UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
| For the quarterly period ended September 30, 2004 | Commission file number 001-13337 |
STONERIDGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Ohio | 34-1598949 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 9400 East Market Street, Warren, Ohio | 44484 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(330) 856-2443
Registrant’s Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
The number of Common Shares, without par value, outstanding as of October 28, 2004 was 22,760,666.
STONERIDGE, INC. AND SUBSIDIARIES
INDEX
1
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
| September 30, 2004 |
December 31, 2003 | |||||
| (Unaudited) | (Audited) | |||||
| ASSETS |
||||||
| CURRENT ASSETS: |
||||||
| Cash and cash equivalents |
$ | 32,145 | $ | 24,142 | ||
| Accounts receivable, net |
118,579 | 89,161 | ||||
| Inventories, net |
58,992 | 48,047 | ||||
| Prepaid expenses and other |
13,845 | 10,420 | ||||
| Deferred income taxes |
9,763 | 7,856 | ||||
| Total current assets |
233,324 | 179,626 | ||||
| PROPERTY, PLANT AND EQUIPMENT, net |
112,933 | 116,262 | ||||
| OTHER ASSETS: |
||||||
| Goodwill |
255,292 | 255,292 | ||||
| Investments and other, net |
29,202 | 28,487 | ||||
| TOTAL ASSETS |
$ | 630,751 | $ | 579,667 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||
| CURRENT LIABILITIES: |
||||||
| Current portion of long-term debt |
$ | 38 | $ | 417 | ||
| Accounts payable |
64,474 | 53,594 | ||||
| Accrued expenses and other |
65,585 | 54,569 | ||||
| Total current liabilities |
130,097 | 108,580 | ||||
| LONG-TERM LIABILITIES: |
||||||
| Long-term debt, net of current portion |
200,149 | 200,245 | ||||
| Deferred income taxes |
30,143 | 25,288 | ||||
| Other liabilities |
2,623 | 2,148 | ||||
| Total long-term liabilities |
232,915 | 227,681 | ||||
| SHAREHOLDERS’ EQUITY: |
||||||
| Preferred shares, without par value, 5,000 authorized, none issued |
— | — | ||||
| Common shares, without par value, 60,000 authorized, 22,759 (net of 7 treasury shares) and 22,459 issued and outstanding at September 30, 2004 and December 31, 2003, respectively, with no stated value |
— | — | ||||
| Additional paid-in capital |
145,125 | 143,535 | ||||
| Retained earnings |
121,179 | 98,758 | ||||
| Accumulated other comprehensive income |
1,435 | 1,113 | ||||
| Total shareholders’ equity |
267,739 | 243,406 | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 630,751 | $ | 579,667 | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except for per share data)
| For the three months ended September 30, |
For the nine months ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| NET SALES |
$ | 164,286 | $ | 140,832 | $ | 518,365 | $ | 455,416 | ||||||||
| COSTS AND EXPENSES: |
||||||||||||||||
| Cost of goods sold |
124,836 | 106,462 | 385,676 | 339,796 | ||||||||||||
| Selling, general and administrative |
28,877 | 23,273 | 82,785 | 71,277 | ||||||||||||
| OPERATING INCOME |
10,573 | 11,097 | 49,904 | 44,343 | ||||||||||||
| Interest expense, net |
6,031 | 6,805 | 18,528 | 20,558 | ||||||||||||
| Other income, net |
(358 | ) | (187 | ) | (757 | ) | (180 | ) | ||||||||
| INCOME BEFORE INCOME TAXES |
4,900 | 4,479 | 32,133 | 23,965 | ||||||||||||
| Provision for income taxes |
979 | 1,378 | 9,712 | 7,667 | ||||||||||||
| NET INCOME |
$ | 3,921 | $ | 3,101 | $ | 22,421 | $ | 16,298 | ||||||||
| BASIC NET INCOME PER SHARE |
$ | 0.17 | $ | 0.14 | $ | 0.99 | $ | 0.73 | ||||||||
| BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING |
22,630 | 22,410 | 22,605 | 22,410 | ||||||||||||
| DILUTED NET INCOME PER SHARE |
$ | 0.17 | $ | 0.14 | $ | 0.98 | $ | 0.72 | ||||||||
| DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING |
22,925 | 22,758 | 22,863 | 22,676 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| For the nine months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 22,421 | $ | 16,298 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities- |
||||||||
| Depreciation and amortization |
19,791 | 18,325 | ||||||
| Deferred income taxes |
2,866 | 10,585 | ||||||
| Equity earnings of unconsolidated subsidiaries |
(1,350 | ) | (1,013 | ) | ||||
| Loss on sale of fixed assets |
166 | 346 | ||||||
| Share based compensation |
994 | 376 | ||||||
| Changes in operating assets and liabilities- |
||||||||
| Accounts receivable, net |
(29,457 | ) | (14,075 | ) | ||||
| Inventories |
(10,247 | ) | 3,469 | |||||
| Prepaid expenses and other |
(3,945 | ) | 1,487 | |||||
| Other assets |
393 | (19 | ) | |||||
| Accounts payable |
10,814 | 7,834 | ||||||
| Accrued expenses and other |
14,421 | 7,424 | ||||||
| Net cash provided by operating activities |
26,867 | 51,037 | ||||||
| INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
(18,108 | ) | (11,615 | ) | ||||
| Proceeds from sale of fixed assets |
16 | 832 | ||||||
| Business acquisitions and other |
(714 | ) | (3 | ) | ||||
| Net cash used by investing activities |
(18,806 | ) | (10,786 | ) | ||||
| FINANCING ACTIVITIES: |
||||||||
| Repayments of long-term debt |
(359 | ) | (22,355 | ) | ||||
| Net repayments under revolving credit facilities |
— | (715 | ) | |||||
| Proceeds from exercise of share options |
376 | 258 | ||||||
| Other financing costs |
(134 | ) | — | |||||
| Net cash used by financing activities |
(117 | ) | (22,812 | ) | ||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |
59 | 730 | ||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS |
8,003 | 18,169 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
24,142 | 27,235 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 32,145 | $ | 45,404 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except for per share data, unless otherwise indicated)
| 1. | The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission). The information furnished in the condensed consolidated financial statements includes normal recurring accruals and adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to the Commission’s rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s 2003 Annual Report on Form 10-K. |
The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year.
| 2. | Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 70% and 68% of the Company’s inventories at September 30, 2004 and December 31, 2003, respectively, and by the first-in, first-out (FIFO) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following: |
| September 30, 2004 |
December 31, 2003 |
|||||||
| Raw materials |
$ | 32,885 | $ | 25,035 | ||||
| Work in progress |
10,125 | 10,414 | ||||||
| Finished goods |
17,026 | 13,308 | ||||||
| 60,036 | 48,757 | |||||||
| Less: LIFO reserve |
(1,044 | ) | (710 | ) | ||||
| Total |
$ | 58,992 | $ | 48,047 | ||||
| 3. | 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 September 30, 2004, per quoted market sources, was $225.3 million and the carrying value was $200.0 million. |
The Company uses derivative financial instruments to reduce exposure to market risks resulting from fluctuations in interest rates (swaps) and currency rates (forward contracts). The Company does not enter into financial instruments for trading purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. At September 30, 2004, the Company had no outstanding interest rate swaps.
The Company has entered into a foreign currency forward purchase contract with a notional value of 58.4 million of Swedish krona to reduce exposure related to the Company’s krona denominated receivables. The estimated fair value of this forward contract at September 30, 2004, per quoted market sources, was $(0.3) million. The contract is marked to market, with gains and losses recognized in the Condensed Consolidated Statement of Operations. The Company’s foreign currency forward purchase contract substantially offsets losses and gains on the underlying foreign denominated receivables.
5
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except for per share data, unless otherwise indicated)
| 4. | Under Statement of Financial Accounting Standard (SFAS) 142, “Goodwill and Other Intangible Assets,” goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The Company performed an annual impairment test of goodwill as of October 1, 2003 and no impairment was recognized. There was no change in the carrying value of goodwill by reportable operating segment during the first nine months of 2004. The Company is currently in the process of completing this year’s annual impairment test of goodwill, as of October 1, 2004. |
| 5. | In January 2003, the Financial Accounting Standards Board (FASB) issued interpretation (FIN) 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51.” FIN 46 requires unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks and rewards of ownership among their owners and other parties involved. The provisions of FIN 46 were applicable immediately to all variable interest entities created after January 31, 2003. In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51 (revised December 2003),” which includes significant amendments to previously issued FIN 46. Among other things, FIN 46R includes revised transition dates for public entities, which required the Company to adopt the provisions of FIN 46 as of March 31, 2004. The adoption of this interpretation did not impact the Company’s consolidated financial statements. |
| 6. | The Company has two share-based compensation plans. One plan is for employees and one plan is for non-employee directors. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” prospectively to all employee and director awards granted, modified or settled after January 1, 2003, under the provisions of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” Awards under the Company’s plans vest over periods ranging from one to five years, and compensation expense is recognized on a straight-line basis. Because the Company adopted the fair value method on a prospective basis, the cost related to share-based compensation recognized during the three and nine month period ended September 30, 2004 and 2003 is less than that which would have been recognized if the fair value method had been applied to all awards granted since the original effective date of SFAS 123. The following table illustrates the effect on net income and net income per share if the fair value method had been applied to all outstanding and unvested awards in each period. |
| Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| Net income, as reported |
$ | 3,921 | $ | 3,101 | $ | 22,421 | $ | 16,298 | ||||||||
| Add: Share-based employee compensation expense included in reported net income, net of related tax effects |
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