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

STONERIDGE, INC. 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended April 1, 2006
   
Commission file number: 001-13337
STONERIDGE, INC.
(Exact name of registrant as specified in its charter)
     
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
Registrant’s telephone number, including area code
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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.
 
 

 


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES
INDEX
                 
  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

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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.

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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.

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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.

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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.

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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,

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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  
 
           

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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  
 
           

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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  
 
                 

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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.

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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

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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  
 
           

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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  
 
           
(A)   These amounts represent depreciation and amortization on fixed and certain intangible assets.
 
(B)   Assets located at Corporate consist primarily of cash, deferred taxes and equity investments.
     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.

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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.

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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  
 
                             

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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  
 
                             

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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  
 
                             
 
                                       
                                         
    Thirteen Weeks Ended April 2, 2005  
                    Non-              
            Guarantor     Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
                                       
Net Sales
  $ 89,268     $ 59,652     $ 51,012     $ (19,105 )   $ 180,827  
 
                                       
Costs and Expenses:
                                       
Cost of goods sold
    74,593       42,265       37,382       (18,648 )     135,592  
Selling, general and administrative
    12,437       7,903       10,505       (457 )     30,388  
Restructuring charges
          300       1,826             2,126  
 
                             
 
                                       
Operating Income
    2,238       9,184       1,299             12,721  
 
                                       
Interest expense (income), net
    6,022             (33 )           5,989  
Other expense (income), net
    (2,505 )     1,658       (82 )           (926 )
Equity earnings from subsidiaries
    (8,418 )                 8,418        
 
                             
 
                                       
Income Before Income Taxes
    7,139       7,526       1,414       (8,418 )     7,661  
 
                                       
Provision (benefit) for income taxes
    2,770       (509 )     1,031             3,292  
 
                             
 
                                       
Net Income
  $ 4,369     $ 8,035     $ 383     $ (8,418 )   $ 4,369  
 
                             

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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 cash provided (used) by operating activities
  $ (5,398 )   $ 4,773     $ 6,691     $ 155     $ 6,221  
 
                             
 
                                       
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (2,891 )     (1,977 )     (1,695 )           (6,563 )
Proceeds from sale of fixed assets
    2,266                         2,266  
Business acquisitions and other
    (1,720 )     (63 )           749       (1,034 )
 
                             
Net cash used by investing activities
    (2,345 )     (2,040 )     (1,695 )     749       (5,331 )
 
                             
 
                                       
FINANCING ACTIVITIES:
                                       
Repayments of long-term debt
    348             (237 )     (155 )     (44 )
Share-based compensation activity
    4,255       (2,728 )     (847 )     (749 )     (69 )
Other financing costs
    (150 )                       (150 )
 
                             
Net cash provided (used) by financing activities
    4,453       (2,728 )     (1,084 )     (904 )     (263 )
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                363             363  
 
                             
Net change in cash and cash equivalents
    (3,290 )     5       4,275             990  
Cash and cash equivalents at beginning of period
    7,754       48       32,982             40,784  
 
                             
Cash and cash equivalents at end of period.
  $ 4,464     $ 53     $ 37,257     $     $ 41,774  
 
                             
                                         
    Thirteen Weeks Ended April 2, 2005  
                    Non-              
            Guarantor     Guarantor              
    Parent     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net cash provided (used) by operating activities
  $ (2,562 )   $ 560     $ (7,517 )   $ 4,184     $ (5,335 )
 
                             
 
                                       
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (1,923 )     (541 )     (1,590 )           (4,054 )
Other
    4       (17 )           13        
 
                             
Net cash used by investing activities
    (1,919 )     (558 )     (1,590 )     13       (4,054 )
 
                             
 
                                       
FINANCING ACTIVITIES:
                                       
Repayments of long-term debt
                4,147       (4,184 )     (37 )
Share-based compensation activity
    42                         42  
Other financing costs
                13       (13 )      
 
                             
Net cash provided by financing activities
    42             4,160       (4,197 )     5  
 
                             
 
                                       
Effect of exchange rate changes on cash and cash equivalents
                (631 )           (631 )
 
                             
Net change in cash and cash equivalents
    (4,439 )     2       (5,578 )           (10,015 )
Cash and cash equivalents at beginning of period
    20,363       17       31,952             52,332  
 
                             
Cash and cash equivalents at end of period
  $ 15,924     $ 19     $ 26,374     $     $ 42,317  
 
                             

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STONERIDGE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except per share data, unless otherwise indicated)
(18) Subsequent Event
     On April 24, 2006, the shareholders of Stoneridge, Inc. approved the Company’s Amended and Restated Long-Term Incentive Plan (the “2006 Plan”), which had been unanimously approved on February 18, 2006 by the Board of Directors upon the recommendation of the Board’s Compensation Committee. The 2006 Plan will replace the Company’s current equity incentive plan when the current plan expires in June 2007.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     Overview
     The following Management Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.
     We are an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
     Our net income for the period ending April 1, 2006 was $3.8 million, or $0.16 per diluted share, compared with net income of $4.4 million, or $0.19 per diluted share, for the period ending April 2, 2005.
     Our first quarter 2006 operating results were unfavorably affected by a number of challenging industry-wide issues, including intense competition, product price reductions, higher commodity costs, and customer bankruptcies. We continuously work to address these challenges by implementing a broad range of initiatives aimed to improve operating performance. During the first quarter of 2006, we implemented focused teams to implement best practices in our underperforming operations and we have realigned our purchasing organization to reduce our direct material procurement costs. These challenges were favorably offset by a number of items in the first quarter, including a $1.9 million pretax reduction in our restructuring expense and $1.5 million pretax gain on the sale of a fixed asset. Our PST joint venture in Brazil continued to perform well during the quarter, resulting in equity earnings of $1.4 million compared with $0.7 million in the previous year.
     Significant factors inherent to our markets that could affect our results for 2006 include our ability to successfully execute our planned productivity and cost reduction initiatives and the financial stability of our customers and suppliers. We are undertaking these initiatives to mitigate commodity price increases and customer demanded price reductions. Our results for 2006 also depend on conditions in the automotive and commercial vehicle industries, which are generally dependent on domestic and global economies.
     Results of Operations
     We are primarily organized by markets served and products produced. Under this organization structure, our operations have been aggregated into two reportable segments: Vehicle Management & Power Distribution and Control Devices. The Vehicle Management & Power Distribution reportable segment includes results of operations that design and manufacture electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment includes results of operations from our operations that design and manufacture electronic and electromechanical switches, control actuation devices and sensors.
     Beginning in 2005, we changed from a calendar year-end to a 52-53 week fiscal year-end. Our fiscal quarters are now comprised of 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.
     Thirteen Weeks Ended April 1, 2006 Compared to Thirteen Weeks Ended April 2, 2005
     Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the thirteen weeks ended April 1, 2006 and April 2, 2005 are summarized in the following table:
                                 
    Thirteen Weeks Ended              
    April 1,     April 2,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
Vehicle Management & Power Distribution
  $ 100,364     $ 99,023     $ 1,341       1.4 %
Control Devices
    79,270       81,804       (2,534 )     (3.1 )%
 
                         
Total net sales
  $ 179,634     $ 180,827     $ (1,193 )     (0.7 )%
 
                         

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     The increase in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to increased sales to our commercial vehicle customers as North American demand was strong in the quarter. This increase was offset by an unfavorable $3.4 million impact from foreign currency exchange in the quarter and ongoing product price reductions.
     The decrease in net sales for our Control Devices reportable segment was primarily attributable an unfavorable North American light vehicle production mix and product price reductions. In addition, unfavorable foreign currency exchange translation reduced our sales by $0.6 million during the quarter.
     Net sales by geographic location for the thirteen weeks ended April 1, 2006 and April 2, 2005 are summarized in the following table:
                                 
    Thirteen Weeks Ended              
    April 1,     April 2,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
North America
  $ 141,024     $ 140,294     $ 730       0.5 %
Europe and other
    38,610       40,533       (1,923 )     (4.7 )%
 
                         
Total net sales
  $ 179,634     $ 180,827     $ (1,193 )     (0.7 )%
 
                         
     North American sales accounted for 79% of total net sales in the first thirteen weeks of 2006 compared with 78% for the same period in 2005. The increase in North American sales was primarily attributable to increased sales to our commercial vehicle customers as a result of strong North American demand in the quarter. The increase was partially offset by an unfavorable North American light vehicle production mix and product price reductions. Net sales outside North America accounted for 21% of total net sales for the thirteen weeks ended April 1, 2006 compared to 22% for the same period in 2005. Our sales outside of North America declined primarily due to unfavorable foreign currency exchange rates. The unfavorable effect of these exchange rates totaled $4.0 million in the quarter.
     Cost of Goods Sold. Cost of goods sold for the thirteen weeks ended April 1, 2006 increased by $3.3 million, or 2.5%, to $138.9 million from $135.6 million for the same period in 2005. As a percentage of sales, cost of goods sold increased to 77.3% from 75.0%. This increase as a percentage of sales was predominately due to unfavorable material price variances resulting from raw material price increases, continued operating inefficiencies at some of our facilities in Mexico and product price reductions. Going forward, we expect that pricing and raw material price challenges will continue to affect our gross margin through 2006. Our management team is working to offset these pressures through our focused operational improvement efforts, purchasing programs and, in some cases, commodity hedging programs.
     Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses for the thirteen weeks ended April 1, 2006 increased by $0.8 million, or 2.6%, to $31.2 million from $30.4 million for the first thirteen weeks of 2005. Offsetting the net increase in SG&A expense for the period was a decrease of $0.7 million in product development expenses. Product development expenses were $10.3 million for the thirteen weeks ended April 1, 2006 and $11.0 million for the thirteen weeks ended April 2, 2005, respectively. Included in product development expenses in the thirteen weeks ended April 1, 2005, was expenditures incurred to obtain certification for a key product in Europe, which was certified in 2005. Offsetting the decrease in product development expenses was an increase in SG&A expenses. The increase in non-product development SG&A expenses in 2006 compared with 2005 is primarily attributable to the non-recurrence of a favorable legal settlement in 2005. As a percentage of sales, SG&A expenses increased to 17.4% for the first thirteen weeks of 2006 from 16.8% for the same period in 2005.
     Provision for Doubtful Accounts. The provision for doubtful accounts increased $0.3 million compared to the same time period in 2005 primarily due to the Chapter 11 bankruptcy filing of Dana Corporation on March 3, 2006.

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     Restructuring Charges. In January 2005, we announced that we would undertake restructuring efforts related to the rationalization of certain manufacturing facilities in the high cost regions of Europe and North America. This rationalization is a result of our cost reduction initiatives. Restructuring charges recorded by reportable segment during the thirteen weeks ended April 1, 2006 and April 2, 2005 were as follows:
                         
    Thirteen Weeks Ended April 1, 2006  
    Vehicle Management             Total Consolidated  
    & Power             Restructuring  
    Distribution     Control Devices     Charges  
Severance costs
  $ 176     $     $ 176  
Other exit costs
          48       48  
 
                 
Total restructuring charges.
  $ 176     $ 48     $ 224  
 
                 
                         
    Thirteen Weeks Ended April 2, 2005  
    Vehicle Management             Total Consolidated  
    & Power             Restructuring  
    Distribution     Control Devices     Charges  
Severance costs
  $ 88     $ 1,698     $ 1,786  
Asset-related charges
    127       206       333  
Other exit costs
          7       7  
 
                 
Total restructuring charges.
  $ 215     $ 1,911     $ 2,126  
 
                 
     All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges relate primarily to accelerated depreciation and the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Facility closure costs primarily relate to asset relocation and lease termination costs. Other costs include miscellaneous expenditures associated with exiting business activities.
     Gain on Sale of Property, Plant and Equipment. Gain on sale of property, plant and equipment was $1.5 million for the thirteen weeks ended April 1, 2006 and is the result of the sale of land and a building adjacent to our Sarasota, Florida location.
     Equity in Earnings of Investees. Equity in earnings of investees was $1.4 million and $0.7 million for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The increase of $0.7 million was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil. The increase primarily reflects higher volume and pricing for PST’s security product lines.
     Income Before Income Taxes. Income before income taxes is summarized in the following table by reportable segment.
                                 
    Thirteen Weeks Ended              
    April 1,     April 2,     $ Increase /     % Increase /  
    2006     2005     (Decrease)     (Decrease)  
Vehicle Management & Power Distribution
  $ 6,197     $ 9,000     $ (2,803 )     (31.1 )%
Control Devices
    4,409       2,384       2,025       84.9 %
Other corporate activities
    932       2,136       (1,204 )     (56.4 )%
Corporate interest expense
    (5,686 )     (5,859 )     (173 )     (3.0 )%
 
                           
Income before income taxes
  $ 5,852     $ 7,661     $ (1,809 )     (23.6 )%
 
                           

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     The decrease in income before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of unfavorable raw material variances, ongoing operating inefficiencies at our Mexican operations and product price reductions. These factors were partially offset by increased volume in the quarter.
     The increase in income before income taxes at the Control Devices reportable segment was primarily the result of improved operating efficiencies at our United Kingdom operation and a reduction in restructuring expenses in the quarter. These factors were partially offset by ongoing product price reductions and increased raw material costs.
     Income before income taxes for the thirteen weeks ended April 1, 2006 for North America decreased by $5.1 million to $2.7 million from $7.8 million for the same period in 2005. The decrease in our profitability in North America was primarily attributable to unfavorable raw material variances, ongoing operating inefficiencies at our Mexican operations and product price reductions. Income before income taxes for 2005 outside North America increased by $3.3 million to $3.2 million from $(0.1) million in 2005. The increase in our profitability outside North America was primarily due to the operational improvement at our United Kingdom operations, which experienced significant operational inefficiencies in the 2005 period.
     Provision for Income Taxes. We recognized a provision for income taxes of $2.1 million, or 35.6% of pre-tax income, and $3.3 million, or 43.0% of the 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.
     Liquidity and Capital Resources
     Net cash provided by operating activities was $6.2 million and $(5.3) million for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The increase in net cash provided by operating activities of $11.5 million was primarily due to improvements in working capital management in the areas of accounts payable and accrued expenses. The cash provided from accounts payable resulted from better matching of our accounts receivable and accounts payable in the quarter compared with the prior year.
     Net cash used by investing activities was $5.3 million and $4.1 million for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The increase in net cash used by investing activities of $1.2 million was attributable to an increase in capital expenditures during the quarter. This increase in capital expenditures is predominantly related to the launch of new products in the areas of customer-actuated switches, power distribution systems and sensor products. In addition, in February 2006, we invested approximately $1.0 million for an additional 10% stake in our Minda Instruments Limited joint venture. We now maintain a 30% interest in the venture. The increase in capital spending and investment spending was offset by $2.3 million in proceeds from a property sale.
     Net cash used by financing activities for the thirteen weeks ended April 1, 2006 was $(0.3) million, and primarily related to fees for the completion of our credit agreement amendment during the quarter.
     As discussed in Note 4 to our consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $24,500 to reduce exposure related to our 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 to the Mexican peso. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $34.
     Our credit facilities contain various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated EBITDA, interest coverage and fixed charge coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. We were in compliance with all covenants at April 1, 2006. On March 7, 2006, we amended our credit agreement dated May 1, 2002. The amendment modifies certain financial covenant requirements, changes certain reporting requirements, sets borrowing levels based on certain asset levels and prohibits us from repurchasing, repaying or redeeming any of our outstanding subordinated notes unless certain covenant levels are met.
     Future capital expenditures are expected to be consistent with recent levels and future organic growth is expected to be funded through cash flows from operations. Management will continue to focus on reducing its weighted average cost of capital

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and believes that cash flows from operations and the availability of funds from our credit facilities will provide sufficient liquidity to meet our future growth and operating needs. As outlined in Note 7 to our financial statements, the Company is a party to a $100.0 million revolving credit facility. On March 7, 2006, the Company amended the credit agreement, which, among other things, gave the Company substantially all of its borrowing capacity on the $100.0 million credit facility. As of April 1, 2006, $96.1 of the $100.0 million was available.
     Inflation and International Presence
     Given the current economic climate and recent increases in certain commodity prices, we believe that a continuation of such price increases would significantly affect our profitability. Furthermore, by operating internationally, we are affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, we believe we are not significantly exposed to adverse economic conditions.
     Forward-Looking Statements
     Portions of this report contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, our directors or officers with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
    the loss or bankruptcy of a major customer or supplier;
 
    the costs and timing of facility closures, business realignment, or similar actions;
 
    a significant change in automotive, medium- and heavy-duty, agricultural or off-highway vehicle production;
 
    our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
 
    a significant change in general economic conditions in any of the various countries in which we operate;
 
    labor disruptions at our facilities or at any of our significant customers or suppliers;
 
    the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis;
 
    the amount of debt and the restrictive covenants contained in our credit facility;
 
    customer acceptance of new products;
 
    capital availability or costs, including changes in interest rates or market perceptions;
 
    the successful integration of any acquired businesses;
 
    the occurrence or non-occurrence of circumstances beyond our control; and
 
    those items described in Part I, Item IA (“Risk Factors”) of the Company’s 2005 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
     Interest Rate Risk
     From time to time, we are exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At April 1, 2006, however, all of our debt was fixed rate debt. At this time, we do not intend to use financial instruments to manage this risk.
     Commodity Price Risk
     Given the current economic climate and the recent increases in certain commodity costs, we currently are experiencing an increased risk, particularly with respect to the purchase of copper, zinc, resins and certain other commodities. We manage this risk through a combination of fixed price agreements, staggered short-term contract maturities and commercial negotiations with our suppliers. We may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. On February 2, 2006, the Company entered into a fixed price contract to purchase zinc. The initial notional value of the contract was $849, while the estimated fair market value of the contract as of April 1, 2006, was $855. The recent increases in certain commodity costs have negatively affected our operating results, and a continuation of such price increases could significantly affect our profitability. Going forward, we believe that our mitigation efforts will offset a substantial portion of the financial impact of these increased costs. However, no assurances can be given that the magnitude or duration of these increased costs will not have a material impact on our future operating results.
     Foreign Currency Exchange Risk
     Our risks related to foreign currency exchange rates have historically not been material; however, given the current economic climate, we are monitoring this risk. We use derivative financial instruments, including foreign currency forward and option contracts, to mitigate our 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. As discussed in Note 4 to our condensed consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $24,500 to reduce exposure related to our Swedish krona- and British pound-denominated intercompany loans. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $(43). Our foreign currency option contracts have a notional value of $70 and reduce the risk associated with our other known foreign currency exposures related to the Mexican peso. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $34. We do not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries in which we operate. Furthermore, a hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted exchange rates would not significantly affect our results of operations, financial position or cash flows.

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Item 4. Controls and Procedures.
     Evaluation of Disclosure Controls and Procedures
     As of April 1, 2006, an evaluation was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of April 1, 2006.
     Changes in Internal Control Over Financial Reporting
     There were no changes in the Company’s internal control over financial reporting during the thirteen weeks ended April 1, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
     The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company, however, does not believe that any of the litigation in which it is currently engaged, either individually or in the aggregate, will have a material adverse effect on its business, condensed consolidated financial position or results of operations. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company’s products and there can be no assurance that the Company will not experience any material product liability losses in the future. In addition, if any of the Company’s products prove to be defective, the Company may be required to participate in the government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims.
Item 1A. Risk Factors.
     There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     None.
Item 3. Defaults Upon Senior Securities.
     None.
Item 4. Submission of Matters to a Vote of Security Holders.
     No matters were submitted to a vote of security holders during the thirteen weeks ended April 1, 2006.
Item 5. Other Information.
     None.
Item 6. Exhibits.
     Reference is made to the separate, “Index to Exhibits,” filed herewith.

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SIGNATURES
     Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  STONERIDGE, INC.
 
 
Date: May 5, 2006  /s/ John C. Corey    
  John C. Corey   
  President, Chief Executive Officer and Director (Principal Executive Officer)   
 
     
Date: May 5, 2006  /s/ George E. Strickler    
  George E. Strickler   
  Executive Vice President and Chief Financial Officer  
  (Principal Financial Officer)   
 

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INDEX TO EXHIBITS
     
Exhibit    
Number   Exhibit
 
   
10.1
  Form of Change in Control Agreement (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
 
   
10.2
  Severance and Consulting Agreement for Gerald V. Pisani, dated February 28, 2006, (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 3, 2006).
 
   
10.3
  Employment agreement between the Company and John C. Corey, filed herewith.
 
   
10.4
  Amendment No. 5 dated March 7, 2006 to Credit Agreement dated as of May 1, 2002 by and among the Company as Borrower, the Lending Institutions Named Therein, as Lenders, National City Bank, as Administrative Agent, a Joint Lead Arranger and Collateral Agent, Deutsche Bank Securities Inc., as a Joint Lead Arranger, Comerica Bank and PNC Bank, National Association, as the Co-Documentation Agents (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 10, 2006).
 
   
31.1
  Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
31.2
  Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
32.1
  Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
   
32.2
  Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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