts. The majority of the parts sold to OEM and Tier 1 supplier customers are customized to the specific customer, with the exception of camera-based vision systems 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.

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(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 Stoneridge Brazil segment. These monitoring service contracts are generally not capable of being distinct and are accounted for as a single performance obligation. We recognize revenue for our monitoring products and services contracts over the life of the contract. There is no variable consideration associated with these contracts. The Company has the right to consideration from a customer in the amount that corresponds directly with the value to the customer of the Company’s performance to date. Therefore, the Company recognizes revenue over time using the practical expedient ASC 606-10-55-18 in the amount the Company has a “right to invoice” rather than selecting an output or input method.

Contract Balances

The Company had 0 material contract assets, contract liabilities or capitalized contract acquisition costs as of March 31, 2021 and December 31, 2020.

(4) Inventories

Inventories are valued at the lower of cost (using either the first-in, first-out (“FIFO”) or average cost methods) or net realizable value. The Company evaluates and adjusts as necessary its excess and obsolescence reserve on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on-hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. Inventory cost includes material, labor and overhead. Inventories consisted of the following:


	March 31,		December 31,
	2021		2020
Raw materials	$	72,138	$	67,775
Work-in-progress		8,434		7,005
Finished goods		14,867		15,768
Total inventories, net	$	95,439	$	90,548

Inventory valued using the FIFO method was $86,089 and $82,308 at March 31, 2021 and December 31, 2020, respectively. Inventory valued using the average cost method was $9,350 and $8,240 at March 31, 2021 and December 31, 2020, respectively.

(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 March 31, 2021, the Company had open Mexican peso-denominated foreign currency forward contracts. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2021 and 2020. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Foreign Currency Exchange Rate Risk

The Company conducts business internationally and, therefore, is exposed to foreign currency exchange rate risk. The Company uses derivative financial instruments as cash flow hedges to manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The Company hedged the euro and Mexican peso currencies during 2020 and the Mexican peso in 2021.

These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated other comprehensive income, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive income will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the currency.

In certain instances, the foreign currency forward contracts may not qualify for hedge accounting or are not designated as hedges and, therefore, are marked-to-market with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other expense (income), net. At March 31, 2021, all of the Company’s foreign currency forward contracts were designated as cash flow hedges.

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

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

The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, with a notional amount at March 31, 2020 of $2,100 which expired ratably on a monthly basis from April 2020 through December 2020. There were 0 such contracts at March 31, 2021 or December 31, 2020.

Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedges

The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at March 31, 2021 of $11,838 which expire ratably on a monthly basis from April 2021 to December 2021. The notional amount at December 31, 2020 related to Mexican peso-denominated foreign currency forward contracts was $1,242.

The Company evaluated the effectiveness of the Mexican peso and U.S. dollar-denominated forward contracts held as of March 31, 2021 and concluded that the hedges were effective.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Interest Rate Risk

Interest Rate Risk – Cash Flow Hedge

On February 18, 2020, the Company entered into a floating-to-fixed interest rate swap agreement (the “Swap”) with a notional amount of $50,000 to hedge its exposure to interest payment fluctuations on a portion of its Credit Facility. The Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's Credit Facility that has a current balance of $153,500 at March 31, 2021. Accordingly, the change in fair value of the Swap is recognized in accumulated other comprehensive income. The Swap agreement requires monthly settlements on the same days that the Credit Facility interest payments are due and has a maturity date of March 10, 2023, which is prior to the Credit Facility maturity date of June 4, 2024. Under the Swap terms, the Company pays a fixed interest rate and receives a floating interest rate based on the one-month LIBOR, with a floor. The critical terms of the Swap are aligned with the terms of the Credit Facility, resulting in no hedge ineffectiveness. The difference between amounts to be received and paid under the Swap is recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Swap settlements increased interest expense by $158 and $4 for the three months ended March 31, 2021 and 2020, respectively.

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
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020		2021		2020
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$	11,838	$	1,242	$	-	$	255	$	106	$	-
Interest rate swap	$	50,000	$	50,000	$	-	$	-	$	1,121	$	1,318

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

Gross amounts recorded for the cash flow hedges in other comprehensive (loss) income and in net income for the three months ended March 31 were as follows:


					Gain (loss) reclassified from
	Gain (loss) recorded in other				other comprehensive income
	comprehensive income (loss)				(loss) into net income ^(A)
	2021		2020		2021		2020
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(154)	$	(3,320)	$	207	$	(156)
Interest rate swap	$	39	$	(1,467)	$	(158)	$	(4)

(A)

Gains (losses) reclassified from other comprehensive loss into net income recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $80 and $0 for the three months ended March 31, 2021 and 2020, respectively. Gains (losses) reclassified from other comprehensive loss into net income recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $127 and $(127) for the three months ended March 31, 2021 and 2020, respectively. Gains (losses) reclassified from other comprehensive loss income into net income recognized in D&D in the Company’s condensed consolidated statements of operations were $0 and $(29) for the three months ended March 31, 2021 and 2020, respectively. Losses reclassified from other comprehensive loss into net income recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $158 and $4 for the three months ended March 31, 2021 and 2020, respectively.

For the three months ended March 31, 2021, the total net losses on the foreign currency contract cash flow hedges of $106 are expected to be included in COGS, SG&A and D&D within the next 12 months. Of the total net losses on the interest rate swap cash flow hedges, $588 of losses are expected to be included in interest expense, net within the next 12 months and $533 of losses are expected to be included in interest expense, net in subsequent periods.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Cash flows from derivatives used to manage foreign exchange and interest rate risks are classified as operating activities within the condensed consolidated statements of cash flows.

Fair Value Measurements

Certain assets and liabilities held by the Company are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency contracts, inputs include foreign currency exchange rates. For the interest rate swap, inputs include LIBOR. Fair values estimated using Level 3 inputs consist of significant unobservable inputs.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of inputs used.


								March 31,		December 31,
			2021						2020
			Fair values estimated using
		Fair	Level 1		Level 2		Level 3
	value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contracts	$	-	$	-	$	-	$	-	$	255
Total financial assets carried at fair value	$	-	$	-	$	-	$	-	$	255

Financial liabilities carried at fair value:
Forward currency contracts	$	106	$	-	$	106	$	-	$	-
Interest rate swap		1,121		-		1,121		-		1,318
Earn-out consideration		5,372		-		-		5,372		5,813
Total financial liabilities carried at fair value	$	6,599	$	-	$	1,227	$	5,372	$	7,131

The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities related to earn-out consideration that are measured at fair value on a recurring basis.


	Stoneridge Brazil
	2021		2020
Balance at January 1	$	5,813	$	12,011
Change in fair value		72		(633)
Foreign currency adjustments		(513)		(2,768)
Balance at March 31	$	5,372	$	8,610

The Company will be required to pay the Stoneridge Brazil earn-out consideration, which is not capped, based on Stoneridge Brazil’s financial performance in 2021. The fair value of the Stoneridge Brazil earn-out consideration is based on discounted cash flows utilizing forecasted earnings before interest, depreciation and amortization (“EBITDA”) in 2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The earn-out consideration obligation related to Stoneridge Brazil is recorded within other long-term liabilities in the consolidated balance sheets as of March 31, 2021 and December 31, 2020.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The change in fair value of the earn-out consideration for Stoneridge Brazil was due to updated financial performance projections and favorable foreign currency translation offset by the reduced time from the current period end to the payment date. The change in fair value of the Stoneridge Brazil earn-out consideration was recorded in SG&A expense and the foreign currency impact was included in other expense (income), net in the condensed consolidated statements of operations.

There were 0 transfers in or out of Level 3 from other levels in the fair value hierarchy for the three months ended March 31, 2021.

Impairment of Long-Lived Assets or Finite-Lived Assets

The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired.

On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there are two asset groups comprised of PM fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $2,326 was recorded based on the difference between the fair value and the carrying value of the assets. The Company used the income approach to determine the fair value of the PM fixed assets at the Tallinn, Estonia facility. During the year ended December 31, 2020, the impairment loss of $2,326 was recorded on the Company’s condensed consolidated statement of operations within selling, general and administrative expense. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."

(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 $1,162 and $1,372 for the three months ended March 31, 2021 and 2020, respectively.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(7) Debt

Debt consisted of the following at March 31, 2021 and December 31, 2020:


	March 31,		December 31,		Interest rates at
	2021		2020		March 31, 2021	Maturity
Revolving Credit Facility
Credit Facility	$	153,500	$	136,000	2.85%	June 2024

Debt
Stoneridge Brazil short-term obligations		832		1,561	5.64% - 8.80%	June 2021 - November 2021
Sweden short-term credit line		-		1,591
Suzhou short-term credit line		4,350		4,521	3.85% - 5.00%	April 2021 - September 2021
Total debt		5,182		7,673
Less: current portion		(5,182)		(7,673)
Total long-term debt, net	$	-	$	-

Revolving Credit Facility

On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility provides for a $400,000 senior secured revolving credit facility and it replaced and superseded the Third Amended and Restated Credit Agreement that provided for a $300,000 revolving credit facility. The Credit Facility has an accordion feature which allows the Company to increase the availability by up to $150,000 upon the satisfaction of certain conditions and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The Credit Facility has a termination date of June 5, 2024. In 2019, the Company capitalized $1,366 of deferred financing costs as a result of entering into the Credit Facility. In connection with the Credit Facility, the Company wrote off a portion of the previously recorded deferred financing costs of $275 in interest expense, net during the year ended December 31, 2019. Borrowings under the Credit Facility bear interest at either the Base Rate or the LIBOR rate, at the Company’s option, plus the applicable margin as set forth in the Credit Facility. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio.

The Credit Facility contains customary affirmative covenants and representations. The Credit Facility also contains customary negative covenants, which, among other things, are subject to certain exceptions, including restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The Credit Facility contains customary events of default, subject to customary thresholds and exceptions, including, among other things, (i) non-payment of principal and non-payment of interest and fees, (ii) a material inaccuracy of a representation or warranty at the time made, (iii) a failure to comply with any covenant, subject to customary grace periods in the case of certain affirmative covenants, (iv) cross default of other debt, final judgments and other adverse orders in excess of $30,000, (v) any loan document shall cease to be a legal, valid and binding agreement, (vi) certain uninsured losses or 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.

Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts to the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provides for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021 in form and substance satisfactory to the administrative agent). During the Covenant Relief Period:

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

●

the maximum net leverage ratio is suspended;

●

the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021;

●

the minimum interest coverage ratio of 3.50 is reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively;

●

the Company’s liquidity may not be less than $150,000;

●

the Company’s aggregate amount of cash and cash equivalents cannot exceed $130,000;

●

there are certain restrictions on Restricted Payments (as defined); and

●

a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders.

Amendment No. 1 changes the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points. As of March 31, 2021, Specified Hedge Borrowings were $50,000.

The Company capitalized an additional $1,086 of deferred financing costs as a result of entering into Amendment No. 1.

Borrowings outstanding on the Credit Facility were $153,500 and $136,000 at March 31, 2021 and December 31, 2020, respectively.

The Company was in compliance with all credit facility covenants at March 31, 2021 and December 31, 2020.

The Company also has outstanding letters of credit of $1,703 and $1,720 at March 31, 2021 and December 31, 2020, respectively.

Debt

Stoneridge Brazil maintains short-term notes used for working capital purposes which have fixed or variable interest rates. The weighted-average interest rates of short-term debt of Stoneridge Brazil at March 31, 2021 was 7.07%. Depending on the specific note, interest is payable either monthly or annually. Principal repayments of $832 on Stoneridge Brazil debt at March 31, 2021 are due in 2021.

The Company’s wholly-owned subsidiary located in Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20,000 Swedish krona, or $2,291 and $2,435, at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 there was no balance outstanding on this overdraft credit line. At December 31, 2020 there was 13,072 Swedish krona, or $1,591, outstanding on this overdraft credit line. During the three months ended March 31, 2021, the subsidiary borrowed 95,939 Swedish krona, or $10,992, and repaid 109,011 Swedish krona, or $12,490.

The Company’s wholly-owned subsidiary located in Suzhou, China (the “Suzhou subsidiary”), has two credit lines (the “Suzhou credit line”) which allow up to a maximum borrowing level of 50,000 Chinese yuan, or $7,631 and $7,663 at March 31, 2021, and December 31, 2020. At March 31, 2021 and December 31, 2020 there was $4,350 and $4,521, respectively, in borrowings outstanding on the Suzhou credit line with weighted-average interest rates of 4.30% and 4.32%, respectively. The Suzhou credit line is included on the condensed consolidated balance sheet within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which facilitates the extension of trade payable payment terms by 180 days. This bank acceptance draft line of credit allows up to a maximum borrowing level of 15,000 Chinese yuan, or $2,289 and $2,299, at March 31, 2021 and December 31, 2020, respectively. There was $1,254 and $414 utilized on the Suzhou bank acceptance draft line of credit at March 31, 2021 and December 31, 2020, respectively.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(8) Leases

The Company, as lessor, has entered into a lease with a third-party lessee effective July 1, 2020, for the Canton, Massachusetts facility. In conjunction with the Canton restructuring plan outlined in Note 12, the Company ceased operations at this facility in March 2020. The Company recognizes lease income on a straight-line basis over the lease term. The lease includes two optional extension terms of five years each. The Company recognized, in its Control Devices segment, operating and variable lease income from leases in our condensed consolidated statements of operations of $320 and $99, respectively, for the three months ended March 31, 2021.

(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.

Weighted-average Common Shares outstanding used in calculating basic and diluted earnings per share were as follows:


Three months ended March 31	2021	2020
Basic weighted-average Common Shares outstanding	27,016,551	27,232,036
Effect of dilutive shares	468,965	359,135
Diluted weighted-average Common Shares outstanding	27,485,516	27,591,171

There were 778,199 and 789,027 performance-based right to receive Common Shares outstanding at March 31, 2021 and 2020, 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) Equity 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 approximated 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.

On February 25, 2020, the Bank notified the Company that it terminated early its commitment pursuant the ASR Agreement and would deliver 364,604 Common Shares on February 27, 2020 based on the volume weighted average price of our Common Shares during the term set forth in the ASR Agreement. The Bank’s notice of early termination and the subsequent delivery of Common Shares represents the final settlement of the Company’s share repurchase program pursuant to the accelerated share repurchase agreement. These Common Shares became treasury shares and were recorded as a $10,000 reduction to shareholders’ equity as Common Shares held in treasury with the offset of $10,000 to additional paid-in capital.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

On February 24, 2020, the Company’s Board of Directors authorized a new repurchase program of $50,000 for the repurchase of the Company’s outstanding Common Shares over the next 18 months. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under Rule 10b-18 plans, which permit Common Shares to be repurchased through pre-determined criteria.

On March 3, 2020, under the new repurchase program the Company entered into a 10b-18 Agreement Letter (the “10b-18 Agreement”), with the Bank to purchase Company Common Shares, under purchasing conditions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”), for up to $5,000. Under the terms of the 10b-18 Agreement, commencing March 3, 2020 and ending March 6, 2020, the Company received delivery of a total of 242,634 Company Common Shares for the amount of $4,995. These Common Shares became treasury shares and were recorded as a $4,995 reduction to shareholders’ equity as Common Shares held in treasury. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss for the three months ended March 31, 2021 and 2020 were as follows:


		Foreign		Unrealized
		currency		gain (loss)
		translation		on derivatives	Total
Balance at January 1, 2021	$	(88,795)	$	(840)	$	(89,635)
Other comprehensive loss before reclassifications		(10,778)		(90)		(10,868)
Amounts reclassified from accumulated other comprehensive loss		-		(39)		(39)
Net other comprehensive loss, net of tax		(10,778)		(129)		(10,907)
Balance at March 31, 2021	$	(99,573)	$	(969)	$	(100,542)

Balance at January 1, 2020	$	(91,472)	$	-	$	(91,472)
Other comprehensive loss before reclassifications		(17,119)		(3,781)		(20,900)
Amounts reclassified from accumulated other comprehensive loss		-		126		126
Net other comprehensive loss, net of tax		(17,119)		(3,655)		(20,774)
Balance at March 31, 2020	$	(108,591)	$	(3,655)	$	(112,246)

(11) Commitments and Contingencies

From time to time we are subject to various legal actions and claims incidental to our business, including those arising out of breach of contracts, product warranties, product liability, patent infringement, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its consolidated results of operations or financial position.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at the site and engaged an environmental engineering consultant to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. A remedial action plan was approved by the Florida Department of Environmental Protection and groundwater remediation began in the fourth quarter of 2015. During the three months ended March 31, 2021 and 2020, the Company recognized expense of $407 and $0, respectively, related to groundwater remediation. At March 31, 2021 and December 31, 2020, the Company accrued a remaining undiscounted liability of $554 and $180, respectively, related to expected future remediation costs. At March 31, 2021 and December 31, 2020, $379 and $180, respectively, were recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets while the remaining amount as of March 31, 2021 was recorded as a component of other long-term liabilities. Costs associated with the recorded liability will be incurred to complete the groundwater remediation and monitoring. The recorded liability is based on assumptions in the remedial action plan as well as estimates for future remediation activities. 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.

The Company’s Stoneridge Brazil subsidiary has civil, labor and other tax contingencies (excluding income tax) for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$47,755 ($8,383) and R$43,736 ($8,416) at March 31, 2021 and December 31, 2020, respectively. An unfavorable outcome on these contingencies could result in significant cost to the Company and adversely affect its results of operations.

On August 12, 2020, the Brazilian Administrative Counsel for Economic Defense (“CADE”) issued a ruling against Stoneridge Brazil for abuse of dominance and market foreclosure through its prior use of exclusivity provisions in agreements with its distributors. The CADE tribunal imposed a R$7,995 ($1,538) fine which is included in the reasonably possible contingencies noted above. The Company is challenging this ruling in Brazilian federal court to reverse this decision by the CADE tribunal.

Product Warranty and Recall

Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to hold the Company responsible for their product warranties. The Company can provide no assurances that it will not experience material claims or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued. The current portion of 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 $3,088 and $3,647 of a long-term liability at March 31, 2021 and December 31, 2020, 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:


Three months ended March 31	2021		2020
Product warranty and recall at beginning of period	$	12,691	$	10,796
Accruals for warranties established during period		1,232		1,128
Aggregate changes in pre-existing liabilities due to claim developments		529		387
Settlements made during the period		(4,577)		(2,134)
Foreign currency translation		(302)		(385)
Product warranty and recall at end of period	$	9,573	$	9,792

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Brazilian Indirect Tax

In 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on Stoneridge Brazil’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. As a result, the Company recorded a pre-tax benefit of $6,473 in the year ended December 31, 2019.

The Brazilian tax authorities have sought clarification before the Supreme Court of Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these credits and is pending decision which could impact the amount ultimately realized by Stoneridge.

(12) Business Realignment and Restructuring

On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. The decision to exit the PM sensor product line was made after consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. In conjunction with the strategic exit of the PM sensor product line, the Company entered into an asset purchase agreement related to the sale of the PM sensor product line during the first quarter of 2021. Refer to Note 16 of the condensed consolidated financial statements for additional details regarding the sale.

As a result of the PM sensor restructuring actions, the Company recognized expense of $1,369 for the three months ended March 31, 2021 for non-cash fixed asset charges, including impairment and accelerated depreciation of PM sensor related fixed assets and other related costs. For the three months ended March 31, 2021 restructuring related costs of $650, $638 and $81 were recognized in COGS, SG&A and D&D, respectively. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $800 to $3,600 and is related to employee severance and termination costs, contract terminations costs and other related costs such as potential commercial and supplier settlements. We anticipate that these costs will be incurred through the fourth quarter of 2021.

The expenses for the exit of the PM sensor line that relate to the Control Devices reportable segment include the following:


	Accrual as of		2021 Charge			Utilization			Accrual as of
	January 1, 2021		to Expense		Cash		Non-Cash		March 31, 2021
Fixed asset impairment and accelerated depreciation	$	-	$	185	$	-	$	(185)	$	-
Employee termination benefits		-		76		(76)		-		-
Other related costs		-		1,108		(1,108)		-		-
Total	$	-	$	1,369	$	(1,184)	$	(185)	$	-

On January 10, 2019, the Company committed to a restructuring plan that resulted in the closure of the Canton, Massachusetts facility (“Canton Facility”) on March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). Company management informed employees at the Canton Facility of this restructuring decision on January 11, 2019. The costs for the Canton Restructuring included employee severance and termination costs, contract terminations costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton facility.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

As a result of the Canton Restructuring actions, the Company recognized expense of $13 and $2,222 respectively, for the three months ended March 31, 2021 and 2020 for employee termination benefits and other restructuring related costs. For the three months ended March 31, 2021 other restructuring related costs of $13 were recognized in D&D in the condensed consolidated statement of operations. For the three months ended March 31, 2020 severance and other related restructuring costs of $1,490, $314 and $418 were recognized in COGS, SG&A and D&D, respectively, in the condensed consolidated statement of operations. We do not expect to incur additional costs related to the Canton Restructuring. Refer to Note 8 to the condensed consolidated financial statements for additional details regarding the third-party lease of the Canton facility.

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


	Accrual as of		2021 Charge			Utilization			Accrual as of
	January 1, 2021		to Expense		Cash		Non-Cash		March 31, 2021
Employee termination benefits	$	165	$	-	$	(25)	$	-	$	140
Other related costs		-		13		(13)		-		-
Total	$	165	$	13	$	(38)	$	-	$	140


	Accrual as of		2020 Charge			Utilization			Accrual as of
	January 1, 2020		to Expense		Cash		Non-Cash		March 31, 2020
Employee termination benefits	$	2,636	$	1,118	$	(3,437)	$	-	$	317
Other related costs		-		1,104		(1,104)		-		-
Total	$	2,636	$	2,222	$	(4,541)	$	-	$	317

In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its controls product line to China. As a result of these actions, the Company recognized expense of $199 and $7, respectively, for the three months ended March 31, 2021 and 2020 for employee severance and termination costs, contract termination costs, other related costs and non-cash fixed asset charges for accelerated depreciation of fixed assets and other related costs. Electronics segment restructuring (benefit) costs recognized in COGS, SG&A, and D&D in the condensed consolidated statement of operations for the three months ended March 31, 2021 were $(2), $155 and $46, respectively. Electronics segment restructuring costs were recognized in SG&A in the condensed consolidated statement of operations for the three months ended March 31, 2020. The Company expects to incur up to $660 of additional restructuring costs related to these actions through the fourth quarter of 2021.

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


	Accrual as of		2021 Charge to			Utilization			Accrual as of
	January 1, 2021		Expense		Cash		Non-Cash		March 31, 2021
Employee termination benefits	$	227	$	53	$	(48)	$	-	$	232
Other related costs		-		146		(146)		-		-
Total	$	227	$	199	$	(194)	$	-	$	232


	Accrual as of		2020 Charge to			Utilization			Accrual as of
	January 1, 2020		Expense		Cash		Non-Cash		March 31, 2020
Employee termination benefits	$	52	$	-	$	-	$	-	$	52
Other related costs		-		7		(7)		-		-
Total	$	52	$	7	$	(7)	$	-	$	52

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 March 31	2021		2020
Control Devices ^(A)	$	192	$	377
Electronics ^(B)		12		-
Stoneridge Brazil ^(C)		-		153
Unallocated Corporate ^(D)		42		74
Total business realignment charges	$	246	$	604

(A)	Severance costs for the three months ended March 31, 2021 related to SG&A were $192. Severance costs for the three months ended March 31, 2020 related to SG&A were $377.

(B)	Severance (benefit) costs for the three months ended March 31, 2021 related to SG&A and D&D were $(22) and $34, respectively.

(C)	Severance costs for the three months ended March 31, 2020 related to COGS and SG&A were $86 and $67 respectively.

(D)	Severance costs for the three months ended March 31, 2021 and 2020 related to SG&A were $42 and $74, respectively.

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


Three months ended March 31	2021		2020
Cost of goods sold	$	-	$	86
Selling, general and administrative		212		518
Design and development		34		-
Total business realignment charges	$	246	$	604

(13) Income Taxes

For interim tax reporting we estimate our annual effective tax rate and apply it to our year to date ordinary (loss) income. Tax jurisdictions with a projected or year to date loss for which a benefit cannot be realized are excluded.

For the three months ended March 31, 2021, income tax expense of $419 was attributable to the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 76.2% is greater than the statutory rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions, offset by tax deductible stock compensation and tax incentives.

For the three months ended March 31, 2020, income tax expense of $1,213 was primarily related to the mix of earnings among tax jurisdictions. The effective tax rate of 25.8% is greater than the statutory rate primarily due to losses incurred in jurisdictions for which a valuation allowance is recorded.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(14) Segment Reporting

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

The Company has 3 reportable segments, Control Devices, Electronics and Stoneridge Brazil, which also represent its operating segments. The Control Devices reportable segment produces actuators, sensors, switches and connectors. The Electronics reportable segment produces driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. The Stoneridge Brazil reportable segment designs and manufactures electronic vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.

The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s 2020 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and operating income. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

The financial information presented below is for our 3 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 and legal.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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


Three months ended March 31	2021		2020
Net Sales:
Control Devices	$	99,618	$	96,850
Inter-segment sales		1,980		1,347
Control Devices net sales		101,598		98,197
Electronics		82,770		71,546
Inter-segment sales		5,979		8,268
Electronics net sales		88,749		79,814
Stoneridge Brazil		11,407		14,570
Inter-segment sales		-		-
Stoneridge Brazil net sales		11,407		14,570
Eliminations		(7,959)		(9,615)
Total net sales	$	193,795	$	182,966
Operating Income (Loss):
Control Devices	$	10,165	$	7,322
Electronics		(873)		2,872
Stoneridge Brazil		(48)		859
Unallocated Corporate ^(A)		(7,185)		(7,394)
Total operating income	$	2,059	$	3,659
Depreciation and Amortization:
Control Devices	$	4,079	$	3,530
Electronics		2,809		2,481
Stoneridge Brazil		1,004		1,450
Unallocated Corporate		689		526
Total depreciation and amortization^(B)	$	8,581	$	7,987
Interest Expense (Income), net:
Control Devices	$	132	$	81
Electronics		131		87
Stoneridge Brazil		(30)		10
Unallocated Corporate		1,533		852
Total interest expense, net	$	1,766	$	1,030
Capital Expenditures:
Control Devices	$	1,361	$	2,314
Electronics		3,450		2,650
Stoneridge Brazil		662		1,133
Unallocated Corporate^(C)		501		572
Total capital expenditures	$	5,974	$	6,669


	March 31,		December 31,
	2021		2020
Total Assets:
Control Devices	$	200,062	$	194,433
Electronics		304,539		303,914
Stoneridge Brazil		55,261		61,350
Corporate ^(C)		389,410		390,851
Eliminations		(327,795)		(329,140)
Total assets	$	621,477	$	621,408

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The following tables present net sales and long-term assets for each of the geographic areas in which the Company operates:


Three months ended March 31	2021		2020
Net Sales:
North America	$	96,534	$	99,851
South America		11,407		14,570
Europe and Other		85,854		68,545
Total net sales	$	193,795	$	182,966


	March 31,		December 31,
	2021		2020
Long-term Assets:
North America	$	111,104	$	110,330
South America		30,333		33,785
Europe and Other		136,934		142,629
Total long-term assets	$	278,371	$	286,744

(A)	Unallocated Corporate expenses include, among other items, accounting/finance, human resources, information technology and legal costs as well as share-based compensation.

(B)	These amounts represent depreciation and amortization on property, plant and equipment and certain intangible assets.

(C)	Assets located at Corporate consist primarily of cash, intercompany loan receivables, fixed assets for the corporate headquarter building, leased assets, information technology assets, equity investments and investments in subsidiaries.

(15) Investments

Minda Stoneridge Instruments Ltd.

The Company has a 49% equity interest in Minda Stoneridge Instruments Ltd. (“MSIL”), a company based in India that manufactures electronics, instrumentation equipment and sensors primarily for the motorcycle, commercial vehicle and automotive markets. The investment is accounted for under the equity method of accounting. The Company’s investment in MSIL, recorded as a component of investments and other long-term assets, net on the condensed consolidated balance sheets, was $14,171 and $13,547 at March 31, 2021 and December 31, 2020, respectively. Equity in earnings of MSIL included in the condensed consolidated statements of operations was $430 and $457, for the three months ended March 31, 2021 and 2020, respectively.

PST Eletrônica Ltda.

The Company had a 74% controlling interest in Stoneridge Brazil from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26% noncontrolling interest in Stoneridge Brazil. As part of the acquisition agreement, the Company will be required to pay additional earn-out consideration, which is not capped, based on Stoneridge Brazil’s financial performance in 2021. See Note 5 for the fair value and foreign currency adjustments of the earn-out consideration for the current and prior periods.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Stoneridge Brazil had dividends payable to former noncontrolling interest holders of R$24,154 ($6,010) as of December 31, 2019. The dividends payable balance included R$261 ($68) in monetary correction for the three months ended March 31, 2019 based on the Brazilian National Extended Consumer Price inflation index. The dividend payable related to Stoneridge Brazil was recorded within other current liabilities on the consolidated balance sheet as of December 31, 2019. These dividends were paid in January 2020.

Other Investments

In December 2018, the Company entered into an agreement to make a $10,000 investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology which is accounted for under the equity method of accounting. The Company’s $10,000 investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. The Company contributed $650 to and received $251 in distributions from the Autotech Fund II during the three months ended March 31, 2021. The Company did not contribute to or receive distributions from the Autotech Fund II during the three months ended March 31, 2020. The Company has a 6.6% interest in Autotech Fund II. The Company recognized earnings of $184 and $39 during the three months ended March 31, 2021 and 2020, respectively. The Autotech Fund II investment recorded in investments and other long-term assets in the condensed consolidated balance sheets was $4,019 and $3,436 as of March 31, 2021 and December 31, 2020, respectively.

(16) Disposal of Particulate Matter Sensor Business

On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers are not acquiring any of the Company’s locations or employees. The purchase price for the sale of the PM sensor assets is $4,000 (subject to a post-closing inventory adjustment which was a payment to SMP of $1,133) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3,214 and $786, respectively. The sale of the Gen 2 assets will occur upon completion of the Company’s supply commitments to certain customers which are expected to be completed by December 31, 2021. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.

During the three months ended March 31, 2021 the Company’s Control Devices segment recognized net sales and cost of goods sold of $971 and $898, respectively, for the one-time sale of Gen 1 inventory and a gain on disposal of $740 for the sale of Gen 1 fixed assets less transaction costs of $60 within SG&A.

Pursuant to the contract manufacturing agreement, the Company produced and sold PM sensor finished goods inventory to SMP for net sales and COGS of $778 and $744, respectively, in the three months ended March 31, 2021. In addition, the Company received $68 for services provided pursuant to the transition services agreement which were recognized as a reduction in SG&A for the three months ended March 31, 2021.

PM sensor Gen 1 net sales, including sales of $778 to SMP pursuant to the contract manufacturing agreement, and operating income were $3,045 and $508, respectively, for the three months ended March 31, 2021. PM sensor Gen 1 net sales and operating loss were $2,381 and $103, respectively, for the three months ended March 31, 2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a global designer and manufacturer of highly engineered electrical and electronic systems, components and modules, primarily for the automotive, commercial vehicle, motorcycle, agricultural and off-highway vehicle markets.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.

Impact of COVID-19 on Our Business

The coronavirus pandemic (“COVID-19”) had a negative impact on the global economy in 2020 and lingering impacts remain in 2021, disrupting financial markets and increasing volatility, and have impeded global supply chains, restricted manufacturing operations and resulted in significantly reduced economic activity and higher unemployment rates. It has disrupted, and likely will continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway, motorcycle and agricultural vehicles by end-consumers. COVID-19 began to impact our operations in the first quarter of 2020 as government authorities imposed mandatory closures, work-from-home orders, social distancing protocols, and other restrictions. These actions materially affected our ability to adequately staff and maintain our operations and supply chain and significantly impacted our financial results in the first half of 2020. The adverse conditions caused by COVID-19 initially reduced demand for our products and increased operating costs, which has resulted in lower overall margins. Similar to our customers, we instituted several changes to our manufacturing operations to reduce the spread of COVID-19 and keep our employees safe. Although our end-markets have shown strong recovery over the last several months, COVID-19 may continue to adversely impact demand for our products and our financial condition and results of operations in the near term.

The adverse impacts of the COVID-19 pandemic led to a significant vehicle production slowdown in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules in the second half of 2020. This surge in demand led to a worldwide semiconductor supply shortage at the end of 2020 which has continued into 2021, as semiconductor suppliers have been unable to rapidly reallocate production lines to serve the transportation industry. In addition, we have experienced longer lead-times, higher costs and delays in procuring other component parts and raw materials due to shortages and inflation in commodity prices. As a result, we are currently experiencing incremental costs relating to these temporary supply chain related issues. We are assessing the potential supply chain impacts, which may directly or indirectly impact various suppliers, and correspondingly, OEM production. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise, due to this or any other issue. However, any direct or indirect supply chain disruptions may have an adverse impact on our financial condition, results of operations or cash flows.

We continue to actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Beginning in 2020 and continuing through the quarter ended March 31, 2021, we undertook several actions to reduce costs and spending across our organization. This included reducing hiring activities, temporarily reducing workforce in facilities impacted by volume reductions or shutdowns and limiting discretionary spending. Due to the adverse financial impact of COVID-19 resulting from significantly reduced production during the second quarter of 2020, we amended our existing credit facility to waive several financial covenants, including our net debt leverage compliance ratio, until the second quarter of 2021. As of March 31, 2021, our cash and cash equivalents balance was $60.5 million while undrawn commitments on our credit facility were $244.8 million.

We will also continue to actively monitor the impact of COVID-19 on our business and served-markets and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

Segments

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

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

Electronics. This segment includes results of operations from the production of driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units.

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Stoneridge Brazil. This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.

First Quarter Overview

The Company had net income of $0.1 million, or $0.00 per diluted share, for the three months ended March 31, 2021.

Net income decreased by $3.4 million, or $0.13 per diluted share, from $3.5 million, or $0.13 per diluted share, for the three months ended March 31, 2020. Net sales increased by $10.8 million, or 5.9% from higher volumes in certain of our served markets and favorable foreign currency translation. Our operating income decreased by $1.6 million primarily due to lower gross margin as a percentage of sales, higher design and development costs and an unfavorable change in fair value of SRB earn-out consideration adjustments offset by lower restructuring and business realignment costs of $1.6 million and the gain on disposal of the PM sensor business. Interest expense, net was higher in the first quarter of 2021 due to an increase in outstanding Credit Facility borrowings and a higher interest rate and other expense, net was higher than the prior year due to favorable 2020 foreign currency gains.

Our Control Devices segment net sales increased by 2.9% compared to the first quarter of 2020 primarily as a result of increased volumes in our China automotive and commercial vehicle markets. Partially offsetting these increased volumes were decreases in Control Devices’ North American automotive market. Segment gross margin increased due to lower restructuring costs of $0.8 million and favorable leverage of fixed costs offset by costs associated with supply chain disruptions. Segment operating income increased due to higher gross margin, the gain on disposal of the PM Soot business offset by higher Sarasota environmental remediation costs.

Our Electronics segment net sales increased by 15.7% compared to the first quarter of 2020 primarily due to favorable foreign currency translation and an increase in sales volume in our European, North American and China commercial vehicle markets. Segment gross margin decreased due to higher material and labor expenses from costs associated with supply chain disruptions and adverse product mix . Operating income for the segment decreased compared to the first quarter of 2020 due to lower segment gross margin and higher design and development costs.

Our Stoneridge Brazil segment net sales decreased by 21.7% compared to the first quarter of 2020 due to unfavorable foreign currency translation and lower volumes for our aftermarket products offset by higher sales for our Argentina market channel. Segment gross margin declined due to unfavorable foreign currency translation and adverse mix from lower sales of aftermarket products. Operating income decreased compared to 2020 due to lower gross margin and an unfavorable change in fair value of earn-out consideration adjustments offset by lower selling and design and development costs.

In the first quarter of 2021, design and development (“D&D”) expenses increased by $2.4 million compared to the first quarter of 2020 primarily due to higher development costs for awarded programs and development of advanced technologies and systems for future growth opportunities.

At March 31, 2021 and December 31, 2020, we had cash and cash equivalents balances of $60.5 million and $73.9 million, respectively. The 2021 increase in borrowings under the Credit Facility were to support higher working capital levels and to maintain a high level of liquidity to ensure adequate available capital across our global locations. At March 31, 2021 and December 31, 2020, we had $153.5 million and $136.0 million, respectively, in borrowings outstanding on the Credit Facility.

Outlook

The Company believes that focusing on products that address industry megatrends will have a positive impact on both our top-line growth and underlying margins, beginning in the first quarter of 2020 and continuing through the first quarter of 2021, COVID-19 caused worldwide adverse economic conditions and uncertainty in our served markets.

The North American automotive market is expected to increase from 13.0 million units in 2020 to 15.7 million units in 2021 as the market recovers from adverse economic conditions caused by COVID-19 in 2020. The Company expects sales volumes in our Control Devices segment to increase from 2020 based on current 2021 production forecasts and the ramp-up of certain program launches, however, global supply chain shortages, such as the global semiconductor supply shortage, could potentially have an adverse impact on our sales volumes in 2021, primarily in the first half of the year.

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For 2021, we expect an increase in our Electronics’ segment sales in 2021 compared to 2020 primarily due to the increase in production volume forecasts in our European and North American commercial markets and new program launches in 2021, including the first two launches of our MirrorEye camera based vision system for OEM applications as well as the continued roll out of MirrorEye in the retrofit markets.

Our 2020 Stoneridge Brazil segment revenues declined compared to the prior year due to the adverse economic conditions caused by COVID-19 and adverse foreign currency translation. In April 2021, the International Monetary Fund (“IMF”) forecasted the Brazil gross domestic product to grow 3.7% in 2021 and 2.6% in 2022. We expect our served market channels to remain relatively flat based on current market conditions. Our financial performance in our Stoneridge Brazil segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.

Global transportation production has been impacted by supply chain disruptions, in the first quarter of 2021, primarily in our automotive passenger vehicle end-market. Based on the current market conditions, we expect production reductions to be primarily in the first half of 2021 and expect some of the production to be to be made up in the second half of year based on current market demand. We continue to expect the full year revenue impact in 2021 to be limited, however, we do expect that increased material costs, due to material spot buys and increased expediting and premium freight costs, will have an adverse impact on gross margin in 2021.

Other Matters

A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and Stoneridge Brazil segments are denominated in U.S. dollars, and therefore movements in foreign currency exchange rates can also have a significant effect on our results of operations. During the first quarter of 2020 and 2021 the U.S. Dollar strengthened against the euro, Swedish krona, Brazilian real, Argentine peso and Mexican peso, unfavorably impacting our material costs and reported results.

On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers are not acquiring any of the Company’s locations or employees. The purchase price for the sale of the PM sensor business was $4.0 million (subject to a post-closing inventory adjustment which was a payment to SMP of $1.1 million) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3.2 million and $0.8 million, respectively. The sale of the Gen 2 assets will occur upon completion of the Company’s supply commitments to certain customers which are expected to be completed by December 31, 2021. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company will provide and be compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.

On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter sensor product line (“PM Sensor Exit”). The decision to exit the PM sensor product line was made after the consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM Sensor production. We recognized $1.4 million of expense as a result of this initiative during the three months ended March 31, 2021. The estimated range of additional cost of the plan to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $0.8 million to $3.6 million and is related to employee severance and termination costs, contract terminations costs and other related costs such as commercial and supplier settlements. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.

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In January 2019, we committed to a restructuring plan that resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The estimated costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized less than $0.1 million and $2.2 million of expense as a result of these actions during the three months ended March 31, 2021 and 2020, respectively. During the third quarter of 2020, we leased the Canton facility to a third party and are evaluating the sale of the facility. We do not expect to incur additional costs related to the Canton Restructuring.

In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. For the three months ended March 31, 2021 and 2020, we recognized expense of $0.2 million and less than $0.1 million, respectively, as a result of these actions for related costs and non-cash fixed asset charges for accelerated depreciation. The Company expects to incur approximately $0.6 million of additional restructuring costs related to equipment set-up, product launch costs and other related costs for these actions through the fourth quarter of 2021.

On October 26, 2018 the Company announced a Board of Directors approved share repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.

On February 24, 2020, the Board of Directors authorized a new repurchase program of $50.0 million for the repurchase of outstanding Common Shares over an 18 month period. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, under the new 2020 repurchase program, the Company repurchased 242,634 Common Shares for $5.0 million, which became Treasury Shares, in accordance with this repurchase program authorization. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.

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. Business realignment costs of $0.2 million and $0.6 million were incurred in the three ended March 31, 2021 and 2020, respectively.

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.

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Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):


									Dollar
									increase /
Three months ended March 31,	2021				2020				(decrease)
Net sales	$	193,795	100.0	%	$	182,966	100.0	%	$	10,829
Costs and expenses:
Cost of goods sold		147,709	76.2			137,569	75.2			10,140
Selling, general and administrative		29,376	15.2			29,503	16.1			(127)
Design and development		14,651	7.6			12,235	6.7			2,416
Operating income		2,059	1.0			3,659	2.0			(1,600)
Interest expense, net		1,766	0.9			1,030	0.5			736
Equity in earnings of investee		(614)	(0.3)			(457)	(0.2)			(157)
Other expense (income), net		358	0.2			(1,617)	(0.9)			1,975
Income before income taxes		549	0.2			4,703	2.6			(4,154)
Provision for income taxes		419	0.2			1,213	0.7			(794)
Net income	$	130	(0.0)	%	$	3,490	1.9	%	$	(3,360)

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


									Dollar		Percent
									increase		increase
Three months ended March 31,	2021				2020				(decrease)		(decrease)
Control Devices	$	99,618	51.4	%	$	96,850	52.9	%	$	2,768	2.9	%
Electronics		82,770	42.7			71,546	39.1			11,224	15.7	%
Stoneridge Brazil		11,407	5.9			14,570	8.0			(3,163)	(21.7)	%
Total net sales	$	193,795	100.0	%	$	182,966	100.0	%	$	10,829	5.9	%

Our Control Devices segment net sales increased $2.8 million due to increased volumes in our China automotive and commercial vehicle markets of $4.2 million and $2.5 million, respectively, and an increase in our North American commercial vehicle and agricultural markets of $0.9 million and $0.4 million, respectively, as well as a favorable foreign currency translation of $0.7 million. These increases were partially offset by a decrease in volumes in our North American automotive market of $6.1 million.

Our Electronics segment net sales increased due to favorable euro and Swedish krona foreign currency translation of $6.5 million compared to the prior year quarter. Sales volumes increased in our European, North American and China commercial vehicle markets of $3.2 million, $0.9 million and $0.5 million, respectively. In addition, the Electronics segment net sales increased due to higher sales volumes in our European off-highway vehicle products of $0.5 million. These increases were partially offset by a decrease in sales volume in our Automotive market of $0.5 million.

Our Stoneridge Brazil segment net sales decreased due to unfavorable Brazilian real foreign currency translation of $3.1 million and lower volumes for our aftermarket products offset by higher sales for our Argentina market channel.

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


										Dollar	Percent
										increase	increase
Three months ended March 31,	2021				2020					(decrease)	(decrease)
North America	$	96,534	49.8	%	$	99,851	54.5	%	$	(3,317)	(3.3)	%
South America		11,407	5.9			14,570	8.0			(3,163)	(21.7)	%
Europe and Other		85,854	44.3			68,545	37.5			17,309	25.3	%
Total net sales	$	193,795	100.0	%	$	182,966	100.0	%	$	10,829	5.9	%

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The decrease in North American net sales was attributable to sales volume decreases in our North American automotive market of $6.6 million offset by an increase in sales volume in our North American commercial vehicle and other markets by $1.8 million and $0.7 million, respectively. The decrease in net sales in South America was primarily due to unfavorable foreign currency translation of $3.1 million. The increase in net sales in Europe and Other was primarily due to a favorable foreign currency translation of $7.2 million as well as an increase in our China automotive, European commercial vehicle and China commercial vehicle markets of $4.2 million, $3.4 million and $3.0 million, respectively. The increases in Europe and Other sales were offset by a decrease in European automotive sales of $0.8 million.

Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to the first quarter of 2020 and our gross margin decreased from 24.8% in the first quarter of 2020 to 23.8% in the first quarter of 2021. Our material cost as a percentage of net sales increased from 52.8% in the first quarter of 2020 to 54.8% in the first quarter of 2021 from costs associated with supply chain disruptions and adverse product mix. Overhead as a percentage of net sales decreased to 15.7% for the first quarter of 2021 compared to 16.9% for the first quarter of 2020.

Our Control Devices segment gross margin increased due to lower restructuring costs of $1.4 million and favorable leverage of fixed costs from higher sales levels offset by costs associated with supply chain disruptions.

Our Electronics segment gross margin decreased primarily due to higher material and labor costs as a percentage of net sales from costs associated with supply chain disruptions and adverse product mix.

Our Stoneridge Brazil segment gross margin decreased due to the reduction in sales volume and adverse mix from lower sales of aftermarket products.

Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $0.1 million compared to the first quarter of 2020. SGA spending was consistent with the prior period while the 2021 first quarter gain on disposal of the PM sensor business was offset by unfavorable change in fair value of SRB earn-out consideration adjustments.

Design and Development (“D&D”). D&D costs increased by $2.4 million due to an increase in our Electronics segment for ongoing development activities for awarded business programs and development of advanced technologies and systems for future growth opportunities.

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


					Dollar		Percent
					increase /		increase /
Three months ended March 31,	2021		2020		(decrease)		decrease
Control Devices	$	10,165	$	7,322	$	2,843	38.8	%
Electronics		(873)		2,872		(3,745)	NM
Stoneridge Brazil		(48)		859		(907)	NM
Unallocated corporate		(7,185)		(7,394)		209	2.8	%
Operating income	$	2,059	$	3,659	$	(1,600)	(43.7)	%

NM – Not meaningful

Our Control Devices segment operating income increased due to the impact of higher gross margin, the gain on disposal of the PM sensor business offset by higher Sarasota environmental costs.

Our Electronics segment operating income decreased primarily due to the impact of lower segment gross margin and higher D&D costs.

Our Stoneridge Brazil segment operating income decreased primarily due to lower gross margin and an unfavorable change in fair value of earn-out consideration adjustments offset by lower selling and design and development costs.

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Our unallocated corporate operating loss decreased primarily from lower wage and employee benefit expenses offset by higher incentive compensation costs.

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


					Dollar		Percent
					increase /		increase /
Three months ended March 31,	2021		2020		(decrease)		decrease
North America	$	(2,638)	$	(483)	$	(2,155)	(446.2)	%
South America		(48)		859		(907)	NM
Europe and Other		4,745		3,283		1,462	44.5	%
Operating income	$	2,059	$	3,659	$	(1,600)	(43.7)	%

Our North American operating loss increased due to lower sales in our automotive market offset by lower restructuring costs. The decrease in operating income in South America was primarily due lower gross margin. Our operating results in Europe and Other increased primarily due to higher sales in our commercial vehicle and China automotive markets as well as a favorable foreign currency translation impact.

Interest Expense, net. Interest expense, net increased by $0.7 million for the three months ended March 31, 2021 due to an increase in our Credit Facility outstanding balance and interest rate.

Equity in Earnings of Investee. Equity earnings for MSIL were $0.4 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively. Equity earnings for Autotech Fund II were $0.2 million and $0.0 million for the three months ended March 31, 2021 and 2020, respectively.

Other Expense (Income), net. We record certain foreign currency transaction losses (gains) as a component of other expense (income), net on the condensed consolidated statement of operations. Other expense, net of $0.4 million, increased by $2.0 million in the first quarter of 2021 compared to other income, net of $1.6 million for the first quarter of 2020 due to 2020 foreign currency transaction gains in our Stoneridge Brazil and Electronics segments.

Provision for Income Taxes. In the three months ended March 31, 2021, income tax expense of $0.4 million was attributable to the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 76.2% is greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions, offset by tax deductible stock compensation and tax incentives.

In the three months ended March 31, 2020, income tax expense of $1.2 million was attributable to the mix of earnings among tax jurisdictions as well as valuation allowances in certain jurisdictions. The effective tax rate of 25.8% was greater than the statutory tax rate primarily due to losses in jurisdictions for which a valuation allowance is recorded.

Liquidity and Capital Resources

Summary of Cash Flows:


Three months ended March 31,	2021		2020
Net cash provided by (used for):
Operating activities	$	(17,066)	$	(6,562)
Investing activities		(6,912)		(7,132)
Financing activities		12,824		28,199
Effect of exchange rate changes on cash and cash equivalents		(2,257)		(2,603)
Net change in cash and cash equivalents	$	(13,411)	$	11,902

Cash used for operating activities increased compared to the first three months of 2020 primarily due to an increase in cash used to fund working capital levels primarily for accounts receivable and lower net income. Our receivable terms and collections rates have remained consistent between periods presented.

Net cash used for investing activities decreased slightly compared to 2020 due to proceeds from the sale of the PM sensor business offset by higher capital expenditures and investments in the Autotech Fund II.

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Net cash provided by financing activities decreased compared to the prior year primarily due to lower net Credit Facility borrowings of $17.5 million and 2020 Common Share repurchases.

As outlined in Note 7 to our condensed consolidated financial statements, the Credit Facility increased our borrowing capacity by $100.0 million and permits borrowing up to a maximum level of $400.0 million. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The Credit Facility had an outstanding balance of $153.5 million at March 31, 2021.

Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts on the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provides for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021). During the Covenant Relief Period:

●

the maximum net leverage ratio is suspended;

●

the calculation of the minimum interest coverage ratio will exclude second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021;

●

the minimum interest coverage ratio of 3.50 is reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively;

●

the Company’s liquidity may not be less than $150,000;

●

the Company’s aggregate amount of cash and cash equivalents cannot exceed $130,000;

●

there are certain restrictions on Restricted Payments (as defined); and

●

a Permitted Acquisition (as defined) may be not consummated unless otherwise approved in writing by the required lenders.

Amendment No. 1 increases the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points.

The Company was in compliance with all covenants at March 31, 2021. The Company has not experienced a violation which would limit the Company’s ability to borrow under the Credit Facility (as amended) and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the Credit Facility may be limited as a result of lower than expected financial performance due to the adverse impact of COVID-19 on the Company’s markets and general global demand. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations.

Stoneridge Brazil maintains short-term loans used for working capital purposes. At March 31, 2021, there was $0.8 million of Stoneridge Brazil debt outstanding. Scheduled principal repayments of $0.8 million are due in 2021.

The Company’s wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20.0 million Swedish krona, or $2.3 million and $2.4 million, at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, there was no balance outstanding on this overdraft credit line. At December 31, 2020, there was 13.1 million Swedish krona, or $1.6 million, outstanding on this overdraft credit line. During the three months ended March 31, 2021, the subsidiary borrowed 95.9 million Swedish krona, or $11.0 million, and repaid 109.0 million Swedish krona, or $12.5 million.

The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of 50.0 million Chinese yuan, or $7.6 million and $7.7 million at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020 there was $4.4 million and $4.5 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which allows up to a maximum borrowing level of 15.0 million Chinese yuan, or $2.3 million at both March 31, 2021 and December 31, 2020. There was $1.3 million and $0.4 million utilized on the Suzhou bank acceptance draft line of credit at March 31, 2021 and December 31, 2020, respectively.

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On May 19, 2020, the Company committed to the strategic exit of its Control Devices PM sensor product line. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as commercial settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM Sensor production. We recognized $1.4 million of expense as a result of this initiative during the three months ended March 31, 2021. The estimated range of additional cost to exit the PM sensor product line, that will impact the Control Devices segment, is approximately $0.8 million to $3.6 million and is related to employee severance and termination costs, contract terminations costs and other related costs such as potential commercial and supplier settlements. The Company expects the exit from the PM sensor product line to be completed in the fourth quarter of 2021.

In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. For the three months ended March 31, 2021 and 2020, we recognized expense of $0.2 million and less than $0.1 million, respectively, as a result of these actions for related costs and non-cash fixed asset charges for accelerated depreciation fixed assets. The Company expects to incur approximately $0.6 million of additional restructuring costs related to equipment set-up, product launch costs and other related costs for these actions through the fourth quarter of 2021.

On October 26, 2018 the Company announced a Board of Directors approved repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.

On February 24, 2020, the Board of Directors authorized a new repurchase program for $50.0 million of outstanding Common Shares over an 18 month period. The repurchases may be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases may also be made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases will be at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization does not obligate the Company to acquire any particular amount of its Common Shares, and it may be suspended or discontinued at any time. For the quarter ended March 31, 2020, the Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program authorization. In April 2020, the Company announced that was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19.

In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. As of March 31, 2021, the Company’s cumulative investment in the Autotech Fund II was $4.0 million. The Company contributed $0.4 million, net to the Autotech Fund II during the three months ended March 31, 2021 and did not contribute to the fund during the three months ended March 21, 2020.

Our future results could also be adversely affected by unfavorable changes in foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden, Estonia, the Netherlands, United Kingdom and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 5 to the condensed consolidated financial statements for additional details. Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of our raw material purchases.

At March 31, 2021, we had a cash and cash equivalents balance of approximately $60.5 million, of which 92.2% was held in foreign locations. The Company has approximately $244.8 million of undrawn commitments under the Credit Facility as of March 31, 2021, which results in total undrawn commitments and cash balances of more than $305.3 million. However, despite the June 26, 2020 amendment, it is possible that future borrowing flexibility under our Credit Facility may be limited as a result of our financial performance.

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Commitments and Contingencies

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

Seasonality

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

Critical Accounting Policies and Estimates

The Company’s critical accounting policies, which include management’s best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company’s 2020 Form 10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of the Company’s 2020 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no material changes in our significant accounting policies or critical accounting estimates during the first quarter of 2021.

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 2020 Form 10-K.

Inflation and International Presence

By operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Furthermore, given the current economic climate and fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 5 to the condensed consolidated financial statements for additional details on the Company’s foreign currency exchange rate and interest rate risks.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously presented within Part II, Item 7A of the Company’s 2020 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2021, an evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in certain legal actions and claims primarily arising in the ordinary course of business. We establish accruals for matters which we believe that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, we do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. We are subject to litigation regarding civil, labor, regulatory and other tax contingencies in our Stoneridge Brazil segment for which we believe the likelihood of loss is reasonably possible, but not probable, although these claims might take years to resolve. We are also subject to product liability and product warranty claims. In addition, if any of our products prove to be defective, we may be required to participate in a government-imposed or customer OEM-instituted recall involving such products. There can be no assurance that we will not experience any material losses related to product liability, warranty or recall claims. See additional details of these matters in Note 11 to the condensed consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes with respect to risk factors previously disclosed in the Company’s 2020 Form 10-K

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 March 31, 2021. There were 67,475 Common Shares delivered to us by employees as payment for withholding taxes due upon vesting of performance share awards and share unit awards during the three months ended March 31, 2021.


				Total number of	Maximum number
				shares purchased as	of shares that may
				part of publicly	yet be purchased
	Total number of	Average price		announced plans	under the plans
Period	shares purchased	paid per share		or programs	or programs
1/1/21-1/31/21	-	$	-	N/A	N/A
2/1/21-2/28/21	8		36.46	N/A	N/A
3/1/21-3/31/21	67,467		34.78	N/A	N/A
Total	67,475

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit Number	Exhibit

10.1	Form of Change in Control Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020).

10.2	Amendment No. 1, dated February 23, 2021, to Employment Agreement, dated March 16, 2015 between the Company and Jonathan B. DeGaynor (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020).

10.3	Employment Agreement, dated January 29, 2021, by and between the Company and James Zizelman (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020).

10.4	Form of Stoneridge, Inc. Directors’ Restricted Shares Plan 2021 Grant Agreement, filed herewith.

10.5	Form of Stoneridge, Inc. Long-Term Incentive Plan 2021 Performance Shares Grant Agreement, filed herewith.

10.6	Form of Stoneridge, Inc. Long-Term Incentive Plan 2021 Restricted Share Units Agreement, filed herewith.

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.

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.

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.


	101	XBRL Exhibits:

	101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	104	The cover page from our Quarterly Report on Form 10-Q for the period ended March 31, 2021, filed with the Securities and Exchange Commission on April 28, 2021, is formatted in Inline Extensible Business Reporting Language (“iXBRL”)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	STONERIDGE, INC.

Date: April 28, 2021	/s/ Jonathan B. DeGaynor
	Jonathan B. DeGaynor
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

Date: April 28, 2021	/s/ Robert R. Krakowiak
	Robert R. Krakowiak
	Executive Vice President, Chief Financial Officer and Treasurer
	(Principal Financial Officer)

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Stoneridge (SRI) 10-Q2021 Q1 Quarterly report

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