Stoneridge, Inc. and Subsidiaries Stoneridge, Inc. and Subsidiaries 9 8 MANAGEMENT'S DISCUSSION AND ANALYSIS of financial condition and results of operations LIQUIDITY AND CAPITAL RESOURCES INFLATION AND INTERNATIONAL PRESENCE RECENTLY ISSUED ACCOUNTING STANDARDS QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Net cash provided by operating activities was $62.7 mil- lion and $52.4 million for the years ended December 31, 2001 and 2000, respectively. The increase in net cash from operating activities of $10.2 million was primarily attribut- able to a decrease in net income offset by significantly reduced working capital requirements. Net cash used for investing activities was $23.9 million and $25.8 million for the years ended December 31, 2001 and 2000, respectively, and primarily related to capital expenditures.  Net cash used for financing activities was $39.8 million and $24.4 million for the years ended December 31, 2001 and 2000, respectively. Improved cash flows from opera- tions for the year ended December 31, 2001 were used pri- marily to pay down debt. The Company has a $425.0 million credit agreement (of which $286.6 million and $323.7 million was outstanding at December 31, 2001 and 2000, respectively) with a bank group. The credit agreement, as amended on September 28, 2001, has the following components: a $100.0 million revolving facility (of which $30.0 million is currently avail- able) including a $5.0 million swing line facility, a $150.0 million term facility, and a $175.0 million term facility. The $100.0 million revolving facility and the $150.0 million term facility expire on December 31, 2003 and require a commitment fee of 0.50% on the unused balance of the revolver. The revolving facility permits the Company to borrow up to half its borrowing in specified foreign curren- cies. Interest is payable quarterly at either (i) the prime rate plus a margin of 2.50% or (ii) LIBOR plus a margin of 4.00%. These margins increase periodically through September 30, 2002. These facilities require additional interest of 1.00% on the aggregate unpaid principal bal- ance payable on the expiration date. The $5.0 million swing line facility expires on December 31, 2003. Interest is payable monthly at an overnight money market borrowing rate. The $175.0 million term facility expires on December 31, 2005. Interest is payable quarterly at either (i) the prime rate plus a margin of 3.50% or (ii) LIBOR plus a mar- gin of 5.00%. These margins increase periodically through September 30, 2002. This facility also requires additional interest of 1.00% on the aggregate unpaid principal bal- ance payable on the expiration date. The Company was in compliance with respect to its convenants as of December 31, 2001. The Company has entered into three interest rate swap agreements with a total notional amount of $175.3 mil- lion. Two of these interest rate swap agreements will expire on December 31, 2002 and one interest rate swap agreement will expire on December 31, 2003. The interest rate swap agreements exchange variable interest rates on the Company’s credit agreement for fixed interest rates. The Company has also entered into a Swedish krona for- ward contract with a notional amount of $13.3 million to satisfy krona denominated debt obligations and other insignificant forward contracts. The Company does not use derivatives for speculative or profit-motivated purposes.  Management believes that cash flows from operations and the availability of funds from the Company’s credit facili- ties will provide sufficient liquidity to meet the Company’s growth and operating needs. Management believes that the Company’s operations have not been adversely affected by inflation. By operating internationally, the Company is affected by the economic conditions of certain countries. Based on the current eco- nomic conditions in these countries, management believes the Company is not significantly exposed to adverse economic conditions. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities” (as amended by SFAS 138). SFAS 133 establish- In October 2001, the FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144, which will be effective for the Company in fiscal year 2002, supersedes SFAS 121 and establishes guide- lines for accounting for the impairment and disposal of long-lived assets. The Company believes that the adoption of SFAS 144 will not materially impact the Company’s financial statements upon adoption. In July 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets.” Under SFAS 142, the amortiza- tion period for certain intangibles will change and good- will will no longer be subject to amortization. Goodwill will be subject to at least an annual assessment for impairment by applying a fair value-based test. This Statement is effective for the Company on January 1, 2002. The Company is currently in the process of evaluating the overall potential impact of this Statement on the Company’s financial statements. Goodwill amortization, which approximates $9.5 million annually, will no longer be subject to amortization effective January 1, 2002. An impairment analysis will be performed during 2002 as required by the new Statement. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, “Business Combinations.” SFAS 141 eliminates the pooling-of-interests method and requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. The adoption of SFAS 141 did not have a material impact on the Company’s financial statements. es new accounting and reporting standards for derivatives and hedging activities, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes. The cumulative effect of adopting SFAS 133 was to increase other comprehensive loss by $0.3 million, after-tax. The effect on net income was not significant, primarily because the hedges in place as of January 1, 2001 qualified for hedge accounting treatment and were highly effective. The Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. To reduce exposures to market risks resulting from fluctua- tions in interest rates, the Company uses derivative finan- cial instruments. Specifically, the Company uses interest rate swap agreements to mitigate the effects of interest rate fluctuations on net income by swapping the floating interest rates on certain portions of the Company’s debt to fixed interest rates. These agreements had a notional amount of $175.3 million and $140.1 million for the years ended December 31, 2001 and 2000, respectively, and they expire between December 31, 2002 and December 31, 2003. Holding other factors constant (such as foreign exchange rates and debt levels), a 1.00% increase in inter- est rates would have changed the fair market value of these agreements at December 31, 2001 by approximately $1.8 million. The effect of changes in interest rates on the Company’s net income historically has been small relative to other factors that also affect net income, such as sales and operating margins. However, a 1.00% increase in inter- est rates would increase annual interest expense by approximately $3.1 million before considering the impact of interest rate swaps. Management believes that its use of these financial instruments to reduce risk is in the Company’s best interest. The Company does not enter into financial instruments for trading purposes. The Company’s risks related to commodity price and for- eign currency exchange risks have historically not been material. The Company does not expect the effects of these risks to be material in the future based on current operating and economic conditions in the countries and markets in which it operates. Therefore, a 10.00% change in the value of the U.S. dollar would not significantly affect the Company’s financial position.