STONERIDGE INC - Quarter Report: 2006 July (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended July 1, 2006

OR

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

For the transition period from                    to                     

Commission file number: 001-13337

STONERIDGE, INC.

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

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

(330) 856-2443

     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. þ Yes o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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

     The number of Common Shares, without par value, outstanding as of July 24, 2006 was 23,225,949.

 

 

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

						Page No.
PART I-FINANCIAL INFORMATION
Item 1.		Financial Statements
				Condensed Consolidated Balance Sheets as of July 1, 2006 (Unaudited) and December 31, 2005			2
				Condensed Consolidated Statements of Operations (Unaudited) For the 13 and 26 Weeks Ended July 1, 2006 and July 2, 2005			3
				Condensed Consolidated Statements of Cash Flows (Unaudited) For the 26 Weeks Ended July 1, 2006 and July 2, 2005			4
				Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk					30
Item 4.		Controls and Procedures					31
PART II–OTHER INFORMATION
Item 1.		Legal Proceedings					32
Item 1A.		Risk Factors					32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds					32
Item 3.		Defaults Upon Senior Securities					32
Item 4.		Submission of Matters to a Vote of Security Holders					32
Item 5.		Other Information					32
Item 6.		Exhibits					33
Signatures							34
Index to Exhibits							35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES

		July 1,				December 31,
		2006				2005
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash and cash equivalents		$	42,991			$	40,784
Accounts receivable, less allowances for doubtful accounts of $5,387 and $4,562, respectively			126,793				100,362
Inventories, net			57,501				53,791
Prepaid expenses and other			15,095				14,490
Deferred income taxes			10,020				9,253
Total current assets			252,400				218,680
Long-Term Assets:
Property, Plant and Equipment, net			114,223				113,478
Other Assets:
Goodwill			65,176				65,176
Investments and other, net			29,908				26,491
Deferred income taxes			36,847				39,213
Total long-term assets			246,154				244,358
Total Assets		$	498,554			$	463,038
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	—			$	44
Accounts payable			72,600				55,344
Accrued expenses and other			51,428				46,603
Total current liabilities			124,028				101,991
Long-Term Liabilities:
Long-term debt, net of current portion			200,000				200,000
Deferred income taxes			1,430				923
Other liabilities			6,514				6,133
Total long-term liabilities			207,944				207,056
Shareholders’ Equity:
Preferred Shares, without par value, 5,000 authorized, none issued			—				—
Common Shares, without par value, authorized 60,000 shares, issued 23,403 and 23,232 shares and outstanding 23,226 and 23,178 shares, respectively, with no stated value			—				—
Additional paid-in capital			148,285				147,440
Common Shares held in treasury, 177 and 54 shares, respectively, at cost			(141	)			(65	)
Retained earnings			15,864				7,188
Accumulated other comprehensive income (loss)			2,574				(572	)
Total shareholders’ equity			166,582				153,991
Total Liabilities and Shareholders’ Equity		$	498,554			$	463,038

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

STONERIDGE, INC. AND SUBSIDIARIES

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Net Sales		$	185,499			$	180,307			$	365,133			$	361,134
Costs and Expenses:
Cost of goods sold			141,504				138,492				280,447				274,083
Selling, general and administrative			31,150				30,211				62,390				60,587
Provision for doubtful accounts			151				917				507				933
Loss (gain) on sale of property, plant and equipment			20				(336	)			(1,469	)			(339	)
Restructuring charges, net			(150	)			2,014				74				4,140
Operating Income			12,824				9,009				23,184				21,730
Interest expense, net			5,833				6,048				11,752				12,037
Equity in earnings of investees			(1,550	)			(1,074	)			(2,966	)			(1,806	)
Other expense (income), net			1,745				(595	)			1,750				(792	)
Income Before Income Taxes			6,796				4,630				12,648				12,291
Provision for income taxes			1,906				1,815				3,993				5,107
Net Income		$	4,890			$	2,815			$	8,655			$	7,184
Basic net income per share		$	0.21			$	0.12			$	0.38			$	0.32
Basic weighted average shares outstanding			22,861				22,695				22,824				22,689
Diluted net income per share		$	0.21			$	0.12			$	0.38			$	0.31
Diluted weighted average shares outstanding			22,902				22,985				22,884				22,933

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

STONERIDGE, INC AND SUBSIDIARIES

		Twenty-Six Weeks Ended
		July 1,				July 2,
		2006				2005
OPERATING ACTIVITIES:
Net income		$	8,655			$	7,184
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation			12,608				13,503
Amortization			821				758
Deferred income taxes			2,269				2,939
Earnings of equity method investees, less dividends received			(2,980	)			(1,830	)
Gain on sale of property, plant and equipment			(1,469	)			(339	)
Share-based compensation expense			926				742
Changes in operating assets and liabilities -
Accounts receivable, net			(24,274	)			(17,376	)
Inventories, net			(2,372	)			(3,219	)
Prepaid expenses and other			(219	)			(5,146	)
Other assets			985				263
Accounts payable			15,489				7,862
Accrued expenses and other			1,776				(387	)
Net cash provided by operating activities			12,215				4,954
INVESTING ACTIVITIES:
Capital expenditures			(13,150	)			(12,366	)
Proceeds from sale of property, plant and equipment			2,266				1,654
Business acquisitions and other			(673	)			—
Net cash used by investing activities			(11,557	)			(10,712	)
FINANCING ACTIVITIES:
Repayments of long-term debt			(44	)			(71	)
Share-based compensation activity			13				55
Other financing costs			(150	)			—
Net cash used by financing activities			(181	)			(16	)
Effect of exchange rate changes on cash and cash equivalents			1,730				(1,988	)
Net change in cash and cash equivalents			2,207				(7,762	)
Cash and cash equivalents at beginning of period			40,784				52,332
Cash and cash equivalents at end of period		$	42,991			$	44,570

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

STONERIDGE, INC.

(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 notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2005.

     The results of operations for the 13 and 26 weeks ended July 1, 2006 are not necessarily indicative of the results to be 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 7 years, starting in 2008, the fourth quarter will be 14 weeks in length. The second 13-week period of 2006 and 2005 ended on July 1 and July 2, respectively.

     The Company has reclassified the presentation of certain prior-period information to conform to the current presentation.

(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 to 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 68% and 72% of the Company’s inventories at July 1, 2006 and December 31, 2005, 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:

		July 1,				December 31,
		2006				2005
Raw materials		$	39,141			$	34,026
Work in progress			8,884				8,644
Finished goods			10,942				12,400
Total inventories			58,967				55,070
Less: LIFO reserve			(1,466	)			(1,279	)
Inventories, net		$	57,501			$	53,791

(4) Fair Value of 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 senior notes (fixed rate debt) at July 1, 2006, per quoted market sources, was $192.0 million and the carrying value was $200.0 million.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except 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 intercompany transactions denominated in a foreign currency and other known foreign currency exposures. The principal currencies hedged by the Company include the Swedish krona, British pound and the Mexican peso. The foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s 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 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 the 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 approximately $16,003 and reduce exposure related to the Company’s Swedish krona and British pound denominated receivables. The estimated fair value of these contracts at July 1, 2006, per quoted market sources, was approximately $(235). The Company’s foreign currency option contracts have a notional value of $167 and reduce the risk associated with the Company’s other known foreign currency exposures related to the Mexican peso. The estimated fair value of these contracts at July 1, 2006, per quoted market sources, was approximately $43.

(5) Share-Based Compensation

     At July 1, 2006, the Company had three types of share-based compensation plans; (1) Long-Term Incentive Plan (the “Incentive Plan”) (2) Directors’ Share Option Plan (the “Director Option Plan”) and (3) the Directors’ Restricted Shares Plan. One plan is for employees and two plans are for non-employee directors. The Incentive Plan is made up of the Long-Term Incentive Plan that was approved by the Company’s shareholders on September 30, 1997 (the “1997 Plan”) and expires on June 30, 2007 and the Amended and Restated Long-Term Incentive Plan (the “2006 Plan”) that was approved by the Company’s shareholders on April 24, 2006 and expires on April 24, 2016. Prior to the second quarter of 2005, the Company accounted for its plans under the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) 123, “Accounting for Stock-Based Compensation,” adopted prospectively for all employee and director awards granted, modified or settled after January 1, 2003, under the provisions of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” Because the Company adopted the fair value method on a prospective basis, the cost related to share-based compensation recognized during the fiscal year ended December 31, 2005 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 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 13 and 26 weeks ended July 1, 2006.

     Total compensation expense recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $292 and $415 for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26-week period ended July 1, 2006 and July 2, 2005, total compensation expense recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $926 and $742, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $102 and $156 for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26-week period ended July 1, 2006 and July 2, 2005, total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $324 and $434, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

     There were no options granted during the 13 or 26 weeks ended July 1, 2006 or July 2, 2005. As of July 1, 2006, the aggregate intrinsic value of both outstanding and exercisable options was zero.

     The fair value of the non-vested 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 was $6.84 for both the 13- and 26-

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

week periods ended July 1, 2006. The weighted-average grant-date fair value of shares granted during the 13- and 26-week periods ended July 2, 2005 was $10.23.

     The fair value of the non-vested performance-based restricted Common Share awards with a performance condition, requiring the Company to obtain certain net income per share targets, was calculated using the market value of the shares on the date of issuance. The fair value of the non-vested 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 non-vested restricted Common Shares as of July 1, 2006, and the changes during the 26 weeks ended, is presented below:

		Time-Based Awards								Performance-Based Awards
						Weighted-								Weighted-
						Average								Average
						Grant-Date								Grant-Date
Non-vested Restricted Common Shares		Shares				Fair Value				Shares				Fair Value
Non-vested at December 31, 2005			207,251			$	11.47				237,000			$	8.24
Granted			169,000				6.84				—				—
Vested			(142,795	)			10.02				—				—
Forfeited			(9,019	)			11.56				(100,800	)			8.24
Non-vested at July 1, 2006			224,437			$	8.91				136,200			$	8.24

     As of July 1, 2006, total unrecognized compensation cost related to non-vested time-based restricted Common Share awards granted was $1,414. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of shares vested based on service conditions during the 13 and 26 weeks ended July 1, 2006 was $451 and $922, respectively. For the 13 and 26 weeks ended July 2, 2005, the total fair value of time-based restricted Common Share awards vested was $110 and $117, respectively.

     As of July 1, 2006, total unrecognized compensation cost related to non-vested performance-based restricted Common Share awards granted was $238. That cost is expected to be recognized over a weighted-average period of 1.8 years. No performance-based restricted Common Share awards have vested as of July 1, 2006.

(6) Comprehensive Income

     SFAS 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income. Other comprehensive income includes foreign currency translation adjustments and gains and losses from certain foreign currency transactions, the effective portion of gains and losses on certain hedging activities, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

     The components of comprehensive income, net of tax were as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Net income		$	4,890			$	2,815			$	8,655			$	7,184
Other comprehensive income (loss):
Foreign currency translation adjustments			2,495				(1,657	)			3,717				(3,728	)
Minimum pension liability adjustments			(197	)			157				(234	)			224
Unrealized (loss) gain on marketable securities			(189	)			6				(336	)			16
Total other comprehensive income (loss)			2,109				(1,494	)			3,147				(3,488	)
Comprehensive income		$	6,999			$	1,321			$	11,802			$	3,696

     Accumulated other comprehensive income (loss) is comprised of the following:

		July 1,				December 31,
		2006				2005
Foreign currency translation adjustments		$	6,196			$	2,500
Minimum pension liability adjustments			(3,326	)			(3,092	)
Unrealized (loss) gain on marketable securities			(296	)			20
Accumulated other comprehensive income (loss)		$	2,574			$	(572	)

(7) Long-Term Debt

     Senior Notes

     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.

     Credit Agreement

     On March 7, 2006, the Company amended the existing credit agreement, which provided the Company with substantially all of its borrowing capacity on the $100.0 million credit facility. The credit agreement contains various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment utilizes a borrowing base composed of accounts receivable and inventory. The borrowing base limitation expires June 30, 2007. In addition, the Company is prohibited from repurchasing, repaying or redeeming subordinated notes until certain covenant levels are met. As of July 1, 2006, $96.7 million of the $100.0 million credit facility was available to the company. 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 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.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

     Long-term debt consists of the following:

		July 1,				December 31,
		2006				2005
11 1/2% Senior notes, due 2012		$	200,000			$	200,000
Other			—				44
Total debt			200,000				200,044
Less: Current portion			—				(44	)
Total long-term debt less current portion		$	200,000			$	200,000

(8) Net Income Per Share

     Net income 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 per share was computed by dividing net income by the weighted-average number of Common Shares outstanding for each respective period. Diluted net income per share was calculated by dividing net income 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 per share were as follows:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Basic weighted average shares outstanding			22,861				22,695				22,824				22,689
Effect of dilutive securities			41				290				60				244
Diluted weighted-average shares outstanding			22,902				22,985				22,884				22,933

     Outstanding options not included in the computation of diluted net income per share to purchase 681 and 483 Common Shares at an average price of $12.14 and $13.94 per share were outstanding during the 13-week periods ended July 1, 2006 and July 2, 2005, respectively. Outstanding options not included in the computation of diluted net income per share to purchase 681 and 300 Common Shares at an average price of $12.14 and $16.11 per share were outstanding during the 26-week periods ended July 1, 2006 and July 2, 2005, 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.

(9) Restructuring

     In January 2005, the Company announced restructuring initiatives related to the rationalization of certain manufacturing facilities in Europe and North America. This rationalization is part of the Company’s cost reduction initiatives. In connection with these initiatives, the Company recorded restructuring charges of $(150) and $74 for the 13 and 26 weeks ended July 1, 2006. Restructuring charges on the Condensed Consolidated Statements of Operations for the 13 and 26 weeks ended July 2, 2005 were $2,014 and $4,140, respectively. Accrued severance costs of $370 related to the Vehicle Management and Power Distribution segment were reversed during the 13 weeks ended July 1, 2006, resulting from continued production at a plant that was previously scheduled to close. The reversal of the accrual to income represents a non-cash inflow. Also included in the Condensed Consolidated Statements of Operations was a gain on the sale of property, plant and equipment related to our restructuring initiatives of $336 for the 13 and 26 weeks ended July 2, 2005. This gain is netted within the activity listed in the table on the next page.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

     The restructuring charges related to the Vehicle Management & Power Distribution reportable segment included the following:

						Asset-
		Severance				Related
		Costs				Charges				Total
Total expected restructuring charges		$	763			$	127			$	890
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
Fourth quarter charge to expense			70				—				70
Cash payments			(111	)			—				(111	)
Non-cash utilization			—				(127	)			(127	)
Balance at December 31, 2005		$	412			$	—			$	412
First quarter charge to expense			176				—				176
Second quarter charge to expense			(370	)			—				(370	)
Cash payments			(130	)			—				(130	)
Non-cash utilization			—				—				—
Balance at July 1, 2006		$	88			$	—			$	88
Remaining expected restructuring charge		$	434			$	—			$	434

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

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

						Asset-				Facility
		Severance				Related				Closure				Other Exit
		Costs				Charges				Costs				Costs				Total
Total expected restructuring charges		$	3,713			$	983			$	1,219			$	653			$	6,568
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
Fourth quarter charge to expense			(57	)			—				140				(18	)			65
Cash payments			(2,722	)			—				(140	)			(198	)			(3,060	)
Non-cash utilization			—				(369	)			—				—				(369	)
Balance at December 31, 2005		$	197			$	—			$	964			$	—			$	1,161
First quarter charge to expense			—				—				—				48				48
Second quarter charge to expense			204				—				14				2				220
Cash payments			(197	)			—				(368	)			(50	)			(615	)
Non-cash utilization			—				—				—				—				—
Balance at July 1, 2006		$	204			$	—			$	610			$	—			$	814
Remaining expected restructuring charge		$	—			$	—			$	101			$	—			$	101

     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 2007.

(10) 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.

     Customer Bankruptcy

     On March 3, 2006, the Company was notified that one of its customers, Dana Corporation, had filed for Chapter 11 bankruptcy protection. As a result, the Company established a reserve for estimated losses of approximately $343 that are expected to result from the bankruptcy. The charges were recorded in the Company’s Condensed Consolidated Statement of

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

Operations as a component of provision for doubtful accounts expense. The charge was recorded during the 13-week period ended April 1, 2006.

     Product Warranty and Recall

     Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers.

     The following provides a reconciliation of changes in product warranty and recall liability for the 26 weeks ended July 1, 2006 and July 2, 2005:

		2006				2005
Product warranty and recall at beginning of period		$	6,220			$	6,645
Accruals for products shipped during period			2,019				1,638
Changes in estimates of existing liabilities			96				(33	)
Settlements made during the period (in cash or in kind)			(2,291	)			(2,038	)
Product warranty and recall at end of period		$	6,044			$	6,212

(11) Employee Benefit Plans

     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 U.S. The components of net periodic pension and postretirement benefit cost are as follows:

		Pension Benefit Plan
		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Service cost		$	36			$	18			$	64			$	37
Interest cost			331				249				585				506
Expected return on plan assets			(355	)			(258	)			(628	)			(525	)
Amortization of actuarial loss			84				74				149				150
Net periodic benefit cost		$	96			$	83			$	170			$	168

		Postretirement Benefit Plan
		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Service cost		$	4			$	23			$	8			$	46
Interest cost			4				22				8				44
Net periodic benefit cost		$	8			$	45			$	16			$	90

     The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute $273 to its pension plan in 2006. As of July 1, 2006, contributions of $116 have been made to the pension plan.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

(12) Income Taxes

     The Company recognized a provision for income taxes of $ 1,906, or 28.1% of pre-tax income, and $ 1,815, or 39.2% of pre-tax income, for federal, state and foreign income taxes for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. The Company recognized a provision for income taxes of $ 3,993, or 31.6% of pre-tax income, and $ 5,107, or 41.6% of pre-tax income, for federal, state and foreign income taxes for the 26 weeks ended July 1, 2006 and July 2, 2005, respectively. The decrease in the effective tax rate for both the 13- and 26-week periods ended July 1, 2006 compared to the 13- and 26-week periods ended July 2, 2005 was primarily attributable to the improved performance of the United Kingdom operations thus reducing the impact on the effective tax rate of the current year valuation allowance provided.

(13) Accounting Pronouncements

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. Management has determined that the implementation of SFAS 155 will not have an effect on the Company’s financial statements.

     In March 2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement 140”. SFAS 156 will become effective for fiscal years beginning after September 15, 2006. SFAS 156 requires an entity to recognize a servicing asset or servicing liability at fair value, if possible, each time it undertakes an obligation to service a financial asset by entering into a servicing contract under certain conditions. Management has determined that the implementation of SFAS 156 will not have an effect on the Company’s financial statements.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The company is assessing FIN 48 and has not determined yet the impact that the adoption of FIN 48 will have on its result of operations or financial position.

(14) 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 management in deciding how to allocate resources and in assessing performance.

     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.

     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, 2005 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

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

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Net Sales
Vehicle Management & Power Distribution		$	105,543			$	99,684			$	205,907			$	198,707
Intersegment sales			4,534				3,707				9,003				8,526
Vehicle Management & Power Distribution net sales			110,077				103,391				214,910				207,233
Control Devices			79,956				80,623				159,226				162,427
Intersegment sales			1,193				660				2,111				1,516
Control Devices net sales			81,149				81,283				161,337				163,943
Eliminations			(5,727	)			(4,367	)			(11,114	)			(10,042	)
Total consolidated net sales		$	185,499			$	180,307			$	365,133			$	361,134
Income Before Income Taxes
Vehicle Management & Power Distribution		$	8,847			$	7,513			$	15,044			$	16,513
Control Devices			4,497				510				8,906				2,894
Other corporate activities			(735	)			2,472				197				4,608
Corporate interest expense			(5,813	)			(5,865	)			(11,499	)			(11,724	)
Total consolidated income before income taxes		$	6,796			$	4,630			$	12,648			$	12,291
Depreciation and Amortization
Vehicle Management & Power Distribution		$	1,977			$	2,025			$	3,767			$	4,180
Control Devices			4,359				4,432				8,789				8,851
Corporate activities			97				96				188				194
Total consolidated depreciation and amortization(A)		$	6,433			$	6,553			$	12,744			$	13,225
Interest Expense (Income)
Vehicle Management & Power Distribution		$	(131	)		$	29			$	(237	)		$	68
Control Devices			151				154				490				246
Corporate activities			5,813				5,865				11,499				11,723
Total consolidated interest expense, net		$	5,833			$	6,048			$	11,752			$	12,037
Capital Expenditures
Vehicle Management & Power Distribution		$	2,834			$	3,881			$	5,034			$	5,526
Control Devices			3,750				4,424				8,067				6,741
Corporate activities			3				6				49				99
Total consolidated capital expenditures		$	6,587			$	8,311			$	13,150			$	12,366

		July 1,				December 31,
		2006				2005
Total Assets
Vehicle Management & Power Distribution		$	187,452			$	158,203
Control Devices			229,928				222,747
Corporate(B)			249,894				248,739
Eliminations			(168,720	)			(166,651	)
Total consolidated assets		$	498,554			$	463,038

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except 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:

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 1,				July 2,				July 1,				July 2,
		2006				2005				2006				2005
Net Sales
North America		$	143,391			$	142,297			$	284,415			$	282,591
Europe and other			42,108				38,010				80,718				78,543
Total consolidated net sales		$	185,499			$	180,307			$	365,133			$	361,134

		July 1,				December 31,
		2006				2005
Non-Current Assets
North America		$	218,103			$	216,563
Europe and other			28,051				27,795
Total non-current assets		$	246,154			$	244,358

(15) Investments

     PST Indústria Eletrônica da Amazônia Ltda.

     The Company has a 50% interest in PST Indústria Eletrônica da Amazônia Ltda. (“PST”), a Brazilian electronic components business that specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $21,033 and $17,818 at June 30, 2006 and December 31, 2005, respectively. The Company has a note receivable with PST of $1,148 as of June 30, 2006 and December 31, 2005, respectively. PST operates on a calendar year.

     Condensed financial information for PST is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Revenues		$	21,014			$	16,854			$	42,013			$	31,116
Cost of sales		$	10,664			$	9,218			$	21,338			$	17,302
Total pretax income		$	3,628			$	2,592			$	7,824			$	4,230
The Company’s share of pretax income		$	1,814			$	1,296			$	3,912			$	2,115

     Equity in earnings of PST included in the Condensed Consolidated Statements of Operations were $1,466 and $1,046 for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26 weeks ended July 1, 2006 and July 2, 2005, equity in earnings of PST included in the Condensed Consolidated Statements of Operations were $2,826 and $1,765, respectively.

     Minda Instruments Ltd.

     The Company has a 30% interest in Minda Instruments Ltd. (“Minda”), a company based in India that manufactures electronic instrumentation equipment for the transportation market. In February 2006, the Company increased its investment in Minda from 20% to 30% by purchasing an additional 10% of Minda’s equity for $980. The investment is accounted for under the equity method of accounting. The Company’s investment in Minda was $1,890 and $828 at July 1, 2006 and December 31, 2005, respectively. Equity in earnings of Minda included in the Condensed Consolidated Statements of Operations were $84 and $28, for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26 weeks ended July 1,

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

2006 and July 2, 2005, equity in earnings of Minda included in the Condensed Consolidated Statements of Operations were $140 and $41, respectively.

(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 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 condensed consolidated basis, as of July 1, 2006 and December 31, 2005 and for each of the 13 and 26 weeks ended July 1, 2006 and July 2, 2005.

     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 presentations on the subsequent pages.

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

		July 1, 2006
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	14,958			$	50			$	27,983			$	—			$	42,991
Accounts receivable, net			57,342				37,736				31,715				—				126,793
Inventories, net			26,274				12,490				18,737				—				57,501
Prepaid expenses and other			(257,211	)			261,333				10,973				—				15,095
Deferred income taxes			5,254				4,090				676				—				10,020
Total current assets			(153,383	)			315,699				90,084				—				252,400
Long-Term Assets:
Property, Plant and Equipment, net			61,643				32,900				19,680				—				114,223
Other Assets:
Goodwill			44,584				20,592				—				—				65,176
Investments and other, net			30,306				430				172				(1,000	)			29,908
Deferred income taxes			39,295				(2,549	)			101				—				36,847
Investment in subsidiaries			400,115				—				—				(400,115	)			—
Total long-term assets			575,943				51,373				19,953				(401,115	)			246,154
Total Assets		$	422,560			$	367,072			$	110,037			$	(401,115	)		$	498,554
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	27,339			$	22,770			$	22,491			$	—			$	72,600
Accrued expenses and other			24,523				12,597				14,308				—				51,428
Total current liabilities			51,862				35,367				36,799				—				124,028
Long-Term Liabilities:
Long-term debt			200,000				—				1,000				(1,000	)			200,000
Deferred income taxes			—				—				1,430				—				1,430
Other liabilities			4,116				(2,058	)			4,456				—				6,514
Total long-term liabilities			204,116				(2,058	)			6,886				(1,000	)			207,944
Shareholders’ Equity			166,582				333,763				66,352				(400,115	)			166,582
Total Liabilities and Shareholders’ Equity		$	422,560			$	367,072			$	110,037			$	(401,115	)		$	498,554

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)

     Supplemental condensed consolidating financial statements (continued):

		December 31, 2005
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	7,754			$	47			$	32,983			$	—			$	40,784
Accounts receivable, net			46,505				30,883				23,043				(69	)			100,362
Inventories, net			25,662				12,804				15,325				—				53,791
Prepaid expenses and other			(274,706	)			258,203				30,993				—				14,490
Deferred income taxes			4,713				4,116				424				—				9,253
Total current assets			(190,072	)			306,053				102,768				(69	)			218,680
Long-Term Assets:
Property, Plant and Equipment, net			61,620				33,683				18,175				—				113,478
Other Assets:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			38,004				460				46				(12,019	)			26,491
Deferred income taxes			41,547				(3,781	)			1,447				—				39,213
Investment in subsidiaries			399,536				—				—				(399,536	)			—
Total long-term assets			585,292				50,953				19,668				(411,555	)			244,358
Total Assets		$	395,220			$	357,006			$	122,436			$	(411,624	)		$	463,038
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	—			$	—			$	44			$	—			$	44
Accounts payable			20,350				17,358				17,636				—				55,344
Accrued expenses and other			20,879				10,351				15,442				(69	)			46,603
Total current liabilities			41,229				27,709				33,122				(69	)			101,991
Long-Term Liabilities:
Long-term debt, net of current portion			200,000				—				12,019				(12,019	)			200,000
Deferred income taxes			—				—				923				—				923
Other liabilities			—				2,043				4,090				—				6,133
Total long-term liabilities			200,000				2,043				17,032				(12,019	)			207,056
Shareholders’ Equity			153,991				327,254				72,282				(399,536	)			153,991
Total Liabilities and Shareholders’ Equity		$	395,220			$	357,006			$	122,436			$	(411,624	)		$	463,038