STONERIDGE INC - Quarter Report: 2005 October (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 1, 2005		Commission File Number 001-13337

STONERIDGE, INC.

Ohio		34-1598949
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9400 East Market Street, Warren, Ohio		44484
(Address of principal executive offices)		(Zip Code)

(330) 856-2443

Registrant’s telephone number, including area code

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of Common Shares, without par value, outstanding as of October 31, 2005 was 23,182,362.

 

 

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 1, 2005 (Unaudited) and December 31, 2004			2
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended October 1, 2005 and September 30, 2004			3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 1, 2005 and September 30, 2004			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosure about Market Risk			29
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 6. Exhibits			31
Signatures			32
Index to Exhibits			33
EX-31.1 Certification 302 - CEO
EX-31.2 Certification 302 - CFO
EX-32.1 Certification 906 - CEO
EX-32.2 Certification 906 - CFO

STONERIDGE, INC. AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

		October 1,				December 31,
		2005				2004
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	45,926			$	52,332
Accounts receivable, net			111,386				100,615
Inventories, net			53,704				56,397
Prepaid expenses and other			15,587				11,416
Deferred income taxes			8,512				13,282
Total current assets			235,115				234,042
PROPERTY, PLANT AND EQUIPMENT, NET			112,108				114,004
OTHER ASSETS:
Goodwill			65,176				65,176
Investments and other, net			28,669				24,979
Deferred income taxes			39,194				34,800
TOTAL ASSETS		$	480,262			$	473,001
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	19			$	109
Accounts payable			60,117				57,709
Accrued expenses and other			55,905				52,907
Total current liabilities			116,041				110,725
LONG-TERM LIABILITIES:
Long-term debt, net of current portion			200,046				200,052
Other liabilities			6,353				6,619
Total long-term liabilities			206,399				206,671
SHAREHOLDERS’ EQUITY:
Preferred shares, without par value, 5,000 authorized, none issued			—				—
Common shares, without par value, 60,000 shares authorized, 23,232 and 22,788 shares issued as of October 1, 2005 and December 31, 2004, respectively, with no stated value			—				—
Additional paid-in capital			147,068				145,764
Common shares held in treasury, 49 shares as of October 1, 2005, and 8 shares as of December 31, 2004, at cost			(65	)			—
Retained earnings			10,147				6,255
Accumulated other comprehensive income			672				3,586
Total shareholders’ equity			157,822				155,605
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	480,262			$	473,001

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

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(in thousands except for per share data)

		For the Three								For the Nine
		Months Ended								Months Ended
		October 1,				September 30,				October 1,				September 30,
		2005				2004				2005				2004
NET SALES		$	158,715			$	164,286			$	519,849			$	518,365
COSTS AND EXPENSES:
Cost of goods sold			127,154				124,634				401,238				385,268
Selling, general and administrative			31,023				28,759				92,539				82,668
Restructuring charges			823				320				4,627				525
OPERATING INCOME (LOSS)			(285	)			10,573				21,445				49,904
Interest expense, net			5,936				6,031				17,973				18,528
Other income, net			(1,505	)			(358	)			(4,103	)			(757	)
INCOME (LOSS) BEFORE INCOME TAXES			(4,716	)			4,900				7,575				32,133
Provision (benefit) for income taxes			(1,424	)			979				3,683				9,712
NET INCOME (LOSS)		$	(3,292	)		$	3,921			$	3,892			$	22,421
BASIC NET INCOME (LOSS) PER SHARE		$	(0.14	)		$	0.17			$	0.17			$	0.99
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING			22,726				22,630				22,701				22,605
DILUTED NET INCOME (LOSS) PER SHARE		$	(0.14	)		$	0.17			$	0.17			$	0.98
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING			22,726				22,925				22,940				22,863

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

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(in thousands)

		For the Nine
		Months Ended
		October 1,				September 30,
		2005				2004
OPERATING ACTIVITIES:
Net income		$	3,892			$	22,421
Adjustments to reconcile net income to net cash provided (used) by operating activities-
Depreciation			19,749				18,955
Amortization of intangible assets			210				209
Amortization of debt financing costs			931				1,033
Deferred income taxes			551				2,866
Equity earnings of unconsolidated subsidiaries			(3,256	)			(1,350	)
(Gain) loss on sale of fixed assets			(344	)			166
Share-based compensation expense			1,320				994
Changes in operating assets and liabilities-
Accounts receivable, net			(13,985	)			(29,457	)
Inventories, net			1,003				(10,842	)
Prepaid expenses and other			(4,659	)			(3,350	)
Other assets			456				393
Accounts payable			4,845				10,814
Accrued expenses and other			4,808				14,977
Net cash provided by operating activities			15,521				27,829
INVESTING ACTIVITIES:
Capital expenditures			(20,934	)			(18,108	)
Proceeds from sale of fixed assets			1,664				16
Business acquisitions and other			(282	)			(714	)
Net cash used by investing activities			(19,552	)			(18,806	)
FINANCING ACTIVITIES:
Repayments of long-term debt			(96	)			(359	)
Share-based compensation activity			3				(586	)
Other financing costs			(75	)			(134	)
Net cash used by financing activities			(168	)			(1,079	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			(2,207	)			59
NET CHANGE IN CASH AND CASH EQUIVALENTS			(6,406	)			8,003
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			52,332				24,142
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	45,926			$	32,145
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	11,313			$	11,880
Cash paid for income taxes		$	3,993			$	3,130

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

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

(1) Basis of Presentation

     The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the Commission’s rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the footnotes thereto included in the Company’s 2004 Annual Report on Form 10-K.

     The results of operations for the three and nine months ended October 1, 2005 are not necessarily indicative of the results expected for the full year.

     Beginning in 2005, the Company changed from a calendar year end to a 52-53 week fiscal year end. The Company’s fiscal quarters are now comprised of 13-week periods and once every seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The third quarter of 2005 and 2004 ended on October 1 and September 30, respectively.

     Certain prior period amounts have been reclassified to conform to their 2005 presentation in the condensed consolidated financial statements.

(2) Common Shares Held in Treasury

     The Company accounts for Common Shares held in Treasury under the cost method and includes such shares as a reduction of total shareholders’ equity.

(3) Inventories

     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 Company’s inventories at October 1, 2005 and December 31, 2004, respectively, and by the first-in, first-out (FIFO) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following:

		October 1,				December 31,
		2005				2004
Raw materials		$	32,715			$	31,583
Work in progress			8,532				10,216
Finished goods			13,880				15,685
			55,127				57,484
Less: LIFO reserve			(1,423	)			(1,087	)
Total		$	53,704			$	56,397

(4) Financial Instruments and Derivative Financial Instruments

Financial Instruments

     A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The estimated fair value of the Company’s fixed rate debt at October 1, 2005, per quoted market sources, was $211.3 million and the carrying value was $200.0 million.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

Derivative Instruments and Hedging Activities

     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 Company’s condensed consolidated statement of operations as a component of other income. The option contracts are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of operating income. The Company’s 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 purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest.

     The Company’s foreign currency forward contracts have a notional value of $19.8 million and reduce exposure related to the Company’s Swedish krona and British pound denominated receivables. The estimated fair value of these contracts at October 1, 2005, per quoted market sources, was approximately $0.1 million. The Company’s foreign currency option contracts have a notional value of $0.1 million and reduce the risk associated with the Company’s other known foreign currency exposures related to the Swedish krona, British pound, Mexican peso and the Euro. The estimated fair value of these contracts at October 1, 2005, per quoted market sources, was approximately $0.2 million.

(5) Goodwill

     Under Statement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets,” goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The Company performs its annual impairment test of goodwill as of October 2. In the fourth quarter of 2004, the Company determined that the carrying value of one of the Company’s reporting units, which is included in the Control Devices reportable segment, exceeded its fair value by $183.5 million. The corresponding write-down of goodwill to its fair value was reported as a component of operating loss in the Company’s consolidated statement of operations for the fourth quarter of 2004.

     There was no change in the carrying value of goodwill by reportable segment during the first nine months of 2005.

(6) Share-Based Compensation

Accounting for Share-Based Compensation

     At October 1, 2005, the Company had three share-based compensation plans. 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 three and nine-month periods ended October 1, 2005 and September 30, 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 Company’s 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 the three and nine-month periods ended October 1, 2005.

     The following table illustrates the effect on net income (loss) and net income (loss) per share if the fair value method had been applied to all outstanding and unvested awards in each period.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

		For the Three								For the Nine
		Months Ended								Months Ended
		October 1,				September 30,				October 1,				September 30,
		2005				2004				2005				2004
Net income (loss), as reported		$	(3,292	)		$	3,921			$	3,892			$	22,421
Add: Share-based compensation expense included in reported net income, net of related tax effects			376				285				858				621
Deduct: Total share-based compensation expense determined under the fair value method for all awards, net of related tax effects			(376	)			(286	)			(859	)			(664	)
Pro forma net income (loss)		$	(3,292	)		$	3,920			$	3,891			$	22,378
Net income (loss) per share:
Basic – as reported		$	(0.14	)		$	0.17			$	0.17			$	0.99
Basic – pro forma		$	(0.14	)		$	0.17			$	0.17			$	0.99
Diluted – as reported		$	(0.14	)		$	0.17			$	0.17			$	0.98
Diluted – pro forma		$	(0.14	)		$	0.17			$	0.17			$	0.98

     Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $578 and $456 for the three months ended October 1, 2005 and September 30, 2004, respectively. For the nine months ended October 1, 2005 and September 30, 2004, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $1,320 and $994, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $202 and $171 for the three months ended October 1, 2005 and September 30, 2004, respectively. For the nine months ended October 1, 2005 and September 30, 2004, the total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $462 and $373, respectively. There was no compensation cost capitalized as inventory or fixed assets for either 2005 or 2004.

Share-Based Compensation Plans

     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, 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 Company’s 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 Company’s attainment of certain targets of performance measured against a peer group’s performance in terms of total return to shareholders. The actual number of restricted Common Shares to ultimately vest will depend on the Company’s 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 Company’s Common Shares on the date of grant. The options granted cliff-vest one year after the date of grant.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

     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 Company’s 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 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 Company’s Common Shares.

		2004				2003				2002
Risk-free interest rate			1.43	%			2.44	%			4.71	%
Expected dividend yield			0.00	%			0.00	%			0.00	%
Expected lives (in years)			1.0				3.0				7.5
Expected volatility			35.18	%			46.52	%			59.47	%

     A summary of option activity under the plans noted above as of October 1, 2005, and changes during the nine-month period then ended is presented below:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual
		Share Options				Exercise Price				Term
Outstanding at December 31, 2004			828,850			$	11.24
Granted			—				—
Forfeited			(9,000	)			10.39
Expired			(20,500	)			10.90
Exercised			(12,000	)			7.59
Outstanding and Exercisable at October 1, 2005			787,350				11.31				5.52

     The weighted-average grant-date fair value of options granted for the nine-month period ended September 30, 2004 was $2.28. There were no options granted during the three-month period ended September 30, 2004 and there have been no options granted in 2005. The total intrinsic value of options exercised during the three months ended October 1, 2005 and September 30, 2004 was $7 and $785, respectively. For the nine months ended October 1, 2005 and September 30, 2004, the total intrinsic value of options exercised was $41 and $3,742, respectively. As of October 1, 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 three months ended October 1, 2005 and September 30, 2004 was $10.09 and $14.69, respectively. The weighted-average grant-date fair value of shares granted during the nine months ended October 1, 2005 and September 30, 2004 was $10.23 and $15.15, respectively.

     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

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

the date of issuance. The fair value of the nonvested performance-based restricted Common Share awards with a market condition, which measures the Company’s performance against a peer group’s performance in terms of total return to shareholders, was calculated using valuation techniques incorporating the Company’s 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 Company’s nonvested restricted Common Shares as of October 1, 2005, and the changes during the nine-month period then ended, is presented below:

		Time-Based Awards								Performance-Based Awards
						Weighted-								Weighted-
						Average								Average
						Grant-Date								Grant-Date
Nonvested Restricted Common Shares		Shares				Fair Value				Shares				Fair Value
Nonvested at January 1, 2005			100,100			$	15.14				—			$	—
Granted			170,200				10.23				263,300				8.24
Vested			(47,308	)			14.05				—				—
Forfeited			(8,342	)			13.83				(26,300	)			8.24
Nonvested at October 1, 2005			214,650				11.53				237,000				8.24

     As of October 1, 2005, total unrecognized compensation cost related to nonvested time-based restricted Common Share awards granted was $1,526. That cost is expected to be recognized over a weighted-average period of 1.6 years. The total fair value of shares vested based on service conditions during the three and nine months ended October 1, 2005 was $326 and $442, respectively. No time-based restricted Common Share awards vested during the three or nine-month periods ended September 30, 2004.

     As of October 1, 2005, total unrecognized compensation cost related to nonvested performance-based restricted Common Share awards granted was $640. That cost is expected to be recognized over a weighted-average period of 2.5 years. No performance-based restricted Common Share awards have vested as of October 1, 2005.

     Cash received from option exercises under all share-based payment arrangements for the nine months ended October 1, 2005 and September 30, 2004 was $68 and $376, respectively. The actual tax benefit realized for the tax deductions from option exercises of the share-based payment arrangements totaled $214 and $1,403 for the nine months ended October 1, 2005 and September 30, 2004, respectively.

(7) Comprehensive Income (Loss)

     Comprehensive income (loss) includes foreign currency translation adjustments and gains and losses from certain foreign currency transactions, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities. All components of comprehensive income (loss) are recorded net of related taxes. Comprehensive income consists of the following:

		For the Three Months Ended								For the Nine Months Ended
		October 1,				September 30,				October 1,				September 30,
		2005				2004				2005				2004
Net income (loss)		$	(3,292	)		$	3,921			$	3,892			$	22,421
Other comprehensive income (loss):
Currency translation adjustments			621				1,251				(3,107	)			363
Minimum pension liability adjustments			43				2				267				(18	)
Unrealized loss on marketable securities			(90	)			(41	)			(74	)			(23	)
Other comprehensive income (loss)			574				1,212				(2,914	)			322
Comprehensive income (loss)		$	(2,718	)		$	5,133			$	978			$	22,743

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

(8) Long-Term Debt

     On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes. The $200.0 million senior notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. The senior notes are redeemable in May 2007 at 105.75. Interest is payable on May 1 and November 1 of each year. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.

     In conjunction with the issuance of the senior notes, the Company also entered into a new $200.0 million credit agreement with a bank group. The credit agreement had the following components: a $100.0 million revolving facility (of which $96.1 million was available at October 1, 2005, after consideration of outstanding letters of credit), which includes a $10.0 million swing line facility, a €10 million swing line facility, and a $100.0 million term facility. The revolving facility expires on April 30, 2008 and requires a commitment fee of 0.375% to 0.500% on the unused balance. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.25% to 1.25% or (ii) LIBOR plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined. Interest on the swing line facility is payable monthly at the quoted overnight borrowing rate plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined.

     Long-term debt consists of the following:

		October 1,				December 31,
		2005				2004
11 1/2% Senior notes, due 2012		$	200,000			$	200,000
Other			65				161
			200,065				200,161
Less: Current portion			(19	)			(109	)
		$	200,046			$	200,052

(9) Net Income (Loss) Per Share

     Net income (loss) per share amounts for all periods are presented in accordance with SFAS 128, “Earnings Per Share,” which requires the presentation of basic and diluted net income per share. Basic net income (loss) per share was computed by dividing net income (loss) by the weighted-average number of Common Shares outstanding for each respective period. Diluted net income (loss) per share was calculated by dividing net income (loss) by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented. Actual weighted-average shares outstanding used in calculating basic and diluted net income (loss) per share were as follows:

		For the Three Months Ended								For the Nine Months Ended
		October 1,				September 30,				October 1,				September 30,
		2005				2004				2005				2004
Basic weighted-average shares outstanding			22,725,702				22,629,615				22,701,156				22,605,427
Effect of dilutive securities			—				295,176				238,875				257,614
Diluted weighted-average shares outstanding			22,725,702				22,924,791				22,940,031				22,863,041

     Diluted net loss per share for the third quarter of 2005, as reported in the Company’s Condensed 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 483,250 and 475,000 Common Shares at an average price of $13.94 and $16.56 per share were outstanding during the third quarter of 2005 and 2004, respectively. Options to purchase 483,250 and 475,000 Common Shares at an average price of $13.94 and $16.56 per share were outstanding during the first nine months of 2005 and 2004, 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.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

(10) Restructuring

     The Company has announced restructuring initiatives related to the rationalization of certain manufacturing facilities in the high cost regions of Europe and North America. This rationalization is part of the Company’s cost reduction initiatives. In connection with this plan, the Company recorded restructuring charges of $823 and $4,627 in the Company’s condensed consolidated statement of operations for the three and nine-month periods ended October 1, 2005. The restructuring charges related to the Vehicle Management & Power Distribution reportable segment included the following:

						Asset-
		Severance				Related
		Costs				Charges				Total
Total expected restructuring charge		$	1,013			$	127			$	1,140
Balance at December 31, 2004		$	—			$	—			$	—
First quarter charge to expense			88				127				215
Second quarter charge to expense			9				—				9
Third quarter charge to expense			356				—				356
Cash payments			(52	)			—				(52	)
Non-cash utilization			—				(127	)			(127	)
Balance at October 1, 2005		$	401			$	—			$	401
Remaining expected restructuring charge		$	560			$	—			$	560

The restructuring charges related to the Control Devices reportable segment included the following:

						Asset-				Facility
		Severance				Related				Closure				Other
		Costs				Charges				Costs				Costs				Total
Total expected restructuring charge		$	3,593			$	983			$	1,273			$	621			$	6,470
Balance at March 31, 2004		$	—			$	—			$	—			$	—			$	—
Second quarter charge to expense			—				205				—				—				205
Third quarter charge to expense			—				202				—				118				320
Fourth quarter charge to expense			1,068				207				—				287				1,562
Cash payments			(590	)			—				—				(405	)			(995	)
Non-cash utilization			—				(614	)			—				—				(614	)
Balance at December 31, 2004		$	478			$	—			$	—			$	—			$	478
First quarter charge to expense			1,698				206				—				7				1,911
Second quarter charge to expense			586				163				746				174				1,669
Third quarter charge to expense			214				—				218				35				467
Cash payments			(2,501	)			—				—				(216	)			(2,717	)
Non-cash utilization			—				(369	)			—				—				(369	)
Balance at October 1, 2005		$	475			$	—			$	964			$	—			$	1,439
Remaining expected restructuring charge		$	27			$	—			$	309			$	—			$	336

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

     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.

(11) Commitments and Contingencies

     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.

Product Liability Matters

     As previously disclosed, a judgment was entered against the Company in the District Court (365^th 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 Company’s insurance covered 100% of the settlement amount. As a result, the resolution of this litigation did not have an impact on the Company’s condensed consolidated statement of operations.

Customer Bankruptcy

     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 $2,442 for the three months ended October 1, 2005. This charge established a reserve for estimated losses expected to result from the bankruptcy and was recorded in the Company’s condensed consolidated statement of operations as a component of selling, general and administrative expense.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

(12) Employee Benefit Plans

Net Periodic Benefit Cost

     The Company has a single defined benefit pension plan that covers certain employees in the United Kingdom and a single postretirement benefit plan that covers certain employees in the United States. Components of net periodic pension and postretirement benefit cost are as follows:

		Pension Benefit Plan
		For the Three Months Ended								For the Nine Months Ended
		October 1,				September 30,				October 1,				September 30,
		2005				2004				2005				2004
Service cost		$	18			$	18			$	55			$	54
Interest cost			240				217				746				655
Expected return on plan assets			(248	)			(245	)			(773	)			(737	)
Amortization of actuarial loss			71				14				221				42
Net periodic benefit cost.		$	81			$	4			$	249			$	14

		Postretirement Benefit Plan
		For the Three Months Ended								For the Nine Months Ended
		October 1,				September 30,				October 1,				September 30,
		2005				2004				2005				2004
Service cost		$	25			$	22			$	71			$	68
Interest cost			26				23				70				67
Net periodic benefit cost		$	51			$	45			$	141			$	135

Contributions

     The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it expected to contribute $183 to its defined benefit pension plan in 2005. As of October 1, 2005, the Company has contributed $78 to its defined benefit pension plan in 2005 and plans to make the remaining expected contribution during the fourth quarter of 2005.

(13) Provision (Benefit) for Income Taxes

     The Company recognized a provision (benefit) for income taxes of $(1,424), or (30.2%) of pre-tax loss, and $979, or 20.0% of pre-tax income, for federal, state and foreign income taxes for the three months ended October 1, 2005 and September 30, 2004, respectively. The Company recognized a provision for income taxes of $3,683, or 48.6% of pre-tax income, and $9,712, or 30.2% of pre-tax income, for federal, state and foreign income taxes for the nine months ended October 1, 2005 and September 30, 2004, respectively. The decrease in the effective rate for the three-month period ended October 1, 2005 compared to September 30, 2004 was attributable to a change in the mix of foreign earnings to domestic earnings as well as the reversal of tax contingencies previously recorded in accordance with SFAS 5 “Accounting for Contingencies,” upon the expiration of certain statutes of limitation. In addition, the effective tax rate for the third quarter of 2005 was favorably impacted by the refund of state income taxes. The Company, however, has continued to experience losses related to certain operations in the United Kingdom. As the Company does not believe that the related tax benefit of those losses will be realized, a valuation allowance was recorded against the deferred tax assets associated with those foreign losses. The increase in the effective rate for the nine months ended October 1, 2005 compared to September 30, 2004 was primarily attributable to those losses from certain operations in the United Kingdom and the related valuation allowance recorded against the deferred tax assets associated with those foreign losses.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

(14) Accounting Pronouncements

Inventory Costs

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 151, “Inventory Costs,” as an amendment to Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS 151 to have a material impact on the Company’s consolidated financial statements.

(15) Segment Reporting

     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 Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the chief executive officer.

     The Company has 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 segments effective for the fourth quarter of 2004. These four operating segments are aggregated for reporting purposes into the Company’s Vehicle Management & Power Distribution and Control Devices reportable segments. The Company’s chief executive officer also changed the profit measure used to evaluate the business to “Income Before Income Taxes.” In addition to the 2004 changes, the Company further realigned management responsibilities effective for the second quarter of 2005. As a result, a component within the Control Devices reportable segment was realigned to the Vehicle Management & Power Distribution reportable segment. Because the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change, the corresponding information for prior periods has been adjusted to conform to the current year reportable segment presentation.

     The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Company’s December 31, 2004 Form 10-K. The Company’s chief executive officer evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Intersegment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

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

		For the Three Months Ended								For the Nine Months Ended
		October 1,				September 30,				October 1,				September 30,
Net Sales		2005				2004				2005				2004
Vehicle Management & Power Distribution		$	82,463			$	88,554			$	281,169			$	266,818
Intersegment sales			3,522				3,789				12,049				12,100
Vehicle Management & Power Distribution net sales		$	85,985			$	92,343			$	293,218			$	278,918
Control Devices			76,252				75,732				238,680				251,547
Intersegment sales			797				721				2,312				2,025
Control Devices net sales		$	77,049			$	76,453			$	240,992			$	253,572
Eliminations			(4,319	)			(4,510	)			(14,361	)			(14,125	)
Total consolidated net sales		$	158,715			$	164,286			$	519,849			$	518,365
Income (Loss) Before Income Taxes
Vehicle Management & Power Distribution		$	(1,240	)		$	7,718			$	15,274			$	24,914
Control Devices			(325	)			4,500				2,570				27,219
Other corporate activities			2,520				(1,327	)			7,126				(1,665	)
Corporate interest expense			(5,671	)			(5,991	)			(17,395	)			(18,335	)
Total consolidated income (loss) before income taxes		$	(4,716	)		$	4,900			$	7,575			$	32,133
Depreciation and Amortization
Vehicle Management & Power Distribution		$	1,844			$	1,977			$	6,024			$	6,308
Control Devices			4,369				4,379				13,639				12,627
Corporate activities			102				79				296				229
Total consolidated depreciation and amortization		$	6,315			$	6,435			$	19,959			$	19,164
Interest Expense (Income)
Vehicle Management & Power Distribution.		$	50			$	61			$	117			$	242
Control Devices			215				(21	)			461				(49	)
Corporate activities			5,671				5,991				17,395				18,335
Total consolidated interest expense		$	5,936			$	6,031			$	17,973			$	18,528
Capital Expenditures
Vehicle Management & Power Distribution		$	2,084			$	2,235			$	7,609			$	6,954
Control Devices			6,466				4,383				13,208				11,059
Corporate activities			18				62				117				95
Total consolidated capital expenditures		$	8,568			$	6,680			$	20,934			$	18,108

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:

		For the Three Months Ended								For the Nine Months Ended
		October 1,				September 30,				October 1,				September 30,
Net Sales		2005				2004				2005				2004
North America		$	125,789			$	135,680			$	409,060			$	421,749
Europe and other			32,926				28,606				110,789				96,616
Total consolidated net sales		$	158,715			$	164,286			$	519,849			$	518,365

		October 1,				September 30,
Non-Current Assets		2005				2004
North America		$	222,123			$	183,604
Europe and other			23,024				55,355
Total non-current assets		$	245,147			$	238,959

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

(16) Guarantor Financial Information

     The senior notes and the credit facility are fully and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future domestic wholly-owned subsidiaries (Guarantor Subsidiaries). The Company’s non-U.S. subsidiaries do not guarantee the senior notes and the credit facility (Non-Guarantor Subsidiaries).

     Presented below are summarized condensed consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis, as of October 1, 2005 and December 31, 2004, and for the three and nine months ended October 1, 2005 and September 30, 2004.

     These summarized condensed consolidating financial statements are prepared under the equity method. Separate financial statements for the Guarantor Subsidiaries are not presented based on management’s determination that they do not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below.

		October 1, 2005
						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	16,472			$	70			$	29,384			$	—			$	45,926
Accounts receivable, net			48,202				37,843				25,383				(42	)			111,386
Inventories, net			24,262				14,152				15,290				—				53,704
Prepaid expenses, intercompany and other			(267,297	)			251,608				31,276				—				15,587
Deferred income taxes			7,756				354				402				—				8,512
Total current assets			(170,605	)			304,027				101,735				(42	)			235,115
PROPERTY, PLANT AND EQUIPMENT, NET			60,964				32,642				18,502				—				112,108
OTHER ASSETS:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			36,193				481				136				(8,141	)			28,669
Deferred income taxes			36,390				(237	)			3,041				—				39,194
Investment in subsidiaries			397,378				—				—				(397,378	)			—
TOTAL ASSETS		$	404,905			$	357,504			$	123,414			$	(405,561	)		$	480,262
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	—			$	—			$	19			$	—			$	19
Accounts payable			19,878				21,461				18,778				—				60,117
Accrued expenses and other			27,145				11,725				17,077				(42	)			55,905
Total current liabilities			47,023				33,186				35,874				(42	)			116,041
LONG-TERM LIABILITIES:
Long-term debt, net of current portion			200,000				—				8,187				(8,141	)			200,046
Other liabilities			60				2,043				4,250				—				6,353
Total long-term liabilities			200,060				2,043				12,437				(8,141	)			206,399
SHAREHOLDERS’ EQUITY			157,822				322,275				75,103				(397,378	)			157,822
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	404,905			$	357,504			$	123,414			$	(405,561	)		$	480,262

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

     Supplemental condensed consolidating financial statements (continued):

		December 31, 2004
						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	20,363			$	17			$	31,952			$	—			$	52,332
Accounts receivable, net			42,620				32,465				25,535				(5	)			100,615
Inventories, net			24,415				13,098				18,884				—				56,397
Prepaid expenses, intercompany and other			(247,317	)			234,031				24,702				—				11,416
Deferred income taxes			8,454				4,205				623				—				13,282
Total current assets			(151,465	)			283,816				101,696				(5	)			234,042
PROPERTY, PLANT AND EQUIPMENT, NET			57,947				32,791				23,266				—				114,004
OTHER ASSETS:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			27,766				463				185				(3,435	)			24,979
Deferred income taxes			37,773				(3,960	)			987				—				34,800
Investment in subsidiaries			381,664				—				—				(381,664	)			—
TOTAL ASSETS		$	398,270			$	333,701			$	126,134			$	(385,104	)		$	473,001
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	—			$	—			$	109			$	—			$	109
Accounts payable			20,004				17,691				20,014				—				57,709
Accrued expenses and other			22,370				12,741				17,801				(5	)			52,907
Total current liabilities			42,374				30,432				37,924				(5	)			110,725
LONG-TERM LIABILITIES:
Long-term debt, net of current portion			200,000				—				3,487				(3,435	)			200,052
Other liabilities			291				1,902				4,426				—				6,619
Total long-term liabilities			200,291				1,902				7,913				(3,435	)			206,671
SHAREHOLDERS’ EQUITY			155,605				301,367				80,297				(381,664	)			155,605
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	398,270			$	333,701			$	126,134			$	(385,104	)		$	473,001

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except for share and per share data, unless otherwise indicated)

     Supplemental condensed consolidating financial statements (continued):

						For the Three Months Ended October 1, 2005
						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
NET SALES		$	78,079			$	56,604			$	41,145			$	(17,113	)		$	158,715
COSTS AND EXPENSES:
Costs of goods sold			68,403				42,988				32,309				(16,546	)			127,154
Selling, general and administrative			13,931				9,167				8,492				(567	)			31,023
Restructuring charges			176				172				475				—				823
OPERATING INCOME (LOSS)			(4,431	)			4,277				(131	)			—				(285	)
Interest expense (income), net			5,878				—				58				—				5,936
Other (income) expense, net			(1,551	)			—				46				—				(1,505	)
Equity earnings from subsidiaries			(4,194	)			—				—				4,194				—
INCOME (LOSS) BEFORE INCOME TAXES			(4,564	)			4,277				(235	)			(4,194	)			(4,716	)
Provision (benefit) for income taxes			(1,272	)			699				(851	)			—				(1,424	)
NET INCOME (LOSS)		$	(3,292	)		$	3,578			$	616			$	(4,194	)		$	(3,292	)