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

Stoneridge, Inc. 10-Q
Table of Contents

 
 
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.
(Exact name of registrant as specified in its charter)
     
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.
 
 

 


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STONERIDGE, INC. AND SUBSIDIARIES
INDEX
         
    Page No.  
       
       
    2  
    3  
    4  
    5  
    22  
    29  
    30  
 
       
       
    31  
    31  
 
       
    32  
 
       
    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

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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  
 
                       

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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.

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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  
     

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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 (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 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.

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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.

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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.

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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  
 
                       

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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  
 
           

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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  
     

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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  
     

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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 )
             
                                         
            For the Three Months Ended September 30, 2004    
            Guarantor   Non-Guarantor        
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
NET SALES
  $ 81,924     $ 59,098     $ 39,540     $ (16,276 )   $ 164,286  
COSTS AND EXPENSES:
                                       
Costs of goods sold
    67,893       41,262       31,387       (15,908 )     124,634  
Selling, general and administrative
    12,782       9,265       7,080       (368 )     28,759  
Restructuring charges
                320             320  
             
 
                                       
OPERATING INCOME
    1,249       8,571       753             10,573  
 
Interest expense (income), net
    6,091             (60 )           6,031  
Other (income) expense, net
    (593 )           235             (358 )
Equity earnings from subsidiaries
    (9,190 )                 9,190        
             
 
                                       
INCOME BEFORE INCOME TAXES
    4,941       8,571       578       (9,190 )     4,900  
 
                                       
Provision (benefit) for income taxes
    1,020             (41 )           979  
             
 
                                       
NET INCOME
  $ 3,921     $ 8,571     $ 619     $ (9,190 )   $ 3,921  
             

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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 Nine Months Ended October 1, 2005    
            Guarantor   Non-Guarantor        
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
NET SALES
  $ 257,753     $ 175,839     $ 141,115     $ (54,858 )   $ 519,849  
COSTS AND EXPENSES:
                                       
Costs of goods sold
    217,937       128,351       108,287       (53,337 )     401,238  
Selling, general and administrative
    40,472       24,806       28,782       (1,521 )     92,539  
Restructuring charges
    176       728       3,723             4,627  
             
 
                                       
OPERATING INCOME (LOSS)
    (832 )     21,954       323             21,445  
 
                                       
Interest expense, net
    17,950             23             17,973  
Other (income) expense, net
    (4,271 )           168             (4,103 )
Equity earnings from subsidiaries
    (20,323 )                 20,323        
             
 
                                       
INCOME BEFORE INCOME TAXES
    5,812       21,954       132       (20,323 )     7,575  
 
                                       
Provision for income taxes
    1,920       12       1,751             3,683  
             
 
                                       
NET INCOME (LOSS)
  $ 3,892     $ 21,942     $ (1,619 )   $ (20,323 )   $ 3,892  
             
                                         
            For the Nine Months Ended September 30, 2004    
            Guarantor   Non-Guarantor        
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
NET SALES
  $ 253,225     $ 180,360     $ 133,188     $ (48,408 )   $ 518,365  
COSTS AND EXPENSES:
                                       
Costs of goods sold
    206,029       125,334       101,206       (47,301 )     385,268  
Selling, general and administrative
    34,256       28,028       21,491       (1,107 )     82,668  
Restructuring charges
                525             525  
             
 
                                       
OPERATING INCOME
    12,940       26,998       9,966             49,904  
 
                                       
Interest expense (income), net
    18,631             (103 )           18,528  
Other (income) expense, net
    (905 )     8       140             (757 )
Equity earnings from subsidiaries
    (34,449 )                 34,449        
             
 
                                       
INCOME BEFORE INCOME TAXES
    29,663       26,990       9,929       (34,449 )     32,133  
 
                                       
Provision for income taxes
    7,242             2,470             9,712  
             
 
                                       
NET INCOME
  $ 22,421     $ 26,990     $ 7,459     $ (34,449 )   $ 22,421  
             

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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 Nine Months Ended October 1, 2005    
            Guarantor   Non-Guarantor        
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
Net cash provided (used) by operating activities
  $ 7,355     $ 6,298     $ (2,838 )   $ 4,706     $ 15,521  
 
                                       
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (10,880 )     (6,257 )     (3,797 )           (20,934 )
Proceeds from sale of fixed assets
                1,664             1,664  
Business acquisitions and other
    (294 )     (49 )           61       (282 )
             
Net cash used by investing activities
    (11,174 )     (6,306 )     (2,133 )     61       (19,552 )
             
 
                                       
FINANCING ACTIVITIES:
                                       
Repayments of long-term debt
                4,610       (4,706 )     (96 )
Share-based compensation activity
    3       61             (61 )     3  
Other financing costs
    (75 )                       (75 )
             
Net cash provided (used) by financing activities
    (72 )     61       4,610       (4,767 )     (168 )
             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                (2,207 )           (2,207 )
             
Net change in cash and cash equivalents
    (3,891 )     53       (2,568 )           (6,406 )
Cash and cash equivalents at beginning of period
    20,363       17       31,952             52,332  
             
Cash and cash equivalents at end of period
  $ 16,472     $ 70     $ 29,384     $     $ 45,926  
             
                                         
            For the Nine Months Ended September 30, 2004        
            Guarantor   Non-Guarantor        
    Parent   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
Net cash provided by operating activities
  $ 14,568     $ 7,579     $ 19,172     $ (13,490 )   $ 27,829  
 
                                       
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (8,477 )     (6,547 )     (3,084 )           (18,108 )
Proceeds from sale of fixed assets
    1             15             16  
Business acquisitions and other
    (798 )     41             43       (714 )
             
Net cash used by investing activities
    (9,274 )     (6,506 )     (3,069 )     43       (18,806 )
             
 
                                       
FINANCING ACTIVITIES:
                                       
Repayments of long-term debt
    (7,306 )           (6,548 )     13,495       (359 )
Share-based compensation activity
    (1,945 )     (1,081 )     2,488       (48 )     (586 )
Other financing costs
    (134 )                       (134 )
             
Net cash used by financing activities
    (9,385 )     (1,081 )     (4,060 )     13,447       (1,079 )
             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                59             59  
             
Net change in cash and cash equivalents
    (4,091 )     (8 )     12,102             8,003  
Cash and cash equivalents at beginning of period
    14,532       26       9,584             24,142  
             
Cash and cash equivalents at end of period
  $ 10,441     $ 18     $ 21,686     $     $ 32,145  
             

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
     We are a leading, independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
     We recognized net loss for the third quarter of 2005 of $3.3 million, or $0.14 per diluted share, compared with net income of $3.9 million, or $0.17 per diluted share, for the third quarter of 2004.
     We recognized net income for the nine-month period ended October 1, 2005 of $3.9 million, or $0.17 per diluted share, compared with $22.4 million, or $0.98 per diluted share for the comparable period in 2004.
     Our third quarter of 2005 results were affected by a number of challenging industry-wide issues, including intense competition, product price reductions, higher commodity costs, Delphi’s bankruptcy, and lower North American light vehicle production levels. We continuously work to address these challenges by implementing a broad range of initiatives aimed to improve operating performance. In addition to our restructuring initiatives, we have implemented lean manufacturing principles, consolidated our purchasing activities and we are continually evaluating the opportunity to manufacture products in low cost locations.
     Operating inefficiencies related to our restructuring efforts, primarily due to retention issues, also affected our third quarter of 2005 results. These restructuring initiatives include the rationalization of certain manufacturing facilities in the high cost regions of Europe and North America. We recently began a transition of additional production from the United States to Mexico by announcing the closing of a wire harness plant in the United States. The production lines will transition to Mexico over the next six months. In connection with our overall restructuring plan, we recorded charges of $0.8 million for the third quarter and $4.6 million for the first nine months of 2005. We expect the total cost of our restructuring efforts for 2004 and 2005 to approximate $7.6 million. See Note 10 to our condensed consolidated financial statements for more information.
     Significant factors inherent to our markets that could affect our results for the remainder of 2005 include our ability to successfully execute our planned restructuring program, mitigate commodity price increases, and implement planned productivity and cost reduction initiatives. Our results for the remainder of 2005 also depend on conditions in the automotive and commercial vehicle industries, which are generally dependent on domestic and global economies.
Results of Operations
     We are organized based primarily on markets served and products produced. Under this organization structure, our operating segments have been aggregated into two reportable segments: Vehicle Management & Power Distribution and Control Devices. The Vehicle Management & Power Distribution reportable segment includes results of operations from our operations that primarily design and manufacture 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 includes results of operations from our operations that primarily design and manufacture electronic and electromechanical switches, control actuation devices and sensors.
     Beginning in 2005, we changed from a calendar year end to a 52-53 week fiscal year end. Our 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.
Three Months Ended October 1, 2005 Compared To Three Months Ended September 30, 2004
     Net Sales. Net sales for our reportable segments, excluding intersegment sales, for the three months ended October 1, 2005 and September 30, 2004 are summarized in the following table.

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    For the Three Months Ended        
    October   September   $ Increase /   % Increase /
    1, 2005   30, 2004   (Decrease)   (Decrease)
     
Vehicle Management & Power Distribution
  $ 82,463     $ 88,554     $ (6,091 )     (6.9 )%
Control Devices
    76,252       75,732       520       0.7  
     
Total net sales
  $ 158,715     $ 164,286     $ (5,571 )     (3.4 )%
           
     The decrease in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to decreased production from a major commercial vehicle customer, a European product phase-out, and product price reductions. The increase in net sales for our Control Devices reportable segment during the third quarter of 2005 was primarily attributable to more stable production rates in the North American light vehicle market. Net sales were unfavorably affected by foreign exchange rate fluctuations relative to the U.S. dollar, which decreased sales by $0.5 million.
     Net sales by geographic location for the three months ended October 1, 2005 and September 30, 2004 are summarized in the following table.
                                 
    For the Three Months Ended        
    October   September   $ Increase /   % Increase /
    1, 2005   30, 2004   (Decrease)   (Decrease)
     
North America
  $ 125,789     $ 135,680     $ (9,891 )     (7.3 )%
Europe and other
    32,926       28,606       4,320       15.1  
     
Total net sales
  $ 158,715     $ 164,286     $ (5,571 )     (3.4 )%
           
     North American sales accounted for 79.3% of total net sales for the third quarter of 2005 compared with 82.6% for the third quarter of 2004. The decrease in North American net sales was primarily attributable to decreased sales to a major commercial vehicle customer and product price reductions. Net sales outside North America accounted for 20.7% of total net sales for the third quarter of 2005 compared to 17.4% for the third quarter of 2004. The increase in net sales outside of North America was primarily attributable to new product launches and increased commercial vehicle volume.
     Cost of Goods Sold. Cost of goods sold for the third quarter of 2005 increased by $2.6 million, or 2.0%, to $127.2 million from $124.6 million in the third quarter of 2004. As a percentage of sales, cost of goods sold increased to 80.1% from 75.9% for the third quarter of 2004. This increase as a percentage of sales was predominately due to operational inefficiencies resulting from our restructuring efforts, price reductions and reduced commercial vehicle volume. We expect that these challenges will continue to affect our gross margin through the remainder of 2005.
     Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses for the three months ended October 1, 2005 increased by $2.2 million to $31.0 million from $28.8 for the comparable period in 2004. Included in SG&A expenses for the three months ended October 1, 2005 and September 30, 2004 were product development expenses of $9.5 million and $8.8 million, respectively. The increase in SG&A expenses primarily reflects increased investment in our product development activities, which are focused on occupant safety, chassis, driveline and driver information products. The increase also reflects increased sales and marketing activity and bad debt expenses of $2.4 million recorded during the third quarter of 2005 as the result of the Delphi bankruptcy partially offset by decreased Sarbanes-Oxley compliance expenses. As a percentage of sales, SG&A expenses increased to 19.5% for the third quarter of 2005 from 17.5% for the corresponding period 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 America. This rationalization is a result of our cost reduction initiatives. Restructuring charges recorded by reportable segment during the third quarter of 2005 were as follows:

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    For the Three Months Ended October 1, 2005
    Vehicle            
    Management &           Total Consolidated
    Power Distribution   Control Devices   Restructuring Charges
     
Severance costs
  $ 356     $ 214     $ 570  
Facility closure costs
          218       218  
Other costs
          35       35  
     
Total restructuring charges
  $ 356     $ 467     $ 823  
     
                         
    For the Three Months Ended September 30, 2004
    Vehicle            
    Management &           Total Consolidated
    Power Distribution   Control Devices   Restructuring Charges
     
Asset-related charges
  $     $ 202     $ 202  
Other costs
          118       118  
     
Total restructuring charges
  $     $ 320     $ 320  
     
     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 exit costs include miscellaneous expenditures associated with exiting business activities.
     Total restructuring costs for 2004 and 2005 related to the Vehicle Management & Power Distribution reportable segment are expected to approximate $1.1 million, which includes $1.0 million of severance costs and $0.1 million of asset-related charges. Total restructuring costs for 2004 and 2005 related to the Control Devices reportable segment are expected to approximate $6.5 million, which includes $3.6 million of severance costs, $1.0 million of asset-related charges, $1.3 million of facility closure costs and $0.6 million of other exit costs.
     Other Income, net. Other income, which primarily represented equity earnings of unconsolidated subsidiaries and effects of foreign exchange, was $1.5 million and $0.4 million for the three months ended October 1, 2005 and September 30, 2004, respectively. The increase of $1.1 million was predominately attributable to the increase in equity earnings recognized from our joint venture in Brazil.
     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 three months ended October 1, 2005 and September 30, 2004.
                                 
    For the Three Months Ended        
    October   September   $ Increase /   % Increase /
    1, 2005   30, 2004   (Decrease)   (Decrease)
     
Vehicle Management & Power Distribution
  $ (1,240 )   $ 7,718     $ (8,958 )     (116.1 )%
Control Devices
    (325 )     4,500       (4,825 )     (107.2 )
Other corporate activities
    2,520       (1,327 )     3,847       (289.9 )
Corporate interest expense
    (5,671 )     (5,991 )     320       (5.3 )
     
Income (loss) before income taxes
  $ (4,716 )   $ 4,900     $ (9,616 )     (196.2 )%
     
     The decrease in income (loss) before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of operational inefficiencies related to our restructuring activities, Delphi’s bankruptcy, increased product development expenses, product price reductions and reduced sales volume. The Delphi bankruptcy resulted in a charge of $0.9 million in the three months ended October 1, 2005 for the Vehicle Management & Power Distribution reportable segment.

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     The decrease in income (loss) before income taxes at the Control Devices reportable segment was primarily the result of operational inefficiencies due to our restructuring activities, product price reductions, Delphi’s bankruptcy and increased product development activities. The Delphi bankruptcy resulted in a charge of $1.5 million in the three months ended October 1, 2005 for the Control Devices reportable segment.
     Income (loss) before income taxes for the third quarter of 2005 for North America decreased by $7.4 million to $(4.3) million from $3.1 million for the corresponding period in 2004. Income (loss) before income taxes for the third quarter of 2005 outside North America decreased by $2.2 million to $(0.4) million from $1.8 million for the corresponding period in 2004. The decrease in our global profitability was primarily due to operating inefficiencies related to restructuring efforts, Delphi’s bankruptcy, product price reductions, reduced commercial vehicle volume and increased product development activities.
     Provision (Benefit) for Income Taxes. We recognized a provision (benefit) for income taxes of $(1,424), or (30.2%) of pre-tax income, 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 decrease in the effective rate for the three months 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 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 we do 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.
Nine Months Ended October 1, 2005 Compared To Nine Months Ended September 30, 2004
     Net Sales. Net sales for our reportable segments, excluding intersegment sales, for the nine months ended October 1, 2005 and September 30, 2004 are summarized in the following table.
                                 
    For the Nine Months Ended        
    October   September   $ Increase /   % Increase /
    1, 2005   30, 2004   (Decrease)   (Decrease)
     
Vehicle Management & Power Distribution
  $ 281,169     $ 266,818     $ 14,351       5.4 %
Control Devices
    238,680       251,547       (12,867 )     (5.1 )
     
Total net sales
  $ 519,849     $ 518,365     $ 1,484       0.3 %
     
     The increase in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to an increase in commercial vehicle production, partially offset by product price reductions. The decrease in net sales for our Control Devices reportable segment during the first nine months of 2005 was primarily attributable to lower North American light vehicle production and product price reductions. Net sales were favorably affected by foreign exchange rate fluctuations relative to the U.S. dollar, which increased net sales by $2.8 million.
     Net sales by geographic location for the nine months ended October 1, 2005 and September 30, 2004 are summarized in the following table.
                                 
    For the Nine Months Ended        
    October   September   $ Increase /   % Increase /
    1, 2005   30, 2004   (Decrease)   (Decrease)
     
North America
  $ 409,060     $ 421,749     $ (12,689 )     (3.0 )%
Europe and other
    110,789       96,616       14,173       14.7  
     
Total net sales
  $ 519,849     $ 518,365     $ 1,484       0.3 %
     
     North American net sales accounted for 78.7% of total net sales for the first nine months of 2005 compared with 81.4% for the first nine months of 2004. The decrease in North American net sales was primarily attributable to decreased sales to the North American light vehicle market and product price reductions. Net sales outside North America accounted for 21.3%

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of total net sales for the first nine months of 2005 compared to 18.6% for the first nine months of 2004. The increase in net sales outside North America was primarily attributable to increased commercial vehicle production and favorable currency exchange rates.
     Cost of Goods Sold. Cost of goods sold for the first nine months of 2005 increased by $15.9 million, or 4.1%, to $401.2 million from $385.3 million in the first nine months of 2004. As a percentage of sales, cost of goods sold increased to 77.2% from 74.3% for the first nine months of 2004. This increase as a percentage of sales was predominately due to operational inefficiencies resulting from our restructuring efforts, product price reductions, higher commodity costs, and reduced light vehicle volumes. We expect that these challenges will continue to affect our gross margin through the remainder of 2005.
     Selling, General and Administrative Expenses. SG&A expenses for the nine months ended October 1, 2005 increased by $9.8 million to $92.5 million from $82.7 million in the first nine months of 2004. Included in SG&A expenses for the nine months ended October 1, 2005 and September 30, 2004 were product development expenses of $30.5 million and $25.6 million, respectively. The increase in SG&A expenses primarily reflects increased investment in our product development activities, which are focused on occupant safety, chassis, driveline and driver information products. The increase also reflects an increase in sales and marketing activity and bad debt expenses recorded during the nine months ended October 1, 2005 of $3.3 million as the result of customer bankruptcies. Additionally, SG&A for the first nine months of 2005 included favorable commercial dispute settlements of $3.2 million which were offset by an unfavorable commercial dispute settlement of $1.4 million. As a percentage of sales, SG&A expenses increased to 17.8% for the first nine months of 2005 from 15.9% for the corresponding period 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 America. This rationalization is part of our cost reduction initiatives. Restructuring charges recorded by reportable segment during the first nine months of 2005 were as follows:
                         
    For the Nine Months Ended October 1, 2005
    Vehicle            
    Management &           Total Consolidated
    Power Distribution   Control Devices   Restructuring Charges
     
Severance costs
  $ 453     $ 2,498     $ 2,951  
Asset-related charges
    127       369       496  
Facility closure costs
          964       964  
Other costs
          216       216  
     
Total restructuring charges
  $ 580     $ 4,047     $ 4,627  
         
                         
    For the Nine Months Ended September 30, 2004
    Vehicle            
    Management &           Total Consolidated
    Power Distribution   Control Devices   Restructuring Charges
     
Asset-related charges
  $     $    407     $    407  
Other costs
          118       118  
     
Total restructuring charges
      $    525     $    525  
         
     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 exit costs include miscellaneous expenditures associated with exiting business activities.
     Other Income, net. Other income, which primarily represented equity earnings of unconsolidated subsidiaries and effects of foreign exchange, was $4.1 million and $0.8 million for the nine months ended October 1, 2005 and September 30,

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2004, respectively. The increase of $3.3 million was predominately attributable to the increase in equity earnings recognized from our joint venture in Brazil.
     Income Before Income Taxes. Income 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 nine months ended October 1, 2005 and September 30, 2004.
                                 
    For the Nine Months Ended              
    October     September     $ Increase /     % Increase /  
    1, 2005     30, 2004     (Decrease)     (Decrease)  
     
Vehicle Management & Power Distribution
  $ 15,274     $ 24,914     $ (9,640 )     (38.7 )%
Control Devices
    2,570       27,219       (24,649 )     (90.6 )
Other corporate activities
    7,126       (1,665 )     8,791       (528.0 )
Corporate interest expense
    (17,395 )     (18,335 )     940       (5.1 )
     
Income before income taxes
  $ 7,575     $ 32,133     $ (24,558 )     (76.4 )%
           
     The decrease in income before income taxes for the first nine months of 2005 at the Vehicle Management & Power Distribution reportable segment was primarily the result of operational inefficiencies related to our restructuring activities, a customer bankruptcy, increased product development expenses, and product price reductions, offset by increased commercial vehicle production.
     The decrease in income before income taxes for the first nine months of 2005 at the Control Devices reportable segment was primarily the result of operational inefficiencies due to our restructuring activities, decreased North American light vehicle production, product price reductions, higher commodity costs, customer bankruptcies and increased product development activities.
     Income before income taxes for the first nine months of 2005 for North America decreased by $20.2 million to $2.6 million from $22.8 million for the corresponding period in 2004. Income before income taxes for the first nine months of 2005 outside North America decreased by $4.3 million to $5.0 million from $9.3 million for the corresponding period in 2004. The decrease in our global profitability was primarily due to operating inefficiencies related to restructuring efforts, the decrease in passenger car and light truck production, product price reductions, higher commodity costs, customer bankruptcies and increased product development activities, partially offset by increased commercial vehicle production.
     Provision for Income Taxes. We 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 increase in the effective rate for the nine months ended October 1, 2005 compared to September 30, 2004 was attributable to losses incurred outside the United States. In general, the Company’s operations outside the United States are taxed at lower rates than those of domestic operations. The Company has experienced losses related to certain operations in the United Kingdom. The Company believes that the related tax benefit of those losses may not be realized. Therefore, a valuation allowance has been recorded against the deferred tax assets associated with those foreign losses.
Liquidity and Capital Resources
     Net cash provided by operating activities was $15.5 million and $27.8 million for the nine months ended October 1, 2005 and September 30, 2004, respectively. The decrease in net cash provided by operating activities of $12.3 million was primarily due to a decrease in our profitability, largely attributable to operating inefficiencies related to our restructuring efforts, the decrease in passenger car and light truck production, product price reductions, higher commodity costs, customer bankruptcies and increased product development activities. This decrease was partially offset by decreases in working capital requirements.
     Net cash used by investing activities was $19.6 million and $18.8 million for the nine months ended October 1, 2005 and September 30, 2004, respectively. The increase in net cash used by investing activities of $0.8 million was attributable to a slight increase in capital expenditures offset by proceeds received from a sale of fixed assets in the United Kingdom in 2005.

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     Net cash used by financing activities was $1.1 million for the nine months ended September 30, 2004 and was primarily related to share-based compensation activity.
     As discussed in Note 4 to our condensed consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $19.8 million to reduce exposure related to our krona- and pound-denominated receivables. The estimated fair value of these contracts at October 1, 2005, per quoted market sources, was approximately $0.1 million. We have also entered into foreign currency option contracts with a notional value of $0.1 million to reduce the risk associated with our 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. The foreign currency forward contracts are marked to market, with gains and losses recognized in our condensed consolidated statement of operations as a component of other income. The option contracts are marked to market, with gains and losses recognized in our condensed consolidated statement of operations as a component of operating income. Our forward foreign exchange and option contracts substantially offset gains and losses on the underlying foreign-denominated transactions. We do not enter into financial instruments for speculative or profit motivated purposes. We believe that our use of these instruments to reduce risk is in our best interest.
     Future capital expenditures are expected to increase as management targets specific growth opportunities and future organic growth is expected to be funded through cash flows from operations. We believe that cash flows from operations and the availability of funds from our credit facilities and senior notes will provide sufficient liquidity to meet our future growth and operating needs. As outlined in Note 8 to our condensed consolidated financial statements, we have a revolving credit facility of which $96.1 million was available at October 1, 2005. We also had $45.9 million in available cash at October 1, 2005, and believe we will have access to the debt and equity markets should the need arise.
     Our credit facilities contain 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. We were in compliance with all covenants at October 1, 2005.
Inflation and International Presence
     We believe that our operations have not historically been adversely affected by inflation; however, given the current economic climate and recent increases in certain commodity prices, we believe that a continuation of such price increases could significantly affect our profitability. 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.
Forward-Looking Statements
     Portions of this report contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things, the Company’s (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
  the loss or bankruptcy of a major customer;
  the costs and timing of facility closures, business realignment, or similar actions;
  a significant change in automotive, medium- and heavy-duty truck or agricultural and off-highway vehicle production;
  the ability of the Company to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
  a significant change in general economic conditions in any of the various countries in which the Company operates;
  labor disruptions at the Company’s facilities or at any of the Company’s significant customers or suppliers;
  the ability of the Company’s suppliers to supply it with parts and components at competitive prices on a timely basis;

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  the amount of debt and the restrictive covenants contained in the Company’s credit facility;
 
  customer acceptance of new products;
 
  capital availability or costs, including changes in interest rates or market perceptions of the Company;
  changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
  the successful integration of any acquired businesses;
  the impact of laws and regulations, including the Sarbanes-Oxley Act of 2002 and environmental laws and regulations; and
  the occurrence or non-occurrence of circumstances beyond the Company’s control.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
     From time to time, the Company is exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At October 1, 2005, however, all of the Company’s outstanding debt was fixed-rate debt.
Commodity Price Risk
     Given the current economic climate, the Company has been experiencing risk related to the pricing of certain commodities, particularly with respect to copper and resins. The Company is managing this risk through a combination of fixed-price agreements, staggered short-term contract maturities and commercial negotiations with its suppliers. The Company is also considering pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. At this time, the Company does not intend to use financial instruments to mitigate this risk. The increases in certain commodity costs have negatively affected the Company’s operating results, and a continuation of such price increases could affect its profitability.
Foreign Currency Exchange Risk
     The Company’s risks related to foreign currency exchange rates have historically not been material; however, given the current economic climate, the Company is monitoring this risk. The Company does not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries in which it operates. Therefore, a 10.0% change in the value of the U.S. dollar would not significantly affect the Company’s results of operations, financial position or cash flows.
     There have been no material changes to the Company’s exposures to market risk since December 31, 2004, as reported in the Company’s 2004 Annual Report on Form 10-K.

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Item 4. Controls and Procedures.
     Edward F. Mosel, the Company’s chief operating officer, on behalf of the Company has performed the functions of the Company’s principal financial officer since the August 19, 2005 resignation of the Company’s chief financial officer. Mr. Mosel is expected to continue to perform those functions on a temporary basis until the Company hires a new chief financial officer. The Company has retained an executive search firm to assist the Company in the search for a new chief financial officer.
Evaluation of Disclosure Controls and Procedures
     As of October 1, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (CEO) and chief operating officer (COO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and COO, concluded that the Company’s disclosure controls and procedures were effective as of October 1, 2005.
Changes in Internal Control over Financial Reporting
     In connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15, management, including the CEO and COO, identified a change in internal control over financial reporting for the quarter ended October 1, 2005 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
     The Company completed the implementation of new Enterprise Resource Planning (“ERP”) systems at two business units, where inventory is material to the Company. In order to ensure that effective internal control over financial reporting is maintained during the implementation and testing of the new systems, the Company has taken, or plans to take, the following additional steps:
  All significant accounts impacted by the new ERP systems are being reconciled on a timely basis,
  Physical inventory observations have been performed, using a blind-count approach, during the three-month period ended October 1, 2005 and additional observations will be performed during December of 2005,
  Standard product costs and manufacturing variances are being reviewed and investigated at a detailed level, and
  Additional resources have been allocated to these business units to assist in the timely resolution of issues that may arise out of the system implementations.
     We believe that the additional steps taken subsequent to the implementation of the new ERP systems are appropriate and the related controls are designed and operating effectively for the achievement of financial reporting objectives.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
     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.
Item 6. Exhibits.
     Reference is made to the separate, “Index to Exhibits,” contained on page 33, filed herewith.

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SIGNATURES
     Pursuant to the requirements 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: November 4, 2005
  /s/ Gerald V. Pisani
 
   
 
  Gerald V. Pisani
 
  President and Chief Executive Officer
 
  (Principal Executive Officer)
 
   
Date: November 4, 2005
  /s/ Edward F. Mosel
 
   
 
  Edward F. Mosel
 
  Executive Vice President and
 
  Chief Operating Officer
 
  (Interim Principal Financial Officer)

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INDEX TO EXHIBITS
     
Exhibit Number   Exhibit
 
10.1
  Amendment No. 3 dated July 18, 2005 to Credit Agreement dated May 1, 2002 among Stoneridge, Inc. as Borrower, the Lending Institutions Named Therein, as Lenders, National City Bank, as Administrative Agent, a Joint Lead Arranger and Collateral Agent, Deutsche Bank Securities Inc., as a Joint Lead Arranger, Comerica Bank and PNC Bank, National Association, as the Co-Documentation Agents (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 21, 2005).
 
   
10.2
  Severance Agreement and Release dated August 19, 2005 with Joseph M. Mallak in connection with his resignation as the Company’s vice president and chief financial officer (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on August 23, 2005).
 
   
31.1
  Principal Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
31.2
  Principal Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
32.1
  Principal 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
  Principal 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.

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