STONERIDGE INC [SRI] Filings

10-Q 1 sri-20240630.htm 10-Q sri-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended June 30, 2024

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

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.)

39675 MacKenzie Drive, Suite 400, Novi, Michigan						48377
(Address of principal executive offices)						(Zip Code)


			(248) 489-9300
			Registrant’s telephone number, including area code

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, without par value

SRI

New York Stock Exchange

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.

xYes oNo

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

xYes oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer x	Non-accelerated filer o
Smaller reporting company o	Emerging growth company o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). oYes xNo

The number of Common Shares, without par value, outstanding as of July 26, 2024 was 27,677,748.

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STONERIDGE, INC. AND SUBSIDIARIES

INDEX

Page

PART I–FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of June 30 , 2024 (Unaudited) and December 31, 2023

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30 , 2024 and 2023

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Six Months Ended June 30 , 2024 and 2023

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30 , 2024 and 2023

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three and Six Months Ended June 30 , 2024 and 2023

Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II–OTHER INFORMATION

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Forward-Looking Statements

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

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

•fluctuations in the cost and availability of key materials and components (including semiconductors, printed circuit boards, resin, aluminum, steel and copper) and our ability to offset cost increases through negotiated price increases with our customers or other cost reduction actions, as necessary;

•global economic trends, competition and geopolitical risks, including impacts from ongoing or potential global conflicts and any related sanctions and other measures, or an escalation of sanctions, tariffs or other trade tensions between the U.S. and other countries;

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

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

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

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

•competitive market conditions and resulting effects on sales and pricing;

•foreign currency fluctuations and our ability to manage those impacts;

•customer acceptance of new products;

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

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

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

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

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

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

•the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving Credit Facility;

•capital availability or costs, including changes in interest rates;

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

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

•the items described in Part I, Item IA (“Risk Factors”) in the Company’s 2023 Form 10-K.

The forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONERIDGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)	June 30, 2024		December 31, 2023
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	42,112	$	40,841
Accounts receivable, less reserves of $620 and $1,058, respectively	168,215		166,545
Inventories, net	178,749		187,758
Prepaid expenses and other current assets	32,882		34,246
Total current assets	421,958		429,390
Long-term assets:
Property, plant and equipment, net	103,061		110,126
Intangible assets, net	43,586		47,314
Goodwill	34,244		35,295
Operating lease right-of-use asset	8,722		10,795
Investments and other long-term assets, net	55,080		46,980
Total long-term assets	244,693		250,510
Total assets	$	666,651	$	679,900

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:

Current portion of debt	$	2,064	$	2,113
Accounts payable	108,085		111,925
Accrued expenses and other current liabilities	76,098		64,203
Total current liabilities	186,247		178,241
Long-term liabilities:
Revolving credit facility	187,417		189,346
Deferred income taxes	6,276		7,224
Operating lease long-term liability	5,814		7,684
Other long-term liabilities	10,446		9,688
Total long-term liabilities	209,953		213,942
Shareholders' equity:
Preferred Shares, without par value, 5,000 shares authorized, none issued	—		—
Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 27,679 and 27,549 shares outstanding at June 30, 2024 and December 31, 2023, respectively, with no stated value	—		—
Additional paid-in capital	224,599		227,340
Common Shares held in treasury, 1,287 and 1,417 shares at June 30, 2024 and December 31, 2023, respectively, at cost	(39,066)		(43,344)
Retained earnings	193,169		196,509
Accumulated other comprehensive loss	(108,251)		(92,788)
Total shareholders' equity	270,451		287,717
Total liabilities and shareholders' equity	$	666,651	$	679,900

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended June 30,				Six months ended June 30,
(in thousands, except per share data)	2024		2023		2024		2023

Net sales	$	237,059	$	266,814	$	476,216	$	508,139
Costs and expenses:
Cost of goods sold	183,319		206,326		374,119		404,849
Selling, general and administrative	31,876		33,491		62,299		63,354
Design and development	18,457		22,666		36,060		39,634
Operating income	3,407		4,331		3,738		302
Interest expense, net	3,801		3,120		7,435		5,866
Equity in loss of investee	52		329		329		500
Other (income) expense, net	(2,296)		2,387		(260)		3,535
Income (loss) before income taxes	1,850		(1,505)		(3,766)		(9,599)
(Benefit) provision for income taxes	(936)		1,487		(426)		779
Net income (loss)	$	2,786	$	(2,992)	$	(3,340)	$	(10,378)

Income (loss) per share:
Basic	$	0.10	$	(0.11)	$	(0.12)	$	(0.38)
Diluted	$	0.10	$	(0.11)	$	(0.12)	$	(0.38)

Weighted-average shares outstanding:
Basic	27,611		27,452		27,570		27,400
Diluted	27,853		27,452		27,570		27,400

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)


	Three months ended June 30,				Six months ended June 30,
(in thousands)	2024		2023		2024		2023

Net income (loss)	$	2,786	$	(2,992)	$	(3,340)	$	(10,378)

Other comprehensive (loss) income, net of tax:
Foreign currency translation	(8,454)		2,992		(13,333)		7,064
Unrealized (loss) gain on derivatives (1)	(2,200)		288		(2,130)		56
Other comprehensive (loss) income, net of tax	(10,654)		3,280		(15,463)		7,120

Comprehensive (loss) income	$	(7,868)	$	288	$	(18,803)	$	(3,258)


(1)			Net of tax (benefit) expense of $(585) and $76 for the three months ended June 30, 2024 and 2023, respectively. Net of tax (benefit) expense of $(566) and $15 for the six months ended June 30, 2024 and 2023, respectively.

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


Six months ended June 30, (in thousands)	2024		2023

OPERATING ACTIVITIES:
Net loss	$	(3,340)	$	(10,378)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation	13,054		13,161
Amortization, including accretion and write-off of deferred financing costs	4,440		4,004
Deferred income taxes	(7,004)		(3,782)
Loss of equity method investee	329		500
Loss (gain) on sale of fixed assets	258		(854)
Share-based compensation expense	2,207		1,271
Excess tax deficiency related to share-based compensation expense	238		66




Changes in operating assets and liabilities:
Accounts receivable, net	(6,094)		(28,100)
Inventories, net	3,438		(23,142)
Prepaid expenses and other assets	(1,038)		3,313
Accounts payable	(849)		27,069
Accrued expenses and other liabilities	12,123		12,184
Net cash provided by (used for) operating activities	17,762		(4,688)

INVESTING ACTIVITIES:
Capital expenditures, including intangibles	(12,920)		(18,025)
Proceeds from sale of fixed assets	222		1,729



Investment in venture capital fund, net	(260)		—
Net cash used for investing activities	(12,958)		(16,296)

FINANCING ACTIVITIES:
Revolving credit facility borrowings	57,000		42,000
Revolving credit facility payments	(58,000)		(38,068)
Proceeds from issuance of debt	17,677		16,402
Repayments of debt	(17,690)		(18,086)

Repurchase of Common Shares to satisfy employee tax withholding	(666)		(1,325)
Net cash (used for) provided by financing activities	(1,679)		923

Effect of exchange rate changes on cash and cash equivalents	(1,854)		(32)
Net change in cash and cash equivalents	1,271		(20,093)
Cash and cash equivalents at beginning of period	40,841		54,798

Cash and cash equivalents at end of period	$	42,112	$	34,705

Supplemental disclosure of cash flow information:
Cash paid for interest, net	$	8,003	$	5,622
Cash paid for income taxes, net	$	4,372	$	5,927

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

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STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


(in thousands)	Number of Common Shares outstanding	Number of treasury shares	Additional paid-in capital		Common Shares held in treasury		Retained earnings		Accumulated other comprehensive loss		Total shareholders' equity


























BALANCE DECEMBER 31, 2022	27,341	1,625	$	232,758	$	(50,366)	$	201,692	$	(103,142)	$	280,942
Net loss	—	—	—		—		(7,386)		—		(7,386)
Unrealized loss on derivatives, net	—	—	—		—		—		(232)		(232)
Currency translation adjustments	—	—	—		—		—		4,072		4,072
Issuance of Common Shares	234	(234)	—		—		—		—		—
Repurchased Common Shares for treasury, net	(62)	62	—		5,649		—		—		5,649
Share-based compensation, net	—	—	(6,802)		—		—		—		(6,802)
BALANCE MARCH 31, 2023	27,513	1,453	$	225,956	$	(44,717)	$	194,306	$	(99,302)	$	276,243

Net loss	—	—	—		—		(2,992)		—		(2,992)
Unrealized gain on derivatives, net	—	—	—		—		—		288		288
Currency translation adjustments	—	—	—		—		—		2,992		2,992
Issuance of Common Shares	15	(15)	—		—		—		—		—
Repurchased Common Shares for treasury, net	(6)	6	—		350		—		—		350
Share-based compensation, net	—	—	757		—		—		—		757
BALANCE JUNE 30, 2023	27,522	1,444	$	226,713	$	(44,367)	$	191,314	$	(96,022)	$	277,638









BALANCE DECEMBER 31, 2023	27,549	1,417	$	227,340	$	(43,344)	$	196,509	$	(92,788)	$	287,717
Net loss	—	—	—		—		(6,126)		—		(6,126)
Unrealized gain on derivatives, net	—	—	—		—		—		70		70
Currency translation adjustments	—	—	—		—		—		(4,879)		(4,879)
Issuance of Common Shares	154	(154)	—		—		—		—		—
Repurchased Common Shares for treasury, net	(36)	36	—		3,958		—		—		3,958
Share-based compensation, net	—	—	(3,484)		—		—		—		(3,484)
BALANCE MARCH 31, 2024	27,667	1,299	$	223,856	$	(39,386)	$	190,383	$	(97,597)	$	277,256

Net income	—	—	—		—		2,786		—		2,786
Unrealized loss on derivatives, net	—	—	—		—		—		(2,200)		(2,200)
Currency translation adjustments	—	—	—		—		—		(8,454)		(8,454)
Issuance of Common Shares	16	(16)	—		—		—		—		—
Repurchased Common Shares for treasury, net	(4)	4	—		320		—		—		320
Share-based compensation, net	—	—	743		—		—		—		743
BALANCE JUNE 30, 2024	27,679	1,287	$	224,599	$	(39,066)	$	193,169	$	(108,251)	$	270,451

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s 2023 Form 10-K.

Reclassifications

Certain prior period amounts have been reclassified to conform to their 2024 presentation in the condensed consolidated financial statements.

(2) Recently Issued Accounting Standards

Accounting Standards Not Yet Adopted

In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures", which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. Early adoption is permitted. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740) – Improvements to Income Tax Disclosures," which requires companies to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, companies are required to disclose additional information about income taxes paid. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be adopted on a prospective basis; however, retrospective application is permitted. We are currently evaluating the impact on our annual consolidated financial statement disclosures.

(3) Revenue

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

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Revenue by Reportable Segment

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

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

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

The following tables disaggregate our revenue by reportable segment and geographical location(1) for the three months ended June 30, 2024 and 2023:


	Control Devices				Electronics				Stoneridge Brazil				Consolidated
Three months ended June 30,	2024		2023		2024		2023		2024		2023		2024		2023
Net Sales:
North America	$	67,391	$	78,745	$	54,124	$	56,845	$	—	$	—	$	121,515	$	135,590
South America	—		—		—		—		11,649		14,908		11,649		14,908
Europe	—		—		90,613		99,169		—		—		90,613		99,169
Asia Pacific	12,508		13,375		774		3,772		—		—		13,282		17,147
Total net sales	$	79,899	$	92,120	$	145,511	$	159,786	$	11,649	$	14,908	$	237,059	$	266,814

The following tables disaggregate our revenue by reportable segment and geographical location(1) for the six months ended June 30, 2024 and 2023:


	Control Devices				Electronics				Stoneridge Brazil				Consolidated
Six months ended June 30,	2024		2023		2024		2023		2024		2023		2024		2023
Net Sales:
North America	$	133,213	$	154,426	$	106,417	$	104,887	$	—	$	—	$	239,630	$	259,313
South America	—		—		—		—		23,865		29,164		23,865		29,164
Europe	—		—		186,988		186,418		—		—		186,988		186,418
Asia Pacific	23,844		23,636		1,889		9,608		—		—		25,733		33,244
Total net sales	$	157,057	$	178,062	$	295,294	$	300,913	$	23,865	$	29,164	$	476,216	$	508,139

_______________________

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Performance Obligations

For OEM and Tier 1 supplier customers, the Company typically enters into contracts to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts. The majority of the parts sold to OEM and Tier 1 supplier customers are customized to the specific customer, with the exception of camera monitoring systems (“CMS”) sold through our aftermarket channel that are common across all customers. The transaction price is equal to the contracted price per part and there is no expectation of material variable consideration in the transaction price. For most customer contracts, the Company does not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer; therefore, the Company recognizes revenue at the point in time it satisfies a performance obligation by transferring control of a part to the customer. Certain customer contracts contain an enforceable right to payment if the customer terminates the contract for convenience and therefore are recognized over time using the cost to complete input method.

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

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

Contract Balances

The Company had no material contract assets, contract liabilities or capitalized contract acquisition costs as of June 30, 2024 and December 31, 2023.

(4) Inventories

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


	June 30, 2024		December 31, 2023
Raw materials	$	131,100	$	142,744
Work-in-progress	10,398		11,907
Finished goods	37,251		33,107
Total inventories, net	$	178,749	$	187,758

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Inventory valued using the FIFO method was $166,118 and $176,033 at June 30, 2024 and December 31, 2023, respectively. Inventory valued using the average cost method was $12,631 and $11,725 at June 30, 2024 and December 31, 2023, respectively.

(5) Financial Instruments and Fair Value Measurements

Financial Instruments

A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair value of debt approximates the carrying value of debt, due to the variable interest rate on our Credit Facility and the maturity of the remaining outstanding debt.

Derivative Instruments and Hedging Activities

On June 30, 2024, the Company had open Mexican peso-denominated foreign currency forward contracts. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2024 and 2023. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings.

Foreign Currency Exchange Rate Risk

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 on the condensed consolidated statements of operations within other (income) expense, net. These foreign currency transaction (gains) losses, including the impact of hedging activities, were $(2,270) and $2,356 for the three months ended June 30, 2024 and 2023, respectively, and $(326) and $3,458 for the six months ended June 30, 2024 and 2023, respectively.

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

Cash Flow Hedges

The Company entered into foreign currency forward contracts to hedge the Mexican peso currency in 2024 and 2023. These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated other comprehensive loss, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive loss fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. The cash flow hedges were highly effective. The effectiveness of the transactions was measured using regression analysis and forecasted future purchases of the currency.

In certain instances, the foreign currency forward contracts may not qualify for hedge accounting or are not designated as hedges and, therefore, are marked-to-market with gains and losses recognized in the Company’s condensed consolidated statements of operations as a component of other expense, net. At June 30, 2024, all of the Company’s foreign currency forward contracts were designated as cash flow hedges.

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

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

The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at June 30, 2024 of $29,023 which expire ratably on a monthly basis from July 2024 to June 2025. The notional amounts at December 31, 2023 related to Mexican peso-denominated foreign currency forward contracts were $26,613.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The Company evaluated the effectiveness of the Mexican peso denominated forward contracts held as of June 30, 2024 and concluded that the hedges were highly effective.

Interest Rate Risk

Interest Rate Risk – Cash Flow Hedge

On February 18, 2020, the Company entered into a floating-to-fixed interest rate swap agreement (the “Swap”) with a notional amount of $50,000 to hedge its exposure to interest payment fluctuations on a portion of its Credit Facility borrowings. The Swap matured on March 10, 2023. The Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's Fourth Amended and Restated Credit Agreement, as amended, (the “Fourth Amended and Restated Credit Agreement”). Accordingly, the change in fair value of the Swap was recognized in accumulated other comprehensive loss. The Swap agreement required monthly settlements on the same days that the Fourth Amended and Restated Credit Agreement interest payments were due and had a maturity date of March 10, 2023, which was prior to the Fourth Amended and Restated Credit Agreement maturity date of June 5, 2024. Under the Swap terms, the Company paid a fixed interest rate and received a floating interest rate based on the one-month LIBOR, with a floor. The critical terms of the Swap were aligned with the terms of the Fourth Amended and Restated Credit Agreement, resulting in no hedge ineffectiveness. The difference between amounts to be received and paid under the Swap were recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Swap settlements reduced interest expense, net by $290 for the six months ended June 30, 2023.

The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:


	Notional amounts (A)				Prepaid expenses and other current assets				Accrued expenses and other current liabilities
	June 30, 2024		December 31, 2023		June 30, 2024		December 31, 2023		June 30, 2024		December 31, 2023
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$	29,023	$	26,613	$	—	$	1,858	$	838	$	—

_____________________________

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

Gross amounts recorded for the cash flow hedges in other comprehensive (loss) income and in net income (loss) for the three months ended June 30 were as follows:


	(Loss) gain recorded in other comprehensive (loss) income				Gain reclassified from other comprehensive (loss) income into net income (loss) (A)
	2024		2023		2024		2023
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(2,371)	$	416	$	414	$	51

_____________________________


(A)			Gains reclassified from other comprehensive (loss) income into net income (loss) recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $134 and $13 for the three months ended June 30, 2024 and 2023, respectively. Gains reclassified from other comprehensive (loss) income into net income (loss) recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $280 and $38 for the three months ended June 30, 2024 and 2023, respectively.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Gross amounts recorded for the cash flow and net investment hedges in other comprehensive (loss) income and in net income (loss) for the six months ended June 30 were as follows:


	(Loss) gain recorded in other comprehensive (loss) income				Gain reclassified from other comprehensive (loss) income into net loss (A)
	2024		2023		2024		2023
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(1,628)	$	416	$	1,068	$	51
Interest rate swap	$	—	$	(4)	$	—	$	290


(A)			Gains reclassified from other comprehensive (loss) income into net loss recognized in SG&A in the Company’s condensed consolidated statements of operations were $251 and $13 for the six months ended June 30, 2024 and 2023, respectively. Gains reclassified from other comprehensive (loss) income into net loss recognized in COGS in the Company’s condensed consolidated statements of operations were $817 and $38 for the six months ended June 30, 2024 and 2023, respectively. Gains reclassified from other comprehensive (loss) income into net loss recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $0 and $290 for the six months ended June 30, 2024 and 2023, respectively.

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

Fair Value Measurements

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

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


			June 30, 2024						December 31, 2023
			Fair values estimated using
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs		Fair value
Financial assets carried at fair value:
Forward currency contracts	$	—	$	—	$	—	$	—	$	1,858


Total financial assets carried at fair value	$	—	$	—	$	—	$	—	$	1,858

Financial liabilities carried at fair value:
Forward currency contracts	$	838	$	—	$	838	$	—	$	—


Total financial liabilities carried at fair value	$	838	$	—	$	838	$	—	$	—

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the six months ended June 30, 2024.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(6) Share-Based Compensation

Compensation expense for share-based compensation arrangements, which is recognized in the condensed consolidated statements of operations as a component of SG&A expense, was $1,115 and $1,202 for the three months ended June 30, 2024 and 2023, respectively. Compensation expense for share-based compensation arrangements was $2,207 and $1,271 for the six months ended June 30, 2024 and 2023, respectively. The six months ended June 30, 2023 included income from the forfeiture of certain grants associated with employee resignations.

(7) Debt

Debt consisted of the following at June 30, 2024 and December 31, 2023:


	June 30, 2024		December 31, 2023		Interest rates at June 30, 2024		Maturity
Revolving Credit Facility
Revolving Credit Facility	$	187,417	$	189,346	7.48	%	November 2026

Debt

Suzhou short-term credit line	2,064		2,113		3.25	%	August 2024
Total debt	2,064		2,113
Less: current portion	(2,064)		(2,113)
Total long-term debt, net	$	—	$	—

Revolving Credit Facility

On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement. The Fourth Amended and Restated Credit Agreement provided for a $300,000 senior secured revolving credit facility. As a result of entering into the Fourth Amended and Restated Credit Agreement and related amendments, the Company capitalized $332 of deferred financing costs during the year ended December 31, 2023.

On November 2, 2023, the Company entered into the Fifth Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility provides for a $275,000 senior secured revolving credit facility and it replaced and superseded the Fourth Amended and Restated Credit Agreement. The Credit Facility has an accordion feature which allows the Company to increase the availability by up to $150,000 upon the satisfaction of certain conditions, including the consent of lenders providing the increase in commitments and also includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The Credit Facility has a termination date of November 2, 2026. Borrowings under the Credit Facility bear interest at either the Base Rate or the SOFR rate, at the Company’s option, plus the applicable margin as set forth in the Credit Facility. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio.

As a result of entering into the Fifth Amended and Restated Credit Agreement, the Company capitalized $1,915 of deferred financing costs and wrote off $309 of previously recorded deferred financing costs during the year ended December 31, 2023.

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Borrowings outstanding on the Credit Facility were $187,417 and $189,346 at June 30, 2024 and December 31, 2023, respectively.

The Company was in compliance with all Credit Facility covenants at June 30, 2024 and December 31, 2023.

The Company also has outstanding letters of credit of $1,586 at both June 30, 2024 and December 31, 2023.

Debt

The Company’s wholly owned subsidiary located in Stockholm, Sweden (the "Stockholm subsidiary"), has an overdraft credit line that allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20,000 Swedish krona, or $1,888 and $1,987, at June 30, 2024 and December 31, 2023, respectively. At June 30, 2024 and December 31, 2023, there were no borrowings outstanding on this overdraft credit line. During the six months ended June 30, 2024, the subsidiary borrowed and repaid 186,496 Swedish krona, or $17,609. The Stockholm subsidiary has pledged certain of its assets as collateral in order to obtain a guarantee of certain of the Stockholm subsidiary’s obligations to third parties.

The Company’s wholly owned subsidiary located in Suzhou, China (the “Suzhou subsidiary”), has lines of credit (the “Suzhou credit line”) that allow up to a maximum borrowing level of 20,000 Chinese yuan, or $2,752 and $2,818 at June 30, 2024 and December 31, 2023, respectively. At June 30, 2024 and December 31, 2023 there was $2,064 and $2,113, respectively, in borrowings outstanding on the Suzhou credit line with a weighted-average interest rate of 3.25%. The Suzhou credit line was included on the condensed consolidated balance sheets within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which facilitates the extension of trade payable payment terms by 180 days. The bank acceptance draft line of credit allows up to a maximum borrowing level of 60,000 Chinese yuan, or $8,256 and $8,453 at June 30, 2024 and December 31, 2023, respectively. There was $0 and $2,387 utilized on the Suzhou bank acceptance draft line of credit at June 30, 2024 and December 31, 2023, respectively. The Suzhou bank acceptance draft line of credit is included on the condensed consolidated balance sheets within accounts payable.

(8) Earnings (Loss) Per Share

Basic earnings (loss) per share was computed by dividing net income (loss) by the weighted-average number of Common Shares outstanding for each respective period. Diluted earnings (loss) 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. However, for all periods in which the Company recognized a net loss, the Company did not recognize the effect of the potential dilutive securities as their inclusion would be anti-dilutive. Potential dilutive shares of 233,202 for the three months ended June 30, 2023, were excluded from diluted loss per share because the effect would be anti-dilutive. Potential dilutive shares of 265,815 and 256,514 for the six months ended June 30, 2024 and 2023, respectively, were excluded from diluted loss per share because the effect would be anti-dilutive.

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


	Three months ended June 30,		Six months ended June 30,
	2024	2023	2024	2023
Basic weighted-average Common Shares outstanding	27,610,756	27,451,623	27,570,014	27,400,490
Effect of dilutive shares	241,871	—	—	—
Diluted weighted-average Common Shares outstanding	27,852,627	27,451,623	27,570,014	27,400,490

There were 646,500 and 425,612 performance-based right to receive Common Shares outstanding at June 30, 2024 and 2023, respectively. The right to receive Common Shares are included in the computation of diluted earnings per share based on the number of Common Shares that would be issuable if the end of the quarter were the end of the performance period.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(9) Accumulated Other Comprehensive (Loss) Income

Changes in accumulated other comprehensive (loss) income for the three months ended June 30, 2024 and 2023 were as follows:


	Foreign currency translation		Unrealized gain (loss) on derivatives		Total
Balance at April 1, 2024	$	(99,135)	$	1,538	$	(97,597)
Other comprehensive loss before reclassifications	(8,454)		(1,873)		(10,327)
Amounts reclassified from accumulated other comprehensive loss	—		(327)		(327)
Net other comprehensive loss, net of tax	(8,454)		(2,200)		(10,654)
Balance at June 30, 2024	$	(107,589)	$	(662)	$	(108,251)

Balance at April 1, 2023	$	(99,302)	$	—	$	(99,302)
Other comprehensive income before reclassifications	2,992		328		3,320
Amounts reclassified from accumulated other comprehensive loss	—		(40)		(40)
Net other comprehensive income, net of tax	2,992		288		3,280
Balance at June 30, 2023	$	(96,310)	$	288	$	(96,022)

Changes in accumulated other comprehensive loss for the six months ended June 30, 2024 and 2023 were as follows:


	Foreign currency translation		Unrealized gain (loss) on derivatives		Total
Balance at January 1, 2024	$	(94,256)	$	1,468	$	(92,788)
Other comprehensive loss before reclassifications	(13,333)		(1,286)		(14,619)
Amounts reclassified from accumulated other comprehensive loss	—		(844)		(844)
Net other comprehensive loss, net of tax	(13,333)		(2,130)		(15,463)
Balance at June 30, 2024	$	(107,589)	$	(662)	$	(108,251)

Balance at January 1, 2023	$	(103,374)	$	232	$	(103,142)
Other comprehensive income before reclassifications	7,064		325		7,389
Amounts reclassified from accumulated other comprehensive loss	—		(269)		(269)
Net other comprehensive income, net of tax	7,064		56		7,120
Balance at June 30, 2023	$	(96,310)	$	288	$	(96,022)

(10) Commitments and Contingencies

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

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at the site. The Company engaged an environmental engineering consultant to assess the level of contamination and to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. A remedial action plan was approved by the Florida Department of Environmental Protection and groundwater remediation began in the fourth quarter of 2015. During the three months ended June 30, 2024 and 2023, the Company did not recognize any expense related to groundwater remediation. During the six months ended June 30, 2024 and 2023, the Company recognized expense of $0 and $125, respectively, related to groundwater remediation. At June 30, 2024 and December 31, 2023, the Company accrued $129 and $143, respectively, related to expected future remediation costs. At June 30, 2024 and December 31, 2023, $129 and $136, respectively, were recorded as a component of accrued expenses and other current liabilities in the condensed consolidated balance sheets while the remaining amount as of December 31, 2023 was recorded as a component of other long-term liabilities. Costs associated with the recorded liability will be incurred to complete the groundwater remediation and monitoring. The recorded liability is based on assumptions in the remedial action plan as well as estimates for future remediation activities. Although the Company sold the Sarasota facility and related property in December 2011, the liability to remediate the site contamination remains the responsibility of the Company. Due to the ongoing site remediation, the Company is currently required to maintain a $1,489 letter of credit for the benefit of the buyer.

The Company’s Stoneridge Brazil subsidiary has civil, labor and other tax contingencies (excluding income tax) for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$40,976 ($7,372) and R$41,681 ($8,609) at June 30, 2024 and December 31, 2023, respectively. An unfavorable outcome on these contingencies could result in significant cost to the Company and adversely affect its results of operations and cash flows.

On August 12, 2020, the Brazilian Administrative Counsel for Economic Defense (“CADE”) issued a ruling against Stoneridge Brazil for abuse of dominance and market foreclosure through its prior use of exclusivity provisions in agreements with its distributors. The CADE tribunal imposed a R$7,995 ($1,438) fine which is included in the reasonably possible contingencies noted above. The Company continues to challenge this ruling in Brazilian federal court to reverse this decision by the CADE tribunal.

Long Term Supply Commitment

In 2022, the Company entered into a long term supply agreement, as amended, with a supplier for the purchase of certain electronic semiconductor components through December 31, 2027. Pursuant to the agreement, the Company paid capacity deposits of $1,000 in December 2022 and June 2023, respectively. The capacity deposits are recognized in prepaid and other current assets on our condensed consolidated balance sheets and amortized ratably over the life of the purchase commitment. This long term supply agreement requires the Company to purchase minimum annual volumes while requiring the supplier to sell these components at a fixed price. The Company purchased $626 and $2,662 of these components during the three months ended June 30, 2024 and 2023, respectively, and $822 and $3,327 during the six months ended June 30, 2024 and 2023, respectively. The Company is required to purchase $3,914, $10,764, $10,764 and $3,914 of these components in each of the years 2024 through 2027, respectively.

Product Warranty and Recall

Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims, forecasts of the resolution of existing claims, expected future claims on products sold and commercial discussions with our customers. The key factors in our estimate are the warranty period and the customer source. The Company can provide no assurances that it will not experience material claims or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued. The current portion of the product warranty and recall reserve is included as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets. Product warranty and recall reserve included $8,556 and $7,228 of a long-term liability at June 30, 2024 and December 31, 2023, respectively, which is included as a component of other long-term liabilities on the condensed consolidated balance sheets.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

During the second quarter of 2023, the Company received a demand for arbitration from one of our customers seeking recovery for warranty claims related to past sales of PM sensor products, a product line we exited in 2019. In March 2024, pursuant to the arbitration process, the customer submitted a formal statement of claim notification for 29,340 euro ($31,433). In May 2024, the Company responded with a formal statement of defense denying responsibility for the claim. Based on our review of the technical merits and specific claims as well as prior discussions with the customer, we believe these warranty claims lack merit and are significantly overstated. While no assurances can be made as to the ultimate outcome of this matter, or any other future claims, we do not currently believe a material loss is probable.

The following provides a reconciliation of changes in product warranty and recall reserve liability:


Six months ended June 30,	2024		2023
Product warranty and recall reserve at beginning of period	$	21,610	$	13,477
Accruals for warranties established during period	10,030		7,636
Aggregate changes in pre-existing liabilities due to claim developments	399		327
Settlements made during the period	(6,899)		(3,784)
Foreign currency translation	(692)		(196)
Product warranty and recall reserve at end of period	$	24,448	$	17,460

(11) Business Realignment and Restructuring

The Company regularly evaluates the performance of its businesses and cost structures, including personnel, and makes necessary changes thereto in order to optimize its results. The Company also evaluates the required skill sets of its personnel and periodically makes strategic changes. As a consequence of these actions, the Company incurs severance related costs that are referred to as business realignment charges.

Business realignment charges incurred by reportable segment were as follows:


	Three months ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
Control Devices (A)	$	—	$	379	$	—	$	379
Electronics (B)	1,890		1,347		1,890		1,656

Unallocated Corporate (C)	59		184		59		1,137
Total business realignment charges	$	1,949	$	1,910	$	1,949	$	3,172

_____________________________________


(A)			Severance costs for the three and six months ended June 30, 2023 related to COGS and SG&A were $369 and $10, respectively.


(B)			Severance costs for the three and six months ended June 30, 2024 related to D&D and SG&A were $1,432 and $458, respectively. Severance costs for the three months ended June 30, 2023 related to COGS and SG&A were $82 and $1,265, respectively. Severance costs for the six months ended June 30, 2023 related to COGS and SG&A were $257 and $1,399, respectively.


(C)			Severance costs related costs for the three and six months ended June 30, 2024 related to SG&A were $59. Severance costs related costs for the three and six months ended June 30, 2023 related to SG&A were $169 and $1,122, respectively. Severance costs related costs for the three and six months ended June 30, 2023 related to D&D were $15.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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


	Three months ended June 30,				Six months ended June 30,
	2024		2023		2024		2023
Cost of goods sold	$	—	$	451	$	—	$	626
Selling, general and administrative	517		1,444		517		2,531
Design and development	1,432		15		1,432		15
Total business realignment charges	$	1,949	$	1,910	$	1,949	$	3,172

(12) Income Taxes

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

For the three months ended June 30, 2024, income tax benefit of $936 was attributable to the mix of earnings among tax jurisdictions and U.S. taxes on foreign earnings, offset by tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of (50.6)% varies from the statutory rate primarily due to U.S. taxes on foreign earnings offset by the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions.

For the three months ended June 30, 2023, income tax expense of $1,487 was attributable to the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of (98.8)% varies from the statutory rate primarily due to U.S. taxes on foreign earnings and non-deductible expenses offset by the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions and tax credits and incentives.

For the six months ended June 30, 2024, income tax benefit of $426 was attributable to the mix of earnings among tax jurisdictions and U.S. taxes on foreign earnings offset by tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions and tax credits and incentives. The effective tax rate of 11.3% varies from the statutory rate primarily due to U.S. taxes on foreign earnings offset by the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions and tax credits and incentives.

For the six months ended June 30, 2023, income tax expense of $779 was attributable to the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of (8.1)% varies from the statutory rate primarily due to U.S. taxes on foreign earnings and non-deductible expenses offset by the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions and tax credits and incentives.

The OECD (Organisation for Economic Co-operation and Development) implemented a 15% global corporate minimum tax (Pillar Two) to ensure that large multinational enterprises pay a minimum level of tax in the countries they operate. During 2023, many countries took steps to incorporate Pillar Two into their domestic laws. In 2024, we do not expect a material change to our income tax provision in connection with Pillar Two. As additional jurisdictions implement this legislation, our effective tax rate and cash tax payments could increase in future years.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

(13) Segment Reporting

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

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

The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s 2023 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and operating income. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

The financial information presented below is for our three reportable operating segments and includes adjustments for unallocated corporate costs and intercompany eliminations, where applicable. Such costs and eliminations do not meet the requirements for being classified as an operating segment. Corporate costs include various support functions, such as accounting/finance, executive administration, human resources, information technology and legal.

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STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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


	Three months ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net Sales:
Control Devices	$	79,899	$	92,120	$	157,057	$	178,062
Inter-segment sales	955		970		1,786		1,704
Control Devices net sales	80,854		93,090		158,843		179,766
Electronics	145,511		159,786		295,294		300,913
Inter-segment sales	7,967		8,491		14,308		17,007
Electronics net sales	153,478		168,277		309,602		317,920
Stoneridge Brazil	11,649		14,908		23,865		29,164
Inter-segment sales	199		—		199		—
Stoneridge Brazil net sales	11,848		14,908		24,064		29,164
Eliminations	(9,121)		(9,461)		(16,293)		(18,711)
Total net sales	$	237,059	$	266,814	$	476,216	$	508,139
Operating Income (Loss):
Control Devices	$	3,725	$	5,074	$	5,889	$	7,161
Electronics	9,831		7,444		16,920		8,844
Stoneridge Brazil	(41)		899		163		2,242
Unallocated Corporate (A)	(10,108)		(9,086)		(19,234)		(17,945)
Total operating income	$	3,407	$	4,331	$	3,738	$	302
Depreciation and Amortization:
Control Devices	$	2,806	$	3,099	$	5,669	$	6,273
Electronics	3,903		3,503		7,764		6,967
Stoneridge Brazil	1,221		1,201		2,497		2,286
Unallocated Corporate	620		605		1,204		1,207
Total depreciation and amortization (B)	$	8,550	$	8,408	$	17,134	$	16,733
Interest Expense (Income), net:
Control Devices	$	(19)	$	65	$	(19)	$	83
Electronics	501		511		1,104		996
Stoneridge Brazil	(224)		(319)		(594)		(589)
Unallocated Corporate	3,543		2,863		6,944		5,376
Total interest expense, net	$	3,801	$	3,120	$	7,435	$	5,866
Capital Expenditures:
Control Devices	$	1,587	$	2,019	$	3,104	$	3,975
Electronics	2,977		2,334		4,354		8,541
Stoneridge Brazil	799		782		1,739		1,418
Unallocated Corporate(C)