News Column

STONERIDGE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 11, 2014

Background

We are a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the commercial, automotive, motorcycle, off-highway and agricultural vehicle markets.

Segments We are primarily organized by products produced and markets served. Under this structure, our continuing operations have been reported utilizing the following segments:



Control Devices. This segment includes results of operations that manufacture sensors, switches, valves and actuators.

Electronics. This segment includes results of operations from the production of electronic instrument clusters, electronic control units and driver information systems. PST. This segment includes results of operations that design and manufacture electronic vehicle alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices. During the second quarter of 2014 we entered into an asset purchase agreement to divest our Wiring business, which designs and manufactures wiring harness products and assembles instrument panels principally to the commercial, agricultural and off-highway vehicle markets. As such, this business is classified as discontinued operations in our condensed consolidated financial statements and no discussion and analysis of financial condition and results of operations is provided herein. Second Quarter Overview The Company had a net loss from continuing operations attributable to Stoneridge. Inc. of $21.3 million, or $(0.79) per diluted share for the second quarter of 2014, a $27.1 million, or $(1.00) per diluted share decrease from income of $5.8 million, or $0.21 per diluted share for the second quarter of 2013.

The decrease in second quarter earnings from continuing operations compared to the second quarter of 2013 was primarily due to lower earnings of our PST segment. PST recorded a goodwill impairment charge of $29.3 million (including $6.4 million attributable to noncontrolling interest) which had a negative impact of $0.85 per share attributable to Stoneridge, Inc. PST earnings were also negatively impacted by an unfavorable change in mix of products sold, lower sales resulting from weakness in the Brazilian economy and automotive market and an unfavorable change in foreign currency translation. Net sales decreased by $7.7 million, or 4.6%, primarily due to lower product sales volume at our PST segment, which was partially offset by higher sales in our Electronics and Control Devices segments during the second quarter of 2014 compared to the second quarter of 2013. Loss from discontinued operations was $0.5 million, or $(0.02) per diluted share for the second quarter of 2014, a $0.5 million, or $0.02 per diluted share decrease from income from discontinued operations of $0.0 million, or $0.00 per diluted share for the second quarter of 2013 primarily due to the estimated after-tax loss on disposal of the Wiring business of $1.1 million, in particular the write-down of the asset group to their estimated fair value and transaction costs. The decrease is also due to lower sales volume, which was partially offset by a $0.4 million gain recognized on the de-designation of certain Mexican peso and copper hedge contracts, a decrease in labor costs and lower general and administrative expenses. At June 30, 2014 and December 31, 2013, we maintained a cash and cash equivalents balance of $45.8 million and $62.8 million, respectively. The decrease was primarily due to an increase in working capital levels. As discussed in Note 8 to the condensed consolidated financial statements, at June 30, 2014 and December 31, 2013, we had no borrowings outstanding on our asset-based credit facility (the "Credit Facility"). We had undrawn borrowing capacity on the Credit Facility of $85.4 million and $71.1 million at June 30, 2014 and December 31, 2013, respectively. 25 Outlook The North American automotive vehicle market is expected to continue to have modest improvement 2014. For 2014, this production volume is forecasted to be in the range of 16.5 million to 17.0 million units, an increase from 16.2 million units in 2013. The improvement in the North American automotive vehicle market and sales of new products had a favorable effect on our Control Devices segment's results for the first half of 2014 which we expect will continue

for the remainder of the year.



The North American commercial vehicle market showed weakness throughout 2013, but has improved in the first half of 2014 which we believe will continue throughout the remainder of the year.

The European commercial vehicle market improved in the first half of 2014 which is expected to continue throughout 2014 and have a favorable impact on our Electronics segment.

Our PST segment revenues decreased in the first half of 2014 compared to 2013 due to a weakened Brazilian economy. The overall Brazilian economy grew less than 2.0% gross domestic product in the second quarter and its automotive industry has been weak. As there is significant uncertainty regarding the recovery of the Brazilian economy and automotive industry in the second half of 2014, PST has and will continue to realign its cost structure to mitigate the impact on earnings of possible continued lower product demand for the remainder of 2014. However, we remain optimistic for higher growth in the longer term. Due to the competitive nature of the markets we serve, in the ordinary course of business we face pricing pressures from our customers. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected. 26



Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):

Dollar increase /

Three months ended June 30 2014 2013 (decrease) Net sales $ 162,099 100.0 % $ 169,833 100.0 % $ (7,734 ) Costs and expenses: Cost of goods sold 113,814 70.2 115,530 68.0 (1,716 ) Selling, general and administrative 42,206 26.1 42,551 25.1 (345 ) Goodwill impairment 29,300 18.1 - - 29,300 Operating income (loss) (23,221 ) (14.4 ) 11,752 6.9 (34,973 ) Interest expense, net 5,072 3.1 4,504 2.7 568 Equity in earnings of investee (144 ) (0.1 ) (96 ) (0.1 ) (48 ) Other expense, net 330 0.2 156 0.1 174 Income (loss) before income taxes from continuing operations (28,479 ) (17.6 ) 7,188 4.2 (35,667 ) Provision for income taxes from continuing operations 90 0.1 775 0.4 (685 ) Income (loss) from continuing operations (28,569 ) (17.7 ) 6,413 3.8 (34,982 ) Discontinued operations: Income (loss) from discontinued operations, net of tax 594 0.4 (22 ) - 616 Loss on disposal, net of tax (1,138 ) (0.7 ) - - (1,138 ) Income (loss) from discontinued operations (544 ) (0.3 ) (22 ) - (522 ) Net income (loss) (29,113 ) (18.0 ) 6,391 3.8 (35,504 ) Net income (loss) attributable to noncontrolling interest (7,221 ) (4.5 ) 634 0.4 (7,855 ) Net income (loss) attributable to Stoneridge, Inc. $ (21,892 ) (13.5 )% $ 5,757

3.4 % $ (27,649 )



Net Sales. Net sales for our reportable segments, excluding inter-segment sales, are summarized in the following table (in thousands):

Dollar Percent increase / increase / Three months ended June 30 2014 2013 (decrease) (decrease) Control Devices $ 76,413 47.1 % $ 74,434 43.8 % $ 1,979 2.7 % Electronics 52,766 32.6 48,684 28.7 4,082 8.4 % PST 32,920 20.3 46,715 27.5 (13,795 ) (29.5 )% Total net sales $ 162,099 100.0 % $ 169,833 100.0 % $ (7,734 ) (4.6 )% 27

Our Control Devices segment sales increased primarily due to higher volume in our North American automotive and commercial vehicle markets of $1.8 million and $0.8 million, respectively, during the second quarter of 2014 when compared

to the second quarter of 2013.

Our Electronics segment net sales increased primarily due to an increase in sales of our European and North American commercial vehicle products of $3.1 million and $1.0 million, respectively, resulting from higher volume and new product sales for the second quarter of 2014 when compared to the second quarter of 2013.



Our PST segment sales decreased primarily due to lower product volume in its aftermarket, audio and OEM channels and was negatively impacted by an unfavorable change in foreign currency translation which reduced sales by approximately $2.5 million or 5.4%.

Net sales by geographic location are summarized in the following table (in thousands): Dollar Percent increase / increase /

Three months ended June 30 2014 2013 (decrease) (decrease) North America $ 79,718 49.2 % $ 76,789 45.2 % $ 2,929 3.8 % South America 32,920 20.3 46,715 27.5 (13,795 ) (29.5 )% Europe and Other 49,461 30.5 46,329 27.3 3,132 6.8 % Total net sales $ 162,099 100.0 % $ 169,833 100.0 % $ (7,734 ) (4.6 )%



The North American geographic location consists of the results of our operations in the United States and Mexico.

The increase in North American net sales was primarily attributable to increased sales volume in our North American automotive and commercial vehicle markets within our Control Devices segment of $1.8 million and $0.8 million, respectively. Our decrease in net sales in South America was primarily due to lower PST product sales volume and was negatively impacted by an unfavorable foreign currency translation. Our increase in net sales in Europe and Other was primarily due to increased sales of European commercial vehicle market products of $3.1 million. Cost of Goods Sold and Gross Margin. Cost of goods sold decreased by 1.5% primarily due to lower PST sales volume. Our material cost as a percentage of net sales increased to 48.1% for the second quarter of 2014 compared to 45.8% for the second quarter of 2013. Our gross margin decreased to 29.8% for the second quarter of 2014 compared to 32.0% for the second quarter of 2013 due to lower sales volume and higher material costs.



Our Control Devices segment gross margin increased slightly due to a favorable change in mix of products sold and the benefit of increased sales volume.

Our Electronics segment gross margin decreased slightly due to an unfavorable change in mix of products sold partially offset by the benefit of increased sales volume.

Our PST segment gross margin declined due to lower sales volume, an unfavorable change in mix of products sold, an increase in labor costs and business realignment charges of $0.3 million.

Selling, General and Administrative ("SG&A") Expenses. SG&A expenses decreased by $0.3 million for the second quarter of 2014 compared to the prior year second quarter due to decreased sales commissions, design and development and other general and administrative costs in our PST segment, which were offset by higher design and development costs in our Electronics and Control Devices segments as well as higher general and administrative costs in our Electronics segment and $0.1 million in business realignment costs at PST . Goodwill Impairment. The Company recorded a charge of $29.3 million for the quarter ended June 30, 2014 to a portion of the PST goodwill. The impairment was the result of weakening of both the Brazilian economy and automotive market resulting in lower projected revenue growth and to a lesser extent increased competition. This non-cash impairment charge is more fully described in Note 4 to our condensed consolidated financial statements. 28



Operating Income (Loss).Operating income (loss) is summarized in the following table by continuing reportable segment (in thousands):

Dollar Percent increase / increase /

Three months ended June 30 2014 2013 (decrease)

(decrease) Control Devices $ 8,719$ 8,963$ (244 ) (2.7 )% Electronics 4,886 5,283 (397 ) (7.5 )% PST (31,982 ) 2,278 (34,260 ) NM Unallocated corporate (4,844 ) (4,772 ) (72 ) (1.5 )% Operating income (loss) $ (23,221 )$ 11,752$ (34,973 ) (297.6 )% NM - Not meaningful Our Control Devices segment operating income decreased slightly as the increase in sales and gross profit were more than offset by higher design and development and SG&A personnel costs.

Our Electronics segment operating income decreased as the increase in sales and gross profit was more than offset by higher sales, general and administrative costs and higher design and development costs. Our PST segment decrease in operating performance is due to a goodwill impairment charge of $29.3 million, lower sales volume, an unfavorable change in mix of products sold and $0.4 million in business realignment costs, which were partially offset by lower sales commissions, design and development and other general and administrative costs. In addition, PST was more unfavorably impacted by the volatility in foreign exchange rates in the current quarter. Operating income (loss) by geographic location is summarized in the following table (in thousands): Dollar Percent increase / increase /

Three months ended June 30 2014 2013 (decrease) (decrease) North America $ 5,810 (25.0 )% $ 4,756 40.5 % $ 1,054 22.2 % South America (31,982 ) 137.7 2,278 19.4 (34,260 ) NM Europe and Other 2,951 (12.7 ) 4,718 40.1 (1,767 ) (37.4 )% Operating income (loss) $ (23,221 ) 100.0 % $ 11,752 100.0 % $ (34,973 ) (297.6 )% North American operating income includes interest expense, net of approximately $3.9 million and $4.0 million for the quarters ended June 30, 2014 and 2013, respectively. Our North American operating results increased primarily as a result of increased sales in the North American automotive and commercial vehicle markets. The decrease in profitability in South America was primarily due to a goodwill impairment charge, lower sales volume, an unfavorable change in mix of products sold and an unfavorable impact of foreign currency translation. Our results in Europe and Other were negatively affected by an unfavorable mix of product sales and higher sales, general and administrative costs and higher design and development costs. Interest Expense, net. Interest expense, net increased by $0.6 million during the second quarter of 2014 when compared to the prior year second quarter due to higher interest on our PST term notes as a result of higher average outstanding loan balances.



Equity in Earnings of Investee. Equity earnings for Minda were $0.1 million for both the second quarter of 2014 and 2013.

29 Other Expense, net. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense, net on the condensed consolidated statement of operations. Our results for the three months ended June 30, 2014 and 2013 were unfavorably affected by approximately $0.3 million and $0.8 million, respectively, due to the volatility in certain foreign exchange rates. Substantially all of the unfavorable foreign currency loss for the second quarter of 2014 was related to the translation of the Argentinian peso related to PST. Provision for Income Taxes from Continuing Operations.We recognized a provision of $0.1 million and $0.8 million for federal, state and foreign income taxes for the second quarter of 2014 and 2013, respectively. The decrease in the tax provision was primarily due to lower income before income taxes in the current period compared to the same period for 2013 primarily due to the loss incurred by PST, which included a goodwill impairment charge of $29.3 million. The PST goodwill impairment charge does not generate a tax benefit as it is not deductible for Brazilian tax purposes. The decrease in tax related to PST was partially offset by an increase in tax due to the improved financial performance of our operations in Sweden and an increase in the effective tax rate related to our operations in Juarez, Mexico. The decrease in the effective tax rate for the second quarter of 2014 to (0.3)% compared to the same period for 2013 of 10.8% was due to the impact of the nondeductible PST goodwill impairment. 30



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Condensed consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):

Dollar increase /

Six months ended June 30 2014 2013 (decrease) Net sales $ 323,430 100.0 % $ 328,695 100.0 % $ (5,265 ) Costs and expenses: Cost of goods sold 227,007 70.2 223,112 67.9 3,895 Selling, general and administrative 83,910 25.9 85,340 26.0 (1,430 ) Goodwill impairment 29,300 9.1 - - 29,300 Operating income (loss) (16,787 ) (5.2 ) 20,243 6.1 (37,030 ) Interest expense, net 10,001 3.1 8,954 2.7 1,047 Equity in earnings of investee (382 ) (0.1 ) (297 ) (0.1 ) (85 ) Other expense, net 2,246 0.6 539 0.2 1,707 Income (loss) before income taxes from continuing operations (28,652 ) (8.8 ) 11,047 3.3 (39,699 ) Provision for income taxes from continuing operations 385 0.1 1,466 0.4 (1,081 ) Income (loss) from continuing operations (29,037 ) (8.9 ) 9,581 2.9 (38,618 ) Discontinued operations: Income from discontinued operations, net of tax 1,647 0.5 1,093 0.3 554 Loss on disposal, net of tax (1,233 ) (0.4 ) - - (1,233 )



Income from discontinued operations 414 0.1 1,093 0.3

(679 ) Net income (loss) (28,623 ) (8.8 ) 10,674 3.2 (39,297 ) Net income (loss) attributable to noncontrolling interest (8,199 ) (2.5 ) 794 0.2 (8,993 )



Net income (loss) attributable to

Stoneridge, Inc. $ (20,424 ) (6.3 )% $ 9,880 3.0 % $ (30,304 )



Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):

Dollar Percent increase / increase /

Six months ended June 30 2014 2013 (decrease) (decrease) Control Devices $ 153,737 47.5 % $ 146,347 44.5 % $ 7,390 5.0 % Electronics 102,857 31.8 93,204 28.4 9,653 10.4 % PST 66,836 20.7 89,144 27.1 (22,308 ) (25.0 )% Total net sales $ 323,430 100.0 % $ 328,695 100.0 % $ (5,265 ) (1.6 )%

Our Control Devices segment sales increased due to higher volume primarily in our North American automotive and commercial vehicle markets of $5.3 million and $2.5 million, respectively, during the first half of 2014 when compared to

the first half of 2013. 31

Our Electronics segment net sales increased primarily due to an increase in sales of our European and North American commercial vehicle products of $8.6 million and $1.3 million, respectively, resulting from higher volume and new product sales for the first half of 2014 when compared to the first half of 2013. Our PST segment sales decreased due to lower product volume in its aftermarket, audio and OEM channels and an unfavorable change in foreign currency translation with reduced sales by $8.7 million or 9.7%. Net sales by geographic location are summarized in the following table (in thousands): Dollar Percent increase / increase /

Six months ended June 30 2014 2013

(decrease) (decrease) North America $ 159,516 49.3 % $ 151,592 46.1 % $ 7,924 5.2 % South America 66,836 20.7 89,144 27.1 (22,308 ) (25.0 )% Europe and Other 97,078 30.0 87,959 26.8 9,119 10.4 % Total net sales $ 323,430 100.0 % $ 328,695 100.0 % $ (5,265 ) (1.6 )% The increase in North American net sales was primarily attributable to increased sales volume in our North American automotive and commercial vehicle markets within our Control Devices segment of $5.3 million and $2.5 million, respectively. Our decrease in net sales in South America was primarily due to lower PST product sales volume and the negative impact of unfavorable foreign currency translation. Our increase in net sales in Europe and Other was primarily due to increased sales of European commercial vehicle market products of $8.6 million. Cost of Goods Sold.Cost of goods sold increased by 1.7% due to higher material and labor costs. Our material cost as a percentage of net sales increased to 48.1% for the first half of 2014 compared to 45.8% for the first half of 2013. As a result, our gross margin declined to 29.8% for the first half of 2014 compared to 32.1% for the first half of 2013.



Our Control Devices segment gross margin increased due to a favorable change in mix of products sold and the benefit of increased sales volume.

Our Electronics segment gross margin declined despite a 10.4% increase in sales due to an unfavorable change in mix of products sold.

Our PST segment gross margin declined due to lower sales volume, an unfavorable change in mix of products sold, an increase in labor costs and $0.5 million

in business realignment costs. Selling, General and Administrative Expenses. SG&A expenses decreased by $1.4 million for the first half of 2014 primarily due to lower sales commissions and design and development costs in our PST segment, which were offset by higher design and development and general and administrative costs in our Electronics and Control Devices segments and $0.2 million in business realignment costs

at PST.

Goodwill Impairment. The Company recorded a charge of $29.3 million for the six months ended June 30, 2014 to a portion of the PST goodwill. The impairment was the result of weakening of both the Brazilian economy and automotive market resulting in lower projected revenue growth and to a lesser extent increased competition. This non-cash impairment charge is more fully described in Note 4 to our condensed consolidated financial statements. 32



Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):

Dollar Percent increase / increase / Six months ended June 30 2014 2013 (decrease) (decrease) Control Devices $ 17,152$ 16,619$ 533 3.2 % Electronics 9,668 10,529 (861 ) (8.2 )% PST (34,524 ) 3,274 (37,798 ) NM Unallocated corporate (9,083 ) (10,179 ) 1,096 10.8 % Operating income (loss) $ (16,787 )$ 20,243$ (37,030 ) (182.9 )% NM - Not meaningful Our Control Devices segment operating income increased as the increase in sales volume and gross profit was partially offset by higher design and development and SG&A personnel costs.



Our Electronics segment operating income decreased despite higher sales and gross profit due to higher sales, general and administrative costs and higher design and development costs.

Our PST segment operating performance decreased due to a goodwill impairment charge of $29.3 million, lower sales volume, an unfavorable change in mix of products sold and business realignment costs of $0.7 million, which were partially offset by lower sales commissions, design and development and other general and administrative costs. In addition, PST was more unfavorably impacted by the volatility in foreign exchange rates in the current year, primarily related to the Argentinian peso. Unallocated corporate operating loss decreased due to both lower incentive and stock-based compensation expense resulting from decreased current year Company financial performance. Operating income (loss) by geographic location is summarized in the following table (in thousands): Dollar Percent increase / increase /

Six months ended June 30 2014 2013 (decrease) (decrease) North America $ 11,463 (68.3 )% $ 8,689 42.9 % $ 2,774 31.9 % South America (34,524 ) 205.7 3,274 16.2 (37,798 ) NM Europe and Other 6,274 (37.4 ) 8,280 40.9 (2,006 ) (24.2 )% Operating income (loss) $ (16,787 ) 100.0 % $ 20,243 100.0 % $ (37,030 ) (182.9 )%



North American operating income includes interest expense, net of approximately $7.8 million and $7.9 million for the first half of June 2014 and 2013, respectively.

Our North American operating results increased primarily as a result of increased sales in the North American automotive and commercial vehicle markets. The decrease in profitability in South America was primarily due to a goodwill impairment charge, lower sales volume, an unfavorable change in mix of products sold and an unfavorable impact of foreign currency translation. Our results in Europe and Other were negatively affected by an unfavorable mix of product sales and higher sales, general and administrative costs and higher design and development costs.



Interest Expense, net. Interest expense, net increased by $1.0 million during the first half of 2014 when compared to the same period in the prior year primarily from higher interest on our PST term notes due to higher average outstanding loan balances.

Equity in Earnings of Investees. Equity earnings for Minda increased slightly from $0.3 million for the first half of 2013 to $0.4 million for the first

half of 2014. 33

Other Expense, net. Other expense, net was $2.2 million for the first half of 2014 compared to $0.5 million for the first half of 2013. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense, net on the condensed consolidated statement of operations. Our results for the first half of 2014 and 2013 were unfavorably affected by approximately $2.4 million and $1.2 million, respectively, due to the volatility in certain foreign exchange rates. Most of the unfavorable foreign currency loss for the first half of 2014 was related to the translation of the Argentinian peso related to PST. Also, our PST segment received $0.6 million of income in the first half of 2013 associated with deposits at a financial institution which did not recur in 2014. Provision for Income Taxes from Continuing Operations.We recognized a provision for income taxes of $0.4 million and $1.5 million for federal, state and foreign income taxes for the first half of 2014 and 2013, respectively. The decrease in the tax provision was primarily due to lower income before income taxes in the current period compared to the same period for 2013 primarily due to the loss incurred by PST, which included a goodwill impairment charge of $29.3 million. The PST goodwill impairment charge does not generate a tax benefit as it is not deductible for Brazilian tax purposes. The decrease in tax related to PST was partially offset by an increase in tax due to the improved financial performance of our operations in Sweden and Juarez, Mexico. In addition, the decrease in tax expense was partially offset by discrete tax items related to certain foreign operations recorded during the current period. The decrease in the effective tax rate for the first half of 2014 to (1.3)% compared to the same period for 2013 of 13.3% was due to a reduction in the rate related to the nondeductible PST goodwill impairment, which was offset by the impact of the discrete tax items discussed above. In addition, the effective tax rate decreased due to the recognition of a tax benefit on the PST operating loss which was partially offset by the tax impact of the increased profitability of the operations in Sweden and Juarez, Mexico.



Liquidity and Capital Resources

Summary of Cash Flows (in thousands):

Dollar increase / Six months ended June 30 2014 2013 (decrease) Net cash provided by (used for): Operating activities $ (7,059 )$ 3,243$ (10,302 ) Investing activities (13,554 ) (10,618 ) (2,936 ) Financing activities 3,855 451 3,404 Effect of exchange rate changes on cash and cash equivalents (310 ) (608 ) 298 Net change in cash and cash equivalents $ (17,068 ) $ (7,532

) $ (9,536 )

The decrease in cash provided by operating activities for the first half of 2014 compared to the same period in 2013 was primarily due to a $10.0 million decrease in net income excluding the impact of the non-cash PST goodwill impairment. The decrease in the growth of accrued expenses and accounts payable were substantially offset by a decrease in accounts receivable and inventory. Our receivable terms and collections rates have remained consistent between periods presented. The increase in net cash used for investing activities for the first half of 2014 reflects a $1.9 million increase in cash used for capital projects and $1.0 million related to the Electronics segment acquisition of a European aftermarket distributor.



The increase in net cash provided by financing activities was primarily due to higher PST term loan net borrowings.

On October 4, 2010, we issued $175.0 million of senior secured notes. These senior secured notes bear interest at an annual rate of 9.5% and mature on October 15, 2017. The Company may redeem up to 10.0% of the senior secured notes at 103.0% prior to October 15, 2014. The senior secured notes are redeemable in full, at our option, beginning October 15, 2014 at 104.75%. Interest payments are payable on April 15 and October 15 of each year. The senior secured notes indenture limits our restricted subsidiaries' amount of indebtedness, restricts certain payments and includes various other non-financial restrictive covenants, which to date have not been and are not expected to have an impact on our financing flexibility. The senior secured notes are guaranteed by all of our existing domestic restricted subsidiaries. All other restricted subsidiaries that guarantee any of our or our guarantors' indebtedness will also guarantee the senior secured notes. 34

On October 4, 2010, we entered into a fixed-to-variable interest rate swap agreement (the "Swap") with a notional amount of $45.0 million. The Swap was designated as a fair value hedge of the fixed interest rate obligation under our $175.0 million 9.5% senior secured notes due October 15, 2017. We pay variable interest equal to the six-month LIBOR plus 7.19% and we receive a fixed interest rate of 9.5% under the Swap. The critical terms of the Swap match the terms of the senior secured notes, including maturity of October 15, 2017, resulting

in no hedge ineffectiveness. As outlined in Note 8 to our condensed consolidated financial statements, our asset-based credit facility (the "Credit Facility") permits borrowing up to a maximum level of $100.0 million. This facility provides us with lower borrowing rates and allows us the flexibility to refinance other outstanding debt. At June 30, 2014 and December 31, 2013, there were no borrowings outstanding. The available borrowing capacity on our Credit Facility is based on eligible current assets, as defined. At June 30, 2014, we had undrawn borrowing capacity of $85.4 million based on eligible current assets. The Credit Facility contains financial performance covenants which would only constrain our borrowing capacity if our undrawn availability falls below $20.0 million. However, restrictions do include limits on capital expenditures, operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15.0 million minus certain guarantees and obligations. The Company was in compliance with all covenants at June 30, 2014. The covenants included in our Credit Facility to date have not and are not expected to limit our financing flexibility. PST maintains several short-term and long-term loans used for working capital purposes. At June 30, 2014, there was $28.9 million outstanding on the PST term loans. The PST loans at June 30, 2014 mature as follows: $19.5 million in 2014, $3.6 million in 2015, $2.4 million in 2016, $1.2 million in 2017 and approximately $1.1 million annually in 2018 and 2019. The term loan for our Suzhou, China subsidiary is in the amount of 9.0 million Chinese yuan, which U.S. dollar equivalent outstanding balance was approximately $1.5 million at June 30, 2014, and is included on the condensed consolidated balance sheet as a component of current portion long-term debt. The term loan matures in August 2014. Interest is payable quarterly at 132.0% of the one-year lending rate published by The People's Bank of China, which was 7.39% at June 30, 2014.

The Company's wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary's bank account up to a maximum level of 20.0 million Swedish krona, or $3.0 million, at June 30, 2014. At June 30, 2014, there were no overdrafts on the bank account. Although the Company's notes and credit facilities contain various covenants, the violation of which would limit or preclude their use or accelerate the maturity, the Company has not experienced and does not expect these covenants to restrict our financing flexibility. The Company has been and expects to continue to remain in compliance with these covenants during the term of the notes and credit facilities. Our future results could be unfavorably affected by increased commodity prices, including copper as commodity fluctuations impact the cost of our raw material purchases. Our 2014 results could also be adversely affected by unfavorable foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico and Sweden. We have entered into foreign currency forward contracts and maintain Mexican peso- and euro-denominated cash balances to reduce our exposure related to foreign currency fluctuations. At June 30, 2014, we had a cash and cash equivalents balance of approximately $45.8 million, of which $14.3 million was held domestically and $31.5 million was held in foreign locations. The decrease from $62.8 million at December 31, 2013 was due to an increase in working capital levels. Our cash balance was not restricted at June 30, 2014. 35



Commitments and Contingencies

See Note 11 to the condensed consolidated financial statements for disclosures of the Company's commitments and contingencies.

Seasonality



Our Control Devices and Electronics segments are not typically materially impacted by seasonality, however the demand for our PST segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.

Critical Accounting Policies and Estimates

The Company's critical accounting policies, which include management's best estimates and judgments, are included in Part II, Item 7, to the consolidated financial statements of the Company's 2013 Form 10-K. These accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management's Discussion and Analysis of the Company's 2013 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. Information regarding other significant accounting policies is included in Note 2 to our consolidated financial statements in Item 8 of Part II of the Company's 2013 Form 10-K.



Inflation and International Presence

Given the current economic climate and recent fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. Furthermore, by operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Forward-Looking Statements Portions of this report contain "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, our directors or officers with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition or divestiture strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words "will," "may," "should," "designed to," "believes," "plans," "projects," "intends," "expects," "estimates," "anticipates," "continue," and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:



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

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

actions;



a significant change in commercial, automotive, motorcycle, off-highway and

agricultural vehicle production;



competitive market conditions and resulting effects on sales and pricing;

the impact on changes in foreign currency exchange rates on sales, costs and

results, particularly the Brazilian real, Argentinian peso, Mexican peso and

euro;



our ability to achieve cost reductions that offset or exceed certain

customer-mandated selling price reductions;

36



a significant change in general economic conditions in any of the various

countries in which we operate;



labor disruptions at our facilities or at any of our significant customers or

suppliers;



the ability of our suppliers to supply us with parts and components at

competitive prices on a timely basis;



the amount of our indebtedness and the restrictive covenants contained in the

agreements governing our indebtedness, including our credit facility and the

senior secured notes;



customer acceptance of new products;

capital availability or costs, including changes in interest rates or market

perceptions;



the failure to achieve the successful integration of any acquired company or

business; and



those items described in Part I, Item IA ("Risk Factors") of the Company's 2013

Form 10-K.



In addition, 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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Source: Edgar Glimpses


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