Stoneridge(SRI) - 2021 Q3 - Quarterly Report

Form 10-Q General Information Registrant Information This section provides basic filing information for Stoneridge Inc.'s Form 10-Q, detailing registrant specifics and filer status - Registrant: Stoneridge Inc.[2] - Quarter Ended: September 30, 2021[2] - Commission file number: 001-13337[2] - Filer Status: Accelerated filer[4][5] - Common Shares outstanding as of October 22, 2021: 27,178,466[5] Forward-Looking Statements This section identifies forward-looking statements by specific terminology and lists key risk factors that could materially alter actual results from projections - Forward-looking statements are identified by words such as "will," "may," "should," "believes," "plans," and "expects"[9] - Key risk factors include the impact of COVID-19, loss of major customers/suppliers, business realignment costs, changes in vehicle production, competitive conditions, foreign currency fluctuations, ability to achieve cost reductions, customer acceptance of new products, adverse changes in laws/regulations, intellectual property protection, warranty/recall liabilities, labor disruptions, natural disasters, supply chain issues (e.g., semiconductors), indebtedness covenants, capital availability, failure to integrate acquisitions, and IT system risks[10] PART I – FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and related interim disclosures Item 1. Financial Statements This item presents Stoneridge, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, cash flows, and shareholders' equity, with accompanying notes Condensed Consolidated Balance Sheets The condensed consolidated balance sheets present the company's financial position as of September 30, 2021, and December 31, 2020, detailing assets, liabilities, and shareholders' equity Condensed Consolidated Balance Sheets | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | Change (YoY) | | :-------------------------- | :-------------------------- | :-------------------------- | :----------- | | Total Assets | $626,678 | $621,408 | $5,270 (0.85%) | | Total Liabilities | $329,027 | $324,774 | $4,253 (1.31%) | | Total Shareholders' Equity | $297,651 | $296,634 | $1,017 (0.34%) | | Cash and cash equivalents | $50,001 | $73,919 | $(23,918) (-32.36%) | | Inventories, net | $124,741 | $90,548 | $34,193 (37.76%) | Condensed Consolidated Statements of Operations The condensed consolidated statements of operations present the company's financial performance for the three and nine months ended September 30, 2021 and 2020, highlighting net sales, costs, and net income (loss) Three Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :-------------------------- | :------------------ | :------------------ | :----------- | | Net Sales | $181,680 | $175,764 | $5,916 (3.4%) | | Operating (loss) income | $(8,928) | $9,827 | $(18,755) (-190.9%) | | Net (loss) income | $(10,358) | $6,714 | $(17,072) (-254.3%) | | Diluted (Loss) Earnings Per Share | $(0.38) | $0.25 | $(0.63) (-252%) | Nine Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :-------------------------- | :------------------ | :------------------ | :----------- | | Net Sales | $566,809 | $458,275 | $108,534 (23.7%) | | Operating income (loss) | $19,815 | $(13,337) | $33,152 (248.6%) | | Net income (loss) | $9,570 | $(11,530) | $21,100 (183.0%) | | Diluted (Loss) Earnings Per Share | $0.35 | $(0.43) | $0.78 | Condensed Consolidated Statements of Comprehensive (Loss) Income This statement details comprehensive income (loss) components beyond net income, focusing on foreign currency translation adjustments and unrealized gains/losses on derivatives for the three and nine months ended September 30, 2021 and 2020 Three Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Net (loss) income | $(10,358) | $6,714 | | Other comprehensive (loss) income, net of tax | $(7,233) | $6,997 | | Comprehensive (loss) income | $(17,591) | $13,711 | Nine Months Ended September 30 | Metric | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Net (loss) income | $9,570 | $(11,530) | | Other comprehensive (loss) income, net of tax | $(10,582) | $(10,746) | | Comprehensive (loss) income | $(1,012) | $(22,276) | Condensed Consolidated Statements of Cash Flows This statement provides an overview of cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2021 and 2020, showing the net change in cash and cash equivalents Nine Months Ended September 30 (in thousands) | Activity | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | | Net cash provided by (used for) operating activities | $(19,689) | $8,955 | | Net cash provided by (used for) investing activities | $12,948 | $(25,038) | | Net cash (used for) provided by financing activities | $(14,652) | $14,834 | | Effect of exchange rate changes on cash and cash equivalents | $(2,525) | $134 | | Net change in cash and cash equivalents | $(23,918) | $(1,115) | Condensed Consolidated Statements of Shareholders' Equity This statement details changes in shareholders' equity components, including common shares, additional paid-in capital, treasury shares, retained earnings, and accumulated other comprehensive loss, for the three and nine months ended September 30, 2021 and 2020 - Total shareholders' equity at January 1, 2021: $296,634 thousand[20] - Net income for the nine months ended September 30, 2021: $9,570 thousand[13] - Other comprehensive loss, net of tax for the nine months ended September 30, 2021: $(10,582) thousand[15] - Total shareholders' equity at September 30, 2021: $297,651 thousand[12] Notes to Condensed Consolidated Financial Statements These notes provide additional information and explanations to the condensed consolidated financial statements, detailing accounting policies, significant estimates, and specific financial statement line items Note 1. Basis of Presentation This note explains that the condensed consolidated financial statements are unaudited, prepared under SEC rules, and clarify the accounting for the Company's 49% equity investment in Minda Stoneridge Instruments Ltd - Statements are unaudited and prepared under SEC rules, including normal recurring adjustments[22] - Results for interim periods are not necessarily indicative of full-year results[22] - Investment in Minda Stoneridge Instruments Ltd. (MSIL) is accounted for using the equity method due to 49% ownership[23] Note 2. Recently Issued Accounting Standards This note outlines recently adopted and not yet adopted accounting standards, detailing their impact or potential impact on the Company's financial statements - ASU 2019-12 (Income Taxes) adopted Jan 1, 2020, resulted in a $13,750 thousand reduction to deferred tax liabilities and an increase to retained earnings as of December 31, 2020, with no impact on operations or cash flows[24] - ASU 2018-15 (Internal-Use Software), ASU 2018-13 (Fair Value Measurement), and ASU 2016-13 (Credit Losses) were adopted as of January 1, 2020, with no material impact on the financial statements[25][26][27] - ASU 2020-04 (Reference Rate Reform) provides temporary optional expedients for contract modifications and hedge accounting related to the LIBOR transition; the Company is evaluating its impact, with no contracts modified yet[28] Note 3. Revenue This note describes the Company's revenue recognition policies, disaggregates revenue by segment and geographical location, and explains performance obligations for OEM, aftermarket, and monitoring services - Revenue is recognized when control of products/services is transferred, typically upon shipment or delivery[29] Revenue by Reportable Segment (Three months ended September 30) | Segment | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :---------------- | :------------------ | :------------------ | :----------- | | Control Devices | $87,618 | $99,942 | $(12,324) (-12.3%) | | Electronics | $77,585 | $62,995 | $14,590 (23.2%) | | Stoneridge Brazil | $16,477 | $12,827 | $3,650 (28.5%) | | Total Net Sales | $181,680 | $175,764 | $5,916 (3.4%) | Revenue by Reportable Segment (Nine months ended September 30) | Segment | 2021 (in thousands) | 2020 (in thousands) | Change (YoY) | | :---------------- | :------------------ | :------------------ | :----------- | | Control Devices | $273,581 | $243,797 | $29,784 (12.2%) | | Electronics | $250,440 | $180,071 | $70,369 (39.1%) | | Stoneridge Brazil | $42,788 | $34,407 | $8,381 (24.4%) | | Total Net Sales | $566,809 | $458,275 | $108,534 (23.7%) | - OEM and Tier 1 supplier revenue is recognized at the point of transfer of control, typically upon shipment/delivery, for customized parts[35] - Aftermarket product revenue is recognized at the point of transfer of control based on shipping terms, with variable consideration for discounts and rebates[36] - Monitoring services revenue in Stoneridge Brazil is recognized over the life of the contract using the "right to invoice" practical expedient[37] Note 4. Inventories This note details inventory valuation methods (lower of cost or net realizable value, using FIFO or average cost) and provides a breakdown of inventory components - Inventories are valued at the lower of cost or net realizable value (FIFO or average cost)[39] Inventory Breakdown (in thousands) | Component | September 30, 2021 | December 31, 2020 | | :---------------- | :------------------- | :------------------ | | Raw materials | $97,332 | $67,775 | | Work-in-progress | $8,579 | $7,005 | | Finished goods | $18,830 | $15,768 | | Total inventories, net | $124,741 | $90,548 | - Total inventories, net, increased by $34,193 thousand (37.76%) from December 31, 2020, to September 30, 2021[39] Note 5. Financial Instruments and Fair Value Measurements This note describes the Company's financial instruments, including derivatives for hedging foreign currency and interest rate risks, provides fair value measurements, and discusses earn-out consideration and asset impairment - The Company uses derivative financial instruments (foreign currency forward contracts, cross-currency swaps, interest rate swaps) for hedging purposes, not speculation[42][43] Derivative Instruments Notional Amounts (in thousands) | Instrument | September 30, 2021 | December 31, 2020 | | :-------------------------- | :------------------- | :------------------ | | Forward currency contracts | $12,653 | $1,242 | | Interest rate swap | $50,000 | $50,000 | | Cross-currency swaps | $50,000 | $0 | - Cross-currency swaps with notional values of $50,000 thousand were entered into in Q3 2021, designated as net investment hedges for a euro-denominated subsidiary[44] - An interest rate swap with a notional amount of $50,000 thousand hedges exposure to interest payment fluctuations on the Credit Facility, increasing interest expense by $486 thousand for the nine months ended September 30, 2021[51] Fair Value Measurements (in thousands) | Item | September 30, 2021 (Fair Value) | December 31, 2020 (Fair Value) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Financial assets: | | | | Cross-currency swaps | $607 | $0 | | Financial liabilities: | | | | Forward currency contracts | $48 | $0 | | Interest rate swap | $859 | $1,318 | | Earn-out consideration | $6,914 | $5,813 | - The fair value of Stoneridge Brazil earn-out consideration increased to $6,914 thousand at September 30, 2021, due to updated financial performance projections[61][62] - An impairment loss of $2,326 thousand was recorded in 2020 for PM sensor fixed assets at the Tallinn, Estonia facility due to the strategic exit of the product line[66] Note 6. Share-Based Compensation This note reports share-based compensation expense, which increased in 2021 compared to 2020 due to reduced attainment of performance-based awards in the prior year Share-Based Compensation Expense (in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Three months ended Sep 30 | $1,924 | $1,430 | | Nine months ended Sep 30 | $4,685 | $3,535 | - The increase in 2021 is attributed to the recognition of reduced attainment of performance-based awards during 2020[67] Note 7. Debt This note details the Company's debt, including its revolving credit facility and international short-term obligations, along with compliance with covenants Total Debt (in thousands) | Type | September 30, 2021 | December 31, 2020 | | :-------------------------- | :------------------- | :------------------ | | Revolving Credit Facility | $130,000 | $136,000 | | Stoneridge Brazil short-term obligations | $99 | $1,561 | | Sweden short-term credit line | $0 | $1,591 | | Suzhou short-term credit line | $1,551 | $4,521 | | Total Debt | $131,650 | $143,673 | - The Revolving Credit Facility has a $400,000 thousand maximum, matures in June 2024, and had $130,000 thousand outstanding at September 30, 2021[69][74] - An amendment in June 2020 provided covenant relief during the 'Covenant Relief Period' (ended August 14, 2021) and adjusted LIBOR pricing[72][73] - The Company was in compliance with all credit facility covenants at September 30, 2021[74] - Stoneridge Brazil's short-term debt had a weighted-average interest rate of 8.8% at September 30, 2021[75] - Suzhou subsidiary's credit lines had $1,551 thousand outstanding at September 30, 2021, with a weighted-average interest rate of 4.30%[77] Note 8. Leases This note discusses the Company's lease activities, specifically related to its former Canton, Massachusetts facility, which was leased and subsequently sold - The Company leased its former Canton, Massachusetts facility to a third party from July 1, 2020, until its sale on June 17, 2021[78] - Lease income recognized for the nine months ended September 30, 2021, was $602 thousand (operating) and $199 thousand (variable)[78] Note 9. Earnings Per Share This note outlines the calculation of basic and diluted earnings per share, including weighted-average common shares outstanding and treatment of potentially dilutive securities Weighted-average Common Shares outstanding (in thousands) | Type | Three months ended Sep 30, 2021 | Three months ended Sep 30, 2020 | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | 27,147 | 26,956 | 27,100 | 27,047 | | Diluted | 27,147 | 27,223 | 27,432 | 27,047 | - Potential dilutive shares were excluded from diluted loss per share calculations when their effect would be anti-dilutive (e.g., 239,254 shares for Q3 2021, 265,335 shares for 9M 2020)[79] Note 10. Equity and Accumulated Other Comprehensive Loss This note details changes in shareholders' equity, including common share repurchase programs and components of accumulated other comprehensive loss - The Company had a $50,000 thousand share repurchase program authorized in October 2018, which was settled in February 2020[81][82] - A new $50,000 thousand repurchase program was authorized in February 2020, under which $4,995 thousand was used to repurchase 242,634 shares in Q1 2020; this program was temporarily suspended in April 2020 and expired in Q3 2021[83][84] Accumulated Other Comprehensive Loss (in thousands) | Component | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :------------- | :------------- | | Foreign currency translation | $(99,501) | $(88,795) | | Unrealized gain (loss) on derivatives | $(716) | $(840) | | Total | $(100,217) | $(89,635) | - Accumulated other comprehensive loss increased by $10,582 thousand for the nine months ended September 30, 2021, primarily due to foreign currency translation losses[86] Note 11. Commitments and Contingencies This note describes various legal actions, claims, environmental remediation liabilities, product warranty/recall accruals, and Brazilian tax contingencies - The Company is subject to various legal actions and claims primarily arising in the ordinary course of business, including breach of contracts, product warranties, product liability, patent infringement, regulatory matters, and employment-related matters[87] - Accruals are established for matters where losses are probable and can be reasonably estimated[87] - The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated results of operations or financial position[87] - Accrued $434 thousand at September 30, 2021, for expected future groundwater remediation costs at a former Sarasota, Florida facility; expense recognized was $407 thousand (9M 2021) vs $108 thousand (9M 2020)[88] - Stoneridge Brazil has civil, labor, and tax contingencies totaling R$45,127 thousand ($8,296 thousand) at September 30, 2021, deemed reasonably possible but not probable, with no provision recorded[89] - A R$7,995 thousand ($1,598 thousand) fine from CADE against Stoneridge Brazil for abuse of dominance is being challenged in Brazilian federal court[90] Product Warranty and Recall Liability (in thousands) | Item | Nine months ended Sep 30, 2021 | Nine months ended Sep 30, 2020 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Beginning balance | $12,691 | $10,796 | | Accruals established | $5,125 | $4,817 | | Changes in pre-existing liabilities | $49 | $1,137 | | Settlements made | $(7,990) | $(4,630) | | Foreign currency translation | $(317) | $42 | | Ending balance | $9,558 | $12,162 | - A favorable judicial decision in 2019 granted Stoneridge Brazil the right to recover $6,473 thousand in federal tax liabilities, with no expected impact from a May 2021 Supreme Court decision[93][94] Note 12. Business Realignment and Restructuring This note details costs and actions for restructuring initiatives, including the PM sensor product line exit, Canton facility closure, Electronics segment restructuring, and ongoing business realignment charges - The Company committed to the strategic exit of its Control Devices particulate matter (PM) sensor product line on May 19, 2020[95] - PM sensor restructuring expense: $675 thousand (Q3 2021) vs $342 thousand (Q3 2020); $2,329 thousand (9M 2021) vs $2,894 thousand (9M 2020)[96] - Remaining estimated costs for PM sensor commercial settlements and legal fees are approximately $1,400 to $4,200 thousand[96] - The Canton, Massachusetts facility restructuring resulted in its closure on March 31, 2020, with no additional costs expected[98][99] - Electronics segment restructuring actions include moving European Aftermarket sales and transferring European controls production to China, with immaterial additional costs expected through Q4 2021[101] Total Business Realignment Charges (in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Three months ended Sep 30 | $1,080 | $401 | | Nine months ended Sep 30 | $1,386 | $3,588 | Note 13. Income Taxes This note explains the Company's interim tax reporting methodology, detailing income tax expense (benefit) and effective tax rates for the three and nine months ended September 30, 2021 and 2020, attributing changes to earnings mix, valuation allowances, and the Canton facility sale gain Income Tax Expense (Benefit) (in thousands) | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Three months ended Sep 30 | $526 | $1,814 | | Nine months ended Sep 30 | $6,739 | $(3,694) | Effective Tax Rate | Period | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Three months ended Sep 30 | (5.4)% | 21.3% | | Nine months ended Sep 30 | 41.3% | 24.3% | - The effective tax rate for Q3 2021 was negative due to the estimated tax impact on the gain from the sale of the Canton facility and tax losses for which no benefit is recognized[108] - The effective tax rate for 9M 2021 was higher than the statutory rate primarily due to tax losses with no recognized benefit and U.S. taxes on foreign earnings, partially offset by tax incentives[109] Note 14. Segment Reporting This note provides financial information disaggregated by the Company's three reportable segments (Control Devices, Electronics, and Stoneridge Brazil) and geographic locations, including net sales, operating income, and total assets - The Company's three reportable segments are Control Devices, Electronics, and Stoneridge Brazil[113] Net Sales by Segment (in thousands) | Segment | 9M 2021 | 9M 2020 | Change (YoY) | | :---------------- | :-------- | :-------- | :----------- | | Control Devices | $273,581 | $243,797 | $29,784 (12.2%) | | Electronics | $250,440 | $180,071 | $70,369 (39.1%) | | Stoneridge Brazil | $42,788 | $34,407 | $8,381 (24.4%) | | Total Net Sales | $566,809 | $458,275 | $108,534 (23.7%) | Operating (Loss) Income by Segment (in thousands) | Segment | 9M 2021 | 9M 2020 | Change (YoY) | | :---------------- | :-------- | :-------- | :----------- | | Control Devices | $50,129 | $10,116 | $40,013 (395.5%) | | Electronics | $(7,793) | $(7,523) | $(270) (-3.6%) | | Stoneridge Brazil | $112 | $3,419 | $(3,307) (-96.7%) | | Unallocated Corporate | $(22,633) | $(19,349) | $(3,284) (-17.0%) | | Total Operating (Loss) Income | $19,815 | $(13,337) | $33,152 (248.6%) | Total Assets by Segment (in thousands) | Segment | Sep 30, 2021 | Dec 31, 2020 | | :---------------- | :------------- | :------------- | | Control Devices | $189,426 | $194,433 | | Electronics | $313,569 | $303,914 | | Stoneridge Brazil | $62,262 | $61,350 | | Corporate (unallocated) | $395,178 | $390,851 | | Eliminations | $(333,757) | $(329,140) | | Total Assets | $626,678 | $621,408 | Net Sales by Geographic Area (in thousands) | Region | 9M 2021 | 9M 2020 | Change (YoY) | | :---------------- | :-------- | :-------- | :----------- | | North America | $288,629 | $240,549 | $48,080 (20.0%) | | South America | $42,788 | $34,407 | $8,381 (24.4%) | | Europe and Other | $235,392 | $183,319 | $52,073 (28.4%) | | Total Net Sales | $566,809 | $458,275 | $108,534 (23.7%) | Note 15. Investments This note details the Company's equity investments, including Minda Stoneridge Instruments Ltd. and Autotech Fund II, and the earn-out consideration related to the Stoneridge Brazil acquisition - The Company holds a 49% equity interest in Minda Stoneridge Instruments Ltd. (MSIL), accounted for under the equity method, with an investment value of $14,859 thousand at September 30, 2021[120] - Equity in earnings from MSIL was $1,320 thousand for the nine months ended September 30, 2021, compared to $556 thousand in the prior year[120] - The Company is required to pay additional earn-out consideration for Stoneridge Brazil based on its 2021 financial performance, which is not capped[121] - The Company has a $10,000 thousand investment in Autotech Fund II, a venture capital fund, with a cumulative investment of $6,159 thousand at September 30, 2021[123] - Equity in earnings from Autotech Fund II was $374 thousand for the nine months ended September 30, 2021, compared to $168 thousand in the prior year[123] Note 16. Disposals This note details the disposal of the PM sensor business and the sale of the Canton Facility, including financial impacts and ongoing commitments - The Company sold its PM sensor business assets to Standard Motor Products, Inc. (SMP) for $4,000 thousand (subject to adjustment), recognizing a gain on disposal of $740 thousand for Gen 1 fixed assets in Q1 2021[124][125] - PM sensor Gen 1 net sales to SMP were $3,228 thousand in Q3 2021 and $6,298 thousand for 9M 2021 under a contract manufacturing agreement[126] - Gen 2 fixed assets of $287 thousand are held for sale as of September 30, 2021, following the completion of supply commitments[128] - The Canton Facility was sold for an adjusted purchase price of $37,900 thousand on June 17, 2021, resulting in net proceeds of $35,167 thousand and a net gain of $30,718 thousand[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, discussing key trends, performance drivers, and future outlook COVID-19 Impact and Supply Chain Uncertainties The COVID-19 pandemic continued to impact the global economy and the Company's operations in 2021, leading to significant supply chain disruptions, particularly a worldwide semiconductor shortage, resulting in increased costs and production volume reductions - COVID-19 caused adverse economic conditions, supply chain disruptions, and restricted manufacturing in 2020 and 2021[134] - A worldwide semiconductor supply shortage and other constraints led to longer lead-times, higher costs, and production volume reductions in Q3 2021[135] - The Company is working with suppliers and customers to minimize impacts, but the magnitude of adverse effects depends on the evolution of these disruptions[135] Segments Overview The Company operates through three reportable segments: Control Devices, Electronics, and Stoneridge Brazil, each focusing on distinct product categories and solutions - Control Devices segment manufactures actuators, sensors, switches, and connectors[136] - Electronics segment produces driver information systems, camera-based vision systems, connectivity and compliance products, and electronic control units[136] - Stoneridge Brazil (SRB) segment designs and manufactures vehicle tracking devices, monitoring services, security alarms, convenience accessories, in-vehicle audio/infotainment, and telematics solutions[137] Third Quarter Overview (Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020) The Company reported a net loss of $10.4 million in Q3 2021, a significant decrease from net income in Q3 2020, primarily due to lower gross margin, higher SG&A, and increased D&D costs, despite modest net sales growth Net Sales Analysis Net sales increased by 3.4% in Q3 2021, driven by strong Electronics and Stoneridge Brazil performance due to COVID-19 recovery, partially offset by Control Devices declines from supply chain issues and the PM sensor business exit Total Net Sales (in thousands) | Period | 2021 | 2020 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Three months ended Sep 30 | $181,680 | $175,764 | $5,916 (3.4%) | - Control Devices net sales decreased by $12.3 million (-12.3%) due to supply chain disruptions in North American automotive and commercial vehicle markets, and the PM sensor business exit in Europe[140][165] - Electronics net sales increased by $14.6 million (23.2%) due to increased volumes in European, North American, and China commercial vehicle markets, and off-highway vehicle markets, benefiting from COVID-19 recovery and favorable foreign currency translation[141][166] - Stoneridge Brazil net sales increased by $3.7 million (28.5%) due to higher volumes in OEM and OES product lines[142][167] - North American net sales decreased by $2.2 million (-2.2%) due to automotive market declines from supply chain disruptions, partially offset by commercial vehicle and off-highway increases[168] - South American net sales increased by $3.7 million (28.5%) due to higher OEM and OES product line volumes[168] - Europe and Other net sales increased by $4.4 million (6.8%) due to increases in European off-highway and commercial vehicle markets, and China automotive, with favorable foreign currency translation, offset by the PM sensor business exit[168] Cost of Goods Sold and Gross Margin Analysis Gross margin significantly decreased to 19.8% in Q3 2021 from 26.2% in Q3 2020, primarily due to increased material costs and overhead as a percentage of sales, driven by supply chain disruptions and material price increases - Gross margin decreased from 26.2% (Q3 2020) to 19.8% (Q3 2021)[169] - Material cost as a percentage of net sales increased from 52.6% (Q3 2020) to 56.8% (Q3 2021) due to supply chain disruptions and material price increases[169] - Overhead as a percentage of net sales increased to 18.1% (Q3 2021) from 16.2% (Q3 2020) due to higher material and supply chain disruption costs[169] - Control Devices gross margin decreased primarily due to lower sales volume, supply chain costs, and unfavorable fixed cost leverage[170] - Electronics gross margin decreased primarily due to increased supply chain disruption costs and material prices[170] - Stoneridge Brazil gross margin as a percentage of sales decreased due to adverse sales mix and increased costs associated with supply chain disruptions[172] Selling, General and Administrative Expenses Analysis SG&A expenses increased by $4.1 million in Q3 2021, mainly due to an unfavorable adjustment to Stoneridge Brazil earn-out consideration, higher business realignment costs, and increased professional services, partially offset by lower incentive compensation - SG&A expenses increased by $4.1 million (Q3 2021 vs Q3 2020)[143][173] - Key drivers include a $3.1 million increase in net adjustments to the fair value of SRB earn-out consideration, $0.8 million higher business realignment costs, and higher professional services and selling costs, offset by lower incentive compensation expense of $2.6 million[143][173] Design and Development Costs Analysis D&D costs increased by $4.7 million in Q3 2021, primarily driven by higher consulting and prototype costs in the Electronics segment and reduced customer reimbursements for ongoing development activities - D&D costs increased by $4.7 million (Q3 2021 vs Q3 2020)[144][174] - Increase due to higher consulting and prototype costs in the Electronics segment and lower customer reimbursements for ongoing development activities[144][174] Operating (Loss) Income Analysis The Company's operating income shifted to a loss of $8.9 million in Q3 2021 from an income of $9.8 million in Q3 2020, primarily due to lower gross margin, higher D&D, and increased SG&A, with significant declines in Control Devices and Stoneridge Brazil Total Operating (Loss) Income (in thousands) | Period | 2021 | 2020 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Three months ended Sep 30 | $(8,928) | $9,827 | $(18,755) (-190.9%) | - Control Devices operating income decreased by $9.6 million (-76.7%) due to lower gross margin from supply chain disruptions, higher material prices, and adverse fixed cost leverage[140][175] - Electronics operating loss increased by $5.8 million (-890.3%) due to lower gross margin from higher material prices and supply chain costs, and increased D&D spending[141][176] - Stoneridge Brazil operating income decreased by $2.5 million (-73.6%) primarily due to a $3.1 million increase in net adjustments to the fair value of the earn-out consideration[142][176] - Unallocated corporate operating loss increased by $0.9 million (-13.6%) due to higher business realignment costs and professional services, offset by lower incentive compensation[177] - North American operating loss increased by $10.1 million (-304.1%) due to decreased automotive sales and increased supply chain disruption costs[178] - Europe and Other operating results decreased by $6.1 million (-199.6%) due to lower gross margin and higher D&D spending[178] Other Income/Expense Analysis (Interest, Equity in Earnings, Other, Taxes) Interest expense decreased in Q3 2021 due to lower borrowings and rates, equity in earnings increased, other expense, net, increased due to foreign currency transaction losses, and income tax expense decreased due to the Canton facility sale gain and tax losses - Interest expense, net, decreased by $0.4 million (Q3 2021 vs Q3 2020) due to a reduction in average outstanding borrowings and lower interest rates[139][179] - Equity in earnings for MSIL was $0.4 million (Q3 2021) vs $0.3 million (Q3 2020)[179] - Other expense, net, increased by $0.3 million (Q3 2021 vs Q3 2020) due to 2020 foreign currency transaction gains in Control Devices and Stoneridge Brazil segments[180] - Provision for income taxes was $0.5 million expense (Q3 2021) vs $1.8 million expense (Q3 2020), with an effective tax rate of (5.4)% in Q3 2021 due to the estimated tax impact of the Canton facility sale gain and tax losses with no recognized benefit[181][182] Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 For the first nine months of 2021, the Company achieved net income of $9.6 million, a significant improvement from a net loss in the prior year, driven by increased net sales and operating income, largely due to the Canton facility sale gain and COVID-19 recovery, despite ongoing supply chain challenges and higher D&D costs Net Sales Analysis Total net sales increased by 23.7% for the nine months ended September 30, 2021, with all segments showing growth, primarily driven by COVID-19 recovery and favorable foreign currency translation, despite the PM sensor business exit Total Net Sales (in thousands) | Period | 2021 | 2020 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Nine months ended Sep 30 | $566,809 | $458,275 | $108,534 (23.7%) | - Control Devices net sales increased by $29.8 million (12.2%) due to recovery in North American automotive, agricultural, and commercial vehicle markets, and China markets, along with favorable foreign currency translation, partially offset by the PM sensor business exit in Europe[185] - Electronics net sales increased by $70.4 million (39.1%) due to recovery in European and North American commercial and off-highway vehicle markets, and favorable foreign currency translation[186] - Stoneridge Brazil net sales increased by $8.4 million (24.4%) due to higher volumes across all product lines and the Argentina market, offset by unfavorable foreign currency translation[187] - North American net sales increased by $48.1 million (20.0%) due to sales volume increases in automotive, commercial vehicle, and Electronics off-highway markets[189] - South American net sales increased by $8.4 million (24.4%) due to higher volumes, offset by unfavorable Brazilian real foreign currency translation[189] - Europe and Other net sales increased by $52.1 million (28.4%) due to increases in European commercial and off-highway markets, and China markets, with favorable foreign currency translation, partially offset by the PM sensor business exit[189] Cost of Goods Sold and Gross Margin Analysis Gross margin slightly decreased to 22.0% for the nine months ended September 30, 2021, from 22.8% in the prior year, primarily due to increased material costs as a percentage of sales from supply chain disruptions and price increases, despite favorable fixed cost leverage - Gross margin decreased from 22.8% (9M 2020) to 22.0% (9M 2021)[189] - Material cost as a percentage of net sales increased from 52.9% (9M 2020) to 55.8% (9M 2021) due to supply chain disruptions and material price increases[189] - Overhead as a percentage of net sales decreased to 16.6% (9M 2021) from 18.9% (9M 2020) due to fixed cost leverage from higher sales, offset by higher incremental freight costs[189] - Control Devices gross margin increased due to lower restructuring costs and favorable fixed cost leverage, offset by supply chain disruptions[190] - Electronics gross margin decreased primarily due to higher supply chain disruption costs, offsetting favorable fixed cost leverage[190] - Stoneridge Brazil gross margin decreased due to adverse sales mix (higher product sales vs. monitoring fees) and supply chain disruption costs, offset by favorable fixed cost leverage[191] Selling, General and Administrative Expenses Analysis SG&A expenses increased by $7.6 million for the nine months ended September 30, 2021, driven by increased earn-out consideration adjustments for Stoneridge Brazil, impairment of Brazilian indirect tax credits, and higher professional service costs, partially offset by a gain on disposal of the PM sensor business - SG&A expenses increased by $7.6 million (9M 2021 vs 9M 2020)[192] - Key drivers include a $4.5 million increase in net adjustments to the fair value of SRB earn-out consideration, $0.6 million impairment of Brazilian indirect tax credits, and higher professional service costs, partially offset by a $0.7 million gain on disposal of the PM sensor business[192] Design and Development Costs Analysis D&D costs increased by $10.2 million for the nine months ended September 30, 2021, primarily due to increased consulting and prototype costs in the Electronics segment and lower customer reimbursements, partially offset by higher capitalized software development costs - D&D costs increased by $10.2 million (9M 2021 vs 9M 2020)[193] - Primarily due to a $9.0 million increased spend in the Electronics segment for consulting and prototype costs, and lower customer reimbursements, offset by higher capitalized software development costs[193][194] Operating Income (Loss) Analysis Operating income significantly improved to $19.8 million for the nine months ended September 30, 2021, from a loss of $13.3 million in the prior year, largely due to the Canton Facility and PM sensor business sale gains, and higher Control Devices gross margin, despite increased losses in Electronics and Stoneridge Brazil Total Operating Income (Loss) (in thousands) | Period | 2021 | 2020 | Change (YoY) | | :-------------------------- | :----- | :----- | :----------- | | Nine months ended Sep 30 | $19,815 | $(13,337) | $33,152 (248.6%) | - Control Devices operating income increased by $40.0 million (395.5%) due to higher gross margin, $30.7 million gain on Canton Facility sale, $0.7 million gain on PM sensor business disposal, and lower restructuring expense, offset by supply chain disruptions and higher environmental costs[195] - Electronics operating loss increased by $0.3 million (-3.6%) due to higher supply chain disruption costs and D&D costs, partially offset by higher sales and gross margin[196] - Stoneridge Brazil operating income decreased by $3.3 million (-96.7%) due to a $4.5 million increase in earn-out consideration adjustments and $0.7 million impairment of Brazilian indirect tax credits, partially offset by higher sales and gross margin[196] - Unallocated corporate operating loss increased by $3.3 million (-17.0%) due to higher business realignment costs and professional service costs[197] - North American operating income increased by $33.6 million (197.0%) due to Canton Facility sale gain, higher sales in automotive/commercial markets, and lower restructuring costs, offsetting supply chain disruptions[198] - South American operating loss increased by $3.3 million (-96.7%) due to unfavorable earn-out consideration adjustments, offsetting higher sales and gross margin[198] - Europe and Other operating results increased by $2.9 million (1,060.9%) due to higher sales in commercial vehicle/off-highway markets and favorable foreign currency translation, offset by supply chain disruptions and D&D costs[198] Other Income/Expense Analysis (Interest, Equity in Earnings, Other, Taxes) Interest expense increased for the nine months ended September 30, 2021, due to higher interest rates and interest rate swap impact, despite lower borrowings; equity in earnings increased, other expense, net, shifted from income to expense due to prior year foreign currency transaction gains, and income tax expense increased significantly due to the Canton facility sale gain and earnings mix - Interest expense, net, increased by $0.8 million (9M 2021 vs 9M 2020) due to higher interest rates on the Credit Facility and the adverse impact of the interest rate swap, offsetting reduced average outstanding borrowings[199] - Equity in earnings for MSIL was $1.3 million (9M 2021) vs $0.6 million (9M 2020)[199] - Other expense (income), net, shifted from $1.9 million income (9M 2020) to $0.1 million expense (9M 2021) due to 2020 foreign currency transaction gains in Stoneridge Brazil and Electronics segments[200] - Provision (benefit) for income taxes was $6.7 million expense (9M 2021) vs $(3.7) million benefit (9M 2020), with an effective tax rate of 41.3% in 9M 2021 due to the Canton facility sale gain, earnings mix, and tax losses with no recognized benefit[201][202] Outlook The Company anticipates continued positive impact from products addressing industry megatrends but expects ongoing challenges from supply chain disruptions, particularly semiconductor shortages, impacting sales volumes and gross margins through 2021; D&D spending is projected to increase, and the effective tax rate is expected to remain higher than normal in 2021 before returning to previous rates in 2022 - The Company believes focusing on products addressing industry megatrends will positively impact top-line growth and underlying margins[146] - Continued adverse impact from supply chain disruptions (semiconductor shortage) on sales volumes and gross margins is expected for the remainder of 2021[147][151] - Electronics segment sales are expected to increase in 2021 due to production volume forecasts, strong off-highway demand, and new program launches, including MirrorEye camera-based vision systems[148] - D&D spend is expected to moderately increase from current levels to support new program launches and advanced technologies[149] - The effective tax rate is expected to remain higher than normal in 2021 due to atypical jurisdictional earnings mix and incremental engineering expenses, returning to previous rates in 2022[152] Other Matters This section discusses various other significant matters including foreign currency exchange rate impacts, details of the PM sensor business disposal, Canton facility sale, Electronics segment restructuring, share repurchase programs, and ongoing customer pricing pressures - Foreign currency exchange rate movements significantly affect results, especially in Brazil, Argentina, Mexico, Sweden, Estonia, Netherlands, United Kingdom, and China[153][220] - The U.S. Dollar strengthened against several foreign currencies in 2021, unfavorably impacting material costs and reported results[153] - The PM sensor business assets were sold for $4.0 million (subject to adjustment); Gen 2 assets ($0.3 million) were held for sale as of September 30, 2021[154] - The Canton Facility was sold for $37.9 million, resulting in a $30.7 million net gain[156] - A $50.0 million share repurchase program authorized in February 2020 was temporarily suspended due to COVID-19 and expired in Q3 2021, with $5.0 million utilized in Q1 2020[160] - Business realignment costs of $1.1 million (Q3 2021) and $1.4 million (9M 2021) were incurred for severance and related costs[161] - The Company faces competitive pricing pressures and is negotiating for price increases and mitigation of future costs[162] Liquidity and Capital Resources The Company's cash and cash equivalents decreased in 2021, with cash used for operating activities increasing due to working capital needs; net cash provided by investing activities increased due to asset sales, while financing activities used cash for debt repayments; the Company maintains a $400 million revolving credit facility and was in compliance with all covenants as of September 30, 2021, but future borrowing flexibility could be impacted by financial performance Net Change in Cash and Cash Equivalents (in thousands) | Activity | 9M 2021 | 9M 2020 | | :------------------------------------------ | :-------- | :-------- | | Operating activities | $(19,689) | $8,955 | | Investing activities | $12,948 | $(25,038) | | Financing activities | $(14,652) | $14,834 | | Effect of exchange rate changes | $(2,525) | $134 | | Net change | $(23,918) | $(1,115) | - Cash used for operating activities increased due to higher working capital for inventory, despite higher net income[203] - Net cash provided by investing activities increased due to proceeds from the sale of the Canton Facility and PM sensor business, and lower capital expenditures[204] - Net cash used for financing activities increased due to net Credit Facility payments and debt repayments[204] - The Credit Facility has a $400 million maximum, with $130 million outstanding at September 30, 2021[205] - The Company was in compliance with all credit facility covenants at September 30, 2021[210] - Total undrawn commitments under the Credit Facility and cash balances exceed $318.3 million, but future borrowing flexibility may be limited by lower than expected financial performance due to supply chain disruptions[210][221] Commitments and Contingencies The Company refers to Note 11 for detailed disclosures regarding its commitments and contingencies, including legal actions, environmental remediation, Brazilian tax contingencies, and product warranty/recall claims - Refer to Note 11 for details on legal actions, environmental remediation, Brazilian tax contingencies, and product warranty/recall claims[222] Seasonality The Control Devices and Electronics segments are not typically seasonal, but the Stoneridge Brazil segment experiences higher demand for consumer products in the second half of the year, particularly the fourth quarter - Control Devices and Electronics segments are not typically seasonal[223] - Stoneridge Brazil segment's consumer product demand is higher in the second half of the year, especially Q4[223] Critical Accounting Policies and Estimates This section states no material changes to the Company's critical accounting policies and estimates as disclosed in its 2020 Form 10-K, which involve significant management judgment and potential financial statement impact - No material changes in critical accounting policies or estimates during Q3 2021[225] - Critical accounting policies involve management's best estimates and judgments due to inherent uncertainty[225] Inflation and International Presence The Company's international operations expose it to foreign currency exchange rates and economic conditions in various countries, and fluctuations in commodity prices are noted as a potential significant impact on profitability - International operations expose the Company to foreign currency exchange rates and economic conditions[227] - Increases in commodity prices could significantly affect profitability[227] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item states no material changes to the Company's quantitative and qualitative disclosures about market risk from those previously presented in its 2020 Form 10-K - No material changes to market risk disclosures from the 2020 Form 10-K[228] Item 4. Controls and Procedures As of September 30, 2021, the Company's management, including the PEO and PFO, concluded that its disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of September 30, 2021[229] - No material changes in internal control over financial reporting during Q3 2021[230] PART II – OTHER INFORMATION This part contains other information not covered in the financial statements, including legal proceedings, risk factors, equity security sales, defaults, mine safety disclosures, and exhibits Item 1. Legal Proceedings The Company is involved in various legal actions and claims incidental to its business, including product liability, warranty, and regulatory matters; accruals are made for probable and estimable losses, and the Company does not expect a material adverse effect on its financial position or results of operations - The Company is involved in various legal actions and claims primarily arising in the ordinary course of business, including breach of contracts, product warranties, product liability, patent infringement, regulatory matters, and employment-related matters[231] - Accruals are established for matters where losses are probable and can be reasonably estimated[231] - The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on its consolidated results of operations or financial position[231] - The Stoneridge Brazil segment is subject to civil, labor, regulatory, and other tax contingencies for which the likelihood of loss is deemed reasonably possible, but not probable[231] Item 1A. Risk Factors This item states no material changes to the risk factors previously disclosed in the Company's 2020 Form 10-K - No material changes to risk factors previously disclosed in the Company's 2020 Form 10-K[232] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports on repurchases of Common Shares during the three months ended September 30, 2021, specifically detailing shares delivered by employees for tax withholding purposes - During August 2021, 11,530 Common Shares were delivered by employees as payment for tax withholding purposes due upon vesting of performance share awards and share unit awards[233][234] - The average price paid per share for these repurchases was $26.81[234] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - None[235] Item 4. Mine Safety Disclosures The Company reported no mine safety disclosures - None[236] Item 5. Other Information The Company reported no other information for this item - None[237] Item 6. Exhibits This item lists the exhibits filed as part of the Form 10-Q, including separation agreements, certifications, and XBRL exhibits - Exhibits include separation agreements, Chief Executive Officer and Chief Financial Officer certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and XBRL exhibits[238] Signatures The report is duly signed on behalf of Stoneridge, Inc. by Jonathan B. DeGaynor (President, CEO, and Director) and Matthew R. Horvath (CFO and Treasurer) on October 27, 2021 - The report is signed by Jonathan B. DeGaynor (President, Chief Executive Officer and Director) and Matthew R. Horvath (Chief Financial Officer and Treasurer)[242] - Date of signing: October 27, 2021[242]