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

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended April 1, 2006		Commission file number: 001-13337

STONERIDGE, INC.

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

9400 East Market Street, Warren, Ohio (Address of principal executive offices)		44484 (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 April 28, 2006 was 23,225,266.

 

 

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

PART I—FINANCIAL INFORMATION						Page No.
Item 1.		Financial Statements
				Condensed Consolidated Balance Sheets as of April 1, 2006 (Unaudited) and December 31, 2005			2
				Condensed Consolidated Statements of Operations (Unaudited) For the Thirteen Weeks Ended April 1, 2006 and April 2, 2005			3
				Condensed Consolidated Statements of Cash Flows (Unaudited) For the Thirteen Weeks Ended April 1, 2006 and April 2, 2005			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk					25
Item 4.		Controls and Procedures					26
PART II—OTHER INFORMATION
Item 1.		Legal Proceedings					27
Item 1A.		Risk Factors					27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds					27
Item 3.		Defaults Upon Senior Securities					27
Item 4.		Submission of Matters to a Vote of Security Holders					27
Item 5.		Other Information					27
Item 6.		Exhibits					27
Signatures							28
Index to Exhibits							29
EX-10.3 Employment Agreement
EX-31.1 Certification 302 - CEO
EX-31.2 Certification 302 - CFO
EX-32.1 Certification 906 - CEO
EX-32.2 Certification 906 - CFO

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

		April 1,				December 31,
		2006				2005
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash and cash equivalents		$	41,774			$	40,784
Accounts receivable, less allowances for doubtful accounts of $5,135 and $4,562, respectively			121,434				100,362
Inventories, net			55,139				53,791
Prepaid expenses and other			14,842				14,490
Deferred income taxes			9,352				9,253
Total current assets			242,541				218,680
Long-Term Assets:
Property, Plant and Equipment, net			113,170				113,478
Other Assets:
Goodwill			65,176				65,176
Investments and other, net			29,372				26,491
Deferred income taxes			38,600				39,213
Total long-term assets			246,318				244,358
Total Assets		$	488,859			$	463,038
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	—			$	44
Accounts payable			68,788				55,344
Accrued expenses and other			53,016				46,603
Total current liabilities			121,804				101,991
Long-Term Liabilities:
Long-term debt, net of current portion			200,000				200,000
Deferred income taxes			1,477				923
Other liabilities			6,216				6,133
Total long-term liabilities			207,693				207,056
Shareholders’ Equity:
Preferred Shares, without par value, 5,000 authorized, none issued			—				—
Common Shares, without par value, authorized 60,000 shares, issued 23,401 and 23,232 shares and outstanding 23,228 and 23,178, respectively, with no stated value			—				—
Additional paid-in capital			148,074				147,440
Common Shares held in treasury, 173 and 54 shares, respectively, at cost			(133	)			(65	)
Retained earnings			10,955				7,188
Accumulated other comprehensive income (loss)			466				(572	)
Total shareholders’ equity			159,362				153,991
Total Liabilities and Shareholders’ Equity		$	488,859			$	463,038

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

STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

		Thirteen Weeks Ended
		April 1,				April 2,
		2006				2005
Net Sales		$	179,634			$	180,827
Costs and Expenses:
Cost of goods sold			138,942				135,592
Selling, general and administrative			31,240				30,372
Provision for doubtful accounts			355				16
Gain on sale of property, plant and equipment			(1,489	)			—
Restructuring charges			224				2,126
Operating Income			10,362				12,721
Interest expense, net			5,919				5,989
Equity in earnings of investees			(1,416	)			(732	)
Other loss (income), net			7				(197	)
Income Before Income Taxes			5,852				7,661
Provision for income taxes			2,085				3,292
Net Income		$	3,767			$	4,369
Basic net income per share		$	0.17			$	0.19
Basic weighted average shares outstanding			22,766				22,683
Diluted net income per share		$	0.16			$	0.19
Diluted weighted average shares outstanding			22,884				22,891

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

STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

		Thirteen Weeks Ended
		April 1,				April 2,
		2006				2005
OPERATING ACTIVITIES:
Net income		$	3,767			$	4,369
Adjustments to reconcile net income to net cash provided (used) by operating activities —
Depreciation			6,246				6,805
Amortization			403				380
Deferred income taxes			1,143				2,701
Earnings of equity method investees, less dividends received			(1,416	)			(752	)
Gain on sale of property, plant and equipment			(1,489	)			—
Share-based compensation expense			634				327
Changes in operating assets and liabilities —
Accounts receivable, net			(20,674	)			(19,900	)
Inventories, net			(1,093	)			(3,222	)
Prepaid expenses and other			(276	)			(3,331	)
Other assets			204				(617	)
Accounts payable			13,140				5,846
Accrued expenses and other			5,632				2,059
Net cash provided (used) by operating activities			6,221				(5,335	)
INVESTING ACTIVITIES:
Capital expenditures			(6,563	)			(4,054	)
Proceeds from sale of property, plant and equipment			2,266				—
Business acquisitions and other			(1,034	)			—
Net cash used by investing activities			(5,331	)			(4,054	)
FINANCING ACTIVITIES:
Repayments of long-term debt			(44	)			(37	)
Share-based compensation activity			(69	)			42
Other financing costs			(150	)			—
Net cash (used) provided by financing activities			(263	)			5
Effect of exchange rate changes on cash and cash equivalents			363				(631	)
Net change in cash and cash equivalents			990				(10,015	)
Cash and cash equivalents at beginning of period			40,784				52,332
Cash and cash equivalents at end of period		$	41,774			$	42,317

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

STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except 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 notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2005.

     The results of operations for the thirteen weeks ended April 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 thirteen-week periods and once every seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The first thirteen-week period of 2006 and 2005 ended on April 1 and April 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 71% and 72% of the Company’s inventories at April 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:

		April 1,				December 31,
		2006				2005
Raw materials		$	38,077			$	34,026
Work in progress			8,115				8,644
Finished goods			10,355				12,400
Total inventories			56,547				55,070
Less: LIFO reserve			(1,408	)			(1,279	)
Inventories, net		$	55,139			$	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 April 1, 2006, per quoted market sources, was $172.0 million and the carrying value was $200.0 million.

STONERIDGE, INC. AND SUBSIDIARIES
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 foreign currency denominated intercompany transactions 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 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 approximately $24,500 and reduce exposure related to the Company’s Swedish krona and British pound denominated receivables. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $(43). The Company’s foreign currency option contracts have a notional value of $70 and reduce the risk associated with the Company’s other known foreign currency exposures related the Mexican peso. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $34.

(5) Share-Based Compensation

     At April 1, 2006, the Company had three 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. 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 thirteen weeks ended April 1, 2006.

     Total compensation expense recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $634 and $327 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $222 and $123 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

     There were no options granted during the thirteen weeks ended April 1, 2006 or April 2, 2005. As of April 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 during the thirteen weeks ended April 1, 2006 was $6.84. There were no time-based restricted Common Share awards granted during the thirteen weeks ended April 2, 2005.

     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,

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

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 April 1, 2006, and the changes during the thirteen 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			(73,534	)			9.19				—				—
Forfeited			(5,735	)			11.48				(100,800	)			8.24
Non-vested at April 1, 2006			296,982			$	9.40				136,200			$	8.24

     As of April 1, 2006, total unrecognized compensation cost related to non-vested time-based restricted Common Share awards granted was $534. That cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested based on service conditions during the thirteen weeks ended April 1, 2006 was $470. No time-based restricted Common Share awards vested during the thirteen weeks ended April 2, 2005.

     As of April 1, 2006, total unrecognized compensation cost related to non-vested performance-based restricted Common Share awards granted was $274. That cost is expected to be recognized over a weighted-average period of 2.0 years. No performance-based restricted Common Share awards have vested as of April 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.

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

		Thirteen Weeks Ended
		April 1,				April 2,
		2006				2005
Net income		$	3,767			$	4,369
Other comprehensive income (loss):
Currency translation adjustments			1,223				(2,071	)
Minimum pension liability adjustments			(37	)			67
Unrealized (loss) gain on marketable securities			(147	)			10
Total other comprehensive income (loss)			1,039				(1,994	)
Comprehensive income		$	4,806			$	2,375

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

(7) 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.

     On March 7, 2006, the Company amended it's existing credit agreement, which, among other things, provided the Company 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 EBITDA and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment, among other things, 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 April 1, 2006, $96.1 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 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 EBIDTA, as defined.

     Long-term debt consists of the following:

		April 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
		April 1,				April 2,
		2006				2005
Basic weighted average shares outstanding			22,766				22,683
Effect of dilutive securities			118				208
Diluted weighted-average shares outstanding			22,884				22,891

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

     Options to purchase 682 and 279 Common Shares at an average price of $12.13 and $16.10 per share were outstanding at April 1, 2006 and April 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 $224 for the thirteen weeks ended April 1, 2006.

     The restructuring charges related to the Vehicle Management & Power Distribution reportable segment and 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
Cash payments			(46	)			—				(46	)
Non-cash utilization			—				—				—
Balance at April 1, 2006		$	542			$	—			$	542
Remaining expected restructuring charge		$	64			$	—			$	64

STONERIDGE, INC. AND SUBSIDIARIES
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				Other
		Severance				Related				Closure				Exit
		Costs				Charges				Costs				Costs				Total
Total expected restructuring charges		$	3,509			$	983			$	1,219			$	651			$	6,352
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
Cash payments			(197	)			—				(177	)			(40	)			(414	)
Non-cash utilization			—				—				—				—				—
Balance at April 1, 2006		$	—			$	—			$	787			$	8			$	795
Remaining expected restructuring charge		$	—			$	—			$	115			$	—			$	115

     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.

(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 if its customers, Dana Corporation, had filed for Chapter 11 bankruptcy protection. As a result, the Company recorded a charge of approximately $343 for the thirteen weeks ended April 1, 2006. These charges established a reserve for estimated losses expected to result from the bankruptcies and were recorded in the Company’s Condensed Consolidated Statement of Operations as a component of provision of doubtful accounts expense.

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

(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								Postretirement Benefit Plan
		Thirteen Weeks Ended								Thirteen Weeks Ended
		April 1,				April 2,				April 1,				April 2,
		2006				2005				2006				2005
Service cost		$	28			$	19			$	4			$	23
Interest cost			254				257				4				22
Expected return on plan assets			(273	)			(267	)			—				—
Amortization of actuarial loss			65				76				—				—
Net periodic benefit cost		$	74			$	85			$	8			$	45

     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 April 1, 2006, contributions of $57 have been made to the pension plan.

(12) Income Taxes

     The Company recognized a provision for income taxes of $2,085, or 35.6% of pre-tax income, and $3,292, or 43.0% of pre-tax income, for federal, state and foreign income taxes for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The decrease in the effective tax rate for the thirteen weeks ended April 1, 2006 compared to the thirteen weeks ended April 2, 2005 was primarily attributable to the improved performance of the United Kingdom operations and the corresponding decrease in the amount of valuation allowance pertaining to the Company’s deferred tax assets.

(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.

(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 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

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

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.

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

		Thirteen Weeks Ended
		April 1,				April 2,
Net Sales		2006				2005
Vehicle Management & Power Distribution		$	100,364			$	99,023
Intersegment sales			4,469				4,819
Vehicle Management & Power Distribution net sales			104,833				103,842
Control Devices			79,270				81,804
Intersegment sales			918				856
Control Devices net sales			80,188				82,660
Eliminations			(5,387	)			(5,675	)
Total consolidated net sales		$	179,634			$	180,827
Income Before Income Taxes
Vehicle Management & Power Distribution		$	6,197			$	9,000
Control Devices			4,409				2,384
Other corporate activities			932				2,136
Corporate interest expense			(5,686	)			(5,859	)
Total consolidated income before income taxes		$	5,852			$	7,661
Depreciation and Amortization
Vehicle Management & Power Distribution		$	1,790			$	2,155
Control Devices			4,430				4,419
Corporate activities			91				98
Total consolidated depreciation and amortization(A)		$	6,311			$	6,672
Interest Expense (Income)
Vehicle Management & Power Distribution		$	(106	)		$	39
Control Devices			339				92
Corporate activities			5,686				5,858
Total consolidated interest expense		$	5,919			$	5,989
Capital Expenditures
Vehicle Management & Power Distribution		$	2,200			$	1,644
Control Devices			4,317				2,317
Corporate activities			46				93
Total consolidated capital expenditures		$	6,563			$	4,054

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

		April 1,				December 31,
Total Assets		2006				2005
Vehicle Management & Power Distribution		$	179,176			$	158,203
Control Devices			232,373				222,747
Corporate(B)			247,681				248,739
Eliminations			(170,371	)			(166,651	)
Total consolidated assets		$	488,859			$	463,038

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

		Thirteen Weeks Ended
		April 1,				April 2,
Net Sales		2006				2005
North America		$	141,024			$	140,294
Europe and other			38,610				40,533
Total consolidated net sales		$	179,634			$	180,827

		April 1,				December 31,
Non-Current Assets		2006				2005
North America		$	218,260			$	216,563
Europe and other			28,058				27,795
Total non-current assets		$	246,318			$	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 $19,716 and $17,818 at April 1, 2006 and December 31, 2005, respectively. The Company has a note receivable with PST of $1,148 as of April 1, 2006 and December 31, 2005, respectively. PST operates on a calendar year.

     Condensed financial information for PST is as follows:

		First Quarter ended
		March 31,
		2006				2005
Revenues		$	20,999			$	14,262
Cost of sales		$	10,674			$	8,084
Total pretax income		$	4,196			$	1,638
The Company’s share of pretax income		$	2,098			$	819

     Equity in earnings of PST included in the Condensed Consolidated Statements of Operations was $1,360 and $719 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively.

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

     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 automotive and truck markets. 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 $1,859 and $828 at April 1, 2006 and December 31, 2005, respectively. Equity in earnings of Minda included in the Condensed Consolidated Statements of Operations were $56 and $13, for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively.

(16) Warranty Reserves

     The Company’s warranty reserve is 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.

     The following is a reconciliation of the changes in the Company’s warranty reserve:

		Thirteen Weeks Ended				Fiscal Year Ended
		April 1,				December 31,
		2006				2005
Warranty reserves at beginning of period		$	4,981			$	5,425
Payments made			(720	)			(2,548	)
Costs recognized for warranties issued during the period			561				1,483
Changes in estimates for preexisting warranties			195				621
Warranty reserves at end of period		$	5,017			$	4,981

(17) 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, at April 1, 2006 and April 2, 2005 and for each of the thirteen weeks ended April 1, 2006 and April 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 presentation below.

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

		April 1, 2006
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	4,464			$	53			$	37,257			$	—			$	41,774
Accounts receivable, net			54,716				37,964				28,825				(71	)			121,434
Inventories, net			26,597				12,551				15,991				—				55,139
Prepaid expenses and other			(268,914	)			254,164				29,592				—				14,842
Deferred income taxes			(3,971	)			12,876				447				—				9,352
Total current assets			(187,108	)			317,608				112,112				(71	)			242,541
Long-Term Assets:
Property, Plant and Equipment, net			60,890				33,626				18,654				—				113,170
Other Assets:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			40,871				494				180				(12,173	)			29,372
Deferred income taxes			43,871				(5,738	)			467				—				38,600
Investment in subsidiaries			406,763				—				—				(406,763	)			—
Total long-term assets			596,980				48,973				19,301				(418,936	)			246,318
Total Assets		$	409,872			$	366,581			$	131,413			$	(419,007	)		$	488,859
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	24,876			$	22,029			$	21,883			$	—			$	68,788
Accrued expenses and other			25,634				10,935				16,518				(71	)			53,016
Total current liabilities			50,510				32,964				38,401				(71	)			121,804
Long-Term Liabilities:
Long-term debt			200,000				—				12,173				(12,173	)			200,000
Deferred income taxes			—				—				1,477				—				1,477
Other liabilities			—				2,050				4,166				—				6,216
Total long-term liabilities			200,000				2,050				17,816				(12,173	)			207,693
Shareholders’ Equity			159,362				331,567				75,196				(406,763	)			159,362
Total Liabilities and Shareholders’ Equity		$	409,872			$	366,581			$	131,413			$	(419,007	)		$	488,859

STONERIDGE, INC. AND SUBSIDIARIES
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

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

     Supplemental condensed consolidating financial statements (continued):

		Thirteen Weeks Ended April 1, 2006
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net Sales		$	90,327			$	58,860			$	52,600			$	(22,153	)		$	179,634
Costs and Expenses:
Cost of goods sold			77,798				43,364				39,253				(21,473	)			138,942
Selling, general and administrative			16,536				6,741				8,998				(680	)			31,595
Gain on sale of property, plant and equipment			—				(1,489	)			—				—				(1,489	)
Restructuring charges			176				47				1				—				224
Operating Income (Loss)			(4,183	)			10,197				4,348				—				10,362
Interest expense			5,879				—				40				—				5,919
Other income			(1,147	)			—				(262	)			—				(1,409	)
Equity earnings from subsidiaries			(13,245	)			—				—				13,245				—
Income (Loss) Before Income Taxes			4,330				10,197				4,570				(13,245	)			5,852
Provision for income taxes			563				19				1,503				—				2,085
Net Income (Loss)		$	3,767			$	10,178			$	3,067			$	(13,245	)		$	3,767