Item 9A. Controls and Procedures
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In evaluating the Company’s internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Under the supervision and with the participation of our management, including the PEO and PFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2020. Based on our evaluation under the framework in Internal Control-Integrated Framework (2013 Framework), our management has concluded that our internal control over financial reporting was effective as of December 31, 2020.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, as auditor of the Company’s financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2020. Ernst & Young’s report is included herein.
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Changes in Internal Control Over Financial Reporting
There were no changes to our internal controls over financial reporting during the quarter ended December 31, 2020 that has materially or is reasonably likely to materially affect internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Stoneridge, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Stoneridge, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Stoneridge, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule of the Company and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Detroit, Michigan
February 24, 2021
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Item 9B. Other Information.
Change in Control Agreements
On February 22, 2021, each of the following executive officers entered into a new Change in Control Agreement (the “CIC Agreement”) with the Company: Thomas M. Dono Jr, Robert R. Krakowiak and Laurent Borne. The CIC Agreement is designed to provide for continuity of management in the event of change in control of the Company. The Company believes that it is important for the Company’s executive officer to be able to react neutrally to a potential change in control and not be influenced by personal financial concerns. For these executive officers, the CIC Agreement sets a level of benefits, as described below, to remain competitive with our select peer group. All payments under the CIC Agreement are conditioned on a customary non-compete, non-solicitation and non-disparagement agreement. There is no excise tax gross-up payment under the CIC Agreement. The CIC Agreement is “double trigger” agreement meaning that in order for the executive officers to receive a payment and other benefits both of the following must occur: (1) a change in control of the Company, and (2) a triggering event within two years of a change in control where (a) the Company separates the executive officer other than in the case of a termination for cause (as defined), or (b) the executive officer separates from service from the Company for good reason (as defined). Under the CIC Agreement if the events set forth above occur and the executive delivers a release to the Company, the Company will be obligated to pay the applicable executive officers (1) an amount equal to two times the greater of the executive officer’s annual base salary at the time of a triggering event or at the time of the occurrence of a change in control, (2) an amount equal to two times the greater of the executives officer’s target annual incentive award at the time of termination or the actual incentive award received for the fiscal year prior to termination, and (3) an amount equal to the pro rata amount of annual incentive compensation the executive officer would have been entitled to at the time of a triggering event calculated based on the performance goals that were achieved in the year in which the triggering event occurred. In addition, the executive officer will be provided continued life and health insurance benefits for twenty-four months following termination.
The material amendments to the prior Change in Control agreements are that the new CIC Agreement changes (i) changes the defined term “Executives Annual Bonus” to mean the greater of the target annual incentive award at the time of termination or the actual incentive award received for the year prior to termination, and (ii) the provisions related to payment in connection total compensation in excess of the safe harbor amount of Section 208G of the Internal Revenue Code so that the covered executive will receive the greater of safe harbor amount (as defined) or aggregate parachute value (as defined) of the total payments (as defined) less applicable excise tax. The prior Change in Control Agreements with Thomas M. Dono Jr, Robert R. Krakowiak and Laurent Borne are superseded and replaced by the new CIC Agreement described above. The above summary of the CIC Agreement is qualified in its entirety by reference to the full text of the CIC Agreement, a copy of which are filed as an exhibit to this Form 10-K and incorporated herein by reference.
Amendment to Jonathan DeGaynor Employment Agreement
On February 23, 2021, the Company and Jonathan B. DeGaynor (“DeGaynor”) entered into an amendment (the “Amendment”) to DeGaynor’s March 16, 2015 Employment Agreement (the “Employment Agreement”). The Amendment also amended the Change in Control Agreement, also dated March 16, 2015, by and between DeGaynor and the Company (the, “DeGaynor CIC Agreement”). The CIC Agreement is attached as Appendix C to the Employment Agreement.
The Amendment was designed to conform the Employment Agreement and the DeGaynor CIC Agreement to other compensation plans and practices applicable to the Company’s other executive officers in terms of the vesting of equity-based awards under the Company’s Long-Term Incentive Plan and the treatment of certain payments in the event of a Company change in control. The material changes made by the Amendment (i) eliminate automatic (single trigger) vesting of equity-based awards under the Company’s Long-Term Incentive Plan pursuant to the Employment Agreement so that all current and future awards under the Company’s Long-Term Incentive Plan will be subject to “double trigger” vesting in the event of a change in control, and (ii) adjusts the provisions related to payment in connection total compensation in excess of the safe harbor amount of Section 208G of the Internal Revenue Code so that DeGaynor will receive the greater of safe harbor amount (as defined) or aggregate parachute value (as defined) of the total payments (as defined) less applicable excise tax.
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The Employment Agreement will be automatically renewed for one year every year unless notice of termination is delivered by either party before the end of the then current term. The Employment Agreement provides the payment of an annual base salary of $500,000; participation in the Company’s annual incentive plan (“AIP”) at a target of 100% of base salary (since 2015 both DeGaynor’s base salary and AIP percentage target have been increased by the Board’s Compensation Committee as result of regular, annual merit pay increases – in 2019, DeGaynor’s base salary was $825,000 and his AIP base salary target was 103%); relocation benefits; a monthly car allowance; and participation in the Company’s customary benefit plans for senior executive officers. Under the Employment Agreement if DeGaynor is terminated by the Company without cause or he terminates the Employment Agreement and his employment for good reason, the Company will be obligated to pay him severance in equal to his annual base salary and target annual incentive. In addition, upon a termination without cause (or good reason termination) the Company must continue to cover his health and welfare benefits for a period of twelve months following such termination. In connection with the Employment Agreement, DeGaynor and the Company entered in the DeGaynor CIC Agreement. Under the DeGaynor CIC Agreement, if within two years after a Change in Control (as defined in the DeGaynor CIC Agreement) DeGaynor is terminated without cause or resigns for good reason then the Company shall be obligated to pay DeGaynor a lump sum cash payment equal to the sum of two times DeGaynor’s annual salary, plus two times his annual bonus, plus his pro rata annual bonus. The Company shall also be obligated to continue DeGaynor’s health and welfare benefits for twenty-four months.
DeGaynor is entitled to be nominated each year for election to serve on the Company’s Board of Directors under the Employment Agreement. The Employment Agreement also contains certain other customary provisions for employment agreements, such as covenants by DeGaynor regarding non-competition and non-solicitation and use of confidential information and a release obligation as a condition to severance payments.
The above summaries of the Employment Agreement, the DeGaynor CIC Agreement and the Amendment are qualified in their entirety by references to the full text of such agreements or amendment, copies of which are filed as exhibits to this Form 10-K and incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 regarding our directors is incorporated by reference to the information under the sections and subsections entitled, “Proposal One: Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021. The information required by this Item 10 regarding our executive officers appears as a Supplementary Item following Item 1 under Part I, hereof.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference to the information under the sections and subsections “Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Executive Compensation” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 (other than the information required by Item 201(d) of Regulation S-K which is set forth below) is incorporated by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
In May 2010, we adopted an Amended Directors’ Restricted Share Plan and an Amended and Restated Long-Term Incentive Plan, as amended. In May 2013, we adopted an Amended Directors’ Restricted Shares Plan and an Amended and Restated Long-Term Incentive Plan, as amended, to increase the number of shares available for issuance under the plans. In May 2016, we adopted the 2016 Long-Term Incentive Plan. In May 2018, we adopted the 2018 Amended and Restated Director’s Restricted Shares Plan. Our shareholders approved each plan.
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Equity compensation plan information as of December 31, 2020 is as follows:
Number of securities
remaining available for
future issuance under
equity compensation
plans (A )
Equity compensation plans approved by shareholders
1,457,832
Equity compensation plans not approved by shareholders
-
(A) Excludes 1,207,841 share units issued to key employees pursuant to the Company’s 2016 Long-Term Incentive Plan .
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated by reference to the information under the subsections “Transactions with Related Persons”, “Review and Approval of Transactions with Related Persons” and “Director Independence” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated by reference to the information under the subsections “Service Fees Paid to Independent Registered Accounting Firm” and “Pre-Approval Policies and Procedures” contained in the Company’s Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 11, 2021.
PART IV
Item 15. Exhibits, Financial Statement Schedule.
(a) The following documents are filed as part of this Form 10-K.
HIDDEN_ROW
Page in
Form 10-K
(1)
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
41
Consolidated Balance Sheets as of December 31, 2020 and 2019
44
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018
45
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
46
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
47
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
48
Notes to Consolidated Financial Statements
49
(2)
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
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(3)
Exhibits:
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Exhibit
Number
Exhibit
3.1
Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999).
3.2
Amended and Restated Code of Regulations of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
4.1
Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997).
4.2
Description of Stoneridge, Inc. Common Shares registered under Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2019).
10.1
Form of Directors’ Restricted Shares Plan Grant Agreement under the Directors' Restricted Shares Plan (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2017)*.
10.2
Stoneridge, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 2, 2017) *.
10.3
First Amendment to the Stoneridge, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on October 26, 2018)*.
10.4
Annual Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on May 12, 2016)*.
10.5
Stoneridge, Inc. Long-Term Cash Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009)*.
10.6
Amended and Restated Officers’ and Key Employees’ Severance Plan of Stoneridge, Inc., filed herewith .
10.7
Stoneridge, Inc. Amended and Restated Long-Term Incentive Plan – Form of Restricted Shares Grant Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)* .
10.8
Form of Phantom Share Grant Agreement under the Stoneridge, Inc. Long-Term Cash Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)*.
10.9
Stoneridge, Inc. 2018 Amended and Restated Directors' Restricted Shares Plan (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on May 16, 2018)*.
10.10
Form of Performance Share Grant Agreement under the Stoneridge, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017)*.
10.11
Form of Share Units Grant Agreement under the Stoneridge, Inc. 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017)*.
10.12
Stoneridge, Inc. 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on May 12, 2016)*.
10.13
Form of Change in Control Agreement, filed herewith *.
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Exhibit
Number
Exhibit
10.14
Employment Agreement, dated March 16, 2015, between the Company and Jonathan B. DeGaynor (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on March 19, 2015)*.
10.15
Amendment No. 1, dated February 23, 2021, to Employment Agreement, dated March 16, 2015 between the Company and Jonathan B. DeGaynor, filed herewith *.
10.16
Indemnification Agreement between the Company and Jonathan B. DeGaynor (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on March 19, 2015).
10.17
Fourth Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 7, 2019).
10.18
Employment Agreement, dated January 3, 2020, by and between the Company and Kevin Heigel (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020)*.
10.19
Separation Agreement and Release of Claim, dated March 31, 2020, by and between the Company and Robert Willig (incorporated by reference to Exhibit 99.1 on the Company's Current Report on Form 8-K filed on April 3, 2020) *.
10.20
Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 1, 2020)*.
10.21
First Amendment to the Stoneridge, Inc. 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on May 20, 2020)*.
10.22
Employment Agreement, dated January 29, 2021, by and between the Company and James Zizelman, filed herewith *.
21.1
Principal Subsidiaries and Affiliates of the Company, filed herewith.
23.1
Consent of Independent Registered Public Accounting Firm, filed herewith.
31.1
Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2
Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
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Exhibit
Number
Exhibit
104
Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document
* - Reflects management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K.
(b) The exhibits listed are filed as part of or incorporated by reference into this report.
(c) Additional Financial Statement Schedules. None .
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STONERIDGE, INC.
Date: February 24, 2021
/s/ ROBERT R. KRAKOWIAK
Robert R. Krakowiak
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 24, 2021
/s/ JONATHAN B. DEGAYNOR
Jonathan B. DeGaynor
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: February 24, 2021
/s/ ROBERT R. KRAKOWIAK
Robert R. Krakowiak
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: February 24, 2021
/s/ ROBERT J. HARTMAN JR.
Robert J. Hartman Jr.
Chief Accounting Officer
(Principal Accounting Officer)
Date: February 24, 2021
/s/ WILLIAM M. LASKY
William M. Lasky
Chairman of the Board of Directors
Date: February 24, 2021
/s/ JEFFREY P. DRAIME
Jeffrey P. Draime
Director
Date: February 24, 2021
/s/ DOUGLAS C. JACOBS
Douglas C. Jacobs
Director
Date: February 24, 2021
/s/ IRA C. KAPLAN
Ira C. Kaplan
Director
Date: February 24, 2021
/s/ KIM KORTH
Kim Korth
Director
Date: February 24, 2021
/s/ GEORGE S. MAYES, JR.
George S. Mayes, Jr.
Director
Date: February 24, 2021
/s/ PAUL J. SCHLATHER
Paul J. Schlather
Director
Date: February 24, 2021
Frank S. Sklarsky*
* Mr. Sklarsky was added to the Board of Directors on February 22, 2021
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