Stoneridge 10-K 2006
Documents found in this filing:
Registrants telephone number, Including Area Code:
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of July 2, 2005, the aggregate market value of the registrants Common Shares, without par value, held by non-affiliates of the registrant was approximately $95.7 million. The closing price of the Common Shares on July 2, 2005 as reported on the New York Stock Exchange was $7.13 per share. As of July 2, 2005, the number of Common Shares outstanding was 23,212,366.
The number of Common Shares, without par value, outstanding as of February 10, 2006 was 23,327,478.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2006, into Part III, Items 10, 11, 12, 13 and 14.
For further information related to our reportable segments and financial information about geographic areas, see Note 13, Segment Reporting, to the consolidated financial statements included in this report.
The principal production materials used in the manufacturing process for both reportable segments include: copper wire, cable, resins, plastics, printed circuit boards, metal stamping and certain electrical components such as microprocessors, memories, resistors, capacitors, fuses, relays and connectors. We purchase such materials pursuant to both annual contract and spot purchasing methods. Such materials are readily available from multiple sources, but we generally establish collaborative relationships with a qualified supplier for each of our key production materials in order to lower costs and enhance service and quality.
Patents and Intellectual Property
Both of our reportable segments maintain and have pending various U.S. and foreign patents and other rights to intellectual property relating to our business, which we believe are appropriate to protect the Companys interests in existing products, new inventions, manufacturing processes and product developments. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or ability to compete. We are not currently engaged in any material infringement litigation, nor are there any material infringement claims pending by or against the Company.
Industry Cyclicality and Seasonality
The markets for products in both of our reportable segments have historically been cyclical. Because these products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets, sales, and therefore results of operations, are significantly dependent on the general state of the economy and other factors, which affect these markets. A decline in automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle production of our principal customers could adversely impact the Company. Approximately 43%, 46% and 53% of our net sales in 2005, 2004 and 2003, respectively, were made to the automotive market. Approximately 57%, 54% and 47% of our net sales in 2005, 2004 and 2003, respectively, were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
We typically experience decreased sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is similarly impacted by plant shutdowns for the holidays.
The majority of our products are not on a backlog status. They are produced from readily available materials and have a relatively short manufacturing cycle. Each of our production facilities maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and will be expanded to handle increased growth when needed.
Markets for our products in both reportable segments are highly competitive. Our principle methods of competition are quality, service, price, timely delivery and technological innovation. We compete for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM will usually continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns.
Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. We compete based on strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price. We compete against the following primary competitors:
Vehicle Management & Power Distribution. Our primary competitors include Alcoa Fujikura, Ametek, Delphi, Sumitomo Electric, Siemens VDO, Visteon and Yazaki.
D.M. Draime, Chairman of the Board of Directors and Assistant Secretary. Mr. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965. Mr. Draime served as Interim President and Chief Executive Officer from January 2004 to May 2004.
John C. Corey, President, Chief Executive Officer and Director. Mr. Corey has served as President and Chief Executive Officer since being appointed by the Board of Directors in January 2006. Mr. Corey has served as a Director on the Board of Directors since January 2004. Prior to his employment with the Company, Mr. Corey served from October 2000, as President and Chief Executive Officer and Director of the Safety Components International, a leading low-cost supplier of airbags and components, with worldwide operations.
The Company did not repurchase any Common Shares in 2005 or 2004.
For information on Related Stockholder Matters required by Item 201(d) of Regulation S-K, refer to Item 12 of this report.
The following table sets forth selected historical financial data and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data was derived from our consolidated financial statements.
The increase in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to increased North American commercial vehicle production, mitigated by product price reductions and a European product phase-out. The decrease in net sales for our Control Devices reportable segment during the fiscal year 2005 was primarily attributable to product price reductions and reduced North American light vehicle production for our customers.
Net sales by geographic location for the fiscal years ended December 31, 2005 and 2004 are summarized in the following table.
North American sales accounted for 79.3% of total net sales in 2005 compared with 79.1% in 2004. Net sales outside North America accounted for 20.7% of total net sales in 2005 compared to 20.9% in 2004. The decrease in sales outside North America was primarily attributed to lower light vehicle volume and a product phase-out. The decrease was partially offset by increased commercial vehicle production. The decline in North American sales is attributable to reduced light vehicle volumes and price reductions.
Cost of Goods Sold. Cost of goods sold for the fiscal year ended December 31, 2005 increased by $16.2 million, or 3.2%, to $523.0 million from $506.8 million in 2004. As a percentage of sales, cost of goods sold increased to 77.9% from 74.3% for 2004. This increase as a percentage of sales was predominately due to operational inefficiencies resulting from the execution of our restructuring efforts, price reductions and reduced North American light vehicle volume. Going forward, we believe our management efforts will offset operational inefficiencies; however, we expect that pricing and volume challenges will continue to affect our gross margin through 2006.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses for the fiscal year ended December 31, 2005 increased by $2.2 million to $116.9 million from $114.7 in 2004. Included in SG&A expenses for the fiscal year ended December 31, 2005 and 2004 were product development expenses of $39.2 million and $36.1 million, respectively. The increase in SG&A expenses primarily reflects increased investment in our product development activities, which are focused on driver information products, emissions system products, chassis and occupant safety. The increase also reflects increased sales and marketing activity partially offset by decreased Sarbanes-Oxley compliance expenses. As a percentage of sales, SG&A expenses increased to 17.4% in 2005 from 16.8% in 2004.
Restructuring Charges. In January 2005, we announced that we would undertake restructuring efforts related to the rationalization of certain manufacturing facilities in the high cost regions of Europe and North
All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges relate primarily to accelerated depreciation and the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Facility closure costs primarily relate to asset relocation and lease termination costs. Other costs include miscellaneous expenditures associated with exiting business activities.
Equity in Earnings of Investees. Equity in earnings of investees was $4.1 million and $1.7 million for the fiscal years ended December 31, 2005 and 2004, respectively. The increase of $2.4 million was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil. The increase primarily reflects higher volume and pricing for the companys security product lines.
Other Income, net. Other income increased by $1.8 million to $1.0 million from a loss of $0.8 million in 2004. The increase was primarily the result of favorable foreign currency forward and option contracts.
Income (Loss) Before Income Taxes. Income (loss) before income taxes, which is the primary profitability measure used by our chief executive officer, is summarized in the following table by reportable segment for the fiscal years ended December 31, 2005 and 2004.
The decrease in income (loss) before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of operational inefficiencies, bad debt expenses related to customer bankruptcies, increased product development expenses, restructuring charges and product price
The increase in net sales for both of our reportable segments during 2004 was primarily attributable to an increase in commercial vehicle production partially offset by lower North American light vehicle production and price reductions. Net sales were also favorably impacted by foreign exchange rate fluctuations relative to the U.S. dollar, which increased sales by $13.5 million.
Net sales by geographic location for the fiscal years ended December 31, 2004 and 2003 are summarized in the following table.
North American sales accounted for 79.1% of total sales in 2004 compared with 79.3% in 2003. The increase in North American sales was primarily attributable to increased sales to the commercial vehicle market, partially offset by a decrease in sales to the light vehicle market, and price reductions. Sales outside North America accounted for 20.9% of total sales in 2004 compared with 20.7% in 2003. The increase in net sales outside North America was primarily attributable to increased commercial vehicle production and also
All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges relate primarily to accelerated depreciation resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Other costs include miscellaneous expenditures associated with exiting business activities.
Income (Loss) Before Income Taxes. Income (loss) before income taxes, which is the primary profitability measure used by our chief executive officer, is summarized in the following table by reportable segment for the years ended December 31, 2004 and 2003.
Income before income taxes for the year ended December 31, 2004 increased by $15.9 million at the Vehicle Management & Power Distribution reportable segment, primarily as the result of increased commercial vehicle production, offset by higher commodity costs and price reductions. This increase also includes a benefit due to favorable currency exchange rates.
The loss before income taxes recognized at our Control Devices reportable segment was due to the goodwill impairment loss of $183.5 million recorded in the fourth quarter of 2004 after we performed its
Future capital expenditures are expected to be consistent with recent levels and future organic growth is expected to be funded through cash flows from operations. Management will continue to focus on reducing its weighted average cost of capital and believes that cash flows from operations and the availability of funds from our credit facilities will provide sufficient liquidity to meet our future growth and operating needs. As outlined in Note 4 to our financial statements, the Company is a party to a $100.0 million revolving credit facility. Due to certain financial covenants, as of December 31, 2005, the Company was restricted to access no more than $35.0 million of the $100.0 million credit facility. On March 7, 2006, the Company amended the credit agreement, which, among other things, gave the Company substantially all of its borrowing capacity on the $100.0 million credit facility. We also have $40.8 million in available cash, and believe that we will have access to the debt and equity markets should the need arise.
Given the current economic climate and recent increases in certain commodity prices, we believe that a continuation of such price increases would significantly affect our profitability. Furthermore, by operating internationally, we are affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, we believe we are not significantly exposed to adverse economic conditions.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions used in our financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
We believe the following are critical accounting policies; those most important to the financial presentation and those that require the most difficult, subjective or complex judgments.
Revenue Recognition and Sales Commitments. We recognize revenues from the sale of products, net of actual and estimated returns of products sold based on authorized returns and historical trends in sales returns, at the point of passage of title, which is generally at the time of shipment. We often enter into agreements with our customers at the beginning of a given vehicles expected production life. Once such agreements are entered into, it is our obligation to fulfill the customers purchasing requirements for the
Other than Schedule II, all Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 72% and 67% of the Companys inventories at December 31, 2005 and 2004,
Property, plant and equipment are recorded at cost and consist of the following at December 31:
Depreciation is provided by both the straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation expense for the fiscal years ended December 31, 2005, 2004 and 2003 was $25,861, $25,137 and $21,906, respectively. Depreciable lives within each property classification are as follows:
Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of property are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income.
Aggregate amortization expense on patents was $301 and $279 for the fiscal years ended December 31, 2005 and December 31, 2004, respectively. Estimated annual amortization expense is $271, $208, and $198 for fiscal years 2006, 2007 and 2008, respectively.
The Company accounts for income taxes using the provisions of SFAS 109, Accounting for Income Taxes. Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive income (loss). Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction, with the resulting adjustments included in the results of operations.
The Company recognizes revenues from the sale of products, net of actual and estimated returns, at the point of passage of title, which is generally at the time of shipment. Actual and estimated returns are based on authorized returns and historical trends of sales returns. The Company often enters into agreements with its customers at the beginning of a given vehicles expected production life. Once such agreements are entered into, it is the Companys obligation to fulfill the customers purchasing requirements for the entire production life of the vehicle. These agreements are subject to renegotiation, which may affect product pricing.
The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customers inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectibility in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The company does not have collateral requirements with its customers.
Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. These costs amounted to $39,193, $36,145 and $28,714 in fiscal years 2005, 2004 and 2003, respectively.
At December 31, 2005, the Company had three share-based compensation plans; (1) Long-Term Incentive Plan (the Incentive Plan), (2) Directors Share Option Plan (the Director Option Plan) and (3) the Directors Restricted Shares Plan. One plan is for employees and two plans are for non-employee directors. Prior to the second quarter of 2005, the Company accounted for its plans under the fair value recognition provisions of SFAS 123, Accounting for Stock-Based Compensation, adopted prospectively for all employee and director awards granted, modified or settled after January 1, 2003, under the provisions of SFAS 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of SFAS 123. Because the Company adopted the fair value method on a prospective basis, the cost related to share-based compensation recognized during the fiscal years ended December 31, 2005 and 2004 is less than that which would have been recognized if the fair value method had been applied to all awards granted since the original effective date of SFAS 123.
Effective at the beginning of the second quarter of 2005, the Company adopted SFAS 123(R), Share-Based Payment, using the modified-prospective-transition method. Because the Company had previously adopted the fair value recognition provisions required by SFAS 123, and due to the fact that all unvested awards at the time of adoption were being recognized under a fair value approach, the adoption of SFAS 123(R) did not impact the Companys operating income, income before income taxes, net income, cash flow from operating activities, cash flow from financing activities, or basic and diluted net income per share for fiscal year ended December 31, 2005.
Total compensation expense recognized in the Consolidated Statements of Operations for share-based compensation arrangements was $1,695, $1,389 and $1,300 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. The total income tax benefit recognized in the Consolidated Statements of Operations for share-based compensation arrangements was $593, $521 and $486 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. There was no compensation cost capitalized as inventory or fixed assets for 2005, 2004 or 2003.
The fair value of options granted under the Incentive Plan and Director Option Plan was estimated at the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of options granted is derived from the output of the option-pricing model and represents the period of time that options granted are expected to be outstanding. Expected volatilities are based on historical volatility of the Companys Common Shares. The following are assumptions that were used to estimate the fair value of the options granted in 2004, 2003 and 2002.
Financial instruments, including derivative financial instruments, held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and foreign currency forward and option contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts
Diluted net loss per share for the fiscal year ended December 31, 2004, as reported in the Companys Consolidated Statements of Operations in accordance with SFAS 128, disregards the effect of potentially dilutive Common Shares, as a net loss causes dilutive shares to have an anti-dilutive effect.
Options to purchase 474,250, 225,000 and 481,000 Common Shares at an average price of $13.93, $16.56 and $16.22 per share were outstanding at December 31, 2005, 2004 and 2003, respectively. These outstanding options were not included in the computation of diluted net income per share because their respective exercise prices were greater than the average market price of Common Shares and, therefore, their effect would have been anti-dilutive.
SFAS 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income. Other comprehensive income includes foreign currency translation adjustments and
The tax effects related to each component of other comprehensive income (loss) were as follows:
The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
Equity in earnings of PST included in the consolidated statements of operations were $3,976, $1,677 and $1,288 for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. In addition, the Company
The credit agreement contains various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated EBITDA, interest coverage and fixed charge coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. As of December 31, 2005, certain financial covenants limited the Companys ability to access more than $35.0 million of the $100 million revolving credit facility. On March 7, 2006, the Company amended the credit agreement, which, among other things, gave the Company substantially all of its borrowing capacity on the $100.0 million credit facility.
The provisions for income taxes on income included in the accompanying consolidated financial statements represent federal, state and foreign income taxes. The components of income (loss) before income taxes and the provision for income taxes consist of the following:
For the years ended December 31, 2005 and 2004, the Companys effective tax rate increased from (38.0)% to 79.0%. The effective tax rate for 2005 increased primarily due to net operating loss carryforwards and certain other deferred tax assets in the United Kingdom that required a full valuation allowance as of December 31, 2005.
Unremitted earnings of foreign subsidiaries were $18,030, $20,538 and $11,062 as of December 31, 2005, 2004 and 2003, respectively. Because these earnings have been indefinitely reinvested in foreign operations, no provision has been made for U.S. income taxes. It is impracticable to determine the amount of unrecognized deferred taxes with respect to these earnings; however, foreign tax credits may be available to reduce U.S. income taxes in the event of a distribution.
The valuation allowance represents the amount of tax benefit related to foreign net operating losses and state deferred tax assets, which management believes are not likely to be realized.
The Company has deferred tax assets for net operating loss carryforwards of $3,469 net of a valuation allowance of $10,687. The net operating losses relate to U.S. federal and foreign tax jurisdictions. The U.S. net operating losses expire beginning in 2024 through 2026 whereas the foreign net operating losses have indefinite expiration dates. The Company has a deferred tax asset for general business credit carryforwards of $5,131. The general business credit carryforwards expire beginning in 2021 through 2025.
The Company leases equipment, vehicles and buildings from third parties under operating lease agreements.
D.M. Draime, Chairman of the Board of Directors, is a 50% owner of Hunters Square, Inc. (HSI), an Ohio corporation, which owns Hunters Square, an office complex and shopping mall located in Warren, Ohio. The Company leases office space in Hunters Square. The Company pays all maintenance, tax and insurance costs related to the operation of the office. Lease payments made by the Company to HSI were $342, $301 and $301 in 2005, 2004 and 2003, respectively. The lease terminates in December 2009. The Company believes the terms of the lease are no less favorable to it than would be the terms of a third-party lease.
For the years ended December 31, 2005, 2004 and 2003, lease expense totaled $6,495, $6,455 and $6,874, including related party lease expense of $342, $301 and $451, respectively.
In October 1997, the Company adopted a Long-Term Incentive Plan (Incentive Plan). The Company has reserved 2,500,000 Common Shares for issuance to officers and other key employees under the Incentive Plan. Under the Incentive Plan, as of December 31, 2005, the Company has granted cumulative options to purchase 1,594,500 Common Shares to management with exercise prices equal to the fair market value of the Companys Common Shares on the date of grant. The options issued cliff-vest ratably from one to five years after the date of grant. In addition, the Company has also issued 500,300 restricted Common Shares under the Incentive Plan, of which 237,000 are time-based with graded vesting (graded vesting attribution method) over a period of one to four years while the remaining 263,300 restricted Common Shares are performance-based. Approximately one-half of the performance-based restricted Common Share awards vest and will no longer be subject to forfeiture upon the recipient remaining an employee of the Company for three years from time of grant and upon the achievement of certain net income per share targets established by the Company. The remaining one-half of the performance-based restricted Common Share awards also vest and will no longer be subject to forfeiture upon the recipient remaining an employee for three years from time of grant and upon the Companys attainment of certain targets of performance measured against a peer groups performance in terms of total return to shareholders. The actual number of restricted Common Shares to ultimately vest will depend on the Companys level of achievement of the targeted performance measures and the employees attainment of the defined service requirements. Restricted Common Shares awarded under the Incentive Plan entitle the shareholder to all the rights of Common Share ownership except that the shares may not be sold, transferred, pledged, exchanged, or otherwise disposed of during the forfeiture period.
In May 2001, the Company issued options to purchase 60,000 Common Shares to directors of the Company with exercise prices equal to the fair market value of the Companys Common Shares on the date of grant. The options granted cliff-vest one year after the date of grant.
In May 2002, the Company adopted the Director Share Option Plan (Director Option Plan). The Company has reserved 500,000 Common Shares for issuance under the Director Option Plan. Under the Director Option Plan, the Company has granted cumulative options to purchase 86,000 Common Shares to directors of the Company with exercise prices equal to the fair market value of the Companys Common Shares on the date of grant. The options granted cliff-vest one year after the date of grant.
In April 2005, the Company adopted the Directors Restricted Shares Plan (Director Share Plan). The Company has reserved 300,000 Common Shares for issuance under the Director Share Plan. Under the Director Share Plan, the Company has cumulatively issued 41,600 restricted Common Shares, which will cliff-vest over a period of one year.
The weighted-average grant-date fair value of options granted during the fiscal years ended December 31, 2004 and December 31, 2003 was $2.28 and $5.39, respectively. There were no options granted during the fiscal year ended December 31, 2005. The total intrinsic value of options exercised during the fiscal years ended December 31, 2005, 2004 and 2003 was $42, $3,909 and $480 respectively. As of December 31, 2005, the aggregate intrinsic value of both outstanding and exercisable options was zero.
The fair value of the nonvested time-based restricted Common Share awards was calculated using the market value of the shares on the date of issuance. The weighted-average grant-date fair value of shares granted during the fiscal years ended December 31, 2005 and 2004 was $10.23 and $15.15, respectively. There were no restricted shares granted prior to 2004.
The fair value of the nonvested performance-based restricted Common Share awards with a performance condition, requiring the Company to obtain certain net income per share targets, was calculated using the market value of the shares on the date of issuance. The fair value of the nonvested performance-based restricted Common Share awards with a market condition, which measures the Companys performance against a peer groups performance in terms of total return to shareholders, was calculated using valuation techniques incorporating the Companys historical total return to shareholders in comparison to its peers to determine the expected outcomes related to these awards.
A summary of the status of the Companys nonvested restricted Common Shares as of December 31, 2005, and the changes during the fiscal year ended, are presented below:
As of December 31, 2005, total unrecognized compensation cost related to nonvested time-based restricted Common Share awards granted was $1,132. That cost is expected to be recognized over a weighted-average period of 1.3 years. The total fair value of shares vested based on service conditions
The Companys expected long-term return on plan assets assumption is based on a periodic review and modeling of the plans asset allocation and liability structure over a long-term horizon. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling and are based on comprehensive reviews of historical data and economic/ financial market theory. The expected long-term rate of return on assets was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy, and (b) projections of inflation over the long-term period during which benefits are payable to plan participants.
Components of net periodic pension and postretirement benefit cost are as follows:
The Company has one non-pension postretirement benefit plan. The healthcare portion of the plan is contributory, with participants contributions adjusted annually; the life insurance portion of the plan is noncontributory. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare portion. A 1% point change in assumed healthcare cost trend rates would have the following effects:
In December 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As of December 31, 2005, the Company recognized the effects of the Act in the measure of its projected and accumulated benefit obligation under its postretirement benefit plan in accordance with FSP SFAS 106-2 and it did not have a material impact on the Companys consolidated financial statements.
The Companys defined benefit pension plan fair value weighted-average asset allocations at December 31 by asset category are as follows:
The Companys target asset allocation as of December 31, 2005, by asset category, is as follows:
The Companys investment policy for the defined benefit pension plan includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges (shown above) by major asset categories. The objectives of the target
The provisions of SFAS 87, Employers Accounting for Pensions, require the Company to record an additional minimum benefit (liability) for the defined benefit pension plan of $565 and $(3,177) at December 31, 2005 and 2004, respectively. This liability represents the amount by which the accumulated benefit obligation exceeds the sum of the fair market value of plan assets and accrued amounts previously recorded. A corresponding charge (benefit) was recorded as a component of accumulated other comprehensive income of $396 and $(2,224), net of related tax benefit (provision) of $(170) and $953, at December 31, 2005 and 2004, respectively. At December 31, 2005, the Company was required to record a valuation allowance of $1,328 that fully offset the deferred tax asset.
A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The estimated fair value of the Companys senior notes (fixed rate debt) at December 31, 2005, per quoted market sources, was $202.1 million and the carrying value was $200.0 million.
The Company uses derivative financial instruments, including foreign currency forward and option contracts, to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currencies hedged by the Company include the Swedish krona, British pound, Mexican peso and the Euro. The foreign currency forward contracts are marked to market, with gains and losses recognized in the Companys consolidated statement of operations as a component of other income. The option contracts are marked to market, with gains and losses recognized in the Companys consolidated statement of operations as a component of operating income. The Companys foreign currency forward and option contracts substantially offset gains and losses on the underlying foreign denominated transactions. The Company does not enter into financial instruments for speculative or profit motivated
The above swap agreements were terminated in 2002. As of December 31, 2003, these swap agreements were fully amortized into income.
In the ordinary course of business, the Company is involved in various legal proceedings, workers compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, cash flows or the financial position of the Company.
As previously disclosed, a judgment was entered against the Company in the District Court (365th Judicial District) in Maverick County, Texas on January 15, 2004. The plaintiffs alleged in their complaint that a Company fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The plaintiffs are the parents of the decedent. The final judgment entered against the Company was approximately $36.5 million. The Company denied its fuel valve contributed to the fire and believed that there were valid grounds to reverse the judgment on appeal. In the second quarter of 2005, the Company settled this case with the plaintiffs. A final judgment was entered by the trial court on June 21, 2005. The Companys insurance covered 100% of the settlement amount. As a result, the resolution of this litigation did not have an impact on the Companys operations or cash flows.
On October 8, 2005, the Company was notified that one if its customers, Delphi Corporation, had filed for Chapter 11 bankruptcy protection. As a result, the Company recorded a charge of $2.7 million for the fiscal year ended December 31, 2005. Other customer bankruptcies resulted in an additional $0.9 million charge in 2005. These charges established reserves for estimated losses expected to result from the bankruptcies and
All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges primarily relate to accelerated depreciation and the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Facility closure costs primarily relate to asset relocation and lease termination costs. Other exit costs include miscellaneous expenditures associated with exiting business activities. The Company expects that these restructuring efforts will be substantially completed during the second quarter of 2006.
SFAS 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the Companys chief operating decision maker in deciding how to allocate resources and in assessing performance. The Companys chief operating decision maker is the chief executive officer.
The Company has two reportable segments: Vehicle Management & Power Distribution and Control Devices. These reportable segments were determined based on the differences in the nature of the products offered. The Vehicle Management & Power Distribution reportable segment produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment produces electronic and electromechanical switches and control actuation devices and sensors.
As a result of changes in executive leadership during 2004, the Company realigned senior management responsibilities under four operating units effective for the fourth quarter of 2004. These four operating