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 quarterly period ended March 31, 2000. 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.) 9400 East Market Street, Warren, Ohio 44484 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (330) 856-2443 -------------------------------------------------- Registrant's Telephone Number, Including Area Code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 X No --- --- The number of Common Shares, without par value, outstanding as of May 11, 2000 was 22,397,311. STONERIDGE, INC. INDEX Page No. -------- Part I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Income for the three months ended March 31, 2000 and 1999 3 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 4 Notes to Condensed Consolidated Financial Statements 5-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 11 Part II Other Information 12 Signatures 13 Exhibit Index 14 1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STONERIDGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) March 31, December 31, 2000 1999 ------------------ -------------------- (Unaudited) (Audited) ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 5,581 $ 3,924 Accounts receivable, net 117,035 98,744 Inventories 67,421 65,701 Prepaid expenses and other 14,929 13,383 Deferred income taxes 9,088 10,564 ------------------ -------------------- Total current assets 214,054 192,316 ------------------ -------------------- PROPERTY, PLANT AND EQUIPMENT, net 109,558 106,163 OTHER ASSETS: Goodwill and other intangibles, net 365,628 369,265 Investments and other 29,078 30,565 ------------------ -------------------- TOTAL ASSETS $718,318 $698,309 ================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ 29,240 $ 25,753 Accounts payable 52,706 42,337 Accrued expenses and other 55,031 47,114 ------------------ -------------------- Total current liabilities 136,977 115,204 ------------------ -------------------- LONG-TERM DEBT, net of current portion 318,419 331,898 DEFERRED INCOME TAXES 16,393 15,985 OTHER LIABILITIES 3,011 3,594 ------------------ -------------------- Total long-term liabilities 337,823 351,477 ------------------ -------------------- SHAREHOLDERS' EQUITY: Preferred shares, without par value, 5,000 authorized, none issued -- -- Common shares, without par value, 60,000 authorized, 22,397 issued and outstanding at March 31, 2000 and December 31, 1999, stated at -- -- Additional paid-in capital 141,506 141,506 Retained earnings 103,018 90,502 Accumulated other comprehensive loss (1,006) (380) ------------------ -------------------- Total shareholders' equity 243,518 231,628 ------------------ -------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $718,318 $698,309 ================== ==================== The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated balance sheets. 2 STONERIDGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share data) For the three months ended March 31, ------------------------------ 2000 1999 ------------ ------------ NET SALES $184,211 $177,654 COST AND EXPENSES: Cost of goods sold 132,549 128,214 Selling, general and administrative expenses 25,070 23,183 ------------ ------------ Operating income 26,592 26,257 Interest expense, net 7,931 8,250 Other income, net (313) -- ------------ ------------ INCOME BEFORE INCOME TAXES 18,974 18,007 Provision for income taxes 6,458 7,234 ------------ ------------ NET INCOME $ 12,516 $ 10,773 ============ ============ BASIC AND DILUTED NET INCOME PER SHARE $ 0.56 $ 0.48 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 22,397 22,397 ============ ============ The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements. 3 STONERIDGE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the three months ended March 31, ------------------------------ 2000 1999 ------------ ------------ OPERATING ACTIVITIES: Net income $ 12,516 $ 10,773 Adjustments to reconcile net income to net cash from operating activities- Depreciation and amortization 6,601 7,106 Deferred income taxes 1,555 696 Changes in operating assets and liabilities- Accounts receivable, net (18,417) (13,385) Inventories (1,909) 945 Prepaid expenses and other (1,552) (1,531) Other assets, net 621 796 Accounts payable 10,512 (4,656) Accrued expenses and other 7,581 64 ------------- ------------- Net cash from operating activities 17,508 808 ------------- ------------- INVESTING ACTIVITIES: Capital expenditures (5,712) (1,639) Business acquisitions and other (100) (12,452) ------------- ------------- Net cash from investing activities (5,812) (14,091) ------------- ------------- FINANCING ACTIVITIES: Proceeds from long-term debt -- 2,722 Repayments of long-term debt (1,572) -- Net (repayments) borrowings under credit agreement (8,413) 10,391 ------------- ------------- Net cash from financing activities (9,985) 13,113 ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (54) 58 NET CHANGE IN CASH AND CASH EQUIVALENTS 1,657 (112) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,924 1,876 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,581 $ 1,764 ============= ============= The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements. 4 STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands) 1. The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Commission's rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's 1999 Annual Report to Shareholders. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the full year. 2. Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 87% and 88% of the Company's inventories at March 31, 2000 and December 31, 1999, respectively, and by the first-in, first-out (FIFO) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following: March 31, December 31, 2000 1999 ------------ ------------ Raw materials $43,445 $42,876 Work in progress 10,641 9,636 Finished goods 13,781 13,400 Less-LIFO reserve (446) (211) ------------ ------------ Total $67,421 $65,701 ============ ============ 3. On August 27, 1999, the Company purchased all the outstanding shares of TVI Europe Limited (TVI) for approximately $20,700. TVI is a United Kingdom manufacturer of vehicle information and management systems for the European commercial vehicle market. The transaction was accounted for as a purchase. On March 6, 1999, the Company purchased certain assets and assumed certain liabilities of Delta Schoeller, Limited (Delta) for approximately $12,200. Delta is a United Kingdom manufacturer of switches for the automotive industry. The transaction was accounted for as a purchase. 5 STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands) 4. Other comprehensive (loss) income includes foreign currency translation adjustments, net of related tax. Comprehensive (loss) income consists of the following: March 31, March 31, 2000 1999 ----------- ----------- Net income $12,516 $10,773 Other comprehensive (loss) income (626) 85 ----------- ----------- Comprehensive income $11,890 $10,858 =========== =========== 5. The Company has a $425,000 credit agreement with a bank group. The credit agreement has three components: a $100,000 revolving credit facility, a $150,000 term facility and a $175,000 term facility. The $100,000 revolving facility and the $150,000 term facility expire on December 31, 2003 and require a commitment fee of 0.37% to 0.50% on the unused balance. Interest is payable quarterly at either (i) the prime rate plus a margin of .00% to 1.00% or (ii) LIBOR plus a margin of 1.25% to 2.50%, depending upon the Company's ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined. The $175,000 term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.00% or (ii) LIBOR plus a margin of 3.50%. Long-term debt consists of the following: March 31, December 31, 2000 1999 ---------- ----------- Borrowings under credit agreement $338,449 $346,862 Borrowings payable to foreign banks 6,966 7,917 Other 2,244 2,872 ---------- ----------- 347,659 357,651 Less: Current portion 29,240 25,753 ---------- ----------- $318,419 $331,898 ========== =========== 6. The Company presents basic and diluted earnings per share in accordance with Statement of Financial Accounting Standard No. 128, "Earnings Per Share". Potentially dilutive securities are not significant and do not create differences between reported basic and diluted earnings per share for all periods presented. 6 STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) (in thousands) 7. Based on the criteria set forth in Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company operates in one business segment. The following table presents net sales and noncurrent assets for each of the geographic areas in which the Company operates: March 31, March 31, 2000 1999 ---------- ---------- Net Sales: North America $160,576 $161,154 Europe and other 23,635 16,500 ---------- ---------- Total $184,211 $177,654 ========== ========== March 31, December 31, 2000 1999 --------- ---------- Noncurrent assets: North America $449,214 $452,774 Europe and other 55,050 53,219 --------- ---------- Total $504,264 $505,993 ========== ========== 8. Effective January 1, 2000 the Company adopted Emerging Issues Task Force Issue No. 99-5 (EITF 99-5), "Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements." EITF 99-5 establishes new accounting rules for costs related to the design and development of products and for costs incurred to develop molds, dies and other tools to be used to produce products that will be sold under long-term supply agreements. The Company elected to adopt the requirements of EITF 99-5 on a prospective basis, as permitted. In accordance with the criteria set forth in EITF 99-5, the Company is now required to expense as incurred certain costs that were previously capitalized. The adoption of EITF 99-5 did not have a significant impact on the Company's financial statements during the first quarter; however, the impact could be significant in future periods. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- Three Months Ended March 31, 2000 Compared To Three Months Ended March 31, 1999 - ------------------------------------------------------------------------------- Net Sales. Net sales for the first quarter of 2000 increased by $6.5 million, or 3.7%, to $184.2 million from $177.7 million for the same period in 1999. Sales of core products increased by $21.7 million, or 13.4%, to $184.2 million during the first quarter of 2000 compared to $162.5 million for the same period of 1999. Sales of core products from the recent acquisition of TVI accounted for $6.2 million of the change, while sales of existing core products increased by $15.5 million, or 9.5%, compared to the same period in 1999. Sales revenues for the quarter were favorably impacted by the strong automotive and commercial vehicle markets, and the agricultural equipment market showed improvement compared with the first quarter of 1999. Sales for the first quarter of 2000 for North America decreased $.6 million to $160.6 million from $161.2 million for the same period in 1999. North American sales revenues for the first quarter of 1999 included $15.2 million of sales generated from the contract manufacturing business, which was phased out during the second quarter of 1999. Contract manufacturing sales accounted for 8.6% of total sales for the first quarter of 1999. North American sales accounted for 87.2% of total sales for the first quarter of 2000 compared with 90.7% for the same period in 1999. Sales for the first quarter of 2000 outside North America increased $7.1 million to $23.6 million from $16.5 million for the same period in 1999. Sales outside North America accounted for 12.8% of total sales for the first quarter of 2000 compared with 9.3% for the same period in 1999. Cost of Goods Sold. Cost of goods sold for the first quarter of 2000 increased by $4.3 million, or 3.4%, to $132.5 million from $128.2 million in the first quarter of 1999. As a percentage of sales, cost of goods sold decreased to 72.0% in 2000 from 72.2% in 1999. The decrease as a percent of sales was due primarily to a shift in product mix to higher value added electrical and electronic core products and the phase-out of contract manufacturing sales. Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses increased by $1.9 million to $25.1 million in the first quarter of 2000 from $23.2 million for the same period in 1999. As a percentage of sales, SG&A expenses increased to 13.6% for the first quarter of 2000 from 13.1% for the same period in 1999. The increase is due primarily to higher development costs to support new product launches for safety-related products, including the seat track position and fuel cut-off switch, and the Next Generation Vehicle. In addition, the commercial costs related to the newly acquired companies and geographical expansion were also responsible for this increase. Interest Expense. Interest expense for the first quarter of 2000 was $7.9 million compared with $8.2 million in 1999. Average outstanding indebtedness was $346.3 million and $349.1 million for the first three months of 2000 and 1999, respectively. Income Before Income Taxes. As a result of the foregoing, income before taxes increased by $1.0 million for the first quarter of 2000 to $19.0 million from $18.0 million in 1999. Provision for Income Taxes. The Company recognized provisions for income taxes of $6.5 million and $7.2 million for federal, state and foreign income taxes for the first quarters of 2000 and 1999, respectively. The decline in the effective tax rate in 2000 is a result of more income being generated in jurisdictions with lower tax burdens, and the implementation of certain tax planning strategies. 8 Net Income. As a result of the foregoing, net income increased by $1.7 million, or 15.7%, to $12.5 million for the first quarter of 2000 from $10.8 million in 1999. Liquidity and Capital Resources Net cash provided by operating activities was $17.5 million and $0.8 million for the quarters ended March 31, 2000 and 1999, respectively. The increase in net cash from operating activities of $16.7 million was due to the increase in net income of $1.7 million and improved working capital management. Net cash used for investing activities was $5.8 million and $14.1 million for the quarters ended March 31, 2000 and 1999, respectively. The decrease in cash used for investing activities of $8.3 million was primarily the result of the acquisition of Delta in the first quarter of 1999. The acquisition of Delta was financed with funds from the Company's $425.0 million credit agreement. Net cash used for financing activities was $10.0 million for the quarter ended March 31, 2000 as compared to net cash provided by financing activities of $13.1 million for the quarter ended March 31, 1999. Primarily as a result of the Delta acquisition, long-term debt increased $13.1 million for the quarter ended March 31, 1999, while during the first quarter of 2000 improved working capital management resulted in $10.0 million of debt repayment. The Company has a $425.0 million credit agreement (of which $338.5 and $352.5 million was outstanding at March 31, 2000 and 1999, respectively) with a bank group. The credit agreement has three components: a $100.0 million revolving facility (of which $62.1 million is currently available), a $150.0 million term facility, and a $175.0 million term facility. The $100.0 million revolving facility and the $150.0 million term facility expire on December 31, 2003, and require a commitment fee of 0.37% to 0.50% on the unused balance. Interest is payable quarterly at either (i) the prime rate plus a margin of .00% to 1.00% or (ii) LIBOR plus a margin of 1.25% to 2.50%, depending upon the Company's ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization, as defined. The $175.0 million term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.00% or (ii) LIBOR plus a margin of 3.50%. The Company has entered into four interest rate swap agreements with a total notional amount of $285.9 million. These interest rate swap agreements expire by December 31, 2000. The interest rate swap agreements exchange variable interest rates on the senior secured credit facility for fixed interest rates. The Company does not use derivatives for speculative or profit-motivated purposes. Management believes that cash flows from operations and the availability of funds from the Company's credit facilities will provide sufficient liquidity to meet the Company's growth and operating needs. Inflation and International Presence Management believes that the Company's operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, management believes they are not significantly exposed to adverse economic conditions. 9 Recently Issued Accounting Standards The Company is required to adopt Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS 137) for its fiscal year ending 2001. SFAS 133 establishes new accounting and reporting standards for derivatives and hedging activities. The Company does not expect the adoption of SFAS 133 to significantly affect the financial statements. Effective January 1, 2000 the Company adopted Emerging Issues Task Force Issue No. 99-5 (EITF 99-5), "Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements." EITF 99-5 establishes new accounting rules for costs related to the design and development of products and for costs incurred to develop molds, dies and other tools to be used to produce products that will be sold under long-term supply agreements. The Company elected to adopt the requirements of EITF 99-5 on a prospective basis, as permitted. In accordance with the criteria set forth in EITF 99-5, the Company is now required to expense as incurred certain costs that were previously capitalized. The adoption of EITF 99-5 did not have a significant impact on the Company's financial statements during the first quarter; however, the impact could be significant in future periods. Year 2000 Initiative The Company had conducted an evaluation of the actions necessary in order to gain assurance that its information and non-information technology systems would be able to function without disruption with respect to the application of dating systems in the Year 2000. As a result of this evaluation, the Company upgraded, replaced and tested its information systems, computer applications and other systems to ensure they would be able to operate without disruption due to Year 2000 issues. The Company completed these remedial actions by December 31, 1999. Historical Year 2000 expenditures through December 31, 1999 were approximately $4.2 million. Year 2000 expenditures related to modifying software, purchasing new software and hardware, and replacing non-compliant software and hardware. These costs included both internal and external personnel costs related to the assessment process, as well as the cost of purchasing certain hardware and software. Year 2000 expenditures anticipated to be incurred subsequent to December 31, 1999 are not expected to be significant. The Company has not experienced any material disruptions or unexpected costs related to Year 2000 problems with internal or third-party information and non-information technology systems. In addition, the Company has not identified any significant contingencies related to Year 2000 problems. However, no assurance can be given that a currently unknown material Year 2000 problem will not arise in the future. Such an event could have a material adverse effect on the Company's financial condition and results of operations. 10 ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. To reduce exposures to market risks resulting from fluctuations in interest rates, the Company uses derivative financial instruments. Specifically, the Company uses interest rate swap agreements to mitigate the effects of interest rate fluctuations on net income by changing the floating interest rates on certain portions of the Company's debt to fixed interest rates. The effect of changes in interest rates on the Company's net income generally has been insignificant relative to other factors that also affect net income, such as sales and operating margins. Management believes that its use of these financial instruments to reduce risk is in the Company's best interest. The Company does not enter into financial instruments for trading purposes. The Company's risks related to commodity price and foreign currency exchange risks have historically not been significant. The Company does not expect the effects of these risks to be significant based on current operating and economic conditions in the countries and markets in which it operates. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ----------------------------- In the ordinary course of business, the Company is involved in various legal proceedings, workers' compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - ----------------------------------------------------- None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ------------------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------- None. ITEM 5. OTHER INFORMATION - ----------------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------------------- (a) Exhibits 27.1 Financial Data Schedule for the three months ended March 31, 2000 12 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: May 11, 2000 /s/ Cloyd J. Abruzzo ------------------------------------- Cloyd J. Abruzzo President and Chief Executive Officer (Principal Executive Officer) Date: May 11, 2000 /s/ Kevin P. Bagby ------------------------------------- Kevin P. Bagby Treasurer and Chief Financial Officer (Principal Financial and Chief Accounting Officer) 13 STONERIDGE, INC. EXHIBIT INDEX Exhibit Number Exhibit - ------------ ------- 27.1 Financial Data Schedule for the three months ended March 31, 2000, filed herewith. 14