STONERIDGE INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
________to ________
Commission
file number: 001-13337
STONERIDGE,
INC.
(Exact
name of registrant as specified in its charter)
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Ohio
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34-1598949
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(State or other jurisdiction
of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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9400 East Market Street, Warren,
Ohio
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44484
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(Address
of principal executive offices)
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(Zip
Code)
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(330) 856-2443
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Registrant’s telephone number, including area code
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Shares, without par value
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New
York Stock Exchange
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Securities
registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
o Yes x
No
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
o Yes x
No
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. x Yes o
No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). o Yes x
No
As of
June 30, 2008, the aggregate market value of the registrant’s Common Shares,
without par value, held by non-affiliates of the registrant was approximately
$247.1 million. The closing price of the Common Shares on June 30,
2008 as reported on the New York Stock Exchange was $17.06 per
share. As of June 30, 2008, the number of Common Shares outstanding
was 24,660,471.
The
number of Common Shares, without par value, outstanding as of February 20, 2009
was 24,664,529.
DOCUMENTS
INCORPORATED BY REFERENCE
Definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on May 4,
2009, into Part III, Items 10, 11, 12, 13 and 14.
1
STONERIDGE,
INC. AND SUBSIDIARIES
INDEX
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Page No.
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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9
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Item
1B.
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Unresolved
Staff Comments
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12
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Item
2.
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Properties
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13
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Item
3.
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Legal
Proceedings
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14
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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14
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PART
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Item
6.
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Selected
Financial Data
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16
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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33
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Item
8.
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Financial
Statements and Supplementary Data
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34
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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72
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Item
9A.
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Controls
and Procedures
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72
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Item
9B.
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Other
Information
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74
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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74
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Item
11.
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Executive
Compensation
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74
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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74
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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75
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Item
14.
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Principal
Accounting Fees and Services
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75
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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75
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Signatures
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76
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2
PART
I
Item
1. Business.
Overview
Founded
in 1965, Stoneridge, Inc. (the “Company”) is an independent designer and
manufacturer of highly engineered electrical and electronic components, modules
and systems for the medium- and heavy-duty truck, agricultural, automotive and
off-highway vehicle markets. Our custom-engineered products are
predominantly sold on a sole-source basis and consist of application-specific
control devices, sensors, vehicle management electronics and power and signal
distribution systems. These products comprise the elements of every
vehicle’s electrical system, and individually interface with a vehicle’s
mechanical and electrical systems to (i) activate equipment and accessories,
(ii) display and monitor vehicle performance and (iii) control and distribute
electrical power and signals. Our products improve the performance,
safety, convenience and environmental monitoring capabilities of our customers’
vehicles. As such, the growth in many of the product areas in which
we compete is driven by the increasing consumer desire for safety, security and
convenience. This is coupled with the need for original equipment
manufacturers (“OEM”) to meet safety requirements in addition to the general
trend of increased electrical and electronic content per vehicle. Our
technology and our partnership-oriented approach to product design and
development enables us to develop next-generation products and to excel in the
transition from mechanical-based components and systems to electrical and
electronic components, modules and systems.
Products
We
conduct our business in two reportable segments: Electronics and Control
Devices. Under the provisions of Statement of Financial Accounting Standard
(“SFAS”) No. 131, Disclosures
about Segments of an Enterprise and Related Information, the Company’s
operating segments are aggregated based on sharing similar economic
characteristics. Other aggregation factors include the nature of the
products offered and management and oversight
responsibilities. The core products of the Electronics
reportable segment include vehicle electrical power and distribution systems and
electronic instrumentation and information display products. The core products
of the Control Devices reportable segment include electronic and electrical
switch products, control actuation devices and sensors. We design and
manufacture the following vehicle parts:
Electronics. The Electronics
reportable segment produces electronic instrument clusters, electronic control
units, driver information systems and electrical distribution systems, primarily
wiring harnesses and connectors for electrical power and signal
distribution. These products collect, store and display vehicle
information such as speed, pressure, maintenance data, trip information,
operator performance, temperature, distance traveled and driver messages related
to vehicle performance. In addition, power distribution systems
regulate, coordinate and direct the operation of the entire electrical system
within a vehicle compartment. These products use state-of-the-art
hardware, software and multiplexing technology and are sold principally to the
medium- and heavy-duty truck, agricultural and off-highway vehicle
markets.
Control Devices. The Control
Devices reportable segment produces products that monitor, measure or activate a
specific function within the vehicle. Product lines included within
the Control Devices segment are sensors, switches, actuators, as well as other
electronic products. Sensor products are employed in most major
vehicle systems, including the emissions, safety, powertrain, braking, climate
control, steering and suspension systems. Switches transmit a signal
that activates specific functions. Hidden switches are not typically
seen by vehicle passengers, but are used to activate or deactivate selected
functions. Customer activated switches are used by a vehicle's
operator or passengers to manually activate headlights, rear defrosters and
other accessories. In addition, the Control Devices segment designs
and manufactures electromechanical actuator products that enable users to deploy
power functions in a vehicle and can be designed to integrate switching and
control functions. We sell these products principally to the
automotive market.
3
The
following table presents net sales by reportable segment, as a percentage of
total net sales:
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For the Years Ended
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||||||||||||
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December 31,
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||||||||||||
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2008
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2007
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2006
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Electronics
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69 | % | 61 | % | 62 | % | ||||||
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Control
Devices
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31 | 39 | 38 | |||||||||
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Total
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100 | % | 100 | % | 100 | % | ||||||
For
further information related to our reportable segments and financial information
about geographic areas, see Note 13, “Segment Reporting,” to the consolidated
financial statements included in this report.
Production
Materials
The
principal production materials used in the manufacturing process for both
reportable segments include: copper wire, zinc, cable, resins, plastics, printed
circuit boards, and certain electrical components such as microprocessors,
memory devices, resistors, capacitors, fuses, relays and
connectors. We purchase such materials pursuant to both annual
contract and spot purchasing methods. Such materials are readily
available from multiple sources, but we generally establish collaborative
relationships with a qualified supplier for each of our key production materials
in order to lower costs and enhance service and quality. Any change
in the supply of, or price for, these raw materials could materially affect our
results of operations and financial condition.
Patents
and Intellectual Property
Both of
our reportable segments maintain and have pending various U.S. and foreign
patents and other rights to intellectual property relating to our business,
which we believe are appropriate to protect the Company's interests in existing
products, new inventions, manufacturing processes and product developments. We
do not believe any single patent is material to our business, nor would the
expiration or invalidity of any patent have a material adverse effect on our
business or ability to compete. We are not currently engaged in any material
infringement litigation, nor are there any material infringement claims pending
by or against the Company.
Industry
Cyclicality and Seasonality
The
markets for products in both of our reportable segments have historically been
cyclical. Because these products are used principally in the production of
vehicles for the medium- and heavy-duty truck, agricultural, automotive and
off-highway vehicle markets, sales, and therefore results of operations, are
significantly dependent on the general state of the economy and other factors,
like the impact of environmental regulations on our customers, which affect
these markets. A decline in medium- and heavy-duty truck, agricultural,
automotive and off-highway vehicle production of our principal customers could
adversely impact the Company. Approximately 70%, 60% and 62% of our
net sales in 2008, 2007 and 2006, respectively, were derived from the medium-
and heavy-duty truck, agricultural and off-highway vehicle
markets. Approximately 30%, 40% and 38% of our net sales in 2008,
2007 and 2006, respectively, were made to the automotive market.
We
typically experience decreased sales during the third calendar quarter of each
year due to the impact of scheduled OEM plant shutdowns in July for vacations
and new model changeovers. The fourth quarter is similarly impacted by plant
shutdowns for the holidays.
Customers
We are
dependent on a small number of principal customers for a significant percentage
of our sales. The loss of any significant portion of our sales to these
customers or the loss of a significant customer would have a material adverse
impact on the financial condition and results of operations of the
Company. We supply numerous different parts to each of our principal
customers. Contracts with several of our customers provide for
supplying their requirements for a particular model, rather than for
manufacturing a specific quantity of products. Such contracts range from one
year to the life of the model, which is generally three to seven years.
Therefore, the loss of a contract for a major model or a significant decrease in
demand for certain key models or group of related models sold by any of our
major customers could have a material adverse impact on the Company. We may also
enter into contracts to supply parts, the introduction of which may then be
delayed or not used at all. We also compete to supply products for
successor models and are therefore subject to the risk that the customer will
not select the Company to produce products on any such model, which could have a
material adverse impact on the financial condition and results of operations of
the Company. In addition, we sell products to other customers that
are ultimately sold to our principal customers.
4
The
following table presents the Company’s principal customers, as a percentage of
net sales:
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For
the Ended
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||||||||||||
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December 31,
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2008
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2007
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2006
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Navistar
International
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26 | % | 20 | % | 25 | % | ||||||
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Deere
& Company
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10 | 7 | 6 | |||||||||
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Ford
Motor Company
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6 | 8 | 6 | |||||||||
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Chrysler
LLC
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6 | 5 | 5 | |||||||||
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MAN
AG
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4 | 6 | 6 | |||||||||
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General
Motors
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4 | 6 | 5 | |||||||||
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Other
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44 | 48 | 47 | |||||||||
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Total
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100 | % | 100 | % | 100 | % | ||||||
Backlog
Our
products are produced from readily available materials and have a relatively
short manufacturing cycle; therefore our products are not on backlog status.
Each of our production facilities maintains its own inventories and production
schedules. Production capacity is adequate to handle current
requirements and can be expanded to handle increased growth if
needed.
Competition
Markets
for our products in both reportable segments are highly competitive. The
principal methods of competition are technological innovation, price, quality,
service and timely delivery. We compete for new business both at the
beginning of the development of new models and upon the redesign of existing
models. New model development generally begins two to five years before the
marketing of such models to the public. Once a supplier has been selected to
provide parts for a new program, an OEM customer will usually continue to
purchase those parts from the selected supplier for the life of the program,
although not necessarily for any model redesigns.
Our
diversity in products creates a wide range of competitors, which vary depending
on both market and geographic location. We compete based on strong
customer relations and a fast and flexible organization that develops
technically effective solutions at or below target price. We compete
against the following primary competitors:
Electronics. Our
primary competitors include Continental AG/Siemens VDO, Delphi and
Leoni.
Control
Devices. Our primary competitors include Methode, Denso,
Delphi, Bosch, Continental AG/Siemens VDO, Hella, TRW and BEI
Duncan.
Product
Development
Our
research and development efforts are largely product design and development
oriented and consist primarily of applying known technologies to customer
generated problems and situations. We work closely with our customers
to creatively solve problems using innovative approaches. The
majority of our development expenses are related to customer-sponsored programs
where we are involved in designing custom-engineered solutions for specific
applications or for next generation technology. To further our
vehicles platform penetration, we have also developed collaborative
relationships with the design and engineering departments of key
customers. These collaborative efforts have resulted in the
development of new and complimentary products and the enhancement of existing
products.
5
Development
work at the Company is largely performed on a decentralized basis. We
have engineering and product development departments located at a majority of
our manufacturing facilities. To ensure knowledge sharing among
decentralized development efforts, we have instituted a number of mechanisms and
practices whereby innovation and best practices are shared. The
decentralized product development operations are complimented by larger
technology groups in Canton, Massachusetts, Lexington, Ohio and Stockholm,
Sweden.
We use
efficient and quality oriented work processes to address our customers’ high
standards. Our product development technical resources include a full
complement of computer-aided design and engineering (“CAD/CAE”) software
systems, including (i) virtual three-dimensional modeling, (ii) functional
simulation and analysis capabilities and (iii) data links for rapid
prototyping. These CAD/CAE systems enable the Company to expedite
product design and the manufacturing process to shorten the development time and
ultimately time to market.
We have
further strengthened our electrical engineering competencies through investment
in equipment such as (i) automotive electro-magnetic compliance test chambers,
(ii) programmable automotive and commercial vehicle transient generators, (iii)
circuit simulators and (iv) other environmental test
equipment. Additional investment in product machining equipment has
allowed us to fabricate new product samples in a fraction of the time required
historically. Our product development and validation efforts are
supported by full service, on-site test labs at most manufacturing facilities,
thus enabling cross-functional engineering teams to optimize the product,
process and system performance before tooling initiation.
We have
invested, and will continue to invest in technology to develop new products for
our customers. Research and development costs incurred in connection
with the development of new products and manufacturing methods, to the extent
not recoverable from the customer, are charged to selling, general and
administrative expenses, as incurred. Such costs amounted to
approximately $45.6 million, $44.2 million and $40.8 million for 2008, 2007 and
2006, respectively, or 6.1%, 6.1% and 5.8% of net sales for these
periods.
We will
continue shifting our investment spending toward the design and development of
new products rather than focusing on sustaining existing product programs for
specific customers. This shift is essential to the future growth of
the Company. However, the typical product development process takes
three to five years to show tangible results. As part of our effort
to shift our investment spending, we reviewed our current product portfolio and
adjusted our spending to either accelerate or eliminate our investment in these
products, based on our position in the market and the potential of the market
and product.
Environmental
and Other Regulations
Our
operations are subject to various federal, state, local and foreign laws and
regulations governing, among other things, emissions to air, discharge to waters
and the generation, handling, storage, transportation, treatment and disposal of
waste and other materials. We believe that our business, operations and
facilities have been and are being operated in compliance, in all material
respects, with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations.
Employees
As of
December 31, 2008, we had approximately 6,400 employees, approximately 1,600 of
whom were salaried and the balance of whom were paid on an hourly
basis. Except for certain employees located in Mexico, Sweden, and
the United Kingdom, our employees are not represented by a union. Our unionized
workers are not covered by collective bargaining agreements. We
believe that relations with our employees are good.
Joint
Ventures
We form
joint ventures in order to achieve several strategic objectives including
gaining access to new markets, exchanging technology and intellectual capital,
broadening our customer base and expanding our product offerings.
Specifically we have formed joint ventures in Brazil, PST Eletrônica S.A.
(“PST”), and India, Minda Stoneridge Instruments Ltd. (“Minda”), and continue to
explore similar business opportunities in other global markets. We
have a 50% interest in PST and a 49% interest in Minda. We entered
into our PST joint venture in October 1997 and our Minda joint venture in August
2004. Each of these investments is accounted for using the equity
method of accounting.
6
Our joint
ventures have contributed positively to our financial results in 2008, 2007 and
2006. Equity earnings by joint venture for the years ended December
31, 2008, 2007 and 2006 are summarized in the following table (in
thousands):
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For
the Years Ended
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||||||||||||
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December 31,
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2008
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2007
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2006
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PST
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$ | 12,788 | $ | 10,351 | $ | 6,771 | ||||||
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Minda
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702 | 542 | 354 | |||||||||
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Total
equity earnings of investees
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$ | 13,490 | $ | 10,893 | $ | 7,125 | ||||||
In
Brazil, our PST joint venture, which is an electronic system provider
focused on security and convenience applications primarily for the vehicle and
motorcycle industry, generated net sales of $174.3 million, $133.0
million and $94.1 million in 2008, 2007 and 2006, respectively. We
also received dividend payments of $4.2 million, $5.6 million and $3.7 million
from PST in 2008, 2007 and 2006, respectively.
Executive
Officers of the Company
Each
executive officer of the Company is appointed by the Board of Directors, serves
at its pleasure and holds office until a successor is appointed, or until the
earlier of death, resignation or removal. The Board of Directors
generally appoints executive officers annually. The executive
officers of the Company are as follows:
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Name
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Age
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Position
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John
C. Corey
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61
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President,
Chief Executive Officer and Director
|
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George
E. Strickler
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61
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Executive
Vice President, Chief Financial Officer and Treasurer
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Thomas A. Beaver
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55
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Vice
President of Global Sales and Systems Engineering
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Mark
J. Tervalon
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42
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Vice
President of the Company and President of the Stoneridge Electronics
Division
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John C. Corey,
President, Chief Executive Officer and Director. Mr. Corey has served as
President and Chief Executive Officer since being appointed by the Board of
Directors in January 2006. Mr. Corey has served as a Director on the
Board of Directors since January 2004. Prior to his employment with
the Company, Mr. Corey served from October 2000, as President and Chief
Executive Officer and Director of Safety Components International, a supplier of
airbags and components, with worldwide operations.
George E.
Strickler, Executive Vice President, Chief Financial Officer and
Treasurer. Mr. Strickler has
served as Executive Vice President and Chief Financial Officer since joining the
Company in January of 2006. Mr. Strickler was appointed Treasurer of
the Company in February 2007. Prior to his employment with the
Company, Mr. Strickler served as Executive Vice President and Chief Financial
Officer for Republic Engineered Products, Inc. (“Republic”), from February 2004
to January of 2006. Before joining Republic, Mr. Strickler was
BorgWarner Inc.’s Executive Vice President and Chief Financial Officer from
February 2001 to November 2003.
Thomas A. Beaver,
Vice President of Global Sales and Systems Engineering. Mr. Beaver has served as Vice
President of Global Sales and Systems Engineering of the Company since January
of 2005. Prior to this time, Mr. Beaver served as Vice President of
Stoneridge Sales and Marketing from January 2000 to January 2005.
Mark J. Tervalon,
Vice President of the Company and President of the Stoneridge Electronics
Division. Mr. Tervalon has served as President of the
Stoneridge Electronics Division and Vice President of the Company since August
of 2006. Prior to that, Mr. Tervalon served as Vice President and
General Manager of the Electronic Products Division from May 2002 to December
2003 when he became Vice President and General Manager of the Stoneridge
Electronics Group.
7
Available
Information
We make
available, free of charge through our website (www.stoneridge.com), our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, all amendments to those reports, and other filings with the Securities and
Exchange Commission (“SEC”), as soon as reasonably practicable after they are
filed with the SEC. Our Corporate Governance Guidelines, Code of
Business Conduct and Ethics, Code of Ethics for Senior Financial Officers,
Whistleblower Policy and Procedures and the charters of the Board’s Audit,
Compensation and Nominating and Corporate Governance Committees are posted on
our website as well. Copies of these documents will be available to
any shareholder upon request. Requests should be directed in writing
to Investor Relations at 9400 East Market Street, Warren, Ohio
44484.
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F. Street, NE, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including the
Company.
8
Item
1A. Risk Factors.
Set forth
below and elsewhere in this Annual Report on Form 10-K are some of the
principal risks and uncertainties that could cause our actual business results
to differ materially from any forward-looking statements contained in this
Report. In addition, future results could be materially affected by general
industry and market conditions, changes in laws or accounting rules, general
U.S. and non-U.S. economic and political conditions, including a global economic
slow-down, fluctuation of interest rates or currency exchange rates, terrorism,
political unrest or international conflicts, political instability or major
health concerns, natural disasters, commodity prices or other disruptions of
expected economic and business conditions. These risk factors should be
considered in addition to our cautionary comments concerning forward-looking
statements in this Report, including statements related to markets for our
products and trends in our business that involve a number of risks and
uncertainties. Our separate section to follow, "Forward-Looking Statements," on
page 32 should be considered in addition to the following
statements.
Current
worldwide economic conditions and credit tightening may adversely affect our
business, operating results and financial condition.
General
worldwide economic conditions have experienced a downturn due to the effects of
the sub-prime lending crisis, general credit market crisis, collateral effects
on the finance and banking industries, concerns about inflation, slower economic
activity, decreased consumer confidence, reduced corporate profits and capital
spending, adverse business conditions and liquidity concerns. We are
not immune to changes in economic conditions. We believe
the current worldwide economic crisis has resulted and may continue to result in
a further decline in current and forecasted production volumes for light and
commercial vehicles, which will likely result in decreased demand for our
products. The worldwide economic crisis also may have other adverse
implications on our business. For example, the ability of our
customers to borrow money from their existing lenders or to obtain credit from
other sources to purchase our products may be impaired. Although we
maintain an allowance for doubtful accounts for estimating losses resulting from
the inability of our customers to make required payments and such losses have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same loss rates that we
have in the past, especially given the current turmoil in the worldwide
economy. A significant change in the liquidity or financial condition
of our customers could cause unfavorable trends in our receivable collections
and additional allowances may be required, which could adversely affect our
operating results. In addition, the worldwide economic crisis may
adversely impact the ability of suppliers to provide us with materials and
components, which could adversely affect our business and operating
results.
The
North American and European automotive industries are in distress and further
deterioration could adversely impact our business.
Global
automotive market sales represented 30%, 40% and 38% of our total net sales in
2008, 2007 and 2006, respectively. A number of companies in the
global automotive industry are facing severe financial difficulties. In North
America, General Motors, Ford, and Chrysler have experienced a market decline.
They have announced significant restructuring actions in an effort to improve
profitability and some have received Federal financing assistance. The North
American automotive manufacturers are also burdened with substantial structural
costs, such as pension and healthcare costs, that have impacted their
profitability and labor relations and may ultimately result in severe financial
difficulty, including bankruptcy. Automakers across Europe and Japan are also
experiencing difficulties from a weakened economy and tightening credit markets.
Automotive industry conditions have adversely affected our supply base. Lower
production levels for some of our key suppliers, increases in certain raw
material, commodity and energy costs and the global credit market crisis has
resulted in severe financial distress among many companies within the automotive
supply base. The continuation of financial distress within the automotive
industry and the supply base and/or the bankruptcy of one or more of the
automakers may lead to supplier bankruptcies, commercial disputes, supply chain
interruptions, supplier requests for company sponsored capital support, or a
collapse of the supply chain.
Our
business is cyclical and seasonal in nature and downturns in the medium- and
heavy-duty truck, agricultural, automotive and off-road vehicle markets could
reduce the sales and profitability of our business.
The
demand for our products is largely dependent on the domestic and foreign
production of medium- and heavy-duty trucks, agricultural, automobiles and
off-road vehicles. The markets for our products have historically
been cyclical, because new vehicle demand is dependent on, among other things,
consumer spending and is tied closely to the overall strength of the economy.
Because our products are used principally in the production of vehicles for the
medium- and heavy-duty truck, agricultural, automotive and off-road vehicle
markets, our sales, and therefore our results of operations, are significantly
dependent on the general state of the economy and other factors which affect
these markets. A decline in medium- and heavy-duty truck,
agricultural, automotive and off-highway vehicle production could adversely
impact our results of operations and financial condition. In 2008, approximately
70% were derived from the medium- and heavy-duty truck, agricultural and
off-highway vehicle markets and approximately 30% of our net sales were made to
the automotive market. Seasonality experienced by the automotive
industry also impacts our operations. We typically experience
decreased sales during the third quarter of each year due to the impact of
scheduled OEM customer plant shutdowns in July for vacations and new model
changeovers. The fourth quarter is also impacted by plant shutdowns
for the holidays.
9
We
may not realize sales represented by awarded business.
We base
our growth projections, in part, on commitments made by our
customers. There commitments generally renew yearly during a program
life cycle. If actual production orders from our customers do not
approximate such commitments, it could adversely affect our business.
The
prices that we can charge some of our customers are predetermined and we bear
the risk of costs in excess of our estimates.
Our
supply agreements with some of our customers require us to provide our products
at predetermined prices. In some cases, these prices decline over the
course of the contract and may require us to meet certain productivity and cost
reduction targets. In addition, our customers may require us to share
productivity savings in excess of our cost reduction targets. The
costs that we incur in fulfilling these contracts may vary substantially from
our initial estimates. Unanticipated cost increases or the inability
to meet certain cost reduction targets may occur as a result of several factors,
including increases in the costs of labor, components or
materials. In some cases, we are permitted to pass on to our
customers the cost increases associated with specific materials. Cost overruns
that we cannot pass on to our customers could adversely affect our business,
results of operations and financial condition.
We
are dependent on the availability and price of raw materials.
We
require substantial amounts of raw materials and substantially all raw materials
we require are purchased from outside sources. The availability and
prices of raw materials may be subject to curtailment or change due to, among
other things, new laws or regulations, suppliers’ allocations to other
purchasers, interruptions in production by suppliers, changes in exchange rates
and worldwide price levels. Any change in the supply of, or price for, these raw
materials could materially affect our results of operations and financial
condition.
The
loss or insolvency of any of our major customers would adversely affect our
future results.
We are
dependent on a small number of principal customers for a significant percentage
of our net sales. In 2008, our top three principal customers were
Navistar International, Deere & Company and Ford Motor Company, which
comprised 26%, 10% and 6% of our net sales respectively. In 2008, our
top ten customers accounted for 68% of our net sales. The loss of any
significant portion of our sales to these customers or any other customers would
have a material adverse impact on our results of operations and financial
condition. The contracts we have entered into with many of our
customers provide for supplying the customers’ requirements for a particular
model, rather than for manufacturing a specific quantity of products. Such
contracts range from one year to the life of the model, which is generally three
to seven years. These contracts are subject to renegotiation, which
may affect product pricing and generally may be terminated by our customers at
any time. Therefore, the loss of a contract for a major model or a
significant decrease in demand for certain key models or group of related models
sold by any of our major customers could have a material adverse impact on our
results of operations and financial condition by reducing cash flows and our
ability to spread costs over a larger revenue base. We also compete to supply
products for successor models and are subject to the risk that the customer will
not select us to produce products on any such model, which could have a material
adverse impact on our results of operations and financial
condition. In addition, we have significant receivable balances
related to these customers and other major customers that would be at risk in
the event of their bankruptcy.
Consolidation
among vehicle parts customers and suppliers could make it more difficult for us
to compete favorably.
The
vehicle part supply industry has undergone a significant consolidation as OEM
customers have sought to lower costs, improve quality and increasingly purchase
complete systems and modules rather than separate components. As a result of the
cost focus of these major customers, we have been, and expect to continue to be,
required to reduce prices. Because of these competitive pressures, we cannot
assure you that we will be able to increase or maintain gross margins on product
sales to our customers. The trend toward consolidation among vehicle
parts suppliers is resulting in fewer, larger suppliers who benefit from
purchasing and distribution economies of scale. If we cannot achieve
cost savings and operational improvements sufficient to allow us to compete
favorably in the future with these larger, consolidated companies, our results
of operations and financial condition could be adversely
affected.
10
Our
physical properties and information systems are subject to damage as a result of
disasters, outages or similar events.
Our
offices and facilities, including those used for design and development,
material procurement, manufacturing, logistics and sales are located throughout
the world and are subject to possible destruction, temporary stoppage or
disruption as a result of any number of unexpected events. If any of
these facilities or offices were to experience a significant loss as a result of
any of the above events, it could disrupt our operations, delay production,
shipments and revenue, and result in large expenses to repair or replace these
facilities or offices.
In
addition, network and information system shutdowns caused by unforeseen events
such as power outages, disasters, hardware or software defects; computer viruses
and computer security breaks pose increasing risks. Such an event
could also result in the disruption of our operations, delay production,
shipments and revenue, and result in large expenditures necessary to repair or
replace such network and information systems.
We
must implement and sustain a competitive technological advantage in producing
our products to compete effectively.
Our
products are subject to changing technology, which could place us at a
competitive disadvantage relative to alternative products introduced by
competitors. Our success will depend on our ability to continue to
meet customers’ changing specifications with respect to quality, service, price,
timely delivery and technological innovation by implementing and sustaining
competitive technological advances. Our business may, therefore,
require significant ongoing and recurring additional capital expenditures and
investment in research and development and manufacturing and management
information systems. We cannot assure you that we will be able to
achieve the technological advances or introduce new products that may be
necessary to remain competitive. Our inability to continuously
improve existing products and to develop new products and to achieve
technological advances could have a material adverse effect on our results of
operations and financial condition.
We
may experience increased costs associated with labor unions that could adversely
affect our financial performance and results of operations.
As of
December 31, 2008, we had approximately 6,400 employees, approximately 1,600 of
whom were salaried and the balance of whom were paid on an hourly basis. Certain
employees located in Mexico, Sweden, and the United Kingdom are represented by a
union but not collective bargaining agreements. We cannot assure you
that our employees will not be covered by collective bargaining agreements in
the future or that any of our facilities will not experience a work stoppage or
other labor disruption. Any prolonged labor disruption involving our
employees, employees of our customers, a large percentage of which are covered
by collective bargaining agreements, or employees of our suppliers could have a
material adverse impact on our results of operations and financial condition by
disrupting our ability to manufacture our products or the demand for our
products.
Compliance
with environmental and other governmental regulations could be costly and
require us to make significant expenditures.
Our
operations are subject to various federal, state, local and foreign laws and
regulations governing, among other things:
|
|
·
|
the
discharge of pollutants into the air and
water;
|
|
|
·
|
the
generation, handling, storage, transportation, treatment, and disposal of
waste and other materials;
|
|
|
·
|
the
cleanup of contaminated properties;
and
|
|
|
·
|
the
health and safety of our employees.
|
We
believe that our business, operations and facilities have been and are being
operated in compliance in all material respects with applicable environmental
and health and safety laws and regulations, many of which provide for
substantial fines and criminal sanctions for violations. The
operation of our manufacturing facilities entails risks and we cannot assure you
that we will not incur material costs or liabilities in connection with these
operations. In addition, potentially significant expenditures could
be required in order to comply with evolving environmental and health and safety
laws, regulations or requirements that may be adopted or imposed in the
future.
11
We
may incur material product liability costs.
We are
subject to the risk of exposure to product liability claims in the event that
the failure of any of our products results in personal injury or death and we
cannot assure you that we will not experience material product liability losses
in the future. In addition, if any of our products prove to be
defective, we may be required to participate in government-imposed or customer
OEM-instituted recalls involving such products. We maintain insurance
against such product liability claims, but we cannot assure you that such
coverage will be adequate for liabilities ultimately incurred or that it will
continue to be available on terms acceptable to us. A successful
claim brought against us that exceeds available insurance coverage or a
requirement to participate in any product recall could have a material adverse
effect on our results of operations and financial condition.
We
are subject to risks related to our international operations.
Approximately
25.9% of our net sales in 2008 were derived from sales outside of North America.
Non-current assets outside of North America accounted for approximately 13.6% of
our non-current assets as of December 31, 2008. International sales
and operations are subject to significant risks, including, among
others:
|
|
·
|
political
and economic instability;
|
|
|
·
|
restrictive
trade policies;
|
|
|
·
|
economic
conditions in local markets;
|
|
|
·
|
currency
exchange controls;
|
|
|
·
|
labor
unrest;
|
|
|
·
|
difficulty
in obtaining distribution support and potentially adverse tax
consequences; and
|
|
|
·
|
the
imposition of product tariffs and the burden of complying with a wide
variety of international and U.S. export
laws.
|
Additionally,
to the extent any portion of our net sales and expenses are denominated in
currencies other than the U.S. dollar, changes in exchange rates could have a
material adverse effect on our results of operations and financial condition.
We
face risks through our equity investments in companies that we do not
control.
Our net
earnings include significant equity earnings from unconsolidated
subsidiaries. For the year ended December 31, 2008, we recognized
$13.5 million of equity earnings and received $4.2 million in cash dividends
from our unconsolidated subsidiaries. Our equity investments may not
always perform at the levels we have seen in recent years.
Our
annual effective tax rate could be volatile and materially change as a result of
changes in mix of earnings and other factors.
The
overall effective tax rate is equal to our total tax expense as a percentage of
our total earnings before tax. However, tax expense and benefits are
not recognized on a global basis but rather on a jurisdictional or legal entity
basis. Losses in certain jurisdictions provide no current financial
statement tax benefit. As a result, changes in the mix of earnings
between jurisdictions, among other factors, could have a significant impact on
our overall effective tax rate.
Item
1B. Unresolved Staff Comments.
None.
12
Item
2. Properties.
The
Company and our joint ventures currently own or lease 16 manufacturing
facilities, which together contain approximately 1.4 million square feet of
manufacturing space. Of these manufacturing facilities, nine are used
by our Electronics reportable segment, four are used by our Control Devices
reportable segment and three are owned by our joint venture
companies. The following table provides information regarding our
facilities:
|
Owned/
|
Square
|
|||||
|
Location
|
Leased
|
Use
|
Footage
|
|||
|
Electronics
|
||||||
|
Portland,
Indiana
|
Owned
|
Manufacturing
|
182,000
|
|||
|
Juarez,
Mexico
|
Owned
|
Manufacturing/Division
Office
|
178,000
|
|||
|
Chihuahua,
Mexico
|
Owned
|
Manufacturing
|
135,569
|
|||
|
El
Paso, Texas
|
Leased
|
Warehouse
|
93,000
|
|||
|
Tallinn,
Estonia
|
Leased
|
Manufacturing
|
85,911
|
|||
|
Orebro,
Sweden
|
Leased
|
Manufacturing
|
77,472
|
|||
|
Mitcheldean,
England
|
Leased
|
Manufacturing
(Vacant)
|
74,790
|
|||
|
Monclova,
Mexico
|
Leased
|
Manufacturing
|
68,436
|
|||
|
Chihuahua,
Mexico
|
Leased
|
Manufacturing
|
49,805
|
|||
|
Cheltenham,
England
|
Leased
|
Manufacturing
(Vacant)
|
39,983
|
|||
|
Stockholm,
Sweden
|
Leased
|
Engineering
Office/Division Office
|
37,714
|
|||
|
Dundee,
Scotland
|
Leased
|
Manufacturing/Sales
Office/Engineering Office
|
32,753
|
|||
|
Warren,
Ohio
|
Leased
|
Engineering
Office/Division Office
|
24,570
|
|||
|
Chihuahua,
Mexico
|
Leased
|
Manufacturing
|
10,000
|
|||
|
Bayonne,
France
|
Leased
|
Sales
Office/Warehouse
|
8,267
|
|||
|
Portland,
Indiana
|
Leased
|
Warehouse
|
8,250
|
|||
|
Madrid,
Spain
|
Leased
|
Sales
Office/Warehouse
|
1,560
|
|||
|
Rome,
Italy
|
Leased
|
Sales
Office
|
1,216
|
|||
|
Control Devices
|
||||||
|
Lexington,
Ohio
|
Owned
|
Manufacturing/Division
Office
|
209,492
|
|||
|
Canton,
Massachusetts
|
Owned
|
Manufacturing/Division
Office
|
132,560
|
|||
|
Sarasota,
Florida
|
Owned
|
Manufacturing
(Vacant)
|
115,000
|
|||
|
Suzhou,
China
|
Leased
|
Manufacturing/Warehouse
|
25,737
|
|||
|
Lexington,
Ohio
|
Owned
|
Manufacturing
|
10,120
|
|||
|
Sarasota,
Florida
|
Owned
|
Warehouse
(Vacant)
|
7,500
|
|||
|
Lexington,
Ohio
|
Leased
|
Warehouse
|
5,000
|
|||
|
Lexington,
Ohio
|
Leased
|
Warehouse
|
4,000
|
|||
|
Corporate
|
||||||
|
Novi,
Michigan
|
Leased
|
Sales
Office/Engineering Office
|
9,400
|
|||
|
Warren,
Ohio
|
Owned
|
Headquarters
|
7,500
|
|||
|
Stuttgart,
Germany
|
Leased
|
Sales
Office/Engineering Office
|
1,000
|
|||
|
Shanghai,
China
|
Leased
|
Sales
Office
|
270
|
|||
|
Seoul,
South Korea
|
Leased
|
Sales
Office
|
154
|
|||
|
Joint Ventures
|
||||||
|
Pune,
India
|
Owned
|
Manufacturing/Engineering
Office/Sales Office
|
76,000
|
|||
|
Manaus,
Brazil
|
Owned
|
Manufacturing
|
73,550
|
|||
|
São
Paulo, Brazil
|
Owned
|
Manufacturing/Engineering
Office/Sales Office
|
45,343
|
|||
|
Buenos
Aires, Argentina
|
Leased
|
Sales
Office
|
3,551
|
13
Item
3. Legal Proceedings.
The
Company is involved in certain legal actions and claims arising in the ordinary
course of business. The Company, however, does not believe that any
of the litigation in which it is currently engaged, either individually or in
the aggregate, will have a material adverse effect on its business, consolidated
financial position or results of operations. The Company is subject
to the risk of exposure to product liability claims in the event that the
failure of any of its products causes personal injury or death to users of the
Company’s products and there can be no assurance that the Company will not
experience any material product liability losses in the future. The
Company maintains insurance against such product liability claims. In
addition, if any of the Company’s products prove to be defective, the Company
may be required to participate in the government-imposed or customer
OEM-instituted recall involving such products.
Item
4. Submission of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of security holders during the fourth quarter
of 2008.
14
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Our
shares are listed on the New York Stock Exchange (“NYSE”) under the symbol
“SRI.” As of February 20, 2009, we had 24,664,529 Common Shares
without par value, issued and outstanding, which were owned by approximately 300
registered holders, including Common Shares held in the names of brokers and
banks (so-called “street name” holdings) who are record holders with
approximately 2,000 beneficial owners.
The
Company has not historically paid or declared dividends, which are restricted
under both the senior notes and the asset-based credit facility, on our Common
Shares. We may only pay cash dividends in the future if immediately
prior to and immediately after the payment is made, no event of default shall
have occurred and outstanding indebtedness under our asset-based credit facility
is not greater than or equal to $20.0 million before and after the payment of
the dividend. We currently intend to retain earnings for
acquisitions, working capital, capital expenditures, general corporate purposes
and reduction in outstanding indebtedness. Accordingly, we do not
expect to pay cash dividends in the foreseeable future.
High and
low sales prices (as reported on the NYSE composite tape) for our Common Shares
for each quarter ended during 2008 and 2007 are as follows:
|
Quarter
Ended
|
High
|
Low
|
|||||||
|
2008
|
March
31
|
$ | 14.15 | $ | 6.97 | ||||
|
June
30
|
$ | 17.98 | $ | 13.04 | |||||
|
September
30
|
$ | 19.06 | $ | 11.25 | |||||
|
December
31
|
$ | 10.32 | $ | 2.42 | |||||
|
2007
|
March
31
|
$ | 12.17 | $ | 8.25 | ||||
|
June
30
|
$ | 13.53 | $ | 10.29 | |||||
|
September
30
|
$ | 13.76 | $ | 9.15 | |||||
|
December
31
|
$ | 10.98 | $ | 8.00 | |||||
The Company did not repurchase any
Common Shares in 2008 or 2007.
Set forth
below is a line graph comparing the cumulative total return of a hypothetical
investment in our Common Shares with the cumulative total return of hypothetical
investments in the Hemscott Group–Industry Group 333 (Automotive Parts) Index
and the NYSE Market Index based on the respective market price of each
investment at December 31, 2003, 2004, 2005, 2006, 2007 and 2008 assuming in
each case an initial investment of $100 on December 31, 2003, and reinvestment
of dividends.
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||||
|
Stoneridge,
Inc
|
100.00 | 100.53 | 43.99 | 54.42 | 53.42 | 30.30 | ||||||||||||||||||
|
Hemscott
Group–Industry Group 333 Index
|
100.00 | 102.92 | 91.50 | 103.09 | 110.76 | 48.02 | ||||||||||||||||||
|
NYSE
Market Index
|
100.00 | 112.92 | 122.25 | 143.23 | 150.88 | 94.76 | ||||||||||||||||||
For
information on “Related Stockholder Matters” required by Item 201(d) of
Regulation S-K, refer to Item 12 of this report.
15
Item
6. Selected Financial Data.
The
following table sets forth selected historical financial data and should be read
in conjunction with the consolidated financial statements and notes related
thereto and other financial information included elsewhere
herein. The selected historical data was derived from our
consolidated financial statements.
|
For
the Years Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
|
(in
thousands, except per share data)
|
|||||||||||||||||||
| Statement of Operations Data: | ||||||||||||||||||||
|
Net
sales:
|
||||||||||||||||||||
|
Electronics
|
$ | 533,328 | $ | 458,672 | $ | 456,932 | $ | 401,663 | $ | 403,322 | ||||||||||
|
Control
Devices
|
236,038 | 289,979 | 271,943 | 291,434 | 299,408 | |||||||||||||||
|
Eliminations
|
(16,668 | ) | (21,531 | ) | (20,176 | ) | (21,513 | ) | (20,935 | ) | ||||||||||
|
Consolidated
|
$ | 752,698 | $ | 727,120 | $ | 708,699 | $ | 671,584 | $ | 681,795 | ||||||||||
|
Gross
profit
|
$ | 166,287 | $ | 167,723 | $ | 158,906 | $ | 148,588 | $ | 174,987 | ||||||||||
|
Operating
income (loss) (A)
|
$ | (43,271 | ) | $ | 34,799 | $ | 35,063 | $ | 23,303 | $ | (125,570 | ) | ||||||||
|
Equity
in earnings of investees
|
$ | 13,490 | $ | 10,893 | $ | 7,125 | $ | 4,052 | $ | 1,698 | ||||||||||
|
Income
(loss) before income taxes (A)
|
||||||||||||||||||||
|
Electronics
|
$ | 38,713 | $ | 20,692 | $ | 20,882 | $ | (216 | ) | $ | 27,562 | |||||||||
|
Control
Devices
|
(78,858 | ) | 15,825 | 13,987 | 19,429 | (147,960 | ) | |||||||||||||
|
Other
corporate activities
|
10,078 | 8,676 | 6,392 | 8,217 | (4,477 | ) | ||||||||||||||
|
Corporate
interest
|
(20,708 | ) | (21,969 | ) | (21,622 | ) | (22,994 | ) | (24,281 | ) | ||||||||||
|
Consolidated
|
$ | (50,775 | ) | $ | 23,224 | $ | 19,639 | $ | 4,436 | $ | (149,156 | ) | ||||||||
|
Net
income (loss) (A)
|
$ | (97,527 | ) | $ | 16,671 | $ | 14,513 | $ | 933 | $ | (92,503 | ) | ||||||||
|
Basic
net income (loss) per share (A)
|
$ | (4.17 | ) | $ | 0.72 | $ | 0.63 | $ | 0.04 | $ | (4.09 | ) | ||||||||
|
Diluted
net income (loss) per share (A)
|
$ | (4.17 | ) | $ | 0.71 | $ | 0.63 | $ | 0.04 | $ | (4.09 | ) | ||||||||
|
Other
Data:
|
||||||||||||||||||||
|
Product
development expenses
|
$ | 45,508 | $ | 44,203 | $ | 40,840 | $ | 39,193 | $ | 36,145 | ||||||||||
|
Capital
expenditures
|
$ | 24,573 | $ | 18,141 | $ | 25,895 | $ | 28,934 | $ | 23,917 | ||||||||||
|
Depreciation
and amortization (B)
|
$ | 26,399 | $ | 28,503 | $ | 26,180 | $ | 26,157 | $ | 24,802 | ||||||||||
|
Balance
Sheet Data (at period end):
|
||||||||||||||||||||
|
Working
capital
|
$ | 160,387 | $ | 184,788 | $ | 135,915 | $ | 116,689 | $ | 123,317 | ||||||||||
|
Total
assets
|
$ | 382,437 | $ | 527,769 | $ | 501,807 | $ | 463,038 | $ | 473,001 | ||||||||||
|
Long-term
debt, less current portion
|
$ | 183,000 | $ | 200,000 | $ | 200,000 | $ | 200,000 | $ | 200,052 | ||||||||||
|
Shareholders'
equity
|
$ | 91,758 | $ | 206,189 | $ | 178,622 | $ | 153,991 | $ | 155,605 | ||||||||||
|
(A)
|
Our
2008 and 2004 operating loss, loss before income taxes, net loss, and
related basic and diluted loss per share amounts include non-cash, pre-tax
goodwill impairment losses of $65,175 and $183,450,
respectively.
|
|
(B)
|
These
amounts represent depreciation and amortization on fixed and certain
finite-lived intangible assets.
|
16
Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Overview
The
following Management Discussion and Analysis (“MD&A”) is intended to help
the reader understand the results of operations and financial condition of
Stoneridge, Inc. (the “Company”). This MD&A is provided as a
supplement to, and should be read in conjunction with, our financial statements
and the accompanying notes to the financial statements.
We are an
independent designer and manufacturer of highly engineered electrical and
electronic components, modules and systems for the medium- and heavy-duty truck,
agricultural, automotive and off-highway markets.
For the
year ended December 31, 2008, net sales were $752.7 million, an increase of
$25.6 million compared with $727.1 million for the year ended December 31,
2007.
Our net
loss for the year ended December 31, 2008 was $97.5 million, or $(4.17) per
diluted share, compared with net income of $16.7 million, or $0.71 per diluted
share, for 2007. Earnings per share for 2008 include $(5.15) per share for
restructuring expenses, an after-tax non-cash goodwill impairment charge and a
non-cash deferred tax asset valuation allowance.
Our
increase in net sales was predominantly attributable to net new business
sales. This increase was partially offset by volume reductions and
contractual price reductions at our major customers in the automotive vehicle
market for the year ended December 31, 2008.
Our 2008
net loss was due to a non-cash goodwill impairment charge of $65.2 million and a
non-cash deferred tax asset valuation of $62.0 million.
We
achieved income from continuing operations excluding restructuring, the effect
of the goodwill impairment charge and the deferred tax asset valuation allowance
(“other non-recurring items”) in 2008 of $22.8 million, or $0.98 per share,
compared with $17.6 million, or $0.75 per share, in 2007. We
aggressively pursued restructuring efforts starting in late 2007 and during 2008
to adjust the cost structure and eliminate overhead centers to enhance
profitability in robust economic times and protect profitability when market
adversity occurs. We recorded after-tax restructuring expenses of
$12.3 million, or $0.53 per share in 2008. In accordance with
Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”) and SFAS 109, Accounting
for Income Taxes, the 2008 results also include an after-tax non-cash
goodwill impairment charge in our Control Device reporting segment of $46.1
million, or $1.97 per share, and a non-cash valuation allowance against deferred
tax assets of $62.0 million or $2.65 per share. The impact of the
non-cash impairment charge and deferred tax asset valuation allowance was driven
by adverse equity market conditions that caused a decrease in current market
multiples and our stock price as of December 31, 2008.
Affecting
our profitability were restructuring initiatives that began in the fourth
quarter of 2007 to improve the Company’s manufacturing efficiency and cost
position by ceasing manufacturing operations at our Sarasota, Florida and
Mitcheldean, United Kingdom locations. Related 2008 expenses,
primarily comprised of one-time termination benefits and line-transfer
expenses of approximately $15.4 million. Restructuring
expenses that were general and administrative in nature were included in the
Company’s consolidated statements of operations as restructuring charges, while
the remaining restructuring related expenses were included in cost of goods
sold.
In 2008,
our PST Eletrônica S.A. (“PST”) joint venture in Brazil, which is an electronic system provider
focused on security and convenience applications primarily for the vehicle and
motorcycle industry, continued to perform well, resulting in equity
earnings of $12.8 million compared to $10.4 million in the previous
year. We also received dividend payments from PST of $4.2 million and
$5.6 million in 2008 and 2007, respectively. We currently hold a 50% equity
interest in PST. The results of PST in 2009 will be impacted by
fluctuations in foreign exchange rates.
17
To
supplement the Company’s consolidated financial statements presented on a basis
in accordance with generally accepted accounting principles (“GAAP”) in the United
States, the Company's management also uses and discloses certain non-GAAP
financial measures. These non-GAAP financial measures are not in accordance
with, nor are they alternatives for, GAAP-based financial measures. The Company
includes these non-GAAP financial measures because it believes they provide
useful information with which to evaluate the performance of the Company. The
non-GAAP measures included in this Annual Report on Form 10-K have been
reconciled to the comparable GAAP measures within the accompanying table, as
required under Securities and Exchange Commission rules regarding the use of
non-GAAP financial measures. They should not be considered in isolation or as a
substitute for analysis of the Company's results as reported under
GAAP.
A
reconciliation of GAAP net loss and earnings per share (“EPS”) to adjusted net
income before restructuring related expenses and other non-recurring costs and
EPS is presented below (in thousands except per share data):
|
For
the Year Ended
|
||||||||||||||||
|
December
31,
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
Dollars
|
EPS
|
Dollars
|
EPS
|
|||||||||||||
|
Adjusted
net income per share before restructuring related expenses and other
non-recurring items
|
||||||||||||||||
|
Net
income (loss)
|
$ | (97,527 | ) | $ | (4.17 | ) | $ | 16,671 | $ | 0.71 | ||||||
|
Total
restructuring related expenses, net of tax benefits
|
12,286 | 0.53 | 915 | 0.04 | ||||||||||||
|
Goodwill
impairment, net of tax benefits
|
46,052 | 1.97 | - | - | ||||||||||||
|
Deferred
tax asset valuation allowance
|
62,006 | 2.65 | - | - | ||||||||||||
|
Adjusted
net income before restructuring related expenses and other non-recurring
items
|
$ | 22,817 | $ | 0.98 | $ | 17,586 | $ | 0.75 | ||||||||
|
Diluted weighted average shares outstanding 1
|
23,367 | 23,548 | ||||||||||||||
1 - Basic
and Diluted weighted average shares outstanding are the same for 2008 periods as
a net loss caused the dilutive shares to have an anti-dilutive
effect.
Recent Trends and Market
Conditions
The
automotive and commercial vehicle industries experienced significantly
unfavorable developments during 2008 (primarily the second half of 2008),
particularly in North America and Europe. These trends
include:
General Economic Factors:
Disruptions
in financial markets and restrictions on liquidity are adversely impacting the
availability and cost of incremental credit for many companies. These
disruptions are also adversely affecting the global economy, further negatively
impacting consumer spending patterns in the automotive and commercial
vehicle industries. Our customers and suppliers are attempting to respond to
rapidly changing consumer preferences, restricted liquidity and increased
cost of capital any of which could negatively impact their
business and could result in further restructuring or even reorganization
or liquidation under bankruptcy laws. Any such negative event could, in turn,
negatively affect our business either through loss of sales to our customers or
through our inability to meet our commitments (or inability to meet them without
excess expense), due to the loss of supplies from any of our suppliers so
affected.
Production Levels and Product
Mix:
In the
U.S. and Europe, overall negative economic conditions, including the
deterioration of global financial markets, reduced credit availability and lower
consumer confidence have significantly impacted the automotive and commercial
vehicle industries. As such, automotive and commercial vehicle production and
sales have deteriorated substantially and are not expected to recover
significantly in the near term. Therefore, considering the drastic changes to
consumer demand for vehicles, and corresponding decrease in production and
demand for our products, as well as are common share price, we tested our
goodwill for impairment and recognized a pre-tax non-cash $65.2 million goodwill
impairment charge in 2008.
18
In recent
years, and continuing into 2008, General Motors, Ford and Chrysler (“Detroit
Three”) have seen a steady decline in their market share for vehicle sales in
North America. Declining market share, inherent legacy issues with the Detroit
Three and the impact of declining consumer confidence have led to recent,
unprecedented production cuts and permanent capacity reductions. During 2008,
the Detroit Three North American production levels declined approximately 21%
compared to 2007. These declines will have a continuing negative impact on our
sales, liquidity and results of operations.
In
addition, in order to address market share declines, reduced production levels,
negative industry trends (such as change in mix of vehicles), general
macroeconomic conditions and other structural issues specific to their companies
(such as significant overcapacity and pension and healthcare costs), the Detroit
Three and certain of our other customers continue to implement or may implement
various forms of restructuring initiatives (including, in certain cases,
reorganization under bankruptcy laws). These restructuring actions have had and
may continue to have a significant impact throughout our industry, including our
supply base.
Outlook
In the
fourth quarter of 2008 the North American automotive and the global commercial
vehicle markets experienced the beginning of a significant decline that is
unprecedented in its breadth, depth and speed. It is currently
accelerating into the first part of 2009. The uncertainty of the
activity of the global economy makes it difficult to predict how demand for
automotive and commercial vehicle products will develop in 2009.
Significant
factors inherent to our markets that could affect our results for 2009 include
general economic conditions and the financial stability of our customers and
suppliers as well as our ability to successfully execute our planned
restructuring, productivity and cost reduction initiatives. We are
undertaking these initiatives to mitigate significant sales volume reductions in
our served markets and customer-demanded price reductions. Our
management team is focused on improving operational efficiency while adapting to
the needs of our customers.
We
continue our transition to low-cost manufacturing
locations. Initially, this initiative will result in restructuring
costs stemming from facility closures and production
relocations. However, the longer-term effects of such an initiative
will enable us to reduce our operating costs and increase global sourcing
capacity to our customers.
We will
continue to monitor business conditions and will take the necessary steps to
address the current economic environment.
Results
of Operations
We are
primarily organized by markets served and products produced. Under
this organizational structure, our operations have been aggregated into two
reportable segments: Electronics and Control Devices. The Electronics
reportable segment includes results of operations that design and manufacture
electronic instrument clusters, electronic control units, driver information
systems and electrical distribution systems, primarily wiring harnesses and
connectors for electrical power and signal distribution. The Control
Devices reportable segment includes results from our operations that design and
manufacture electronic and electromechanical switches, control actuation devices
and sensors.
Year
Ended December 31, 2008 Compared To Year Ended December 31, 2007
Net Sales. Net sales for our
reportable segments, excluding inter-segment sales, for the years ended December
31, 2008 and 2007 are summarized in the following table (in
thousands):
|
For
the Years Ended December 31,
|
$
Increase /
|
%
Increase /
|
||||||||||||||||||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||||
|
Electronics
|
$ | 520,936 | 69.2 | % | $ | 441,717 | 60.7 | % | $ | 79,219 | 17.9 | % | ||||||||||||
|
Control
Devices
|
231,762 | 30.8 | 285,403 | 39.3 | (53,641 | ) | (18.8 | )% | ||||||||||||||||
|
Total
net sales
|
$ | 752,698 | 100.0 | % | $ | 727,120 | 100.0 | % | $ | 25,578 | 3.5 | % | ||||||||||||
19
The
increase in net sales for our Electronics segment was primarily due to new
business sales and increased sales volume in 2008. Contractual price
reductions and foreign currency exchange rates negatively affected net sales by
approximately $2.0 million in 2008.
The
decrease in net sales for our Control Devices segment was primarily attributable
to production volume reductions at our major customers in the North American
automotive market. Additionally, the loss of sensor product revenue
at our Sarasota, Florida, facility had a negative impact on net
sales.
Net sales
by geographic location for the years ended December 31, 2008 and 2007 are
summarized in the following table (in thousands):
|
For
the Years Ended December 31,
|
$
Increase /
|
%
Increase /
|
||||||||||||||||||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||||
|
North
America
|
$ | 557,990 | 74.1 | % | $ | 522,730 | 71.9 | % | $ | 35,260 | 6.7 | % | ||||||||||||
|
Europe
and other
|
194,708 | 25.9 | 204,390 | 28.1 | (9,682 | ) | (4.7 | )% | ||||||||||||||||
|
Total
net sales
|
$ | 752,698 | 100.0 | % | $ | 727,120 | 100.0 | % | $ | 25,578 | 3.5 | % | ||||||||||||
The
increase in North American sales was primarily attributable to net new business
sales of electronics products. The increase was partially offset by
lower sales volume in our North American automotive market. Our
decrease in sales outside North America was primarily due to reduced volume in
light vehicle products and reduced European commercial vehicle sales
volume.
Consolidated
statements of operations as a percentage of net sales for the years ended
December 31, 2008 and 2007 are presented in the following table (in
thousands):
|
For
the Years Ended December 31,
|
$
Increase /
|
|||||||||||||||||||
|
2008
|
2007
|
(Decrease)
|
||||||||||||||||||
|
Net
Sales
|
$ | 752,698 | 100.0 | % | $ | 727,120 | 100.0 | % | $ | 25,578 | ||||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||
|
Cost
of goods sold
|
586,411 | 77.9 | 559,397 | 76.9 | 27,014 | |||||||||||||||
|
Selling,
general and administrative
|
136,563 | 18.1 | 133,708 | 18.4 | 2,855 | |||||||||||||||
|
Gain
on sale of property, plant & equipment, net
|
(571 | ) | (0.1 | ) | (1,710 | ) | (0.2 | ) | 1,139 | |||||||||||
|
Goodwill
impairment charge
|
65,175 | 8.7 | - | - | 65,175 | |||||||||||||||
|
Restructuring
charges
|
8,391 | 1.1 | 926 | 0.1 | 7,465 | |||||||||||||||
|
Operating
Income (Loss)
|
(43,271 | ) | (5.7 | ) | 34,799 | 4.8 | (78,070 | ) | ||||||||||||
|
Interest
expense, net
|
20,575 | 2.7 | 21,759 | 3.0 | (1,184 | ) | ||||||||||||||
|
Equity
in earnings of investees
|
(13,490 | ) | (1.8 | ) | (10,893 | ) | (1.5 | ) | (2,597 | ) | ||||||||||
|
Loss
on early extinguishment of debt
|
770 | 0.1 | - | - | 770 | |||||||||||||||
|
Other
(income) expense, net
|
(351 | ) | - | 709 | 0.1 | (1,060 | ) | |||||||||||||
|
Income
(Loss) Before Income Taxes
|
(50,775 | ) | (6.7 | ) | 23,224 | 3.2 | (73,999 | ) | ||||||||||||
|
Provision
for income taxes
|
46,752 | 6.2 | 6,553 | 0.9 | 40,199 | |||||||||||||||
|
Net
Income (Loss)
|
$ | (97,527 | ) | (12.9 | )% | $ | 16,671 | 2.3 | % | $ | (114,198 | ) | ||||||||
Cost of Goods Sold. The
increase in cost of goods sold as a percentage of sales was primarily due to
$7.0 million of restructuring expenses included in cost of goods sold for the
year ended December 31, 2008. The negative impact of restructuring
expenses were partially offset by a more favorable product mix and new business
sales.
Selling, General and Administrative
Expenses. Product development expenses included in SG&A
were $45.6 million and $44.2 million for the years ended December 31, 2008 and
2007, respectively. The increase was primarily related to development
spending in the areas of instrumentation and wiring. The
Company intends to reallocate its resources to focus on the design and
development of new products rather than primarily focusing on sustaining
existing product programs. The increase in SG&A expenses, excluding product
development was due primarily to increased compensation related
items.
20
Gain on Sale of Property, Plant and
Equipment, net. The gain for 2008 was primarily a result of
selling manufacturing lines which was part of the line transfer initiative at
our Mitcheldean, United Kingdom facility. The gain for the year ended
December 31, 2007 was primarily attributable to the sale of non-strategic assets
including two idle facilities and the Company airplane.
Goodwill Impairment
Charge. A goodwill impairment charge of $65.2 million was
recorded during the year ended December 31, 2008. During the fourth
quarter, as a result of the deterioration of the global economy and its effects
on the automotive and commercial vehicle markets, we were required to perform an
additional goodwill impairment test subsequent to our annual October 1, 2008
test. The result of the December 31, 2008 impairment test was that
our goodwill was determined to be significantly impaired and was written
off. The goodwill related to two reporting units in the Control
Devices segment.
Restructuring Charges. The
increase in restructuring charges that were general and administrative in
nature, were primarily the result of the ratable recognition of one-time
termination benefits that were due to employees and the cancellation of certain
contracts upon the closure of our Sarasota, Florida, and Mitcheldean, United
Kingdom, locations. Additionally, in 2008, we announced additional
restructuring initiatives at our Canton, Massachusetts, Orebro, Sweden and
Tallinn, Estonia locations. The majority of this charge resulted in
the recognition of one-time termination benefits that were due to affected
employees. No fixed-asset impairment charges were incurred because
the assets were transferred to our other locations for continued
production. Restructuring expenses that were general and
administrative in nature were included in the Company’s consolidated statements
of operations as restructuring charges, while the remaining restructuring
related expenses were included in cost of goods sold. These
initiatives were substantially completed in 2008.
Restructuring
charges recorded by reportable segment during the year ended December 31, 2008
were as follows (in thousands):
|
Electronics
|
Control Devices
|
Total
Consolidated
Restructuring
Charges
|
||||||||||
|
Severance
costs
|
$ | 2,564 | $ | 2,521 | $ | 5,085 | ||||||
|
Contract
termination costs
|
1,305 | - | 1,305 | |||||||||
|
Other
costs
|
23 | 1,978 | 2,001 | |||||||||
|
Total
restructuring charges
|
$ | 3,892 | $ | 4,499 | $ | 8,391 | ||||||
Severance
costs relate to a reduction in workforce. Contract termination costs
represent expenditures associated with long-term lease obligations that were
cancelled as part of the restructuring initiatives. Other exit costs
include miscellaneous expenditures associated with exiting business activities,
such as the transferring of production equipment.
Restructuring
charges recorded by reportable segment during the year ended December 31, 2007
were as follows (in thousands):
|
Electronics
|
Control Devices
|
Total
Consolidated
Restructuring
Charges
|
||||||||||
|
Severance
costs
|
$ | 542 | $ | 357 | $ | 899 | ||||||
|
Other
costs
|
- | 27 | 27 | |||||||||
|
Total
restructuring charges
|
$ | 542 | $ | 384 | $ | 926 | ||||||
21
Restructuring
related expenses, general and administrative in nature, for the year ended
December 31, 2007 were primarily severance costs as a result of the ratable
recognition of one-time termination benefits that were due to employees upon the
closure of our Sarasota, Florida and Mitcheldean, United Kingdom locations that
were announced in 2007.
Equity in Earnings of Investees.
The increase was predominately attributable to the increase in equity
earnings recognized from our PST joint venture. The increase
primarily reflects higher volume for PST’s security product lines and favorable
exchange rates throughout most of 2008.
Income (Loss) Before Income
Taxes. Income (loss) before income taxes is summarized in the
following table by reportable segment (in thousands):
|
For
the Years Ended
December 31, |
$
Increase /
|
%
Increase /
|
||||||||||||||
|
2008
|
2007
|
(Decrease)
|
(Decrease)
|
|||||||||||||
|
Electronics
|
$ | 38,713 | $ | 20,692 | $ | 18,021 | 87.1 | % | ||||||||
|
Control
Devices
|
(78,858 | ) | 15,825 | (94,683 | ) | (598.3 | )% | |||||||||
|
Other
corporate activities
|
10,078 | 8,676 | 1,402 | 16.2 | % | |||||||||||
|
Corporate
interest expense
|
(20,708 | ) | (21,969 | ) | 1,261 | 5.7 | % | |||||||||
|
Income
(loss) before income taxes
|
$ | (50,775 | ) | $ | 23,224 | $ | (73,999 | ) | (318.6 | )% | ||||||
The
increase in income before income taxes in the Electronics segment was related to
higher net sales, which increased by $79.2 million
in 2008. This was partially offset by increased
restructuring related expenses of $3.4 million in 2008 when compared to
2007.
The
decrease in income before income taxes in the Control Devices reportable segment
was primarily due to the goodwill impairment charge of $65.2 million recognized
in 2008. Additionally, net sales reduced by $53.6 million and the
segment recognized an additional $4.1 million of restructuring related expenses
in 2008.
The
increase in income before income taxes from other corporate activities was
primarily due to an increase in equity earnings from our PST joint venture of
$2.4 million in 2008.
Income
(loss) before income taxes by geographic location for the years ended December
31, 2008 and 2007 are summarized in the following table (in
thousands):
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
$
Decrease
|
%
Decrease
|
|||||||||||||||||||||
|
North
America
|
$ | (47,795 | ) | 94.1 | % | $ | 12,405 | 53.4 | % | $ | (60,200 | ) | (485.3 | )% | ||||||||||
|
Europe
and other
|
(2,980 | ) | 5.9 | 10,819 | 46.6 | (13,799 | ) | (127.5 | )% | |||||||||||||||
|
Income
(loss) before income taxes
|
$ | (50,775 | ) | 100.0 | % | $ | 23,224 | 100.0 | % | $ | (73,999 | ) | (318.6 | )% | ||||||||||
Our North
American 2008 profitability was adversely affected by the $65.2 million goodwill
impairment charge, which was offset by new business sales of electronic
products. Other factors impacting the 2008 results were increased
restructuring related expenses of $8.9 million and lower North American
automotive production. The decrease in profitability outside North
America was primarily due to increased restructuring related expenses of $6.5
million and design and development expenses. The decrease was
partially offset by increased European commercial vehicle production during the
first half of 2008.
Provision for Income Taxes.
We recognized a provision for income taxes of $46.8 million, or 92.1% of pre-tax
loss, and $6.6 million, or 28.2% of pre-tax income, for federal, state and
foreign income taxes for the years ended December 31, 2008 and 2007,
respectively. The increase in the effective tax rate for 2008 was primarily
attributable to the recording of a valuation allowance against our domestic
deferred tax assets. Due to the impairment of goodwill the Company was in a
cumulative loss position for the period 2006-2008. Pursuant to the accounting
guidance the Company was required to record a valuation allowance. Additionally,
the effective tax rate was unfavorably affected by the costs incurred to
restructure our United Kingdom operations. Since we do not believe that the
related tax benefit of those losses will be realized, a valuation allowance was
recorded against the foreign deferred tax assets associated with those foreign
losses. Finally, offsetting the impact of the current year valuation allowances,
the effective tax rate was favorably impacted by a combination of audit
settlements, successful litigation and the expiration of certain statutes of
limitation.
22
Year
Ended December 31, 2007 Compared To Year Ended December 31, 2006
Net Sales. Net sales for our
reportable segments, excluding inter-segment sales, for the years ended December
31, 2007 and 2006 are summarized in the following table (in
thousands):
|
For
the Years Ended December 31,
|
$
Increase /
|
%
Increase /
|
||||||||||||||||||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||||
|
Electronics
|
$ | 441,717 | 60.7 | % | $ | 442,427 | 62.4 | % | $ | (710 | ) | (0.2 | )% | |||||||||||
|
Control
Devices
|
285,403 | 39.3 | 266,272 | 37.6 | 19,131 | 7.2 | % | |||||||||||||||||
|
Total
net sales
|
$ | 727,120 | 100.0 | % | $ | 708,699 | 100.0 | % | $ | 18,421 | 2.6 | % | ||||||||||||
The
decrease in net sales for our Electronics segment was primarily due to a
substantial decline in medium- and heavy-duty truck production in North
America. Medium- and heavy-duty truck production in 2007 was
unfavorably impacted by the new 2007 diesel emissions regulations that were
implemented on January 1, 2007 in the U.S. Offsetting the unfavorable
impact of the new diesel emissions standards were new program revenues in North
America and Europe, increased production volume in our European commercial
vehicle operations and favorable foreign currency exchange. Favorable
foreign currency exchange rates contributed $18.6 million to net sales for the
year ended December 31, 2007.
The
increase in net sales for our Control Devices segment was primarily attributable
to new product launches in our temperature and speed sensor
businesses. The increase was partially offset by production volume
reductions at our major automotive customers.
Net sales
by geographic location for the years ended December 31, 2007 and 2006 are
summarized in the following table (in thousands):
|
For
the Years Ended December 31,
|
$
Increase /
|
%
Increase /
|
||||||||||||||||||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||||
|
North
America
|
$ | 522,730 | 71.9 | % | $ | 541,479 | 76.4 | % | $ | (18,749 | ) | (3.5 | )% | |||||||||||
|
Europe
and other
|
204,390 | 28.1 | 167,220 | 23.6 | 37,170 | 22.2 | % | |||||||||||||||||
|
Total
net sales
|
$ | 727,120 | 100.0 | % | $ | 708,699 | 100.0 | % | $ | 18,421 | 2.6 | % | ||||||||||||
The
decrease in North American sales was primarily attributable to lower sales to
our commercial vehicle customers as a result of lower demand because of the new
2007 U.S. diesel emission regulations and lower production volume from our North
American light vehicle customers. The decrease was partially offset
by sales related to new program launches of sensor products and new electronic
products supplied for the production of military vehicles. Our
increase in sales outside of North America for the year was primarily due to
increased production volume, new product revenues and favorable foreign currency
exchange rates. The favorable effect of foreign currency exchange
rates affected net sales outside North America by $18.6 million for the year
ended December 31, 2007.
23
Consolidated
statements of operations as a percentage of net sales for the years ended
December 31, 2007 and 2006 are presented in the following table (in
thousands):
|
For
the Years Ended December 31,
|
$
Increase /
|
|||||||||||||||||||
|
2007
|
2006
|
(Decrease)
|
||||||||||||||||||
|
Net
Sales
|
$ | 727,120 | 100.0 | % | $ | 708,699 | 100.0 | % | $ | 18,421 | ||||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||
|
Cost
of goods sold
|
559,397 | 76.9 | 549,793 | 77.6 | 9,604 | |||||||||||||||
|
Selling,
general and administrative
|
133,708 | 18.4 | 124,538 | 17.6 | 9,170 | |||||||||||||||
|
Gain
on sale of property, plant and equipment, net
|
(1,710 | ) | (0.2 | ) | (1,303 | ) | (0.2 | ) | (407 | ) | ||||||||||
|
Restructuring
charges
|
926 | 0.1 | 608 | 0.1 | 318 | |||||||||||||||
|
Operating
Income
|
34,799 | 4.8 | 35,063 | 4.9 | (264 | ) | ||||||||||||||
|
Interest
expense, net
|
21,759 | 3.0 | 21,744 | 3.1 | 15 | |||||||||||||||
|
Equity
in earnings of investees
|
(10,893 | ) | (1.5 | ) | (7,125 | ) | (1.0 | ) | (3,768 | ) | ||||||||||
|
Other
expense, net
|
709 | 0.1 | 805 | 0.1 | (96 | ) | ||||||||||||||
|
Income
Before Income Taxes
|
23,224 | 3.2 | 19,639 | 2.7 | 3,585 | |||||||||||||||
|
Provision
for income taxes
|
6,553 | 0.9 | 5,126 | 0.7 | 1,427 | |||||||||||||||
|
Net
Income
|
$ | 16,671 | 2.3 | % | $ | 14,513 | 2.0 | % | $ | 2,158 | ||||||||||
Cost of Goods
Sold. The decrease in cost of goods sold as a percentage of
sales was due to increased sales volume from new business awards, ongoing
procurement initiatives and favorable product mix. The decrease was
partially offset by unfavorable material costs, operational inefficiencies
related to new product launches and higher depreciation expense.
Selling, General and Administrative
Expenses. Product development expenses included in SG&A were $44.2
million and $40.8 million for the years ended December 31, 2007 and 2006,
respectively. The increase related to development spending in the
areas of tachographs and instrumentation.
The
increase in SG&A expenses, excluding product development expenses, in 2007
compared with 2006 was primarily attributable to the increase in our selling and
marketing activity to support new products in Europe, the increase in systems
implementation expenses related to a new information system in Europe, and a
$1.2 million one-time gain in the third quarter of 2006 related to the
settlement of the life insurance benefits portion of a postretirement
plan.
Restructuring
Charges. The increase in restructuring charges was primarily
the result of one-time termination benefits related to the restructuring
initiatives announced in 2007 to improve manufacturing efficiency and cost
position by ceasing manufacturing operations at our Sarasota, Florida and
Mitcheldean, United Kingdom locations. No fixed-asset impairment
charges were incurred because assets are primarily being transferred to our
other locations for continued production.
Restructuring
charges recorded by reportable segment during the year ended December 31, 2007
were as follows (in thousands):
|
Electronics
|
Control
Devices
|
Total
Consolidated Restructuring Charges |
||||||||||
|
Severance
costs
|
$ | 542 | $ | 357 | $ | 899 | ||||||
|
Other
costs
|
- | 27 | 27 | |||||||||
|
Total
restructuring charges
|
$ | 542 | $ | 384 | $ | 926 | ||||||
24
Also
included in severance costs for the Electronics reporting segment in 2007 was
$0.1 million of expense related to the rationalization of certain manufacturing
facilities in Europe and North America announced in 2005. These
restructuring initiatives were completed in 2007.
Restructuring
charges recorded by reportable segment during the year ended December 31, 2006
were as follows (in thousands):
|
Electronics
|
Control Devices
|
Total
Consolidated
Restructuring
Charges
|
||||||||||
|
Severance
costs
|
$ | 369 | $ | 156 | $ | 525 | ||||||
|
Other
costs
|
- | 83 | 83 | |||||||||
|
Total
restructuring charges
|
$ | 369 | $ | 239 | $ | 608 | ||||||
Severance
costs related to a reduction in workforce. Other associated costs
include miscellaneous expenditures associated with exiting business
activities.
Gain on Sale of Property, Plant and
Equipment, net. The increase was primarily attributable to a gain on the
sale of two closed facilities during 2007 exceeding the gain on the sale of land
during the first quarter of 2006.
Equity in Earnings of
Investees. The increase in equity earnings from investees was
predominately attributable to the increase in equity earnings recognized from
our PST joint venture in Brazil. The increase primarily reflects
higher volume for PST’s security product lines.
Income Before Income
Taxes. Income before income taxes is summarized in the
following table by reportable segment (in thousands):
|
For the Years Ended
December 31,
|
$ Increase /
|
|||||||||||
|
2007
|
2006
|
(Decrease)
|
||||||||||
|
Electronics
|
$ | 20,692 | $ | 20,882 | $ | (190 | ) | |||||
|
Control
Devices
|
15,825 | 13,987 | 1,838 | |||||||||
|
Other
corporate activities
|
8,676 | 6,392 | 2,284 | |||||||||
|
Corporate
interest expense
|
(21,969 | ) | (21,622 | ) | (347 | ) | ||||||
|
Income
before income taxes
|
$ | 23,224 | $ | 19,639 | $ | 3,585 | ||||||
The
decrease in income before income taxes in the Electronics segment was related to
reduced volume and increased SG&A expenses. The increased
SG&A expenses were predominantly due to increased development spending in
the areas of tachographs and instrumentation and higher selling and marketing
costs associated with new product introductions.
The
increase in income before income taxes in the Control Devices reportable segment
was primarily due to increased sales volume and new product
launches. These factors were offset by operating inefficiencies
related to a new product launch.
The
increase in income before income taxes from other corporate activities was
primarily due to a reduction in foreign exchange losses recorded in the previous
year and an increase in equity earnings from our PST joint venture of $3.6
million.
25
Income
before income taxes by geographic location for the years ended December 31, 2007
and 2006 is summarized in the following table (in thousands):
|
For the Years Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
$ Increase
|
% Increase
|
|||||||||||||||||||||
|
North
America
|
$ | 12,405 | 53.4 | % | $ | 10,847 | 55.2 | % | $ | 1,558 | 14.4 | % | ||||||||||||
|
Europe
and other
|
10,819 | 46.6 | 8,792 | 44.8 | 2,027 | 23.1 | % | |||||||||||||||||
|
Income
before income taxes
|
$ | 23,224 | 100.0 | % | $ | 19,639 | 100.0 | % | $ | 3,585 | 18.3 | % | ||||||||||||
The
increase in our profitability in North America was primarily attributable to
increased revenue from new sensor product launches and new electronic products
supplied for the production of military vehicles. The increase was
primarily offset by unfavorable variances related to a new product launch, lower
North American automotive and commercial vehicle production and contractual
price reductions with our customers. The increase in our
profitability outside North America was primarily due to increased European
commercial vehicle production and revenue from new program
launches. The increase was offset by higher SG&A related to
increased development spending in the areas of tachographs and instrumentation
and higher selling and marketing costs associated with new product
introductions.
Provision for Income Taxes.
We recognized a provision for income taxes of $6.6 million, or 28.2% of pre-tax
income, and $5.1 million, or 26.1% of pre-tax income, for federal, state and
foreign income taxes for the years ended December 31, 2007 and 2006,
respectively. The increase in the effective tax rate was primarily attributable
to the increase in higher taxed domestic earnings and the increase over the
prior year of the valuation allowance recorded against deferred tax assets in
the United Kingdom. These increases were partially offset by a deferred tax
benefit related to a change in state tax law.
Liquidity
and Capital Resources
Summary
of Cash Flows (in thousands):
|
For the Years
|
||||||||||||
|
Ended December 31,
|
$ Increase /
|
|||||||||||
|
2008
|
2007
|
(Decrease)
|
||||||||||
|
Cash
provided by (used for):
|
||||||||||||
|
Operating
activities
|
$ | 42,456 | $ | 33,525 | $ | 8,931 | ||||||
|
Investing
activities
|
(23,901 | ) | (5,826 | ) | (18,075 | ) | ||||||
|
Financing
activities
|
(16,231 | ) | 900 | (17,131 | ) | |||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(5,556 | ) | 1,443 | (6,999 | ) | |||||||
|
Net
change in cash and cash equivalents
|
$ | (3,232 | ) | $ | 30,042 | $ | (33,274 | ) | ||||
The
increase in net cash provided by operating activities was primarily due
to lower accounts receivable balances in the current year.
The
increase in net cash used for investing activities reflects an increase in cash
used for capital projects. The increase was due in part to the
expansion of our Lexington facility during 2008. In addition, 2007
net cash used for investing activities includes the proceeds from the sale of
non-strategic assets, including two idle facilities and the Company
airplane.
The
increase in net cash used by financing activities was primarily due to cash used
to purchase and retire $17.0 million in par value of the Company’s senior notes
during 2008.
As
discussed in Note 9 to our consolidated financial statements, we have entered
into foreign currency forward contracts with a notional value of $8.8 million
and $8.6 million at December 31, 2008 and 2007, respectively. The
purpose of these investments is to reduce exposure related to our British
pound-denominated receivables and Mexican peso-denominated
payables. At December 31, 2007, the Company also used forward
currency contracts to reduce the exposure related to the Company’s Mexican peso-
and Swedish krona-denominated receivables. The estimated fair value of the
British pound contract at December 31, 2008 and 2007, per quoted market sources,
was approximately $2.1 million and $(0.03) million, respectively. The
estimated fair market value of the Mexican peso-denominated contracts at
December 31, 2008, per quoted market sources, was approximately $(2.9)
million. For the year ended December 31, 2008, we recognized a $2.2
million gain related to foreign currency contracts in the consolidated statement
of operations as a component of other expense (income), net. As
discussed in Note 9, we entered into a fixed price swap contract in December
2007 for 1.0 million pounds of copper, which lasted through December
2008. In September 2008, we entered into a fixed price swap contract
for 1.4 million pounds of copper, which will last from January 2009 to December
2009. The purpose of these contracts is to reduce our price risk as
it relates to copper prices. As of December 31, 2008 and 2007, the
fair value of the fixed price commodity swap contract, per quoted market
sources, was approximately $(2.1) million and $0.1 million,
respectively.
26
The
following table summarizes our future cash outflows resulting from financial
contracts and commitments, as of December 31, 2008 (in thousands):
|
Contractual Obligations:
|
Total
|
Less than 1
year
|
2-3 years
|
4-5 years
|
After 5 years
|
|||||||||||||||
|
Long-term
debt
|
$ | 183,000 | $ | - | $ | - | $ | 183,000 | $ | - | ||||||||||
|
Operating
leases
|
20,703 | 5,122 | 6,521 | 4,144 | 4,916 | |||||||||||||||
|
Employee
benefit plans
|
8,695 | 731 | 1,549 | 1,666 | 4,749 | |||||||||||||||
|
Total
contractual obligations
|
$ | 212,398 | $ | 5,853 | $ | 8,070 | $ | 188,810 | $ | 9,665 | ||||||||||
Our 2009
capital expenditures are expected to be slightly lower than our 2008
expenditures, due to lower expected demand in the markets that we
serve. Management will continue to focus on reducing its weighted
average cost of capital and believes that cash flows from operations and the
availability of funds from our asset-based credit facility will provide
sufficient liquidity to meet our future growth and operating needs.
We will
continue to monitor business conditions and will take the necessary steps to
ensure our position in the current economic environment.
As
outlined in Note 4 to our consolidated financial statements, our asset-based
credit facility, permits borrowing up to a maximum level of $100.0
million. This facility provides us with lower borrowing rates and
allows us the flexibility to refinance our outstanding debt. At
December 31, 2008, there were no borrowings on this asset-based credit
facility. The available borrowing capacity on this credit facility is
based on eligible current assets, as defined. At December 31, 2008
and 2007, the Company had borrowing capacity of $57.7 million and $73.5 million,
respectively, based on eligible current assets. The decrease in
borrowing capacity was due primarily to lower accounts receivable balances. The
Company was in compliance with all covenants at December 31, 2008.
As of
December 31, 2008, the Company’s $183.0 million senior notes were redeemable at
103.833%. Given the Company’s senior notes are redeemable, we may
seek to retire the senior notes through a redemption, cash purchases, open
market purchases, privately negotiated transactions or
otherwise. Such redemptions, purchases or exchanges, if any, will
depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved may be
material. During 2008, we have purchased and retired $17.0 million in
face value of our senior notes.
Inflation
and International Presence
Given the
current economic climate and recent fluctuations in certain commodity prices, we
believe that an increase in such items could significantly affect our
profitability. Furthermore, by operating internationally, we are
affected by foreign currency exchange rates and the economic conditions of
certain countries. Based on the current economic conditions in these
countries, we believe we are not significantly exposed to adverse exchange rate
risk or economic conditions.
Critical
Accounting Policies and Estimates
Estimates. The
preparation of financial statements in conformity with U.S. Generally Accepted
Accounting Principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent liabilities at the date of the consolidated financial statements, and
the reported amounts of revenues and expenses during the reporting
period.
27
On an
ongoing basis, we evaluate estimates and assumptions used in our financial
statements. We base our estimates on historical experience and on
various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from these
estimates.
We
believe the following are “critical accounting policies” – those most important
to the financial presentation and those that require the most difficult,
subjective or complex judgments.
Revenue Recognition and Sales
Commitments. We recognize revenues from the sale of products,
net of actual and estimated returns of products sold based on authorized
returns, at the point of passage of title, which is generally at the time of
shipment. We often enter into agreements with our customers at the
beginning of a given vehicle’s expected production life. Once such
agreements are entered into, it is our obligation to fulfill the customers’
purchasing requirements for the entire production life of the
vehicle. These agreements are subject to renegotiation, which may
affect product pricing. In certain limited instances, we may be
committed under existing agreements to supply products to our customers at
selling prices which are not sufficient to cover the direct cost to produce such
products. In such situations, we recognize losses
immediately. There were no such instances in 2008. These
agreements generally may also be terminated by our customers at any
time.
On an
ongoing basis, we receive blanket purchase orders from our customers, which
include pricing terms. Purchase orders do not always specify
quantities. We recognize revenue based on the pricing terms included
in our purchase orders as our products are shipped to our
customers. We are asked to provide our customers with annual cost
reductions as part of certain agreements. In addition, we have
ongoing adjustments to our pricing arrangements with our customers based on the
related content, the cost of our products and other commercial
factors. Such pricing adjustments are recognized as they are
negotiated with our customers.
Warranties. Our warranty
reserve is established based on our best estimate of the amounts necessary to
settle future and existing claims on products sold as of the balance sheet
dates. This estimate is based on historical trends of units sold and
payment amounts, combined with our current understanding of the status of
existing claims. To estimate the warranty reserve, we are required to
forecast the resolution of existing claims as well as expected future claims on
products previously sold. Although we believe that our warranty
reserve is adequate and that the judgment applied is appropriate, such amounts
estimated to be due and payable could differ materially from what will actually
transpire in the future. Our customers are increasingly seeking to
hold suppliers responsible for product warranties, which could negatively impact
our exposure to these costs.
Allowance for Doubtful
Accounts. We have concentrations of sales and trade receivable balances
with a few key customers. Therefore, it is critical that we evaluate the
collectibility of accounts receivable based on a combination of
factors. In circumstances where we are aware of a specific customer’s
inability to meet their financial obligations, a specific allowance for doubtful
accounts is recorded against amounts due to reduce the net recognized receivable
to the amount we reasonably believe will be collected. Additionally,
we review historical trends for collectibility in determining an estimate for
our allowance for doubtful accounts. If economic circumstances change
substantially, estimates of the recoverability of amounts due to the Company
could be reduced by a material amount. We do not have collateral
requirements with our customers.
Contingencies. We are subject
to legal proceedings and claims, including product liability claims, commercial
or contractual disputes, environmental enforcement actions and other claims that
arise in the normal course of business. We routinely assess the
likelihood of any adverse judgments or outcomes to these matters, as well as
ranges of probable losses, by consulting with internal personnel principally
involved with such matters and with our outside legal counsel handling such
matters.
We have
accrued for estimated losses in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies,
when it is probable that a liability or loss has been incurred and the amount
can be reasonably estimated. Contingencies by their nature relate to
uncertainties that require the exercise of judgment both in assessing whether or
not a liability or loss has been incurred and estimating that amount of probable
loss. The reserves may change in the future due to new developments
or changes in circumstances. The inherent uncertainty related to the
outcome of these matters can result in amounts materially different from any
provisions made with respect to their resolution.
28
Inventory Valuation. Inventories are valued
at the lower of cost or market. Cost is determined by the last-in,
first-out (“LIFO”) method for U.S. inventories and by the first-in, first-out
(“FIFO”) method for non-U.S. inventories. Where appropriate, standard
cost systems are utilized for purposes of determining cost and the standards are
adjusted as necessary to ensure they approximate actual
costs. Estimates of the lower of cost or market value of inventory
are determined based upon current economic conditions, historical sales
quantities and patterns and, in some cases, the specific risk of loss on
specifically identified inventories.
Goodwill. Goodwill is tested
for impairment at least annually and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The
valuation methodologies employed by the Company use subjective measures
including forward looking financial information and discount rates that directly
impact the resulting fair values used to test the Company’s business units for
impairment. See Note 2 to our consolidated financial statements for
more information on our application of this accounting standard, including the
valuation techniques used to determine the fair value of goodwill.
Share-Based Compensation. The
estimate for our share-based compensation expense involves a number of
assumptions. We believe each assumption used in the valuation is
reasonable because it takes into account the experience of the plan and
reasonable expectations. We estimate volatility and forfeitures based
on historical data, future expectations and the expected term of the share-based
compensation awards. The assumptions, however, involve inherent
uncertainties. As a result, if other assumptions had been used,
share-based compensation expense could have varied.
Pension
Benefits. The amounts recognized in the consolidated financial
statements related to pension benefits are determined from actuarial valuations.
Inherent in these valuations are assumptions including expected return on plan
assets, discount rates at which the liabilities could be settled at
December 31, 2008, rate of increase in future compensation levels
and mortality rates. These assumptions are updated annually and
are disclosed in Note 8 to the consolidated financial
statements.
The
expected long-term return on assets is determined as a weighted average of the
expected returns for each asset class held by the defined-benefit pension plan
at the date. The expected return on bonds has been based on the yield
available on similar bonds (by currency, issuer and duration) at that
date. The expected return on equities is based on an equity risk
premium of return above that available on long-term government bonds of a
similar duration and the same currency as the liabilities.
Discount
rates for our defined benefit pension plan in the United Kingdom are determined
using the weighted average long-term sterling AA corporate bond. On
December 31, 2008, the yield was approximately 6.7%.
Deferred Income
Taxes. Deferred income taxes are provided for temporary
differences between amounts of assets and liabilities for financial reporting
purposes and the basis of such assets and liabilities as measured by tax laws
and regulations. Our deferred tax assets include, among other items,
net operating loss carry forwards and tax credits that can be used to offset
taxable income in future periods and reduce income taxes payable in those future
periods. These deferred tax assets will begin to expire, if unused,
no later than 2026 and 2021, respectively.
SFAS No.
109, Accounting for Income
Taxes, requires that deferred tax assets be reduced by a valuation
allowance if, based on all available evidence, it is considered more likely than
not that some portion or all of the recorded deferred tax assets will not be
realized in future periods. This assessment requires significant
judgment, and in making this evaluation, the Company considers available
positive and negative evidence, including past results, the existence of
cumulative losses in recent periods, our forecast of taxable income for the
current year and future years and tax planning strategies. Risk
factors include the continuing deterioration in economic conditions in the U.S.
automotive and commercial vehicle markets of which the Company has
significant U.S. operations and higher than planned volume or price reductions
from key customers.
During
the fourth quarter of this year, we concluded that it was no longer
more-likely-than-not that we would realize our U.S. deferred tax assets. As a
result we provided a full valuation allowance, net of certain future reversing
taxable temporary differences, in the amount of $63.8 million with respect to
our U.S. deferred tax assets. To the extent that realization of a portion or all
of the tax assets becomes more-likely-than-not to be realized based on changes
in circumstances a reversal of that portion of the deferred tax asset valuation
allowance will be recorded.
The
Company does not provide deferred income taxes on unremitted earnings of certain
non-U.S. subsidiaries, which are deemed permanently reinvested.
29
Effective
January 1, 2007, we adopted the provisions of Financial Accounting
Standards Board (“FASB”) interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 contains a
two-step approach to recognizing and measuring uncertain tax positions accounted
for in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate
settlement. We consider many factors when evaluating and estimating
our tax positions and tax benefits, which may require periodic adjustments and
which may not accurately anticipate actual outcomes.
Derivative Instruments and Hedging
Activities. We follow
SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”), as
amended, in accounting for financial instruments. Under SFAS 133, the gain
or loss on derivative instruments that have been designated and qualify as
hedges of the exposure to changes in the fair value of an asset or a liability,
as well as the offsetting gain or loss on the hedged item, are recognized in net
earnings during the period of the change in fair values. For derivative
instruments that have been designated and qualify as hedges of the exposure to
variability in expected future cash flows, the gain or loss on the derivative is
initially reported as a component of other comprehensive earnings and
reclassified to the consolidated statement of operations when the hedged
transaction affects net earnings. Any gain or loss on the derivative in excess
of the cumulative change in the present value of future cash flows of the hedged
item is recognized on the consolidated statement of operations during the period
of change.
Restructuring. We
have recorded restructuring charges in the recent period in connection with
improving manufacturing efficiency and cost position by transferring production
to other locations. These charges are recorded when management has
committed to a plan and incurred a liability related to the
plan. Also in connection with this initiative, we recorded
liabilities for severance costs. No fixed-asset impairment charges
were incurred because assets are primarily being transferred to our other
locations for continued production. Estimates for work force
reductions and other costs savings are recorded based upon estimates of the
number of positions to be terminated, termination benefits to be provided and
other information as necessary. Management evaluates the estimates on
a quarterly basis and will adjust the reserve when information indicates that
the estimate is above or below the initial estimate. For further
discussion of our restructuring activities, see Note 12 to our consolidated
financial statements included in this report.
Recently
Issued Accounting Standards
New
accounting standards to be implemented:
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”),
which provides a definition of fair value, establishes a framework for measuring
fair value and requires expanded disclosures about fair value measurements.
SFAS 157 was effective for financial assets and financial liabilities in
years beginning after November 15, 2007 and for nonfinancial assets and
liabilities in years beginning after November 15, 2008. The
provisions of SFAS 157 were applied prospectively. The Company
adopted SFAS 157 for financial assets and liabilities in 2008 with no material
impact to the consolidated financial statements. The Company does not
anticipate the adoption of SFAS 157 to nonfinancial assets and liabilities will
have a material impact on the Company’s financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”). This standard improves reporting by creating greater
consistency in the accounting and financial reporting of business
combinations. Additionally, SFAS 141(R) requires the acquiring entity
in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS 141(R) is effective for financial
statements issued for years beginning after December 15, 2008. Early
adoption of this standard is prohibited. In the absence of any
planned future business combinations, Management does not currently expect
SFAS 141(R) to have a material impact on the Company’s financial condition
or results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”). This standard
improves the relevance, comparability and transparency of financial information
provided to investors by requiring all entities to report noncontrolling
(minority) interests in subsidiaries in the same way. Additionally,
SFAS 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. SFAS 160 is effective for
financial statements issued for years beginning after December 15,
2008. Early adoption of this standard is prohibited. In the absence
of any noncontrolling (minority) interests, management does not currently expect
SFAS 160 to have a material impact on the Company’s financial condition or
results of operations.
30
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133, (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities, including
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, and (iii) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This standard becomes
effective on January 1, 2009. Earlier adoption of SFAS 161 and,
separately, comparative disclosures for earlier periods at initial adoption are
encouraged. As SFAS 161 only requires enhanced disclosures, this
standard will have no impact on the Company’s financial position, results of
operations or cash flows.
New
accounting standards implemented:
In June
2006, the FASB issued interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, Accounting for Income
Taxes. This interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The Company adopted the provisions of FIN
48 as of January 1, 2007. The adoption of FIN 48 did not have a
material impact on the Company’s financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), which expresses the SEC’s views regarding the
process of quantifying financial statement misstatements. Registrants
are required to quantify the impact of correcting all misstatements, including
both the carryover and reversing effects of prior year misstatements, on the
current year financial statements. The financial statements would
require adjustment when either approach results in quantifying a misstatement
that is material, after considering all relevant quantitative and qualitative
factors. SAB 108 was effective for the first quarter of 2007. The
adoption of SAB 108 did not have an impact on the Company’s consolidated
financial statements.
In May
2007, the FASB issued FASB Staff Position (“FSP”), Definition of Settlement in FASB
Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on
determining whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FSP FIN 48-1 was
effective retroactively to January 1, 2007. The implementation of
this standard did not have a material impact on the Company’s consolidated
financial position or results of operations.
31
Forward-Looking
Statements
Portions
of this report contain “forward-looking statements” under the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this report and include statements regarding the intent, belief or current
expectations of the Company, our directors or officers with respect to, among
other things, our (i) future product and facility expansion, (ii) acquisition
strategy, (iii) investments and new product development, and (iv) growth
opportunities related to awarded business. Forward-looking statements
may be identified by the words “will,” “may,” “designed to,” “believes,”
“plans,” “expects,” “continue,” and similar words and
expressions. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual events or results to
differ materially from those expressed in or implied by the statements.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, among other
factors:
|
|
·
|
the
loss or bankruptcy of a major
customer;
|
|
|
·
|
the
costs and timing of facility closures, business realignment, or similar
actions;
|
|
|
·
|
a
significant change in medium- and heavy-duty, agricultural,
automotive or off-highway vehicle
production;
|
|
|
·
|
our
ability to achieve cost reductions that offset or exceed customer-mandated
selling price reductions;
|
|
|
·
|
a
significant change in general economic conditions in any of the various
countries in which we operate;
|
|
|
·
|
labor
disruptions at our facilities or at any of our significant customers or
suppliers;
|
|
|
·
|
the
ability of our suppliers to supply us with parts and components at
competitive prices on a timely
basis;
|
|
|
·
|
the
amount of debt and the restrictive covenants contained in our credit
facility;
|
|
|
·
|
customer
acceptance of new products;
|
|
|
·
|
capital
availability or costs, including changes in interest rates or market
perceptions;
|
|
|
·
|
the
successful integration of any acquired
businesses;
|
|
|
·
|
the
occurrence or non-occurrence of circumstances beyond our control;
and
|
|
|
·
|
those
items described in Part I, Item IA (“Risk
Factors”).
|
32
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
Interest
Rate Risk
From time
to time, we are exposed to certain market risks, primarily resulting from the
effects of changes in interest rates. At December 31, 2008, however,
all of our debt was fixed rate debt. At this time, we do not use
financial instruments to manage this risk.
Commodity
Price Risk
Given the
current economic climate and fluctuations in certain commodity costs throughout
most of 2008, we currently are experiencing an increased risk, particularly with
respect to the purchase of copper, zinc, resins and certain other
commodities. We manage this risk through a combination of fixed price
agreements, staggered short-term contract maturities and commercial negotiations
with our suppliers. We may also consider pursuing alternative
commodities or alternative suppliers to mitigate this risk over a period of
time. The recent decline in certain commodity costs has positively
affected our operating results; however an increase in certain commodity costs
could adversely impact our profitability.
In
December 2007, we entered into a fixed price swap contract for 1.0 million
pounds of copper, which lasted through December 2008. In September
2008, we entered into a fixed price swap contract for 1.4 million pounds of
copper, which will last from January 2009 to December 2009. The
purpose of these contracts is to reduce our price risk as it relates to copper
prices.
Going
forward, we believe that our mitigation efforts will offset a substantial
portion of any financial impact caused by these costs
increasing. However, no assurances can be given that the magnitude or
duration of any increased costs will not have a material impact on our future
operating results. A hypothetical pre-tax gain or loss in fair value
from a 10.0% favorable or adverse change in commodity prices would not
significantly affect our results of operations, financial position or cash
flows.
Foreign
Currency Exchange Risk
Our risks
related to foreign currency exchange rates have historically not been material;
however, given the current economic climate, we are more closely monitoring this
risk. We use derivative financial instruments, including foreign
currency forward contracts, to mitigate our exposure to fluctuations in foreign
currency exchange rates by reducing the effect of such fluctuations on foreign
currency denominated intercompany transactions and other foreign currency
exposures. As discussed in Note 9 to our consolidated financial
statements, we have entered into foreign currency forward contracts that had a
notional value of $8.8 million and $8.6 million at December 31, 2008 and 2007,
respectively. The purpose of these foreign currency contracts is to
reduce exposure related to the Company’s British pound-denominated
receivables. At December 31, 2008, the Company used forward currency
contracts to reduce exposure to future Mexico peso-denominated
purchases. At December 31, 2007, the Company also used forward
currency contracts to reduce the exposure related to Swedish krona-denominated
receivables. The estimated fair value of these contracts at
December 31, 2008 and 2007, per quoted market sources, was approximately $(0.8)
million and $(0.03) million, respectively. The Company’s foreign
currency option contracts expire throughout 2009. We do not expect
the effects of this risk to be material in the future based on the current
operating and economic conditions in the countries in which we
operate.
A
hypothetical pre-tax gain (loss) in fair value from a 10.0% favorable or adverse
change in quoted currency exchange rates would be approximately $0.6 million or
$(0.7) million and $3.7 million or $(3.0) million for the Company’s British
pound-denominated receivables and for the Company’s Mexican peso-denominated
receivables, respectively, as of December 31, 2008. For foreign
currency contracts outstanding at December 31, 2007, a hypothetical pre-tax gain
(loss) in fair value from a 10.0% favorable or adverse change in quoted currency
exchange rates would be approximately $0.8 million or $(0.9) million as of
December 31, 2007. It is important to note that gains and losses
indicated in the sensitivity analysis would generally be offset by gains and
losses on the underlying exposures being hedged. Therefore, a
hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or
adverse change in quoted foreign currencies would not significantly affect our
results of operations, financial position or cash flows.
33
Item
8. Financial Statements and Supplementary Data.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
|
Page
|
||
|
Consolidated Financial
Statements:
|
||
|
Report
of Independent Registered Public Accounting Firm
|
35
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
36
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007
and 2006
|
37
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007
and 2006
|
38
|
|
|
Consolidated
Statements of Shareholders' Equity for the Years Ended December 31,
2008, 2007 and 2006
|
39
|
|
|
Notes
to Consolidated Financial Statements
|
40
|
|
|
Financial Statement
Schedule:
|
||
|
Schedule II
– Valuation and
Qualifying Accounts
|
71
|
34
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders of Stoneridge, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Stoneridge, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2008. Our audit also included the
financial statement schedule listed in the Index at Item 15. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Stoneridge,
Inc. and Subsidiaries at December 31, 2008 and 2007, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statements
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As
discussed in Note 5 to the consolidated financial statements, effective January
1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Stoneridge, Inc. and Subsidiaries’ internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March
11, 2009 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Cleveland,
Ohio
March 11,
2009
35
STONERIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 92,692 | $ | 95,924 | ||||
|
Accounts
receivable, less reserves of $4,204 and $4,736,
respectively
|
96,535 | 122,288 | ||||||
|
Inventories,
net
|
54,800 | 57,392 | ||||||
|
Prepaid
expenses and other
|
9,069 | 15,926 | ||||||
|
Deferred
income taxes, net of valuation allowance
|
1,495 | 9,829 | ||||||
|
Total
current assets
|
254,591 | 301,359 | ||||||
|
Long-Term
Assets:
|
||||||||
|
Property,
plant and equipment, net
|
87,701 | 92,752 | ||||||
|
Other
Assets:
|
||||||||
|
Goodwill
|
- | 65,176 | ||||||
|
Investments
and other, net
|
40,145 | 39,454 | ||||||
|
Deferred
income taxes, net of valuation allowance
|
- | 29,028 | ||||||
|
Total
long-term assets
|
127,846 | 226,410 | ||||||
|
Total
Assets
|
$ | 382,437 | $ | 527,769 | ||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 50,719 | $ | 69,373 | ||||
|
Accrued
expenses and other
|
43,485 | 47,198 | ||||||
|
Total
current liabilities
|
94,204 | 116,571 | ||||||
|
Long-Term
Liabilities:
|
||||||||
|
Long-term
debt
|
183,000 | 200,000 | ||||||
|
Deferred
income taxes
|
7,002 | 2,665 | ||||||
|
Other
liabilities
|
6,473 | 2,344 | ||||||
|
Total
long-term liabilities
|
196,475 | 205,009 | ||||||
|
Shareholders'
Equity:
|
||||||||
|
Preferred
Shares, without par value, authorized 5,000 shares, none
issued
|
- | - | ||||||
|
Common
Shares, without par value, authorized 60,000 shares, issued 24,772 and
24,601
|
||||||||
|
shares
and outstanding 24,665 and 24,209 shares, respectively, with no stated
value
|
- | - | ||||||
|
Additional
paid-in capital
|
158,039 | 154,173 | ||||||
|
Common
Shares held in treasury, 107 and 392 shares, respectively, at
cost
|
(129 | ) | (383 | ) | ||||
|
Retained
earnings (deficit)
|
(59,155 | ) | 38,372 | |||||
|
Accumulated
other comprehensive income (loss)
|
(6,997 | ) | 14,027 | |||||
|
Total
shareholders’ equity
|
91,758 | 206,189 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 382,437 | $ | 527,769 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
36
STONERIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
|
For the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
Sales
|
$ | 752,698 | $ | 727,120 | $ | 708,699 | ||||||
|
Costs
and Expenses:
|
||||||||||||
|
Cost
of goods sold
|
586,411 | 559,397 | 549,793 | |||||||||
|
Selling,
general and administrative
|
136,563 | 133,708 | 124,538 | |||||||||
|
Gain
on sale of property, plant and equipment, net
|
(571 | ) | (1,710 | ) | (1,303 | ) | ||||||
|
Goodwill
impairment charge
|
65,175 | - | - | |||||||||
|
Restructuring
charges
|
8,391 | 926 | 608 | |||||||||
|
Operating
Income (Loss)
|
(43,271 | ) | 34,799 | 35,063 | ||||||||
|
Interest
expense, net
|
20,575 | 21,759 | 21,744 | |||||||||
|
Equity
in earnings of investees
|
(13,490 | ) | (10,893 | ) | (7,125 | ) | ||||||
|
Loss
on early extinguishment of debt
|
770 | - | - | |||||||||
|
Other
expense (income), net
|
(351 | ) | 709 | 805 | ||||||||
|
Income
(Loss) Before Income Taxes
|
(50,775 | ) | 23,224 | 19,639 | ||||||||
|
Provision
for income taxes
|
46,752 | 6,553 | 5,126 | |||||||||
|
Net
Income (Loss)
|
$ | (97,527 | ) | $ | 16,671 | $ | 14,513 | |||||
|
Basic
net income (loss) per share
|
$ | (4.17 | ) | $ | 0.72 | $ | 0.63 | |||||
|
Basic
weighted average shares outstanding
|
23,367 | 23,133 | 22,866 | |||||||||
|
Diluted
net income (loss) per share
|
$ | (4.17 | ) | $ | 0.71 | $ | 0.63 | |||||
|
Diluted
weighted average shares outstanding
|
23,367 | 23,548 | 23,062 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
37
STONERIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
For the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||||
|
Net
income (loss)
|
$ | (97,527 | ) | $ | 16,671 | $ | 14,513 | |||||
|
Adjustments to
reconcile net income to net cash provided (used) by operating
activities -
|
||||||||||||
|
Depreciation
|
26,196 | 28,299 | 25,904 | |||||||||
|
Amortization
|
1,320 | 1,522 | 1,657 | |||||||||
|
Deferred
income taxes
|
46,239 | 3,823 | 3,466 | |||||||||
|
Earnings
of equity method investees, less dividends received
|
(9,277 | ) | (5,299 | ) | (3,455 | ) | ||||||
|
Gain
on sale of fixed assets
|
(571 | ) | (1,710 | ) | (1,303 | ) | ||||||
|
Gain
on sale of partnership interest
|
- | - | (1,627 | ) | ||||||||
|
Share-based
compensation expense
|
3,425 | 2,431 | 1,953 | |||||||||
|
Loss
on early extinguishment of debt
|
770 | - | - | |||||||||
|
Postretirement
benefit settlement gain
|
- | - | (1,242 | ) | ||||||||
|
Goodwill
impairment charge
|
65,175 | - | - | |||||||||
|
Changes
in operating assets and liabilities -
|
||||||||||||
|
Accounts
receivable, net
|
20,087 | (13,424 | ) | (2,739 | ) | |||||||
|
Inventories,
net
|
(1,786 | ) | 933 | (2,350 | ) | |||||||
|
Prepaid
expenses and other
|
2,617 | 1,563 | 1,742 | |||||||||
|
Other
assets
|
39 | (89 | ) | 2,228 | ||||||||
|
Accounts
payable
|
(14,769 | ) | (4,881 | ) | 14,084 | |||||||
|
Accrued
expenses and other
|
518 | 3,686 | (6,291 | ) | ||||||||
|
Net
cash provided by operating activities
|
42,456 | 33,525 | 46,540 | |||||||||
|
INVESTING
ACTIVITIES:
|
||||||||||||
|
Capital
expenditures
|
(24,573 | ) | (18,141 | ) | (25,895 | ) | ||||||
|
Proceeds
from sale of fixed assets
|
1,652 | 12,315 | 2,266 | |||||||||
|
Proceeds
from sale of partnership interest
|
- | - | 1,153 | |||||||||
|
Business
acquisitions and other
|
(980 | ) | - | (2,133 | ) | |||||||
|
Net
cash used by investing activities
|
(23,901 | ) | (5,826 | ) | (24,609 | ) | ||||||
|
FINANCING
ACTIVITIES:
|
||||||||||||
|
Repayments
of long-term debt
|
(17,000 | ) | - | (44 | ) | |||||||
|
Share-based
compensation activity
|
1,322 | 2,119 | 301 | |||||||||
|
Premiums
related to early extinguishment of debt
|
(553 | ) | - | - | ||||||||
|
Other
financing costs
|
- | (1,219 | ) | (150 | ) | |||||||
|
Net
cash provided (used) by financing activities
|
(16,231 | ) | 900 | 107 | ||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(5,556 | ) | 1,443 | 3,060 | ||||||||
|
Net
change in cash and cash equivalents
|
(3,232 | ) | 30,042 | 25,098 | ||||||||
|
Cash
and cash equivalents at beginning of period
|
95,924 | 65,882 | 40,784 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 92,692 | $ | 95,924 | $ | 65,882 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash
paid for interest, net
|
$ | 20,048 | $ | 20,637 | $ | 20,565 | ||||||
|
Cash
paid for income taxes, net
|
$ | 4,466 | $ | 3,672 | $ | 2,394 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
38
STONERIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
thousands)
|
Number of
Common
Shares
|
Number of
Treasury
Shares
|
Additional
Paid-in Capital
|
Common
Shares Held
in Treasury
|
Retained
Earnings
(Deficit)
|
Accumulated Other
Comprehensive
Income (Loss)
|
Total Shareholders'
Equity
|
Comprehensive
Income (Loss)
|
|||||||||||||||||||||||||
|
BALANCE,
DECEMBER 31, 2005
|
23,178 | 54 | $ | 147,440 | $ | (65 | ) | $ | 7,188 | $ | (572 | ) | $ | 153,991 | ||||||||||||||||||
|
Net
income
|
- | - | - | - | 14,513 | - | 14,513 | $ | 14,513 | |||||||||||||||||||||||
|
Exercise
of share options
|
64 | - | 393 | - | - | - | 393 | - | ||||||||||||||||||||||||
|
Issuance
of restricted Common Shares
|
694 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Forfeited
restricted Common Shares
|
(118 | ) | 118 | - | - | - | - | - | - | |||||||||||||||||||||||
|
Repurchased
Common Shares for treasury
|
(14 | ) | 14 | - | (86 | ) | - | - | (86 | ) | - | |||||||||||||||||||||
|
Share-based
compensation matters
|
- | - | 2,245 | - | - | - | 2,245 | - | ||||||||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||||||
|
Minimum
pension liability adjustments
|
- | - | - | - | - | 1,625 | 1,625 | 1,625 | ||||||||||||||||||||||||
|
Unrealized
loss on marketable securities
|
- | - | - | - | - | (84 | ) | (84 | ) | (84 | ) | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | - | 6,025 | 6,025 | 6,025 | ||||||||||||||||||||||||
|
Comprehensive
income
|
$ | 22,079 | ||||||||||||||||||||||||||||||
|
BALANCE,
DECEMBER 31, 2006
|
23,804 | 186 | 150,078 | (151 | ) | 21,701 | 6,994 | 178,622 | ||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | 16,671 | - | 16,671 | $ | 16,671 | |||||||||||||||||||||||
|
Exercise
of share options
|
164 | - | 1,552 | - | - | - | 1,552 | - | ||||||||||||||||||||||||
|
Issuance
of restricted Common Shares
|
447 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Forfeited
restricted Common Shares
|
(181 | ) | 181 | - | - | - | - | - | - | |||||||||||||||||||||||
|
Repurchased
Common Shares for treasury
|
(25 | ) | 25 | - | (232 | ) | - | - | (232 | ) | - | |||||||||||||||||||||
|
Share-based
compensation matters
|
- | - | 2,543 | - | - | - | 2,543 | - | ||||||||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||||||
|
Pension
liability adjustments
|
- | - | - | - | - | 1,039 | 1,039 | 1,039 | ||||||||||||||||||||||||
|
Unrealized
gain on marketable securities
|
- | - | - | - | - | 44 | 44 | 44 | ||||||||||||||||||||||||
|
Unrealized
loss on derivatives
|
- | - | - | - | - | (37 | ) | (37 | ) | (37 | ) | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | - | 5,987 | 5,987 | 5,987 | ||||||||||||||||||||||||
|
Comprehensive
income (loss)
|
$ | 23,704 | ||||||||||||||||||||||||||||||
|
BALANCE,
DECEMBER 31, 2007
|
24,209 | 392 | 154,173 | (383 | ) | 38,372 | 14,027 | 206,189 | ||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (97,527 | ) | - | (97,527 | ) | $ | (97,527 | ) | ||||||||||||||||||||
|
Exercise
of share options
|
88 | - | 795 | - | - | - | 795 | - | ||||||||||||||||||||||||
|
Issuance
of restricted Common Shares
|
462 | (379 | ) | - | 383 | - | - | 383 | - | |||||||||||||||||||||||
|
Forfeited
restricted Common Shares
|
(73 | ) | 73 | - | - | - | - | - | - | |||||||||||||||||||||||
|
Repurchased
Common Shares for treasury
|
(21 | ) | 21 | - | (129 | ) | - | - | (129 | ) | - | |||||||||||||||||||||
|
Share-based
compensation matters
|
- | - | 3,071 | - | - | - | 3,071 | - | ||||||||||||||||||||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||||||||||||||||||
|
Pension
liability adjustments
|
- | - | - | - | - | (1,531 | ) | (1,531 | ) | (1,531 | ) | |||||||||||||||||||||
|
Unrealized
loss on marketable securities
|
- | - | - | - | - | (10 | ) | (10 | ) | (10 | ) | |||||||||||||||||||||
|
Unrealized
loss on derivatives
|
- | - | - | - | - | (4,977 | ) | (4,977 | ) | (4,977 | ) | |||||||||||||||||||||
|
Currency
translation adjustments
|
- | - | - | - | - | (14,506 | ) | (14,506 | ) | (14,506 | ) | |||||||||||||||||||||
|
Comprehensive
loss
|
$ | (118,551 | ) | |||||||||||||||||||||||||||||
|
BALANCE,
DECEMBER 31, 2008
|
24,665 | 107 | $ | 158,039 | $ | (129 | ) | $ | (59,155 | ) | $ | (6,997 | ) | $ | 91,758 | |||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
39
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
1.
Organization and Nature of Business
Stoneridge,
Inc. and its subsidiaries are independent designers and manufacturers of highly
engineered electrical and electronic components, modules and systems for the
medium- and heavy-duty truck, agricultural, automotive and off-highway vehicle
markets.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of
Stoneridge, Inc. and its wholly-owned and majority-owned subsidiaries
(collectively, the “Company”). Intercompany transactions and balances have been
eliminated in consolidation. The Company accounts for investments in joint
ventures in which it owns between 20% and 50% of equity or otherwise acquires
management influence using the equity method as prescribed by Accounting
Principles Board Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock (Note 3).
Cash
and Cash Equivalents
The
Company considers all short-term investments with original maturities of three
months or less to be cash equivalents. Cash equivalents are stated at cost,
which approximates fair value, due to the highly liquid nature and short-term
duration of the underlying securities.
Accounts
Receivable and Concentration of Credit Risk
Revenues
are principally generated from the medium- and heavy-duty truck, agricultural,
automotive and off-highway vehicle markets. The Company’s largest customers were
Navistar International and Deere & Company, which accounted for
approximately 26%, 20% and 25% and 10%, 7% and 6% of net sales for the years
ended December 31, 2008, 2007 and 2006, respectively.
Inventories
Inventories
are valued at the lower of cost or market. Cost is determined by the last-in,
first-out (“LIFO”) method for approximately 72% and 66% of the Company’s
inventories at December 31, 2008 and 2007, 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 at December
31:
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 32,981 | $ | 36,678 | ||||
|
Work-in-progress
|
8,876 | 9,065 | ||||||
|
Finished
goods
|
15,890 | 13,700 | ||||||
|
Total
inventories
|
57,747 | 59,443 | ||||||
|
Less:
LIFO reserve
|
(2,947 | ) | (2,051 | ) | ||||
|
Inventories,
net
|
$ | 54,800 | $ | 57,392 | ||||
40
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost and consist of the following at
December 31:
|
2008
|
2007
|
|||||||
|
Land
and land improvements
|
$ | 3,872 | $ | 3,956 | ||||
|
Buildings
and improvements
|
35,325 | 35,869 | ||||||
|
Machinery
and equipment
|
152,775 | 147,931 | ||||||
|
Office
furniture and fixtures
|
6,586 | 10,607 | ||||||
|
Tooling
|
62,163 | 81,976 | ||||||
|
Vehicles
|
314 | 403 | ||||||
|
Leasehold
improvements
|
2,359 | 2,981 | ||||||
|
Construction
in progress
|
14,878 | 10,909 | ||||||
|
Total
property, plant and equipment
|
278,272 | 294,632 | ||||||
|
Less:
Accumulated depreciation
|
(190,571 | ) | (201,880 | ) | ||||
|
Property,
plant and equipment, net
|
$ | 87,701 | $ | 92,752 | ||||
As a
result of the restructuring plan approved on October 29, 2007 (See Note 12), the
manufacturing facility located in Sarasota, Florida was closed in 2008. The 2008
amounts above include $760, $6,125 and ($3,128) of land and improvements,
buildings and improvements and accumulated depreciation, respectively, related
to the Sarasota facility. The Sarasota facility is currently being marketed for
sale and the fair value of the property is expected to exceed the carrying
value.
Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets. Depreciation expense for the years ended December 31, 2008, 2007 and
2006 was $26,196, $28,299 and $25,904, respectively. Depreciable lives within
each property classification are as follows:
|
Buildings
and improvements
|
10–40
years
|
|
Machinery
and equipment
|
3–20
years
|
|
Office
furniture and fixtures
|
3–10
years
|
|
Tooling
|
2–5
years
|
|
Vehicles
|
3–5
years
|
|
Leasehold
improvements
|
3–8
years
|
Maintenance and repair expenditures
that are not considered improvements and do not extend the useful life of
property are charged to expense as incurred. Expenditures for improvements and
major renewals are capitalized. When assets are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the accounts,
and any gain or loss on the disposition is recorded in the Statement of
Operations as a component of gain on sale of property, plant and equipment,
net.
Impairment
of Finite Lived Assets
The
Company reviews its long-lived assets and identifiable intangible assets with
finite lives for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No significant
impairment charges were recorded in 2008, 2007 or 2006. Impairment would be
recognized when events or changes in circumstances indicate that the carrying
amount of the asset may not be recovered. Measurement of the amount of
impairment may be based on appraisal, market values of similar assets or
estimated discounted future cash flows resulting from the use and ultimate
disposition of the asset.
Goodwill
and Other Intangible Assets
Under
Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”), goodwill is subject to an annual assessment for impairment
(or more frequently if impairment indicators arise) by applying a fair
value-based test.
41
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The
Company performs its annual impairment test of goodwill as of the beginning of
the fourth quarter. The Company uses a combination of valuation techniques,
which include consideration of a market-based approach (guideline company
method) and an income approach (discounted cash flow method), in determining the
fair value of the Company’s applicable reporting units in the annual impairment
test of goodwill. The Company believes that the combination of the valuation
models provides a more appropriate valuation of the Company’s reporting units by
taking into account different marketplace participant assumptions. Both methods
utilize market data in the derivation of a value estimate and are
forward-looking in nature. The guideline assessment of future performance and
the discounted cash flow method utilize a market-derived rate of return to
discount anticipated performance.
These
methodologies are applied to the reporting units’ historical and projected
financial performance. The impairment review is highly judgmental and involves
the use of significant estimates and assumptions. These estimates and
assumptions have a significant impact on the amount of any impairment charge
recorded. Discounted cash flow methods are dependent upon assumption of future
sales trends, market conditions and cash flows of each reporting unit over
several years. Actual cash flows in the future may differ significantly from
those previously forecasted. Other significant assumptions include growth rates
and the discount rate applicable to future cash flows.
As of the
beginning of the fourth quarter, the goodwill balance of $65.2 million was
related to the Control Devices reportable segment. The Company completed its
annual assessment of any potential goodwill impairment as of October 1, 2008 and
October 1, 2007 and determined that no impairment existed as of either
date.
Due to
significant declines in the automotive sector and the world economy as a whole
during the fourth quarter of 2008, the Company performed an additional
impairment test as of December 31, 2008. The initial December 31, 2008
impairment test indicated that the carrying value of the Company’s reporting
units significantly exceeded the corresponding fair value of the reporting
units. The implied fair value of goodwill in these reporting units were then
determined through the allocation of the fair value to the underlying assets and
liabilities. At December 31, 2008, the carrying value of the reporting units was
greater than the implied fair value; therefore the Company recorded a goodwill
impairment charge of $65.2 million, which is included in the Control Devices
reportable segment and as a component of operating loss in the accompanying
consolidated statements of operations.
The
goodwill impairment charge resulted primarily from the significant deterioration
in the global economic environment including tightening credit markets, stock
market declines and significant reductions in current and forecasted production
volumes for light and commercial vehicles during the quarter ended December 31,
2008. This has lead to a significant decline in the Company’s stock price, which
resulted in a market capitalization less than the Company’s carrying value at
December 31, 2008 prior to the impairment test.
The
change in the carrying value of goodwill by reportable segment during 2008 was
as follows:
|
Control
|
||||||||||||
|
Electronics
|
Devices
|
Total
|
||||||||||
|
Goodwill
at beginning of period
|
$ | - | $ | 65,176 | $ | 65,176 | ||||||
|
Impairment
charge
|
- | (65,176 | ) | (65,176 | ) | |||||||
|
Goodwill
at end of period
|
$ | - | $ | - | $ | - | ||||||
The net
carrying amount of the Company’s patents at December 31, 2008 and 2007 was $0
and $203, respectively, and was included in the Company’s consolidated balance
sheets as a component of other assets. Aggregate amortization expense on patents
was $203 and $204 for the years ended December 31, 2008 and December 31, 2007,
respectively. There is no amortization expense for the year ended December 31,
2009 based upon the Company’s intangible asset portfolio at December 31,
2008.
42
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following at December
31:
|
2008
|
2007
|
|||||||
|
Compensation
related obligations
|
$ | 16,041 | $ | 19,053 | ||||
|
Insurance
related obligations
|
1,986 | 4,084 | ||||||
|
Warranty
and recall related obligations
|
5,527 | 5,306 | ||||||
|
Other
(1)
|
19,931 | 18,755 | ||||||
|
Total
accrued expenses and other current liabilities
|
$ | 43,485 | $ | 47,198 | ||||
(1) “Other”
is comprised of miscellaneous accruals; none of which contributed a significant
portion of the total.
Income
Taxes
The
Company accounts for income taxes using the provisions of SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not to occur.
In May
2007, the FASB issued FSP FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on
determining whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective
retroactively to January 1, 2007. The implementation of this standard did not
have a material impact on the Company’s consolidated financial position or
results of operations.
Currency
Translation
The
financial statements of foreign subsidiaries, where the local currency is the
functional currency, are translated into U.S. dollars using exchange rates in
effect at the period end for assets and liabilities and average exchange rates
during each reporting period for the results of operations. Adjustments
resulting from translation of financial statements are reflected as a component
of accumulated other comprehensive income. Foreign currency transactions are
remeasured into the functional currency using translation rates in effect at the
time of the transaction, with the resulting adjustments included in the results
of operations.
Revenue
Recognition and Sales Commitments
The
Company recognizes revenues from the sale of products, net of actual and
estimated returns, at the point of passage of title, which is generally at the
time of shipment. Actual and estimated returns are based on authorized returns.
The Company often enters into agreements with its customers at the beginning of
a given vehicle’s expected production life. Once such agreements are entered
into, it is the Company’s obligation to fulfill the customers’ purchasing
requirements for the entire production life of the vehicle. These agreements are
subject to renegotiation, which may affect product pricing.
Allowance
for Doubtful Accounts
The
Company evaluates the collectibility of accounts receivable based on a
combination of factors. In circumstances where the Company is aware of a
specific customer’s inability to meet its financial obligations, a specific
allowance for doubtful accounts is recorded against amounts due to reduce the
net recognized receivable to the amount the Company reasonably believes will be
collected. Additionally, the Company reviews historical trends for
collectibility in determining an estimate for its allowance for doubtful
accounts. If economic circumstances change substantially, estimates of the
recoverability of amounts due to the Company could be reduced by a material
amount. The Company does not have collateral requirements with its
customers.
43
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
Product
Warranty and Recall Reserves
Amounts
accrued for product warranty and recall claims are established based on the
Company’s best estimate of the amounts necessary to settle future and existing
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. The Company can provide no
assurances that it will not experience material claims in the future or that it
will not incur significant costs to defend or settle such claims beyond the
amounts accrued or beyond what the Company may recover from its
suppliers.
The
following provides a reconciliation of changes in product warranty and recall
liability for the years ended December 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Product
warranty and recall at beginning of period
|
$ | 5,306 | $ | 5,825 | ||||
|
Accruals
for products shipped during period
|
5,487 | 2,689 | ||||||
|
Aggregate
changes in pre-existing liabilities due to claims
developments
|
1,157 | 1,756 | ||||||
|
Settlements
made during the period (in cash or in kind)
|
(6,423 | ) | (4,964 | ) | ||||
|
Product
warranty and recall at end of period
|
$ | 5,527 | $ | 5,306 | ||||
Product
Development Expenses
Expenses
associated with the development of new products and changes to existing products
are charged to expense as incurred. These costs amounted to $45,626, $44,203 and
$40,840 in years ended December 31, 2008, 2007 and 2006, respectively or 6.1%,
6.1% and 5.8% of net sales for these periods.
Share-Based
Compensation
At
December 31, 2008, the Company had three types of share-based compensation
plans: (1) Long-Term Incentive Plan (the “Incentive Plan”), (2) Directors’ Share
Option Plan and (3) the Directors’ Restricted Shares Plan. One plan is for
employees and two plans are for non-employee directors. The Incentive Plan is
made up of the Long-Term Incentive Plan that was approved
by the Company's shareholders on September 30, 1997 and expired
on June 30, 2007 and the Amended and Restated Long-Term Incentive Plan that
was approved by the Company's shareholders on April 24, 2006 and
expires on April 24, 2016. Prior to the second quarter of 2005, the Company
accounted for its plans under the fair value recognition provisions of SFAS No.
123, Accounting for
Stock-Based Compensation, (“SFAS 123”) adopted prospectively for all
employee and director awards granted, modified or settled after January 1, 2003,
under the provisions of SFAS No. 148, Accounting for Stock-Based
Compensation – Transition and Disclosure – an amendment of SFAS 123.
Effective at the beginning of the second quarter of 2005, the Company adopted
SFAS No. 123(R), Share-Based
Payment, (“SFAS 123(R)”) using the modified-prospective-transition
method.
Total compensation expense recognized
as a component of selling, general and administrative on the consolidated
statements of operations for share-based compensation arrangements was $3,425,
$2,431 and $1,953 for the years ended December 31, 2008, 2007 and 2006,
respectively. There was no share-based compensation expense capitalized as
inventory in 2008, 2007 or 2006.
Financial Instruments and Derivative
Financial Instruments
Financial
instruments, including derivative financial instruments, held by the Company
include cash and cash equivalents, accounts receivable, accounts payable,
long-term debt and foreign currency forward contracts. The carrying value of
cash and cash equivalents, accounts receivable and accounts payable is
considered to be representative of fair value because of the short maturity of
these instruments. Refer to Note 9 of the Company’s consolidated financial
statements for fair value disclosures of the Company’s fixed price commodity
swap and foreign currency swap contracts.
44
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
Common
Shares Held in Treasury
The
Company accounts for Common Shares held in treasury under the cost method and
includes such shares as a reduction of total shareholders’ equity.
Accounting
Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, including certain
self-insured risks and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Because
actual results could differ from those estimates, the Company revises its
estimates and assumptions as new information becomes available.
Net
Income (Loss) Per Share
Net
income (loss) per share amounts for all periods is presented in accordance with
SFAS No. 128, Earnings Per
Share (“SFAS 128”), which requires the presentation of basic and diluted
net income (loss) per share. Basic net income (loss) per share was computed by
dividing net income (loss) by the weighted-average number of Common Shares
outstanding for each respective period. Diluted net income 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. For
all periods in which the Company recognized a net loss the Company has
recognized zero dilutive effect from securities as no anti-dilution is
permitted under SFAS 128. Actual weighted-average shares outstanding used in
calculating basic and diluted net income (loss) per share were as
follows:
|
For
the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Basic
weighted-average shares outstanding
|
23,366,515 | 23,132,814 | 22,866,015 | |||||||||
|
Effect
of dilutive securities
|
- | 415,669 | 195,870 | |||||||||
|
Diluted
weighted-average shares outstanding
|
23,366,515 | 23,548,483 | 23,061,885 | |||||||||
Options
not included in the computation of diluted net income (loss) per share to
purchase 74,000, 89,500 and 599,850 Common Shares at an average price of $14.86,
$14.61 and $12.17 per share were outstanding at December 31, 2008, 2007 and
2006, respectively. These outstanding options were not included in the
computation of diluted net income (loss) per share because their respective
exercise prices were greater than the average market price of Common Shares.
These options were excluded from the computation of diluted earnings per share
under the treasury stock method. In addition, the calculation of diluted
earnings per share for the year ended December 31, 2008, would have included
123,750 shares for the assumed exercise of options under the Company’s share
incentive plans, except that the Company was in a net loss position and no
anti-dilution is permitted under SFAS 128.
As of
December 31, 2008, 628,275 performance-based restricted shares were outstanding.
These shares were not included in the computation of diluted net income per
share because associated performance targets were not achieved as of December
31, 2008. These shares may or may not become dilutive based on the Company’s
ability to meet or exceed future performance targets.
Comprehensive
Income (Loss)
SFAS No.
130, Reporting Comprehensive
Income, establishes standards for the reporting and display of
comprehensive income (loss). Other comprehensive income (loss) includes foreign
currency translation adjustments and gains and losses from certain foreign
currency transactions, the effective portion of gains and losses on certain
hedging activities, pension liability adjustments and unrealized gains and
losses on available-for-sale marketable securities.
45
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The
components of accumulated other comprehensive income (loss), as reported in the
statement of consolidated shareholders’ equity as of December 31, net of tax
were as follows:
|
Currency
Translation
Adjustments
|
Pension
Liability
Adjustments
|
Unrealized
Gain (Loss) on
Marketable
Securities
|
Unrealized
Loss on
Derivatives
|
Accumulated
Other
Comprehensive
Income (Loss)
|
||||||||||||||||
|
Balance, January 1, 2006
|
$ | 2,500 | $ | (3,092 | ) | $ | 20 | $ | - | $ | (572 | ) | ||||||||
|
Current
year change
|
6,025 | 1,625 | (84 | ) | - | 7,566 | ||||||||||||||
|
Balance,
December 31, 2006
|
8,525 | (1,467 | ) | (64 | ) | - | 6,994 | |||||||||||||
|
Current
year change
|
5,987 | 1,039 | 44 | (37 | ) | 7,033 | ||||||||||||||
|
Balance,
December 31, 2007
|
14,512 | (428 | ) | (20 | ) | (37 | ) | 14,027 | ||||||||||||
|
Current
year change
|
(14,506 | ) | (1,531 | ) | (10 | ) | (4,977 | ) | (21,024 | ) | ||||||||||
|
Balance,
December 31, 2008
|
$ | 6 | $ | (1,959 | ) | $ | (30 | ) | $ | (5,014 | ) | $ | (6,997 | ) | ||||||
The tax
effects related to each component of other comprehensive income (loss) were as
follows:
|
Before Tax
Amount
|
Benefit /
(Provision)
|
After-Tax
Amount
|
||||||||||
|
2006
|
||||||||||||
|
Foreign
currency translation adjustments
|
$ | 6,025 | $ | - | $ | 6,025 | ||||||
|
Pension
liability adjustments
|
1,625 | - | 1,625 | |||||||||
|
Unrealized
loss on marketable securities
|
(129 | ) | 45 | (84 | ) | |||||||
|
Other
comprehensive income
|
$ | 7,521 | $ | 45 | $ | 7,566 | ||||||
|
2007
|
||||||||||||
|
Foreign
currency translation adjustments
|
$ | 5,987 | $ | - | $ | 5,987 | ||||||
|
Pension
liability adjustments
|
1,039 | - | 1,039 | |||||||||
|
Unrealized
gain on marketable securities
|
68 | (24 | ) | 44 | ||||||||
|
Unrealized
loss on derivatives
|
(57 | ) | 20 | (37 | ) | |||||||
|
Other
comprehensive income
|
$ | 7,037 | $ | (4 | ) | $ | 7,033 | |||||
|
2008
|
||||||||||||
|
Foreign
currency translation adjustments
|
$ | (14,506 | ) | $ | - | $ | (14,506 | ) | ||||
|
Pension liability
adjustments
|
(1,531 | ) | - | (1,531 | ) | |||||||
|
Unrealized
loss on marketable securities
|
(16 | ) | 6 | (10 | ) | |||||||
|
Unrealized
loss on derivatives
|
(4,977 | ) | - | (4,977 | ) | |||||||
|
Other
comprehensive loss
|
$ | (21,030 | ) | $ | 6 | $ | (21,024 | ) | ||||
At
December 31, 2008 and 2007, the Company recorded valuation allowances of $675
and $407, respectively, which fully offset the deferred tax asset related to the
accumulated pension liability adjustments.
Deferred
Finance Costs
Deferred
finance costs are being amortized over the life of the related financial
instrument using the straight-line method. The annual amortization for the years
ended December 31, 2008, 2007 and 2006 was $1,117, $1,318 and $1,379,
respectively.
46
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
Recently
Issued Accounting Standards
New
accounting standards to be implemented:
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”),
which provides a definition of fair value, establishes a framework for measuring
fair value and requires expanded disclosures about fair value measurements.
SFAS 157 was effective for financial assets and financial liabilities in
years beginning after November 15, 2007 and for nonfinancial assests and
liabilities in years beginning after November 15, 2008. The provisions of
SFAS 157 were applied prospectively. The Company adopted SFAS 157 for
financial assets and liabilities in 2008 with no material impact to the
consolidated financial statements. The Company does not anticipate the adoption
of SFAS 157 to nonfinancial assets and liabilities will have a material impact
on the Company’s financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
141(R)”). This standard improves reporting by creating greater consistency in
the accounting and financial reporting of business combinations. Additionally,
SFAS 141(R) requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS 141(R) is effective for financial statements issued for
years beginning after December 15, 2008. Early adoption of this standard is
prohibited. In the absence of any planned future business combinations,
Management does not currently expect SFAS 141(R) to have a material impact
on the Company’s financial condition or results of operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”). This standard improves
the relevance, comparability and transparency of financial information provided
to investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way. Additionally, SFAS 160
eliminates the diversity that currently exists in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. SFAS 160 is effective for financial statements issued
for years beginning after December 15, 2008. Early adoption of this
standard is prohibited. In the absence of any noncontrolling (minority)
interests, management does not currently expect SFAS 160 to have a material
impact on the Company’s financial condition or results of
operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133, (“SFAS 161”). SFAS 161 requires enhanced disclosures about
an entity’s derivative and hedging activities, including (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and
related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and (iii) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. This standard becomes effective on
January 1, 2009. Earlier adoption of SFAS 161 and, separately, comparative
disclosures for earlier periods at initial adoption are encouraged. As SFAS 161
only requires enhanced disclosures, this standard will have no impact on the
Company’s financial position, results of operations or cash flows.
New
accounting standards implemented:
In June
2006, the FASB issued interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.
This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. This interpretation also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The Company adopted the provisions
of FIN 48 as of January 1, 2007. The adoption of FIN 48 did not have a material
impact on the Company’s financial statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”), which expresses the SEC’s views regarding the
process of quantifying financial statement misstatements. Registrants are
required to quantify the impact of correcting all misstatements, including both
the carryover and reversing effects of prior year misstatements, on the current
year financial statements. The financial statements would require adjustment
when either approach results in quantifying a misstatement that is material,
after considering all relevant quantitative and qualitative factors. SAB 108 was
effective for the first quarter of 2007. The adoption of SAB 108 did not have an
impact on the Company’s consolidated financial statements.
47
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
In May
2007, the FASB issued FASB Staff Position (“FSP”), Definition of Settlement in FASB
Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on
determining whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. FSP FIN 48-1 was effective
retroactively to January 1, 2007. The implementation of this standard did not
have a material impact on the Company’s consolidated financial position or
results of operations.
Reclassifications
Certain
prior period amounts have been reclassified to conform to their 2008
presentation in the consolidated financial statements.
3.
Investments
PST
Eletrônica S.A.
The
Company has a 50% interest in PST Eletrônica S.A. (“PST”),
a Brazilian electronic system provider
focused on security and convenience applications primarily for the vehicle and
motorcycle industry. The investment is accounted for under the equity
method of accounting. The Company’s investment in PST was $31,021 and $29,663 at
December 31, 2008 and 2007, respectively.
Condensed
financial information for PST is as follows:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
and cash equivalents
|
$ | 5,678 | $ | 7,124 | ||||
|
Accounts
receivable, net
|
12,533 | 12,306 | ||||||
|
Inventories,
net
|
21,091 | 20,114 | ||||||
|
Property,
plant and equipment, net
|
18,379 | 16,865 | ||||||
|
Other
assets
|
4,272 | 5,331 | ||||||
|
Total
Assets
|
$ | 61,953 | $ | 61,740 | ||||
|
Current
liabilities
|
$ | 17,268 | $ | 25,569 | ||||
|
Long-term
liabilities
|
10,183 | 3,957 | ||||||
|
Equity
of:
|
||||||||
|
Stoneridge
|
17,251 | 16,107 | ||||||
|
Others
|
17,251 | 16,107 | ||||||
|
Total
Liabilities and Equity
|
$ | 61,953 | $ | 61,740 | ||||
The
difference between the Company’s carrying amount of its investment in PST and
the Company’s underlying equity in the net assets of PST is primarily due to a
net goodwill balance of $11.3 million at December 31, 2008 and
2007.
48
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
For
the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 174,305 | $ | 133,039 | $ | 94,097 | ||||||
|
Cost
of goods sold
|
$ | 80,924 | $ | 61,575 | $ | 47,451 | ||||||
|
Total
pre-tax income
|
$ | 31,788 | $ | 25,152 | $ | 17,939 | ||||||
|
The
Company's share of pre-tax income
|
$ | 15,894 | $ | 12,576 | $ | 8,970 | ||||||
Equity in earnings of PST
included in the consolidated statements of operations was $12,788, $10,351 and
$6,771 for the years ended December 31, 2008, 2007 and 2006, respectively.
During 2008 and 2007, PST declared dividends payable to its joint venture
partners, which included the Company. The Company received dividend payments
from PST of $4,213 and $5,594 in 2008 and 2007, respectively, which decreased
the Company’s investment in PST.
Minda
Stoneridge Instruments Ltd.
The
Company has a 49% interest in Minda Stoneridge Instruments Ltd. (“Minda”), a
company based in India that manufactures electronics and instrumentation
equipment for the motorcycle and commercial vehicle market. The investment is
accounted for under the equity method of accounting. The Company’s investment in
Minda was $4,808 and $4,547 at December 31, 2008 and 2007, respectively. Equity
in earnings of Minda included in the consolidated statements of operations was
$702, $542 and $354, for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company increased its ownership in Minda from 20% to 49% in
2006.
4.
Long-Term Debt
Senior
Notes
The
Company had $183.0 million and $200.0 million of senior notes outstanding at
December 31, 2008 and 2007, respectively. During 2008, the Company purchased and
retired $17.0 million in face value of the senior notes. The $183.0 million
senior notes bear interest at an annual rate of 11.50% and mature on May 1,
2012. The senior notes are redeemable, at the Company’s option, at 103.833% of
the principal amount until April 30, 2009. The senior notes will remain
redeemable at various levels until the maturity date. Interest is payable on May
1 and November 1 of each year. On July 1, 2002, the Company completed an
exchange offer of the senior notes for substantially identical notes registered
under the Securities Act of 1933. The senior notes do not contain financial
covenants. The Company was in compliance with all non-financial covenants at
December 31, 2008 and 2007.
Credit
Facility
On
November 2, 2007, the Company entered into an asset-based credit facility, which
permits borrowing up to a maximum level of $100.0 million. At December 31, 2008
and 2007, there were no borrowings on this asset-based credit facility. The
available borrowing capacity on this credit facility is based on eligible
current assets, as defined. At December 31, 2008 and 2007, the Company had
borrowing capacity of $57.7 million and $73.5 million, respectively, based on
eligible current assets. The asset-based credit facility does not contain
financial performance covenants; however, restrictions include limits on capital
expenditures, operating leases and dividends. The asset-based credit facility
expires on November 1, 2011. The credit facility provides that a commitment fee
of 0.25% on the unused balance and that interest is payable monthly at either
(i) the higher of the prime rate or the Federal Funds rate plus 0.50%, plus a
margin of 0.00% to 0.25% or (ii) LIBOR plus a margin of 1.00% to 1.75%,
depending upon the Company’s undrawn availability, as defined. The Company was
in compliance with all covenants at December 31, 2008 and 2007.
49
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
5.
Income Taxes
The
provision for income taxes included in the accompanying consolidated financial
statements represents federal, state and foreign income taxes. The components of
income (loss) before income taxes and the provision for income taxes consist of
the following:
|
For
the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Income
(loss) before income taxes:
|
||||||||||||
|
Domestic
|
$ | (52,320 | ) | $ | 9,186 | $ | 6,581 | |||||
|
Foreign
|
1,545 | 14,038 | 13,058 | |||||||||
|
Total
income (loss) before income taxes
|
$ | (50,775 | ) | $ | 23,224 | $ | 19,639 | |||||
|
Provision
(benefit) for income taxes:
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (1,434 | ) | $ | (55 | ) | $ | (807 | ) | |||
|
State
and foreign
|
1,947 | 2,785 | 3,176 | |||||||||
|
Total
current provision
|
513 | 2,730 | 2,369 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
47,590 | 3,450 | 2,175 | |||||||||
|
State
and foreign
|
(1,351 | ) | 373 | 582 | ||||||||
|
Total
deferred provision
|
46,239 | 3,823 | 2,757 | |||||||||
|
Total
provision for income taxes
|
$ | 46,752 | $ | 6,553 | $ | 5,126 | ||||||
A
reconciliation of the Company’s effective income tax rate to the statutory
federal tax rate is as follows:
|
For
the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Statutory
U.S. federal income tax rate
|
(35.0 | ) % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal tax benefit
|
(1.8 | ) | (1.0 | ) | 0.8 | |||||||
|
Tax
credits
|
(2.0 | ) | (4.0 | ) | (5.6 | ) | ||||||
|
Tax
benefit for export sales
|
- | - | (1.4 | ) | ||||||||
|
Foreign
rate differential
|
(4.4 | ) | (10.9 | ) | (8.9 | ) | ||||||
|
Reduction
of income tax accruals
|
(1.2 | ) | (2.4 | ) | (4.5 | ) | ||||||
|
Foreign
deemed dividends, net of foreign tax credits
|
1.8 | 1.8 | 4.5 | |||||||||
|
Reduction
(increase) of deferred taxes
|
(2.8 | ) | 1.3 | - | ||||||||
|
Valuation
allowances
|
129.2 | 7.4 | 4.1 | |||||||||
|
Non-deductible
goodwill
|
9.0 | - | - | |||||||||
|
Other
|
(0.7 | ) | 1.0 | 2.1 | ||||||||
|
Effective
income tax rate
|
92.1 | % | 28.2 | % | 26.1 | % | ||||||
The
increase in the effective tax rate for 2008 was attributable to the recording of
a valuation allowance against our domestic deferred tax assets. Pursuant to the
accounting guidance, this valuation allowance was recorded based on our domestic
pre-tax losses for the period 2006-2008 including the goodwill impairment
charge.
Unremitted
earnings of foreign subsidiaries were $24,155, $22,451 and $16,703 as of
December 31, 2008, 2007 and 2006, respectively. Because these earnings have been
indefinitely reinvested in foreign operations, no provision has been made for
U.S. income taxes. It is impracticable to determine the amount of unrecognized
deferred taxes with respect to these earnings; however, foreign tax credits may
be available to reduce U.S. income taxes in the event of a
distribution.
50
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
Significant
components of the Company’s deferred tax assets and (liabilities) as of December
31, 2008 and 2007 are as follows:
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Inventories
|
$ | 1,606 | $ | 2,028 | ||||
|
Employee
benefits
|
2,568 | 1,942 | ||||||
|
Insurance
|
1,306 | 1,029 | ||||||
|
Depreciation
and amortization
|
35,735 | 28,244 | ||||||
|
Net
operating loss carryforwards
|
32,169 | 17,430 | ||||||
|
General
business credit carryforwards
|
8,550 | 6,670 | ||||||
|
Reserves
not currently deductible
|
7,204 | 8,814 | ||||||
|
Gross
deferred tax assets
|
89,138 | 66,157 | ||||||
|
Less:
Valuation allowance
|
(82,379 | ) | (16,020 | ) | ||||
|
Deferred
tax assets less valuation allowance
|
6,759 | 50,137 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciation
and amortization
|
(4,293 | ) | (5,404 | ) | ||||
|
Other
|
(7,973 | ) | (8,541 | ) | ||||
|
Gross
deferred tax liabilities
|
(12,266 | ) | (13,945 | ) | ||||
|
Net
deferred tax asset (liability)
|
$ | (5,507 | ) | $ | 36,192 | |||
The
valuation allowance represents the amount of tax benefit related to U.S., state
and foreign net operating losses, credits and other deferred tax assets.
Recording this valuation allowance for accounting purposes will have no impact
on our ability to utilize the U.S. net operating losses and credits to offset
future U.S. taxable income. The Company believes that it will ultimately
generate sufficient U.S. taxable income during the remaining tax loss and credit
carry forward periods in order to realize substantially all of the benefits of
the net operating losses and credits before they expire.
The
Company has deferred tax assets for net operating loss carry forwards of $0 net
of a valuation allowance of $32,169. The net operating losses relate to U.S.
federal, state and foreign tax jurisdictions. The U.S. net operating losses
expire beginning in 2025 through 2028, the state net operating losses expire at
various times and the foreign net operating losses have indefinite expiration
dates. The Company has a deferred tax asset for general business credit carry
forwards of $646 net of a valuation allowance of $7,904. The U.S. federal
general business credit carry forwards expire beginning in 2021 through 2028 and
the state tax credits expire at various times.
The
Company recognized a provision for income taxes of $46,752, or 92.1% of pre-tax
loss, and $6,553, or 28.2% of pre-tax income, for federal, state and foreign
income taxes for the years ended December 31, 2008 and 2007, respectively. The
increase in the effective tax rate for 2008 was primarily attributable to the
recording of a valuation allowance against our domestic deferred tax assets. Due
to a goodwill impairment charge the Company was in a pre-tax cumulative loss
position for the period 2006-2008. Additionally, the effective tax rate was
unfavorably impacted by the costs incurred to restructure our United Kingdom
operations. Since we do not believe that the related tax benefit of those losses
will be realized, a valuation allowance was recorded against the foreign
deferred tax assets associated with those foreign losses. Finally, offsetting
the impact of the current year valuation allowances, the effective tax rate was
favorably impacted by a combination of audit settlements, successful litigation
and the expiration of certain statutes of limitation.
51
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
FIN
48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109
In June
2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109, Accounting
for Income Taxes. This interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The Company adopted the provisions of FIN 48 as of the January 1,
2007. The adoption of FIN 48 did not have a material impact on the Company’s
financial statements.
The
following is a reconciliation of the Company’s total gross unrecognized tax
benefits, from adoption, to December 31, 2008:
|
2008
|
2007
|
|||||||
|
Balance
at January 1
|
$ | 4,618 | $ | 4,731 | ||||
|
Tax
positions related to the current year:
|
||||||||
|
Additions
|
362 | 357 | ||||||
|
Tax
positions related to the prior years:
|
||||||||
|
Additions
|
- | 272 | ||||||
|
Reductions
|
(84 | ) | (655 | ) | ||||
|
Settlements
|
(1,683 | ) | - | |||||
|
Expiration
of statutes of limitation
|
(614 | ) | (87 | ) | ||||
|
Balance
at December 31
|
$ | 2,599 | $ | 4,618 | ||||
The
liability for uncertain tax benefits is classified as a non-current liability
unless it is expected to be paid within one year. At December 31, 2008 the
Company has classified $798 as a current liability and $1,802 as a reduction to
non-current deferred income tax assets. Through a combination of anticipated
state audit settlements and the expiration of certain statutes of limitation,
the amount of unrecognized tax benefits could decrease by approximately $75
within the next 12 months. Management is currently unaware of issues under
review that could result in a significant change or a material deviation in this
estimate.
If the
Company’s tax positions are sustained by the taxing authorities in favor of the
Company, approximately $2,468 would affect the Company’s effective tax
rate.
Consistent
with historical financial reporting, the Company has elected to classify
interest expense and, if applicable, penalties which could be assessed related
to unrecognized tax benefits as a component of income tax expense. For the years
ended December 31, 2008 and 2007, the Company recognized approximately $(246)
and $(149) of gross interest and penalties, respectively. The Company has
accrued approximately $426 and $672 for the payment of interest and penalties at
December 31, 2008 and December 31, 2007, respectively.
The
Company conducts business globally and, as a result, files income tax returns in
the U.S. federal jurisdiction and various state and foreign jurisdictions. In
the normal course of business the Company is subject to examination by taxing
authorities throughout the world. The following table summarizes the open tax
years for each important jurisdiction:
|
Jurisdiction
|
Open Tax Years
|
|
|
U.S.
Federal
|
2005-2008
|
|
|
France
|
2004-2008
|
|
|
Mexico
|
2003-2008
|
|
|
Spain
|
2004-2008
|
|
|
Sweden
|
2003-2008
|
|
|
United
Kingdom
|
2004-2008
|
52
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
6.
Operating Lease Commitments
The
Company leases equipment, vehicles and buildings from third parties under
operating lease agreements.
The
Estate of the late D.M. Draime, former Chairman of the Board of Directors, owned
50% of Hunters Square, Inc. (“HSI”), an Ohio corporation, which owns Hunters
Square, an office complex and shopping mall located in Warren, Ohio. The estate
sold its investment in HSI in 2007. The Company leases office space in Hunters
Square. The Company pays all maintenance, tax and insurance costs related to the
operation of the office. Lease payments made by the Company to HSI were $342 in
2007 and 2006. The Company believes the terms of the lease were no less
favorable to it than would be the terms of a third-party lease.
For the
years ended December 31, 2008, 2007 and 2006, lease expense totaled $7,206,
$7,114 and $6,691, respectively.
Future
minimum operating lease commitments at December 31, 2008 are as
follows:
|
2009
|
$ | 5,122 | ||
|
2010
|
3,744 | |||
|
2011
|
2,777 | |||
|
2012
|
2,115 | |||
|
2013
|
2,029 | |||
|
Thereafter
|
4,916 | |||
|
Total
|
$ | 20,703 |
7.
Share-Based Compensation Plans
In
October 1997, the Company adopted a Long-Term Incentive Plan (“Incentive Plan”).
The Company reserved 2,500,000 Common Shares for issuance to officers and other
key employees under the Incentive Plan. Under the Incentive Plan, as of December
31, 2008, the Company granted cumulative options to purchase 1,594,500 Common
Shares to management with exercise prices equal to the fair market value of the
Company’s Common Shares on the date of grant. The options issued cliff-vest from
one to five years after the date of grant and have a contractual life of 10
years. In addition, the Company has also issued 1,553,125 restricted Common
Shares under the Incentive Plan, of which 814,250 are time-based with either
graded or cliff vesting using the straight-line method while the remaining
738,875 restricted Common Shares are performance-based. Restricted Common Shares
awarded under the Incentive Plan entitle the shareholder to all the rights of
Common Share ownership except that the shares may not be sold, transferred,
pledged, exchanged, or otherwise disposed of during the vesting period. The
Incentive Plan expired on June 30, 2007.
In April
2006, the Company’s shareholders approved the Amended and Restated Long-Term
Incentive Plan (the "2006 Plan"). There are 1,500,000 Common Shares reserved for
awards under the 2006 Plan of which the maximum number of Common Shares which
may be issued subject to Incentive Stock Options is 500,000. Under the 2006
Plan, as of December 31, 2008, the Company has issued 418,700 restricted Common
Shares, of which 194,900 are time-based with cliff- vesting using the
straight-line method and 223,800 are performance based.
In 2005,
pursuant to the Incentive Plan, the Company granted time-based restricted Common
Share awards and performance-based restricted Common Share awards. The
time-based restricted Common Share awards vest over a one to four year period in
equal increments on the first, second, third and fourth grant-date
anniversaries. Approximately one-half of the performance-based restricted Common
Share awards vest and are no longer subject to forfeiture upon the recipient
remaining an employee of the Company for three years from date of grant and upon
achieving certain net income per share targets established by the Company. The
remaining one-half of the performance-based restricted Common Share awards also
vest and are no longer subject to forfeiture upon the recipient remaining an
employee for three years from date of grant and upon the Company attaining
certain targets of performance measured against a peer group’s performance in
terms of total return to shareholders. The actual number of restricted Common
Shares to ultimately vest will depend on the Company’s level of achievement of
the targeted performance measures and the employees’ attainment of the defined
service requirements.
53
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
In 2006,
pursuant to the Incentive Plan, the Company granted time-based restricted shares
and performance-based restricted shares. Certain time-based restricted Common
Share awards cliff-vest three years after the grant date. Other time-based
restricted Common Share awards are subject to graded vesting using the
straight-line method over a three or four year period. The performance-based
restricted Common Share awards vest and are no longer subject to forfeiture upon
the recipient remaining an employee of the Company for three years from date of
grant and upon achieving certain net income per share targets established by the
Company.
In 2007
and 2008, pursuant to the Incentive Plan, the Company granted time-based
restricted shares and performance-based restricted shares. The time-based
restricted Common Share awards cliff-vest three years after the grant date. The
performance-based restricted Common Share awards vest and are no longer subject
to forfeiture upon the recipient remaining an employee of the Company for three
years from date of grant and upon achieving certain net income per share targets
established by the Company.
In
April 2005, the Company adopted the Directors’ Restricted Shares Plan
(“Director Share Plan”). The Company reserved 300,000 Common Shares for issuance
under the Director Share Plan. Under the Director Share Plan, the Company has
cumulatively issued 173,900 restricted Common Shares. Shares issued under the
Director Share Plan during 2008 and 2007 will cliff vest one year after the
grant date.
Options
A summary
of option activity under the plans noted above as of December 31, 2008, and
changes during the years ended are presented below:
|
Share
Options
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
|
|||||||
|
Outstanding
at December 31, 2007
|
288,750 | $ | 10.57 | ||||||
|
Expired
|
(3,500 | ) | 10.39 | ||||||
|
Exercised
|
(87,500 | ) | 9.01 | ||||||
|
Outstanding
and Exercisable at December 31, 2008
|
197,750 | 11.26 |
3.74
|
||||||
There
were no options granted during the years ended December 31, 2008, 2007 and 2006
and all outstanding options have vested.
The
intrinsic value of options outstanding and exercisable is the difference between
the fair market value of the Company’s Common Shares on the applicable date
(“Measurement Value”) and the exercise price of those options that had an
exercise price that was less than the Measurement Value. The intrinsic value of
options exercised is the difference between the fair market value of the
Company’s Common Shares on the date of exercise and the exercise price. The
total intrinsic value of options exercised during the years ended December 31,
2008, 2007 and 2006 was $471, $482 and $176, respectively.
As of
December 31, 2008 and 2007, the aggregate intrinsic value of both outstanding
and exercisable options was $15 and $62, respectively. The total fair value of
options that vested during the years ended December 31, 2006 was $115. Prior to
2006, all outstanding option grants had vested, and therefore, the number of
exercisable and outstanding options is equal.
Restricted
Shares
The fair
value of the non-vested time-based restricted Common Share awards was calculated
using the market value of the shares on the date of issuance. The
weighted-average grant-date fair value of time-based restricted Common Shares
granted during the years ended December 31, 2008, 2007 and 2006 was $10.81,
$12.00 and $7.79, respectively.
54
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The fair
value of the non-vested performance-based restricted Common Share awards with a
performance condition, requiring the Company to obtain certain net income per
share targets, was calculated using the market value of the shares on the date
of issuance. The fair value of the non-vested performance-based restricted
Common Share awards with a market condition, which measures the Company’s
performance against a peer group’s performance in terms of total return to
shareholders, was estimated at the date of issuance using valuation techniques
incorporating the Company’s historical total return to shareholders in
comparison to its peers to determine the expected outcomes related to these
awards.
A summary
of the status of the Company’s non-vested restricted Common Shares as of
December 31, 2008 and the changes during the year then ended, are presented
below:
|
Time-Based Awards
|
Performance-Based Awards
|
|||||||||||||||
|
Non-vested Restricted Common Shares
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
Shares
|
Weighted-
Average
Grant-Date
Fair Value
|
||||||||||||
|
Non-vested
at December 31, 2007
|
503,824 | $ | 9.76 | 490,050 | $ | 9.78 | ||||||||||
|
Granted
|
238,100 | 10.81 | 223,800 | 10.77 | ||||||||||||
|
Vested
|
(106,510 | ) | 9.53 | (21,756 | ) | 6.25 | ||||||||||
|
Forfeited
|
(9,153 | ) | 10.79 | (63,819 | ) | 9.01 | ||||||||||
|
Non-vested
at December 31, 2008
|
626,261 | 10.18 | 628,275 | 10.33 | ||||||||||||
As of
December 31, 2008, total unrecognized compensation cost related to non-vested
time-based restricted Common Share awards granted was $2,394. That cost is
expected to be recognized over a weighted-average period of 0.49 years. For the
years ended December 31, 2008, 2007 and 2006, the total fair value of time-based
restricted Common Share awards vested was $1,366, $1,541 and $1,064,
respectively.
As of
December 31, 2008, total unrecognized compensation cost related to non-vested
performance-based restricted Common Share awards granted was $944. That cost is
expected to be recognized over a weighted-average period of 0.54 years. As noted
above, the Company has issued and outstanding performance-based restricted
Common Share awards that use different performance targets. The awards that use
net income per share as the performance target will not be expensed until it is
probable that the Company will meet the underlying performance condition.
However, the awards that measure performance against a peer group are expensed
even if the market condition is not met.
Cash
received from option exercises under all share-based payment arrangements for
the years ended December 31, 2008, 2007 and 2006 was $575, $1,409 and $301,
respectively. The actual tax benefit realized for the tax deductions from the
vesting of restricted Common Shares and option exercises of the share-based
payment arrangements totaled $731, $360 and $176 for the years ended December
31, 2008, 2007 and 2006, respectively.
8.
Employee Benefit Plans
The
Company has certain defined contribution profit sharing and 401(k) plans
covering substantially all of its employees in the United States and United
Kingdom. Company contributions are generally discretionary; however, a portion
of these contributions is based upon a percentage of employee compensation, as
defined in the plans. The Company’s policy is to fund all benefit costs accrued.
For the years ended December 31, 2008, 2007 and 2006, expenses related to these
plans amounted to $2,743, $3,800 and $3,556, respectively.
The
Company has a single defined benefit pension plan that covers certain employees
in the United Kingdom. As of December 31, 2003, employees covered under the
United Kingdom defined benefit pension plan no longer accrue benefits related to
future service and wage increases.
55
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The
following table sets forth the benefit obligation, fair value of plan assets,
and the funded status of the Company’s defined benefit pension plan; amounts
recognized in the Company’s financial statements; and the principal weighted
average assumptions used:
|
2008
|
2007
|
|||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Projected
benefit obligation at beginning of year
|
$ | 22,301 | $ | 22,681 | ||||
|
Service
cost
|
128 | 140 | ||||||
|
Interest
cost
|
1,154 | 1,180 | ||||||
|
Actuarial
gain
|
(2,730 | ) | (1,281 | ) | ||||
|
Benefits
paid
|
(1,118 | ) | (820 | ) | ||||
|
Settlement
|
(861 | ) | - | |||||
|
Translation
adjustments
|
(5,254 | ) | 401 | |||||
|
Projected
benefit obligation at end of year
|
$ | 13,620 | $ | 22,301 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 20,946 | $ | 20,056 | ||||
|
Actual
return on plan assets
|
(3,628 | ) | 1,100 | |||||
|
Employer
contributions
|
238 | 260 | ||||||
|
Benefits
paid
|
(1,118 | ) | (820 | ) | ||||
|
Settlement
|
(696 | ) | - | |||||
|
Translation
adjustments
|
|
(4,533 | ) | 350 | ||||
|
Fair
value of plan assets at end of year
|
$ | 11,209 | $ | 20,946 | ||||
|
Accumulated
benefit obligation at end of year
|
$ | 13,620 | $ | 22,301 | ||||
|
Funded
status at end of year
|
(2,411 | ) | (1,355 | ) | ||||
|
Amounts recognized
in the consolidated balance sheet
consist
of:
|
||||||||
|
Accrued
liabilities
|
(2,411 | ) | (1,355 | ) | ||||
|
2008
|
2007
|
|||||||
|
Weighted average
assumptions used to determine
benefit obligation at December 31:
|
||||||||
|
Discount
rate
|
6.70 | % | 5.80 | % | ||||
|
Rate
of increase to pensions in payment
|
3.30 | % | 3.30 | % | ||||
|
Rate
of future price inflation
|
2.90 | % | 3.20 | % | ||||
|
Measurement
date
|
12/31/08
|
12/31/07
|
||||||
|
Weighted average
assumptions used to determine
net periodic benefit cost for the years
ended December
31:
|
||||||||
|
Discount
rate
|
5.80 | % | 5.15 | % | ||||
|
Expected
long-term return on plan assets
|
6.10 | % | 7.00 | % | ||||
|
Rate
of increase to pensions in payment
|
3.30 | % | 3.00 | % | ||||
|
Rate
of future price inflation
|
2.90 | % | 2.90 | % | ||||
|
Measurement
date
|
12/31/08
|
12/31/07
|
||||||
56
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
In the
year ended December 31, 2006, the Company adopted the provisions of SFAS No.
158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). Prior to the
adoption of SFAS 158, the Company’s accumulated benefit obligations and
projected benefit obligations were equal, therefore upon adoption, there was no
significant impact on the Company’s consolidated statement of financial position
as of December 31, 2008. In addition, the provisions of SFAS 158 require the
Company to disclose costs recognized in other comprehensive income (loss) for
the period pursuant and the amortization amounts to be recognized in the next
year, which are shown in the following tables:
In the
year ended December 31, 2008, the Company’s only change in plan assets and
benefit obligations recognized in other comprehensive income (loss) was a result
of net actuarial losses incurred in 2008 for $2,034. The Company recognized
$2,016 in net periodic pension cost and other comprehensive income
(loss) for 2008.
No net
amortization on actuarial gains or losses will be recognized in the next
year.
The
Company’s expected long-term return on plan assets assumption is based on a
periodic review and modeling of the plan’s asset allocation and liability
structure over a long-term horizon. Expectations of returns for each asset class
are the most important of the assumptions used in the review and modeling and
are based on comprehensive reviews of historical data and economic / financial
market theory. The expected long-term rate of return on assets was selected from
within the reasonable range of rates determined by (a) historical real returns,
net of inflation, for the asset classes covered by the investment policy, and
(b) projections of inflation over the long-term period during which benefits are
payable to plan participants.
Components of net periodic pension
cost (benefit) are as follows:
|
For
the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Service
cost
|
$ | 128 | $ | 140 | $ | 92 | ||||||
|
Interest
cost
|
1,154 | 1,180 | 994 | |||||||||
|
Expected
return on plan assets
|
(1,300 | ) | (1,420 | ) | (1,086 | ) | ||||||
|
Amortization
of actuarial loss
|
- | 80 | 258 | |||||||||
|
Net
periodic cost (benefit)
|
$ | (18 | ) | $ | (20 | ) | $ | 258 | ||||
The
Company’s defined benefit pension plan fair value weighted-average asset
allocations at December 31, 2008 and 2007 by asset category are as
follows:
|
2008
|
2007
|
|||||||
|
Asset Category:
|
||||||||
|
Equity
securities
|
69 | % | 74 | % | ||||
|
Debt
securities
|
30 | 25 | ||||||
|
Other
|
1 | 1 | ||||||
|
Total
|
100 | % | 100 | % | ||||
The
Company’s target asset allocation, with a permitted range of ± 7.50%, as of
December 31, 2008, by asset category, is as follows:
|
Asset Category:
|
||||
|
Equity
securities
|
75 | % | ||
|
Debt
securities
|
25 | % | ||
57
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The
Company’s investment policy for the defined benefit pension plan includes
various guidelines and procedures designed to ensure assets are invested in a
manner necessary to meet expected future benefits earned by participants. The
investment guidelines consider a broad range of economic conditions. Central to
the policy are target allocation ranges (shown above) by major asset categories.
The objectives of the target allocations are to maintain investment portfolios
that diversify risk through prudent asset allocation parameters, achieve asset
returns that meet or exceed the plans’ actuarial assumptions, and achieve asset
returns that are competitive with like institutions employing similar investment
strategies. The Company and a designated third-party fiduciary periodically
review the investment policy. The policy is established and administered in a
manner so as to comply at all times with applicable government
regulations.
The
Company expects to contribute $190 to its defined benefit pension plan in 2009.
The following pension payments are expected to be paid:
|
2009
|
$ | 731 | ||
|
2010
|
760 | |||
|
2011
|
789 | |||
|
2012
|
818 | |||
|
2013
|
848 | |||
|
2014
to 2018
|
4,749 |
9.
Fair Value of Financial Instruments
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 estimated fair value of the Company’s senior notes (fixed rate debt) at
December 31, 2008 and 2007, per quoted market sources, was $124.4 million and
$199.2 million, respectively. The carrying value at December 31, 2008 and 2007
was $183.0 million and $200.0 million, respectively.
Derivative Instruments and
Hedging Activities
We make use of derivative
instruments in foreign exchange and commodity price hedging programs.
Derivatives currently in use are foreign currency forward contracts and
commodity swaps. These contracts are used strictly for hedging and not for
speculative purposes. Management believes that its use of these instruments to
reduce risk is in the Company’s best interest.
The Company conducts business
internationally and therefore is exposed to foreign currency exchange risk. The
Company uses derivative financial instruments, including foreign currency
forward contracts as cash flow hedges, to mitigate its exposure to fluctuations
in foreign currency exchange rates by reducing the effect of such fluctuations
on foreign currency denominated intercompany transactions and other foreign
currency exposures. The principal currencies hedged by the Company include the
British pound and Mexican peso. In certain instances, the foreign currency
forward contracts are marked to market, with gains and losses recognized in the
Company’s consolidated statement of operations as a component of other expense
(income), net. The Company’s foreign currency forward contracts substantially
offset gains and losses on the underlying foreign currency denominated
transactions. In addition, the Company’s contracts intended to reduce exposure
to the Mexican peso were executed to hedge forecasted transactions, and
therefore the contracts are accounted for as cash flow hedges. The effective
portion of the unrealized gain or loss is deferred and reported in the Company’s
consolidated balance sheets as a component of accumulated other comprehensive
income (loss). The Company’s expectation is that the cash flow hedges will be
highly effective in the future. The effectiveness of the transactions has been
and will be measured on an ongoing basis using regression analysis.
The
Company’s foreign currency forward contracts have a notional value of $8,762 and
$8,551 at December 31, 2008 and 2007, respectively. The purpose of these
investments is to reduce exposure related to the Company’s British
pound-denominated receivables. For the year ended December 31, 2008, the Company
recognized a $2,219 gain related to these contracts in the consolidated
statement of operations as a component of other expense (income), net. The
British pound foreign currency hedge expires on January 2, 2009. At December 31,
2008 and 2007, the Company also used forward currency contracts to reduce the
exposure related to the Company’s Mexican peso-denominated receivables. In 2008,
the Company entered into foreign currency option contracts to reduce the risk of
exposures to the Mexican peso. The Company’s foreign currency option contracts
expire monthly throughout 2009.
58
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
To
mitigate the risk of future price volatility and, consequently, fluctuations in
gross margins, the Company has entered into fixed price commodity swaps with a
bank to fix the cost of copper purchases. In December 2007, we entered into a
fixed price swap contract for 1.0 million pounds of copper, which expired on
December 31, 2008. In September 2008, we entered into a fixed price swap
contract for 1.4 million pounds of copper, which will last from January 2009 to
December 2009. Because these contracts were executed to hedge forecasted
transactions, the contracts are accounted for as cash flow hedges. The
unrealized gain or loss for the effective portion of the hedge is deferred and
reported in the Company’s consolidated balance sheets as a component of
accumulated other comprehensive income (loss). The Company deems these cash flow
hedges to be highly effective. The effectiveness of the transactions has been
and will be measured on an ongoing basis using regression analysis. For the year
ended December 31, 2008, the Company recognized a net $180 gain related to these
contracts in the consolidated statement of operations as a component of cost of
goods sold.
The
following table presents the Company’s financial instruments that are carried at
fair value:
|
December 31, 2008
|
December 31,
|
|||||||||||||||
|
Fair Value Estimated Using
|
2007
|
|||||||||||||||
|
Fair Value
|
Level 1 inputs(1)
|
Level 2 inputs(2)
|
Fair Value
|
|||||||||||||
|
Financial assets
carried at
fair value
|
||||||||||||||||
|
Available
for sale security
|
$ | 252 | $ | 252 | $ | - | $ | 269 | ||||||||
|
Forward
currency contracts
|
2,101 | - | 2,101 | (28 | ) | |||||||||||
|
Total
financial assets carried at fair value
|
$ | 2,353 | $ | 252 | $ | 2,101 | $ | 241 | ||||||||
|
Financial
liabilities carried at fair value
|
||||||||||||||||
|
Forward
currency contracts
|
$ | 2,930 | $ | - | $ | 2,930 | $ | - | ||||||||
|
Commodity
hedge contracts
|
2,104 | - | 2,104 | (57 | ) | |||||||||||
|
Total
financial liabilities carried at fair value
|
$ | 5,034 | $ | - | $ | 5,034 | $ | (57 | ) | |||||||
|
(1)
|
Fair
values estimated using Level 1 inputs, which consist of quoted prices in
active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date. The available for sale
security is an equity security that is publically
traded.
|
|
(2)
|
Fair
values estimated using Level 2 inputs, other than quoted prices, that 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 foreign currency and commodity
contracts, inputs include foreign currency exchange rates and commodity
indexes.
|
59
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
10.
Commitments and Contingencies
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, cash flows or the
financial position of the Company.
11.
Related Party Transactions
Hunters Square. See Note 6 to
the Company’s consolidated financial statements for information on the Company’s
related party transactions involving operating leases.
Industrial Development Associates LP
(“IDA”). The Company owned a 30% interest in IDA, a Maryland limited
partnership. In addition, Earl L. Linehan, a member of Stoneridge’s Board of
Directors owns an interest in IDA and the Estate of D.M. Draime (D.M. Draime was
Chairman of the Board of Directors until his death in July 2006) owned an
interest in IDA. IDA is a real estate development company of certain commercial
properties in Mebane, North Carolina. Stoneridge previously leased a facility
from IDA.
On
December 29, 2006, the Company entered into a Partnership Interest Purchase
Agreement (the “Purchase Agreement”) with Heritage Real Estate Fund V, LLC, a
Maryland limited liability company (“Heritage”). Pursuant to the Purchase
Agreement, on December 29, 2006, Stoneridge sold its 30% general partnership
interest in IDA to Heritage for $1,035 in cash and recognized a gain of $1,627
that is included in the consolidated statement of operations as a component of
other expense (income), net. The transaction price was determined by the average
of two independent appraisals.
Mr.
Linehan is a member of Heritage owning a 14.2% membership interest in Heritage.
The managing member of Heritage is Heritage Properties, Inc. Mr. Linehan is
member of the Board of Directors of Heritage Properties, Inc. Mr. Linehan
also owns approximately 26.35% of MI Holding Company, a Maryland corporation,
which is a 5.0% general partner of IDA. On December 29, 2006, the estate of D.M.
Draime also entered into a Partnership Interest Purchase Agreement with Heritage
to sell the estate’s 10% limited partnership interest to Heritage for $345. The
son of D.M. Draime, Jeffrey P. Draime, is a member of Stoneridge’s Board of
Directors.
12.
Restructuring
In
January 2005, the Company announced restructuring initiatives related to the
rationalization of certain manufacturing facilities in Europe and North America.
These restructuring initiatives were completed in 2007.
On
October 29, 2007, the Company announced restructuring initiatives to improve
manufacturing efficiency and cost position by ceasing manufacturing operations
at its Sarasota, Florida and Mitcheldean, United Kingdom locations. In the third
quarter of 2008, the Company announced restructuring initiatives in our Canton,
Massachusetts, location. In the fourth quarter of 2008, the Company announced
restructuring initiatives in our Orebro, Sweden and Tallinn, Estonia locations
as well as additional initiatives in our Canton, Massachusetts location. These
activities are part of the Company’s cost reduction initiatives. In connection
with these initiatives, the Company recorded restructuring charges of $15,382
and $1,027 in the Company’s consolidated statement of operations for the years
ended December 31, 2008 and 2007, respectively. Restructuring expenses that were
general and administrative in nature were included in the Company’s consolidated
statement of operations as part of restructuring charges, while the remaining
restructuring related charges were included in cost of goods
sold.
60
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The
expenses related to the restructuring initiatives that belong to the Electronics
reportable segment include the following:
|
Severance
Costs
|
Contract
Termination
Costs
|
Other
Associated
Costs
|
Total
|
|||||||||||||
|
Total
expected restructuring charges
|
$ | 3,298 | $ | 1,305 | $ | 2,504 | $ | 7,107 | ||||||||
|
2007
charge to expense
|
$ | 468 | $ | - | $ | 103 | $ | 571 | ||||||||
|
Cash
payments
|
- | - | (103 | ) | (103 | ) | ||||||||||
|
Accrued
balance at December 31, 2007
|
468 | - | - | 468 | ||||||||||||
|
2008
charge to expense
|
2,830 | 1,305 | 2,401 | 6,536 | ||||||||||||
|
Cash
payments
|
(2,767 | ) | - | (2,221 | ) | (4,988 | ) | |||||||||
|
Accrued
balance at December 31, 2008
|
$ | 531 | $ | 1,305 | $ | 180 | $ | 2,016 | ||||||||
|
Remaining
expected restructuring charge
|
$ | - | $ | - | $ | - | $ | - | ||||||||
The
expenses related to the restructuring initiatives that belong to the Control
Devices reportable segment include the following:
|
Severance
Costs
|
Other
Associated
Costs
|
Total
|
||||||||||
|
Total
expected restructuring charges
|
$ | 2,878 | $ | 6,897 | $ | 9,775 | ||||||
|
2007
charge to expense
|
$ | 357 | $ | 99 | $ | 456 | ||||||
|
Cash
payments
|
- | - | - | |||||||||
|
Accrued
balance at December 31, 2007
|
357 | 99 | 456 | |||||||||
|
2008
charge to expense
|
2,521 | 6,325 | 8,846 | |||||||||
|
Cash
payments
|
(1,410 | ) | (6,024 | ) | (7,434 | ) | ||||||
|
Accrued
balance at December 31, 2008
|
$ | 1,468 | $ | 400 | $ | 1,868 | ||||||
|
Remaining
expected restructuring charge
|
$ | - | $ | 473 | $ | 473 | ||||||
All
restructuring charges, except for asset-related charges, result in cash
outflows. Severance costs relate to a reduction in workforce. Contract
termination costs represent costs associated with long-term lease obligations
that were cancelled as part of the restructuring initiatives. Other associated
costs include premium direct labor, inventory and equipment move costs,
relocation expense, increased inventory carrying cost and miscellaneous
expenditures associated with exiting business activities. No fixed-asset
impairment charges were incurred because assets were transferred to other
locations for continued production.
13.
Segment Reporting
SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards
for reporting information about operating segments in financial statements.
Operating segments are defined as components of an enterprise that are evaluated
regularly by the 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 two reportable segments: Electronics and Control Devices. The
Company’s operating segments are aggregated based on sharing similar economic
characteristics. Other aggregation factors include the nature of the products
offered and management and oversight responsibilities. The Electronics
reportable segment produces electronic instrument clusters, electronic control
units, driver information systems and electrical distribution systems, primarily
wiring harnesses and connectors for electrical power and signal distribution.
The Control Devices reportable segment produces electronic and electromechanical
switches and control actuation devices and sensors.
61
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
The
accounting policies of the Company’s reportable segments are the same as those
described in Note 2, “Summary of Significant Accounting Policies.” The Company’s
management evaluates the performance of its reportable segments based primarily
on revenues from external customers, capital expenditures and income (loss)
before income taxes. Inter-segment sales are accounted for on terms similar to
those to third parties and are eliminated upon consolidation.
A summary
of financial information by reportable segment is as follows:
|
For
the Years Ended
|
||||||||||||
|
December 31,
|
||||||||||||
|
Net
Sales
|
2008
|
2007
|
2006
|
|||||||||
|
Electronics
|
$ | 520,936 | $ | 441,717 | $ | 442,427 | ||||||
|
Intersegment
sales
|
12,392 | 16,955 | 14,505 | |||||||||
|
Electronics
net sales
|
533,328 | 458,672 | 456,932 | |||||||||
|
Control
Devices
|
231,762 | 285,403 | 266,272 | |||||||||
|
Intersegment
sales
|
4,276 | 4,576 | 5,671 | |||||||||
|
Control
Devices net sales
|
236,038 | 289,979 | 271,943 | |||||||||
|
Eliminations
|
(16,668 | ) | (21,531 | ) | (20,176 | ) | ||||||
|
Total
consolidated net sales
|
$ | 752,698 | $ | 727,120 | $ | 708,699 | ||||||
|
Income
(Loss) Before Income Taxes
|
||||||||||||
|
Electronics
|
$ | 38,713 | $ | 20,692 | $ | 20,882 | ||||||
|
Control
Devices
|
(78,858 | ) | 15,825 | 13,987 | ||||||||
|
Other
corporate activities
|
10,078 | 8,676 | 6,392 | |||||||||
|
Corporate
interest expense
|
(20,708 | ) | (21,969 | ) | (21,622 | ) | ||||||
|
Total
consolidated income (loss) before income taxes
|
$ | (50,775 | ) | $ | 23,224 | $ | 19,639 | |||||
|
Depreciation
and Amortizaton
|
||||||||||||
|
Electronics
|
$ | 12,189 | $ | 13,392 | $ | 10,564 | ||||||
|
Control
Devices
|
14,130 | 14,823 | 15,191 | |||||||||
|
Corporate
activities
|
80 | 288 | 425 | |||||||||
|
Total
consolidated depreciation and amortization (A)
|
$ | 26,399 | $ | 28,503 | $ | 26,180 | ||||||
|
Interest
Expense (Income), net
|
||||||||||||
|
Electronics
|
$ | (117 | ) | $ | (203 | ) | $ | 130 | ||||
|
Control
Devices
|
(16 | ) | (7 | ) | (8 | ) | ||||||
|
Corporate
activities
|
20,708 | 21,969 | 21,622 | |||||||||
|
Total
consolidated interest expense, net
|
$ | 20,575 | $ | 21,759 | $ | 21,744 | ||||||
|
Capital
Expenditures
|
||||||||||||
|
Electronics
|
$ | 11,374 | $ | 8,777 | $ | 13,522 | ||||||
|
Control
Devices
|
13,306 | 8,699 | 12,191 | |||||||||
|
Corporate
activities
|
(107 | ) | 665 | 182 | ||||||||
|
Total
consolidated capital expenditures
|
$ | 24,573 | $ | 18,141 | $ | 25,895 | ||||||
62
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
December 31,
|
||||||||||||
|
Total
Assets
|
2008
|
2007
|
2006
|
|||||||||
|
Electronics
|
$ | 183,574 | $ | 214,119 | $ | 213,715 | ||||||
|
Control
Devices
|
98,608 | 180,785 | 187,004 | |||||||||
|
Corporate
(B)
|
239,425 | 282,695 | 266,117 | |||||||||
|
Eliminations
|
(139,170 | ) | (149,830 | ) | (165,029 | ) | ||||||
|
Total
consolidated assets
|
$ | 382,437 | $ | 527,769 | $ | 501,807 | ||||||
|
(A)
|
These
amounts represent depreciation and amortization on fixed and certain
intangible assets.
|
|
(B)
|
Assets
located at Corporate consist primarily of cash, fixed assets, deferred
taxes and equity investments.
|
The
following table presents net sales and non-current assets for the geographic
areas in which the Company operates:
|
For
the Years Ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
Net
Sales
|
2008
|
2007
|
2006
|
|||||||||
|
North
America
|
$ | 557,990 | $ | 522,730 | $ | 541,479 | ||||||
|
Europe
and other
|
194,708 | 204,390 | 167,220 | |||||||||
|
Total
consolidated net sales
|
$ | 752,698 | $ | 727,120 | $ | 708,699 | ||||||
|
December 31,
|
||||||||||||
|
Non-Current
Assets
|
2008
|
2007
|
2006
|
|||||||||
|
North
America
|
$ | 110,507 | $ | 204,556 | $ | 215,429 | ||||||
|
Europe
and other
|
17,339 | 21,854 | 32,346 | |||||||||
|
Total
non-current assets
|
$ | 127,846 | $ | 226,410 | $ | 247,775 | ||||||
14.
Guarantor Financial Information
Our
senior notes are fully and unconditionally guaranteed, jointly and severally, by
each of the Company’s existing and future domestic wholly-owned subsidiaries
(Guarantor Subsidiaries). The Company’s non-U.S. subsidiaries do not guarantee
the senior notes (Non-Guarantor Subsidiaries).
Presented
below are summarized condensed consolidating financial statements of the Parent
(which includes certain of the Company’s operating units), the Guarantor
Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated
basis, as of December 31, 2008 and December 31, 2007 and for each of the three
years ended December 31, 2008, 2007 and 2006.
These
summarized condensed consolidating financial statements are prepared under the
equity method. Separate financial statements for the Guarantor Subsidiaries are
not presented based on management’s determination that they do not provide
additional information that is material to investors. Therefore, the Guarantor
Subsidiaries are combined in the presentation below.
63
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
December 31, 2008
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 55,237 | $ | 27 | $ | 37,428 | $ | - | $ | 92,692 | ||||||||||
|
Accounts
receivable, net
|
51,274 | 15,888 | 29,373 | - | 96,535 | |||||||||||||||
|
Inventories,
net
|
28,487 | 10,927 | 15,386 | - | 54,800 | |||||||||||||||
|
Prepaid
expenses and other
|
(304,638 | ) | 301,387 | 12,320 | - | 9,069 | ||||||||||||||
|
Deferred
income taxes, net of valuation allowance
|
- | - | 1,495 | - | 1,495 | |||||||||||||||
|
Total
current assets
|
(169,640 | ) | 328,229 | 96,002 | - | 254,591 | ||||||||||||||
|
Long-Term
Assets:
|
||||||||||||||||||||
|
Property,
plant and equipment, net
|
50,458 | 24,445 | 12,798 | - | 87,701 | |||||||||||||||
|
Other
Assets:
|
||||||||||||||||||||
|
Investments
and other, net
|
38,984 | 319 | 842 | - | 40,145 | |||||||||||||||
|
Investment
in subsidiaries
|
407,199 | - | - | (407,199 | ) | - | ||||||||||||||
|
Total
long-term assets
|
496,641 | 24,764 | 13,640 | (407,199 | ) | 127,846 | ||||||||||||||
|
Total
Assets
|
$ | 327,001 | $ | 352,993 | $ | 109,642 | $ | (407,199 | ) | $ | 382,437 | |||||||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 23,778 | $ | 13,652 | $ | 13,289 | $ | - | $ | 50,719 | ||||||||||
|
Accrued
expenses and other
|
21,429 | 5,065 | 16,991 | - | 43,485 | |||||||||||||||
|
Total
current liabilities
|
45,207 | 18,717 | 30,280 | - | 94,204 | |||||||||||||||
|
Long-Term
Liabilities:
|
||||||||||||||||||||
|
Long-term
debt
|
183,000 | - | - | - | 183,000 | |||||||||||||||
|
Deferred
income taxes
|
3,873 | 41 | 3,088 | - | 7,002 | |||||||||||||||
|
Other
liabilities
|
3,163 | 360 | 2,950 | - | 6,473 | |||||||||||||||
|
Total
long-term liabilities
|
190,036 | 401 | 6,038 | - | 196,475 | |||||||||||||||
|
Shareholders'
Equity
|
91,758 | 333,875 | 73,324 | (407,199 | ) | 91,758 | ||||||||||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 327,001 | $ | 352,993 | $ | 109,642 | $ | (407,199 | ) | $ | 382,437 | |||||||||
64
Supplemental
condensed consolidating financial statements
(continued):
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
December 31, 2007
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current
Assets:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 48,705 | $ | 255 | $ | 46,964 | $ | - | $ | 95,924 | ||||||||||
|
Accounts
receivable, net
|
53,456 | 26,798 | 42,034 | - | 122,288 | |||||||||||||||
|
Inventories,
net
|
25,472 | 12,637 | 19,283 | - | 57,392 | |||||||||||||||
|
Prepaid
expenses and other
|
(293,632 | ) | 294,298 | 15,260 | - | 15,926 | ||||||||||||||
|
Deferred
income taxes, net of valuation allowance
|
3,152 | 4,591 | 2,086 | - | 9,829 | |||||||||||||||
|
Total
current assets
|
(162,847 | ) | 338,579 | 125,627 | - | 301,359 | ||||||||||||||
|
Long-Term
Assets:
|
||||||||||||||||||||
|
Property,
plant and equipment, net
|
48,294 | 25,632 | 18,826 | - | 92,752 | |||||||||||||||
|
Other
Assets:
|
||||||||||||||||||||
|
Goodwill
|
44,585 | 20,591 | - | - | 65,176 | |||||||||||||||
|
Investments
and other, net
|
38,783 | 331 | 340 | - | 39,454 | |||||||||||||||
|
Deferred
income taxes, net of valuation allowance
|
33,169 | (2,843 | ) | (1,298 | ) | - | 29,028 | |||||||||||||
|
Investment
in subsidiaries
|
438,271 | - | - | (438,271 | ) | - | ||||||||||||||
|
Total
long-term assets
|
603,102 | 43,711 | 17,868 | (438,271 | ) | 226,410 | ||||||||||||||
|
Total
Assets
|
$ | 440,255 | $ | 382,290 | $ | 143,495 | $ | (438,271 | ) | $ | 527,769 | |||||||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||||||||||||||
|
Current
Liabilities:
|
||||||||||||||||||||
|
Accounts
payable
|
$ | 20,924 | $ | 19,533 | $ | 28,916 | $ | - | $ | 69,373 | ||||||||||
|
Accrued
expenses and other
|
12,546 | 9,198 | 25,454 | - | 47,198 | |||||||||||||||
|
Total
current liabilities
|
33,470 | 28,731 | 54,370 | - | 116,571 | |||||||||||||||
|
Long-Term
Liabilities:
|
||||||||||||||||||||
|
Long-term
debt
|
200,000 | - | - | - | 200,000 | |||||||||||||||
|
Deferred
income taxes
|
- | - | 2,665 | - | 2,665 | |||||||||||||||
|
Other
liabilities
|
596 | 393 | 1,355 | - | 2,344 | |||||||||||||||
|
Total
long-term liabilities
|
200,596 | 393 | 4,020 | - | 205,009 | |||||||||||||||
|
Shareholders'
Equity
|
206,189 | 353,166 | 85,105 | (438,271 | ) | 206,189 | ||||||||||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 440,255 | $ | 382,290 | $ | 143,495 | $ | (438,271 | ) | $ | 527,769 | |||||||||
65
Supplemental condensed
consolidating financial statements
(continued):
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
For the Year Ended December 31, 2008
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
Sales
|
$ | 409,577 | $ | 185,747 | $ | 255,153 | $ | (97,779 | ) | $ | 752,698 | |||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||
|
Cost
of goods sold
|
339,871 | 147,154 | 194,301 | (94,915 | ) | 586,411 | ||||||||||||||
|
Selling,
general and administrative
|
54,012 | 31,636 | 53,779 | (2,864 | ) | 136,563 | ||||||||||||||
|
(Gain)
Loss on sale of property, plant and equipment, net
|
(6 | ) | 21 | (586 | ) | - | (571 | ) | ||||||||||||
|
Goodwill
impairment charge
|
44,585 | 20,590 | - | - | 65,175 | |||||||||||||||
|
Restructuring
charges
|
3,675 | 824 | 3,892 | - | 8,391 | |||||||||||||||
|
Operating
Income (Loss)
|
(32,560 | ) | (14,478 | ) | 3,767 | - | (43,271 | ) | ||||||||||||
|
Interest
expense (income), net
|
21,468 | - | (893 | ) | - | 20,575 | ||||||||||||||
|
Other
income, net
|
(12,648 | ) | - | (423 | ) | - | (13,071 | ) | ||||||||||||
|
Equity
deficit from subsidiaries
|
10,887 | - | - | (10,887 | ) | - | ||||||||||||||
|
Income
(Loss) Before Income Taxes
|
(52,267 | ) | (14,478 | ) | 5,083 | 10,887 | (50,775 | ) | ||||||||||||
|
Provision
for income taxes
|
45,260 | - | 1,492 | - | 46,752 | |||||||||||||||
|
Net
Income (Loss)
|
$ | (97,527 | ) | $ | (14,478 | ) | $ | 3,591 | $ | 10,887 | $ | (97,527 | ) | |||||||
|
For the Year Ended December 31, 2007
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
Sales
|
$ | 345,212 | $ | 205,384 | $ | 256,357 | $ | (79,833 | ) | $ | 727,120 | |||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||
|
Cost
of goods sold
|
286,419 | 160,501 | 189,624 | (77,147 | ) | 559,397 | ||||||||||||||
|
Selling,
general and administrative
|
55,050 | 31,543 | 49,801 | (2,686 | ) | 133,708 | ||||||||||||||
|
Gain
on sale of property, plant and equipment, net
|
(392 | ) | (1,318 | ) | - | - | (1,710 | ) | ||||||||||||
|
Restructuring
charges
|
458 | - | 468 | - | 926 | |||||||||||||||
|
Operating
Income
|
3,677 | 14,658 | 16,464 | - | 34,799 | |||||||||||||||
|
Interest
expense (income), net
|
23,058 | - | (1,299 | ) | - | 21,759 | ||||||||||||||
|
Other
expense (income), net
|
(10,545 | ) | - | 361 | - | (10,184 | ) | |||||||||||||
|
Equity
earnings from subsidiaries
|
(28,673 | ) | - | - | 28,673 | - | ||||||||||||||
|
Income
Before Income Taxes
|
19,837 | 14,658 | 17,402 | (28,673 | ) | 23,224 | ||||||||||||||
|
Provision
for income taxes
|
3,166 | 17 | 3,370 | - | 6,553 | |||||||||||||||
|
Net
Income
|
$ | 16,671 | $ | 14,641 | $ | 14,032 | $ | (28,673 | ) | $ | 16,671 | |||||||||
66
Supplemental
condensed consolidating financial statements
(continued):
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
For the Year Ended December 31, 2006
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
Sales
|
$ | 352,050 | $ | 223,332 | $ | 219,870 | $ | (86,553 | ) | $ | 708,699 | |||||||||
|
Costs
and Expenses:
|
||||||||||||||||||||
|
Cost
of goods sold
|
304,042 | 167,707 | 161,870 | (83,826 | ) | 549,793 | ||||||||||||||
|
Selling,
general and administrative
|
51,493 | 34,877 | 40,895 | (2,727 | ) | 124,538 | ||||||||||||||
|
(Gain)
Loss on sale of property, plant and equipment, net
|
(1,312 | ) | 4 | 5 | - | (1,303 | ) | |||||||||||||
|
Restructuring
charges
|
368 | 224 | 16 | - | 608 | |||||||||||||||
|
Operating
Income (Loss)
|
(2,541 | ) | 20,520 | 17,084 | - | 35,063 | ||||||||||||||
|
Interest
expense (income), net
|
22,366 | - | (622 | ) | - | 21,744 | ||||||||||||||
|
Other
expense (income), net
|
(7,919 | ) | (291 | ) | 1,890 | - | (6,320 | ) | ||||||||||||
|
Equity
earnings from subsidiaries
|
(32,998 | ) | - | - | 32,998 | - | ||||||||||||||
|
Income
Before Income Taxes
|
16,010 | 20,811 | 15,816 | (32,998 | ) | 19,639 | ||||||||||||||
|
Provision
for income taxes
|
1,497 | 15 | 3,614 | - | 5,126 | |||||||||||||||
|
Net
Income
|
$ | 14,513 | $ | 20,796 | $ | 12,202 | $ | (32,998 | ) | $ | 14,513 | |||||||||
67
Supplemental
condensed consolidating financial statements
(continued):
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
For the Year Ended December 31, 2008
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
cash provided by operating activities
|
$ | 37,167 | $ | 4,889 | $ | 400 | $ | - | $ | 42,456 | ||||||||||
|
INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Capital
expenditures
|
(14,679 | ) | (5,121 | ) | (4,773 | ) | - | (24,573 | ) | |||||||||||
|
Proceeds
from sale of fixed assets
|
275 | 4 | 1,373 | - | 1,652 | |||||||||||||||
|
Business
acquisitions and other
|
- | - | (980 | ) | - | (980 | ) | |||||||||||||
|
Net
cash used for investing activities
|
(14,404 | ) | (5,117 | ) | (4,380 | ) | - | (23,901 | ) | |||||||||||
|
FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Repayments
of long-term debt
|
(17,000 | ) | - | - | - | (17,000 | ) | |||||||||||||
|
Share-based
compensation activity, net
|
1,322 | - | - | - | 1,322 | |||||||||||||||
|
Other
financing costs
|
(553 | ) | - | - | - | (553 | ) | |||||||||||||
|
Net
cash used for financing activities
|
(16,231 | ) | - | - | - | (16,231 | ) | |||||||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
- | - | (5,556 | ) | - | (5,556 | ) | |||||||||||||
|
Net
change in cash and cash equivalents
|
6,532 | (228 | ) | (9,536 | ) | - | (3,232 | ) | ||||||||||||
|
Cash
and cash equivalents at beginning of period
|
48,705 | 255 | 46,964 | - | 95,924 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 55,237 | $ | 27 | $ | 37,428 | $ | - | $ | 92,692 | ||||||||||
|
For the Year Ended December 31, 2007
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
cash provided by (used for) operating activities
|
$ | 20,239 | $ | (505 | ) | $ | 14,091 | $ | (300 | ) | $ | 33,525 | ||||||||
|
INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Capital
expenditures
|
(9,034 | ) | (3,895 | ) | (5,212 | ) | - | (18,141 | ) | |||||||||||
|
Proceeds
from sale of fixed assets
|
7,663 | 4,643 | 9 | - | 12,315 | |||||||||||||||
|
Net
cash (used for) provided by investing activities
|
(1,371 | ) | 748 | (5,203 | ) | - | (5,826 | ) | ||||||||||||
|
FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Repayments
of long-term debt
|
- | - | (300 | ) | 300 | - | ||||||||||||||
|
Share-based
compensation activity, net
|
2,119 | - | - | - | 2,119 | |||||||||||||||
|
Other
financing costs
|
(1,219 | ) | - | - | - | (1,219 | ) | |||||||||||||
|
Net
cash provided by (used for) financing activities
|
900 | - | (300 | ) | 300 | 900 | ||||||||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
- | - | 1,443 | - | 1,443 | |||||||||||||||
|
Net
change in cash and cash equivalents
|
19,768 | 243 | 10,031 | - | 30,042 | |||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
28,937 | 12 | 36,933 | - | 65,882 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 48,705 | $ | 255 | $ | 46,964 | $ | - | $ | 95,924 | ||||||||||
68
Supplemental
condensed consolidating financial statements
(continued):
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
|
For the Year Ended December 31, 2006
|
||||||||||||||||||||
|
Parent
|
Guarantor
Subsidiaries
|
Non-
Guarantor
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
|
Net
cash provided by operating activities
|
$ | 10,415 | $ | 5,603 | $ | 42,241 | $ | (11,719 | ) | $ | 46,540 | |||||||||
|
INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Capital
expenditures
|
(12,412 | ) | (5,619 | ) | (7,864 | ) | - | (25,895 | ) | |||||||||||
|
Proceeds
from sale of fixed assets
|
2,266 | - | - | - | 2,266 | |||||||||||||||
|
Proceeds
from sale of partnership interest
|
1,153 | - | - | - | 1,153 | |||||||||||||||
|
Business
acquisitions and other
|
(1,476 | ) | 245 | (6 | ) | (896 | ) | (2,133 | ) | |||||||||||
|
Net
cash used for investing activities
|
(10,469 | ) | (5,374 | ) | (7,870 | ) | (896 | ) | (24,609 | ) | ||||||||||
|
FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Borrowings
(repayments) of long-term debt
|
2,426 | - | (14,189 | ) | 11,719 | (44 | ) | |||||||||||||
|
Share-based
compensation activity, net
|
1,337 | - | (1,036 | ) | - | 301 | ||||||||||||||
|
Shareholder
distributions
|
10,854 | - | (10,854 | ) | - | - | ||||||||||||||
|
Other
financing costs
|
6,620 | (264 | ) | (7,402 | ) | 896 | (150 | ) | ||||||||||||
|
Net
cash provided by (used for) financing activities
|
21,237 | (264 | ) | (33,481 | ) | 12,615 | 107 | |||||||||||||
|
Effect
of exchange rate changes on cash and cash
equivalents
|
- | - | 3,060 | - | 3,060 | |||||||||||||||
|
Net
change in cash and cash equivalents
|
21,183 | (35 | ) | 3,950 | - | 25,098 | ||||||||||||||
|
Cash
and cash equivalents at beginning of period
|
7,754 | 47 | 32,983 | - | 40,784 | |||||||||||||||
|
Cash
and cash equivalents at end of period
|
$ | 28,937 | $ | 12 | $ | 36,933 | $ | - | $ | 65,882 | ||||||||||
69
STONERIDGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share data, unless otherwise
indicated)
15.
Unaudited Quarterly Financial Data
The
following is a summary of quarterly results of operations for 2008 and
2007:
|
Quarter Ended
|
||||||||||||||||
|
Dec. 31
|
Sept. 30
|
Jun. 30
|
Mar. 31
|
|||||||||||||
|
(in
millions, except per share data)
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$ | 158.0 | $ | 178.4 | $ | 213.2 | $ | 203.1 | ||||||||
|
Gross
profit
|
29.8 | 35.3 | 49.4 | 51.8 | ||||||||||||
|
Goodwill
impairment charge
|
(65.2 | ) | - | - | - | |||||||||||
|
Operating
income (loss)
|
(69.1 | ) | 0.9 | 10.8 | 14.1 | |||||||||||
|
Provision
for income taxes
|
36.7 | 0.9 | 4.1 | 5.1 | ||||||||||||
|
Net
income (loss)
|
(108.4 | ) | (0.4 | ) | 4.7 | 6.5 | ||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
(A)
|
(4.63 | ) | (0.02 | ) | 0.20 | 0.28 | ||||||||||
|
Diluted
(A)
|
(4.63 | ) | (0.02 | ) | 0.20 | 0.28 | ||||||||||
|
Quarter Ended
|
||||||||||||||||
|
Dec. 31
|
Sept. 30
|
Jun. 30
|
Mar. 31
|
|||||||||||||
|
2007
|
||||||||||||||||
|
Net
sales
|
$ | 185.5 | $ | 172.8 | $ | 183.8 | $ | 185.0 | ||||||||
|
Gross
profit
|
48.1 | 37.9 | 38.9 | 42.8 | ||||||||||||
|
Goodwill
impairment charge
|
- | - | - | - | ||||||||||||
|
Operating
income
|
13.0 | 5.2 | 6.9 | 9.7 | ||||||||||||
|
Provision
for income taxes
|
4.3 | 0.4 | 0.7 | 1.2 | ||||||||||||
|
Net
income
|
6.5 | 2.6 | 2.7 | 4.9 | ||||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
(A)
|
0.28 | 0.11 | 0.12 | 0.21 | ||||||||||||
|
Diluted
(A)
|
0.28 | 0.11 | 0.11 | 0.21 | ||||||||||||
|
(A)
|
Earnings
per share for the year may not equal the sum of the four historical
quarters earnings per share due to changes in basic and diluted shares
outstanding.
|
70
STONERIDGE,
INC. AND SUBSIDIARIES
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
(in
thousands)
|
Balance at
Beginning of
Period
|
Charged to
Costs and
Expenses
|
Write-offs
|
Balance at
End of
Period |
|||||||||||||
|
Accounts
receivable reserves:
|
||||||||||||||||
|
Year
ended December 31, 2006
|
$ | 4,562 | $ | 1,877 | $ | (1,196 | ) | $ | 5,243 | |||||||
|
Year
ended December 31, 2007
|
5,243 | 905 | (1,412 | ) | 4,736 | |||||||||||
|
Year
ended December 31, 2008
|
4,736 | 151 | (683 | ) | 4,204 | |||||||||||
|
Balance at
Beginning of
Period
|
Net additions
charged to
income
|
Exchange rate
fluctuations
and other
items
|
Balance at
End of
Period
|
|||||||||||||
|
Valuation
allowance for deferred tax assets:
|
||||||||||||||||
|
Year
ended December 31, 2006
|
$ | 18,172 | $ | 795 | $ | (1,587 | ) | $ | 17,380 | |||||||
|
Year
ended December 31, 2007
|
17,380 | (1,104 | ) | (256 | ) | 16,020 | ||||||||||
|
Year
ended December 31, 2008
|
16,020 | 66,271 | 88 | 82,379 | ||||||||||||
71
Item
9. Changes In and Disagreements With Accountants On Accounting and Financial
Disclosure.
There has
been no disagreement between the management of the Company and its independent
auditors on any matter of accounting principles or practices of financial
statement disclosures, or auditing scope or procedure.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As of
December 31, 2008, an evaluation was performed under the supervision and with
the participation of the Company’s management, including the chief executive
officer (“CEO”) and chief financial officer (“CFO”), of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. Based
on that evaluation, the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures were effective
as of December 31, 2008.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
during the fourth quarter ended December 31, 2008 that materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Management’s Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). In evaluating the Company’s internal control over
financial reporting, management has adopted the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Under the supervision and with the participation of our
management, including the principal executive officer and principal financial
and accounting officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting, as of December 31, 2008. Based on our
evaluation under the framework in Internal Control-Integrated
Framework, our management has concluded that our internal control over
financial reporting was effective as of December 31, 2008.
Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report which appears
herein.
72
Report
of Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders of Stoneridge, Inc. and Subsidiaries
We have
audited Stoneridge Inc. and Subsidiaries’ internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Stoneridge Inc. and
Subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Stoneridge, Inc. and Subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Stoneridge,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of operations, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2008 of Stoneridge,
Inc. and Subsidiaries and our report dated March 11, 2009 expressed an
unqualified opinion thereon.
|
/s/
Ernst & Young
LLP
|
Cleveland,
Ohio
March 11,
2009
73
Item
9B. Other Information.
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
information required by this Item 10 regarding our directors is incorporated by
reference to the information under the sections and subsections entitled,
“Proposal One: Election of Directors,” “Nominating and Corporate Governance
Committee,” “Audit Committee,” “Section 16(a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance Guidelines” contained in the Company's
Proxy Statement in connection with its Annual Meeting of Shareholders to be held
on May 4, 2009. The information required by this Item 10 regarding our executive
officers appears as a Supplementary Item in Item 1 under Part I
hereof.
Item
11. Executive Compensation.
The
information required by this Item 11 is incorporated by reference to the
information under the sections and subsections “Compensation Committee,”
“Compensation Committee Interlocks and Insider Participation,” “Compensation
Committee Report” and “Executive Compensation” contained in the Company's Proxy
Statement in connection with its Annual Meeting of Shareholders to be held on
May 4, 2009.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
information required by this Item 12 (other than the information required by
Item 201(d) of Regulation S-K which is set forth below) is incorporated by
reference to the information under the heading “Security Ownership of Certain
Beneficial Owners and Management” contained in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on May 4,
2009.
In
October 1997, we adopted a Long-Term Incentive Plan for our employees, which
expired on June 30, 2007. In May 2002, we adopted a Director Share Option Plan
for our directors. In April 2005, we adopted a Directors’ Restricted Shares
Plan. In April 2006, we adopted an amended and restated Long-Term Incentive
Plan. Our shareholders approved each plan. Equity compensation plan information,
as of December 31, 2008, is as follows:
|
Number of Securities to
be Issued Upon the
Exercise of Outstanding
Share Options
|
Weighted-Average
Exercise Price of
Outstanding Share
Options
|
Number of Securities
Remaining Available
for Future Issuance Under Equity Compensation Plans (1)
|
||||||||||
|
Equity
compensation plans approved by shareholders
|
197,750 | $ | 11.26 | 1,208,000 | ||||||||
|
Equity
compensation plans not approved by shareholders
|
- | $ | - | - | ||||||||
(1) Excludes securities reflected in
the first column, “Number of securities to be issued upon the exercise of
outstanding share options.” Also excludes 1,224,686 restricted Common Shares
issued and outstanding to key employees pursuant to the Company’s Long-Term
Incentive Plan and 43,200 restricted Common Shares issued and outstanding to
directors under the Directors’ Restricted Shares Plan as of December 31,
2008.
74
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
The
information required by this Item 13 is incorporated by reference to the
information under the sections and subsections “Transactions with Related
Persons” and “Director Independence” contained in the Company's Proxy Statement
in connection with its Annual Meeting of Shareholders to be held on May 4,
2009.
Item
14. Principal Accounting Fees and Services.
The
information required by this Item 14 is incorporated by reference to the
information under the sections and subsections “Service Fees Paid to Independent
Registered Accounting Firm” and “Pre-Approval Policy” contained in the Company's
Proxy Statement in connection with its Annual Meeting of Shareholders to be held
on May 4, 2009.
PART
IV
Item
15. Exhibits, Financial Statement Schedules.
|
|
(a)
The following documents are filed as part of this Form
10-K.
|
|
Page
in
Form 10-K
|
|
|
(1) Consolidated
Financial Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
35
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
36
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
37
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
38
|
|
Consolidated
Statements of Shareholders' Equity for the Years Ended December 31, 2008,
2007 and 2006
|
39
|
|
Notes
to Consolidated Financial Statements
|
40
|
|
(2) Financial
Statement Schedule:
|
|
|
Schedule
II – Valuation and
Qualifying Accounts
|
71
|
|
(3) Exhibits:
|
|
|
See
the List of Exhibits on the Index to Exhibits following the signature
page.
|
|
|
(b)
The exhibits listed on the Index to Exhibits are filed as part of or
incorporated by reference into this
report.
|
|
|
(c)
|
Additional
Financial Statement Schedules.
|
None.
75
SIGNATURES
Pursuant
to the requirements of the Section 13 or 15(d) 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:
March 9, 2009
|
/s/
GEORGE E. STRICKLER
|
|
George
E. Strickler
|
|
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
|
|
(Principal
Financial and Accounting
Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Date:
March 9, 2009
|
/s/
JOHN C. COREY
|
|
John
C. Corey
President,
Chief Executive Officer, and Director
(Principal
Executive Officer)
|
|
|
Date:
March 9, 2009
|
/s/
WILLIAM M. LASKY
|
|
William
M. Lasky
Chairman
of the Board of Directors
|
|
|
Date:
March 9, 2009
|
/s/
JEFFREY P. DRAIME
|
|
Jeffrey
P. Draime
Director
|
|
|
Date:
March 9, 2009
|
/s/
SHELDON J. EPSTEIN
|
|
Sheldon
J. Epstein
Director
|
|
|
Date:
March 9, 2009
|
/s/
DOUGLAS C. JACOBS
|
|
Douglas
C. Jacobs
Director
|
|
|
Date:
March 9, 2009
|
/s/
KIM KORTH
|
|
Kim
Korth
Director
|
|
|
Date:
March 9, 2009
|
/s/
EARL L. LINEHAN
|
|
Earl
L. Linehan
Director
|
76
INDEX
TO EXHIBITS
|
Exhibit
Number
|
Exhibit
|
|
|
3.1
|
Second
Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company’s Registration
Statement on Form S-1 (No. 333-33285)).
|
|
|
3.2
|
Amended
and Restated Code of Regulations of the Company (incorporated by reference
to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (No.
333-33285)).
|
|
|
4.1
|
Common
Share Certificate (incorporated by reference to Exhibit 4.1 to the
Company’s Annual Report on Form 10-K for the year ended December 31,
1997).
|
|
|
4.2
|
Indenture
dated as of May 1, 2002 among Stoneridge, Inc. as Issuer, Stoneridge
Control Devices, Inc. and Stoneridge Electronics, Inc., as Guarantors, and
Fifth Third Bank, as trustee (incorporated by reference to Exhibit 4.1 to
the Company’s Current Report on Form 8-K filed on May 7,
2002).
|
|
|
10.1
|
Lease
Agreement between Stoneridge, Inc. and Hunters Square, Inc., with respect
to the Company’s division headquarters for Alphabet (incorporated by
reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1999).
|
|
|
10.2
|
Form
of Tax Indemnification Agreement (incorporated by reference to Exhibit
10.10 to the Company’s Registration Statement on Form S-1 (No.
333-33285)).
|
|
|
10.11
|
Directors’
Share Option Plan (incorporated by reference to Exhibit 4 of the Company’s
Registration Statement on Form S-8 (No. 333-96953)).
|
|
|
10.12
|
Form
of Long-Term Incentive Plan Share Option Agreement (incorporated by
reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2004).
|
|
|
10.13
|
Form
of Directors’ Share Option Plan Share Option Agreement (incorporated by
reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2004).
|
|
|
10.14
|
Form
of Long-Term Incentive Plan Restricted Shares Grant Agreement
(incorporated by reference to Exhibit 10.18 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2004).
|
|
|
10.15
|
Director’s
Restricted Shares Plan (incorporated by reference to Exhibit 4.3 of the
Company’s Registration Statement on Form S-8 (No.
333-127017)).
|
|
|
10.16
|
Form
of Director’s Restricted Shares Plan Agreement, (incorporated by reference
to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005).
|
|
|
10.17
|
Form
of Long-Term Incentive Plan Restricted Shares Grant Agreement including
Performance and Time-Based Restricted Shares (incorporated by reference to
Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2005).
|
|
|
10.18
|
Amendment
to Restricted Shares Grant Agreement (incorporated by reference to Exhibit
10.24 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2005).
|
|
|
10.19
|
Employment
Agreement between the Company and John C. Corey (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 10-Q filed on May
8, 2006).
|
|
|
10.20
|
Amended
and Restated Long-Term Incentive Plan (incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April
28, 2006).
|
|
|
|
||
|
10.21
|
Outside
Directors’ Deferred Compensation Plan (incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 26,
2006).
|
|
|
10.22
|
Employees’
Deferred Compensation Plan (incorporated by reference to Exhibit 99.2 to
the Company’s Current Report on Form 8-K filed on July 26,
2006).
|
|
|
10.23
|
Form
of 2006 Restricted Shares Grant Agreement (incorporated by reference to
Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on July 26,
2006).
|
77
|
Exhibit
Number
|
Exhibit
|
|
|
10.24
|
Form
of 2006 Directors’ Restricted Shares Grant Agreement (incorporated by
reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K
filed on July 26, 2006).
|
|
|
10.25
|
Annual
Incentive Plan approved by Company’s Board of Directors (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on November 2, 2006).
|
|
|
10.26
|
Partnership
Interest Purchase Agreement for the Sale of Company’s partnership interest
in Industrial Development Associates Limited, dated December 29, 2006,
(incorporated by reference to Exhibit 10.31 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2006).
|
|
|
10.28
|
Annual
Incentive Plan approved by Company’s Board of Directors (incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed on August 9, 2007).
|
|
|
10.29
|
Credit
Agreement dated as of November 2, 2007 among Stoneridge, Inc., as
Borrower, the Lending Institutions Named Therein, as Lenders, National
City Business Credit, Inc., as Administrative Agent and Collateral Agent,
and National City Bank, as Lead Arranger and Issuer (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on November 8, 2007).
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10.30
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Amended
and Restated Change in Control Agreement (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December
21, 2007).
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10.31
|
Amendment
Employment Agreement between Stoneridge, Inc. and John C. Corey, filed
herewith.
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10.32
|
Amended
and Restated Change in Control Agreement, filed
herewith.
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14.1
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Code
of Ethics for Senior Financial Officers (incorporated by reference to
Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2003).
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21.1
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Principal
Subsidiaries and Affiliates of the Company, filed
herewith.
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23.1
|
Consent
of Independent Registered Public Accounting Firm, filed
herewith.
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23.2
|
Consent
of Independent Registered Public Accounting Firm, filed
herewith.
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||
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31.1
|
Chief
Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
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31.2
|
Chief
Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
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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.
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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.
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99.1
|
Financial
Statements of PST Eletrônica S.A., filed
herewith.
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78