STONERIDGE INC - Quarter Report: 2007 June (Form 10-Q)

STONERIDGE, INC. 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarter ended June 30, 2007


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

For the transition period from to

Commission file number: 001-13337

STONERIDGE, INC.

(Exact name of registrant as specified in its charter)


Ohio		34-1598949

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


9400 East Market Street, Warren, Ohio		44484

(Address of principal executive offices)		(Zip Code)

(330) 856-2443

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

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

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

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

The number of Common Shares, without par value, outstanding as of July 27, 2007 was 24,213,162.

STONERIDGE, INC. AND SUBSIDIARIES

INDEX


	Page No.
PART I–FINANCIAL INFORMATION

Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006 (Audited)		2
Condensed Consolidated Statements of Operations (Unaudited) For the 3 and 6 Months Ended June 30, 2007 and 13 and 26 Weeks Ended July 1, 2006		3
Condensed Consolidated Statements of Cash Flows (Unaudited) For the 6 Months Ended June 30, 2007 and 26 Weeks Ended July 1, 2006		4
Notes to Condensed Consolidated Financial Statements (Unaudited)		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		30
Item 4. Controls and Procedures		31

PART II–OTHER INFORMATION

Item 1. Legal Proceedings		32
Item 1A. Risk Factors		32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3. Defaults Upon Senior Securities		32
Item 4. Submission of Matters to a Vote of Security Holders		32
Item 5. Other Information		33
Item 6. Exhibits		33

Signatures		34
Index to Exhibits		35
EX-3.1
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	June 30,			December 31,
	2007			2006
	(Unaudited)			(Audited)
ASSETS
Current Assets:
Cash and cash equivalents	$	66,066		$	65,882
Accounts receivable, less allowances for doubtful accounts and other reserves of $5,747 and $5,243, respectively		113,818			106,985
Inventories, net		57,261			58,521
Prepaid expenses and other		21,037			13,448
Deferred income taxes		8,820			9,196

Total current assets		267,002			254,032


Long-Term Assets:
Property, plant and equipment, net		106,016			114,586
Other Assets:
Goodwill		65,176			65,176
Investments and other, net		36,138			30,875
Deferred income taxes		36,133			37,138

Total long-term assets		243,463			247,775

Total Assets	$	510,465		$	501,807


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	66,499		$	72,493
Accrued expenses and other		46,597			45,624

Total current liabilities		113,096			118,117


Long-Term Liabilities:
Long-term debt		200,000			200,000
Deferred income taxes		1,921			1,923
Other liabilities		3,695			3,145

Total long-term liabilities		205,616			205,068


Shareholders’ Equity:
Preferred Shares, without par value, authorized 5,000 shares, none issued		—			—
Common Shares, without par value, authorized 60,000 shares, issued 24,582 and 23,990 shares and outstanding 24,224 and 23,804 shares, respectively, with no stated value		—			—
Additional paid-in capital		152,754			150,078
Common Shares held in treasury, 358 and 186 shares, respectively, at cost		(369	)		(151	)
Retained earnings		29,266			21,701
Accumulated other comprehensive income		10,102			6,994

Total shareholders’ equity		191,753			178,622

Total Liabilities and Shareholders’ Equity	$	510,465		$	501,807

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)


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Net Sales	$	183,802		$	185,499		$	368,830		$	365,133

Costs and Expenses:
Cost of goods sold		144,920			141,504			287,101			280,447
Selling, general and administrative		33,629			31,151			66,802			62,971
(Gain) Loss on sale of property, plant and equipment, net		(1,653	)		20			(1,688	)		(1,469	)


Operating Income		6,906			12,824			16,615			23,184

Interest expense, net		5,619			5,833			11,103			11,752
Equity in earnings of investees		(2,298	)		(1,550	)		(4,418	)		(2,966	)
Other loss, net		224			1,745			512			1,750


Income Before Income Taxes		3,361			6,796			9,418			12,648

Provision for income taxes		666			1,906			1,853			3,993


Net Income	$	2,695		$	4,890		$	7,565		$	8,655


Basic net income per share	$	0.12		$	0.21		$	0.33		$	0.38

Basic weighted average shares outstanding		23,114			22,861			23,052			22,824


Diluted net income per share	$	0.11		$	0.21		$	0.32		$	0.38

Diluted weighted average shares outstanding		23,702			22,902			23,603			22,884

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)


	Six Months Ended
	June 30,			July 1,
	2007			2006
OPERATING ACTIVITIES:
Net income	$	7,565		$	8,655
Adjustments to reconcile net income to net cash provided by (used for) operating activities -
Depreciation		14,513			12,608
Amortization		799			821
Deferred income taxes		(325	)		2,269
Equity in earnings of investees		(4,418	)		(2,980	)
Gain on sale of property, plant and equipment		(1,688	)		(1,469	)
Share-based compensation expense		1,252			926
Changes in operating assets and liabilities -
Accounts receivable, net		(6,506	)		(24,274	)
Inventories, net		1,538			(2,372	)
Prepaid expenses and other		(3,910	)		(219	)
Other assets		(6	)		985
Accounts payable		(6,112	)		15,489
Accrued expenses and other		1,317			1,776

Net cash provided by operating activities		4,019			12,215


INVESTING ACTIVITIES:
Capital expenditures		(10,814	)		(13,150	)
Proceeds from sale of property, plant and equipment		4,951			2,266
Business acquisitions and other		—			(673	)

Net cash used for investing activities		(5,863	)		(11,557	)


FINANCING ACTIVITIES:
Repayments of long-term debt		—			(44	)
Share-based compensation activity, net		1,796			13
Other financing costs		—			(150	)

Net cash provided by (used for) financing activities		1,796			(181	)


Effect of exchange rate changes on cash and cash equivalents		232			1,730


Net change in cash and cash equivalents		184			2,207

Cash and cash equivalents at beginning of period		65,882			40,784


Cash and cash equivalents at end of period	$	66,066		$	42,991

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data, unless otherwise indicated)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the Commission’s rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2006.

The results of operations for the six months ended June 30, 2007 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. Until October 30, 2006, the Company’s fiscal quarters were comprised of 13-week periods. On October 30, 2006, the Company changed back to a calendar (December 31) fiscal year-end; therefore, the 2006 fiscal year ended on December 31, 2006. Our fiscal quarters are now comprised of 3-month periods. Throughout this document, “three months” and “six months” will be used to reference the 3- and 6-month periods of 2007 and the comparable 13- and 26-week periods of 2006.

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

(2) Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 69% and 67% of the Company’s inventories at June 30, 2007 and December 31, 2006, respectively, and by the first-in, first-out (“FIFO”) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following:


	June 30,			December 31,
	2007			2006
Raw materials	$	36,586		$	39,832
Work-in-progress		8,778			8,196
Finished goods		13,591			12,614

Total inventories		58,955			60,642
Less: LIFO reserve		(1,694	)		(2,121	)

Inventories, net	$	57,261		$	58,521

(3) 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 June 30, 2007 and July 1, 2006, per quoted market sources, was $209.0 million and $192.0 million, respectively. On both dates, the carrying value was $200.0 million.

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

Derivative Instruments and Hedging Activities

The Company makes use of derivative instruments in foreign exchange and commodity price hedging programs. Derivatives currently in use are foreign currency forward and commodity swap contracts. These contracts are used for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest.

As a result of the Company’s international business presence it is exposed to foreign currency exchange risk. The Company uses derivative financial instruments, including foreign currency forward 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 Mexican peso. In certain instances, 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 Company’s foreign currency forward and option contracts substantially offset gains and losses on the underlying foreign currency denominated transactions. In addition, the Company’s contracts intended to reduce exposure to the Mexican peso were executed to hedge forecasted transactions, and therefore the contracts are accounted for as cash flow hedges. The effective portion of the unrealized gain or loss is deferred and reported as a component of accumulated other comprehensive income. The Company’s expectation is that the cash flow hedges will be highly effective in the future. The effectiveness of the transaction will be measured on an ongoing basis using the hypothetical operative method.

The Company’s foreign currency forward contracts had a notional value of $33,268 and $16,003 at June 30, 2007 and July 1, 2006, respectively. The purpose of these investments is to reduce exposure related to the Company’s Mexican peso-, Swedish krona- and British pound-denominated exposures. The estimated fair value of these contracts at June 30, 2007 and July 1, 2006, per quoted market sources, was approximately $676 and $(235), respectively. In 2006, the Company used foreign currency options contracts to reduce the risk of exposures to the Mexican peso. As of July 1, 2006, the Company’s foreign currency option contracts had a notional value of $167 and an estimated fair value of $43. The Company’s foreign currency options contracts expired as of December 31, 2006.

To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company has entered into fixed price commodity swaps with a bank to fix the cost of copper purchases. In December 2006, we entered into a fixed price swap for 480 metric tonnes of copper. In January 2007, we entered into an additional fixed price swap for 420 metric tonnes of copper. Because these contracts were executed to hedge forecasted transactions, the contracts are accounted for as cash flow hedges. The unrealized gain or loss for the effective portion of the hedge is deferred and reported as a component of accumulated other comprehensive income. The Company’s expectation is that the cash flow hedges will be highly effective in the future; however, as of December 31, 2006 they were not deemed effective and had no impact on other comprehensive income. The effectiveness of the transactions has been and will be measured on an ongoing basis using the hypothetical operative method. As of June 30, 2007, the fair value of the fixed price commodity swap contracts was approximately $752.

(4) Share-Based Compensation

Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $665 and $292 for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $1,252 and $926, respectively.

The total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $233 and $102 for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $438 and $324, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

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

(5) Comprehensive Income (Loss)

Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income, establishes standards for the reporting and disclosure of comprehensive income.

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


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Net income	$	2,695		$	4,890		$	7,565		$	8,655

Other comprehensive income:
Currency translation adjustments		1,533			2,325			1,982			3,359
Pension liability adjustments		(28	)		(197	)		(36	)		(234	)
Unrealized gain (loss) on marketable securities		10			(19	)		61			22
Unrecognized gain on derivatives		629			—			1,101			—

Total other comprehensive income		2,144			2,109			3,108			3,147

Comprehensive income	$	4,839		$	6,999		$	10,673		$	11,802

Accumulated other comprehensive income, net of tax is comprised of the following:


	June 30,			December 31,
	2007			2006
Foreign currency translation adjustments	$	10,507		$	8,525
Pension liability adjustments		(1,503	)		(1,467	)
Unrealized loss on marketable securities		(3	)		(64	)
Unrecognized gain on derivatives		1,101			—

Accumulated other comprehensive income	$	10,102		$	6,994

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

(6) Long-Term Debt

Senior Notes

On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes. The $200.0 million senior notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. The senior notes are redeemable at 105.75 until April 2008. The Notes will remain redeemable at various levels until the maturity date. Interest is payable on May 1 and November 1 of each year. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.

Credit Agreement

On March 7, 2006, the Company amended the existing credit agreement, which provided the Company with substantially all of its borrowing capacity on the $100.0 million credit facility. The credit agreement contains various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment utilizes a borrowing base composed of accounts receivable and inventory. The borrowing base limitation expired June 30, 2007. In addition, the Company is prohibited from repurchasing, repaying or redeeming subordinated notes until certain covenant levels are met. As of June 30, 2007, $96.4 million of the $100.0 million credit facility was available to the Company. The revolving facility expires on April 30, 2008 and requires a commitment fee of 0.375% to 0.500% on the unused balance. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.25% to 1.25% or (ii) LIBOR plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined. Interest on the swing line facility is payable monthly at the quoted overnight borrowing rate plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined.

(7) 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 are as follows:


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2007		2006		2007		2006
Basic weighted-average shares outstanding		23,113,827		22,861,311		23,051,721		22,824,135
Effect of dilutive securities		588,522		40,932		551,096		59,968

Diluted weighted-average shares outstanding		23,702,349		22,902,243		23,602,817		22,884,103

For the three months ended June 30, 2007 and July 1, 2006, options to purchase 234,000 and 680,850 Common Shares at an average price of $16.71 and $12.14, respectively, 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. Options not included in the computation of diluted net income per share to purchase 260,000 and 680,850 Common Shares at an average price of $16.20 and $12.14, respectively, were outstanding during the six months ended June 30, 2007 and July 1, 2006, respectively.

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

As of June 30, 2007, 508,275 performance-based restricted shares were outstanding. These shares were not included in the computation of diluted net income per share because not all vesting conditions were met. Approximately one quarter of these shares was associated with a plan that used highly optimistic earnings per share targets. At this time, we believe that meeting such thresholds is highly unlikely. The remainder may or may not become dilutive based on the Company’s ability to exceed future earnings thresholds or attain certain targets of total return to its shareholders measured against a peer group’s performance.

(8) 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 $31 and $(150) for the three months ended June 30, 2007 and July 1, 2006, respectively. Restructuring charges for the six months ended June 30, 2007 and July 1, 2006 was $72 and $74, respectively. Restructuring expenses are included in the Company’s condensed consolidated statement of operations as a part of selling, general and administrative expense.

The restructuring charges related to the Electronics reportable segment included the following:


				Asset-
	Severance			Related
	Costs			Charges			Total
Total expected restructuring charges	$	964		$	127		$	1,091


Balance at December 31, 2004	$	—		$	—		$	—

First quarter charge to expense		88			127			215
Second quarter charge to expense		9			—			9
Third quarter charge to expense		356			—			356
Fourth quarter charge to expense		70			—			70
Cash payments		(111	)		—			(111	)
Non-cash utilization		—			(127	)		(127	)


Balance at December 31, 2005	$	412		$	—		$	412

First quarter charge to expense		176			—			176
Second quarter charge to expense		(370	)		—			(370	)
Third quarter charge to expense		127			—			127
Fourth quarter charge to expense		436			—			436
Cash payments		(343	)		—			(343	)


Balance at December 31, 2006	$	438		$	—		$	438

First quarter charge to expense		41			—			41
Second quarter charge to expense		31			—			31
Cash payments		(493	)		—			(493	)


Balance at June 30, 2007	$	17		$	—		$	17


Remaining expected restructuring charge	$	—		$	—		$	—

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

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


				Asset-			Facility
	Severance			Related			Closure			Other Exit
	Costs			Charges			Costs			Costs			Total
Total expected restructuring charges	$	3,665		$	983		$	1,137		$	653		$	6,438


Balance at March 31, 2004	$	—		$	—		$	—		$	—		$	—

Second quarter charge to expense		—			205			—			—			205
Third quarter charge to expense		—			202			—			118			320
Fourth quarter charge to expense		1,068			207			—			287			1,562
Cash payments		(590	)		—			—			(405	)		(995	)
Non-cash utilization		—			(614	)		—			—			(614	)


Balance at December 31, 2004	$	478		$	—		$	—		$	—		$	478

First quarter charge to expense		1,698			206			—			7			1,911
Second quarter charge to expense		586			163			746			174			1,669
Third quarter charge to expense		214			—			218			35			467
Fourth quarter charge to expense		(57	)		—			140			(18	)		65
Cash payments		(2,722	)		—			(140	)		(198	)		(3,060	)
Non-cash utilization		—			(369	)		—			—			(369	)


Balance at December 31, 2005	$	197		$	—		$	964		$	—		$	1,161

First quarter charge to expense		—			—			—			48			48
Second quarter charge to expense		204			—			14			2			220
Third quarter charge to expense		(48	)		—			1			—			(47	)
Fourth quarter charge to expense		—			—			18			—			18
Cash payments		(353	)		—			(569	)		(50	)		(972	)


Balance at December 31, 2006	$	—		$	—		$	428		$	—		$	428

First quarter charge to expense		—			—			—			—			—
Second quarter charge to expense		—			—			—			—			—
Cash payments		—			—			(324	)		—			(324	)


Balance at June 30, 2007	$	—		$	—		$	104		$	—		$	104


Remaining expected restructuring charge	$	—		$	—		$	—		$	—		$	—

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. As of June 30, 2007, these restructuring initiatives have been substantially completed.

(9)Commitments and Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings and 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.

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

Product Warranty and Recall

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

The following provides a reconciliation of changes in product warranty and recall liability for the six months ended June 30, 2007 and July 1, 2006:


	2007			2006
Product warranty and recall at beginning of period	$	5,825		$	6,220
Accruals for products shipped during period		1,228			2,019
Changes in estimates of existing liabilities		847			96
Settlements made during the period (in cash or in kind)		(2,069	)		(2,291	)

Product warranty and recall at end of period	$	5,831		$	6,044

(10) Employee Benefit Plans

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


	Defined Benefit Plan
	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Service cost	$	43		$	36		$	85		$	64
Interest cost		514			331			1,021			585
Expected return on plan assets		(574	)		(355	)		(1,140	)		(628	)
Amortization of actuarial loss		111			84			221			149

Net periodic benefit cost	$	94		$	96		$	187		$	170


	Postretirement Benefit Plan
	Three Months Ended					Six Months Ended
	June 30,			July 1,		June 30,			July 1,
	2007			2006		2007			2006
Service cost	$	4		$	4	$	7		$	8
Interest cost		6			4		12			8
Amortization of actuarial gain		(2	)		—		(3	)		—

Net periodic benefit cost	$	8		$	8	$	16		$	16

The Company previously disclosed in its financial statements for the year ended December 31, 2006 that it expected to contribute $353 to its pension plan in 2007. Of this amount, contributions of $128 have been made to the pension plan as of June 30, 2007.

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

(11) Income Taxes

The Company recognized a provision for income taxes of $666, or 19.8% of pre-tax income, and $1,906, or 28.1% of pre-tax income, for federal, state and foreign income taxes for the three months ended June 30, 2007 and July 1, 2006, respectively. The Company recognized a provision for income taxes of $1,853, or 19.7% of pre-tax income, and $3,993, or 31.6% of pre-tax income, for federal, state and foreign income taxes for the six months ended June 30, 2007 and July 1, 2006, respectively. The decrease in the effective tax rate for both the three and six months ended June 30, 2007 and July 1, 2006, respectively, was primarily attributable to the benefit of the federal research and development tax credit which had not been extended at July 1, 2006, a reduction in accrued income taxes, and a more favorable mix of domestic and lower taxed foreign earnings.

In June 2006, the Financial Accounting Standards Board issued FASB interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 as of the beginning of the 2007 calendar year. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

As of January 1, 2007, the Company provided a liability of $4,731, excluding interest and penalties, for unrecognized tax benefits related to various federal, state and foreign income tax matters. The liability for uncertain tax positions is classified as a non-current income tax liability unless it is expected to be paid within one year. The liability for unrecognized tax positions increased by $96 for the second quarter ended June 30, 2007 and decreased by $91 for the six months ended June 30, 2007 resulting in a balance at June 30, 2007 of $4,640. Through a combination of anticipated state audit settlements and the expiration of certain statutes of limitation, the amount of unrecognized tax benefits could decrease by approximately $150-$700 within the next 12 months.

If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, approximately $4,438 would reduce the Company’s effective tax rate.

Consistent with historical financial reporting, the Company has elected to classify interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the six months ended June 30, 2007 and 2006, the Company recognized approximately $(43) and $26 of gross interest and penalties, respectively. The Company has accrued approximately $779 and $821 for the payment of interest and penalties at June 30, 2007 and December 31, 2006, respectively.

The Company conducts business globally and, as a result, the Company or a subsidiary of the Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each important jurisdiction:


Jurisdiction	Open Tax Years
Federal		2003-2006
France		2003-2006
Mexico		2001-2006
Spain		2002-2006
Sweden		2001-2006
United Kingdom		2002-2006

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

(12) Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The provisions of SFAS 157 will be applied prospectively. The Company is currently evaluating the impact that SFAS 157 will have on the Company’s financial statements in 2008.

In September 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities (“FSP No. AUG AIR-1”). This position prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. The Company adopted the provisions of this FSP as of January 1, 2007, as required. The adoption did not have a material impact on our condensed consolidated statements of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities –

Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 with earlier application permitted, subject to certain conditions. The Company is currently evaluating the impact of adopting SFAS 159 on its consolidated financial statements and whether to adopt its provisions prior to the required effective date.

In May 2007, the FASB issued FASB Staff Position FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on determining whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

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

(13) Segment Reporting

SFAS No. 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 president and chief executive officer.

The Company has two reportable segments: Electronics and Control Devices. These reportable segments were determined based on the differences in the nature of the products offered. The Electronics reportable segment, formerly known as the Vehicle Management & Power Distribution reportable segment, produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment produces electronic and electromechanical switches and control actuation devices and sensors.

The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s December 31, 2006 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:


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Net Sales
Electronics	$	98,248		$	105,543		$	199,049		$	205,907
Inter-segment sales		5,359			4,534			10,490			9,003

Electronics net sales		103,607			110,077			209,539			214,910


Control Devices		85,554			79,956			169,781			159,226
Inter-segment sales		590			1,193			1,391			2,111

Control Devices net sales		86,144			81,149			171,172			161,337


Eliminations		(5,949	)		(5,727	)		(11,881	)		(11,114	)

Total consolidated net sales	$	183,802		$	185,499		$	368,830		$	365,133


Income Before Income Taxes
Electronics	$	1,884		$	8,847		$	8,990		$	15,044
Control Devices		5,510			4,497			8,038			8,906
Other corporate activities		1,572			(735	)		3,521			197
Corporate interest expense		(5,605	)		(5,813	)		(11,131	)		(11,499	)

Total consolidated income before income taxes	$	3,361		$	6,796		$	9,418		$	12,648


Depreciation and Amortization
Electronics	$	2,427		$	1,977		$	4,757		$	3,767
Control Devices		4,885			4,359			9,690			8,789
Corporate activities		88			97			173			188

Total consolidated depreciation and amortization(A)	$	7,400		$	6,433		$	14,620		$	12,744

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


	Three Months Ended						Six Months Ended
	June 30,			July 1,			June 30,			July 1,
	2007			2006			2007			2006
Interest Expense (Income)
Electronics	$	(137	)	$	(131	)	$	(225	)	$	(237	)
Control Devices		151			151			197			490
Corporate activities		5,605			5,813			11,131			11,499

Total consolidated interest expense, net	$	5,619		$	5,833		$	11,103		$	11,752


Capital Expenditures
Electronics	$	1,446		$	2,834		$	4,173		$	5,034
Control Devices		2,817			3,750			6,231			8,067
Corporate activities		(256	)		3			410			49

Total consolidated capital expenditures	$	4,007		$	6,587		$	10,814		$	13,150


	June 30,			December 31,
	2007			2006
Total Assets
Electronics	$	172,237		$	184,327
Control Devices		220,653			216,523
Corporate(B)		275,775			265,986
Eliminations		(158,200	)		(165,029	)

Total consolidated assets	$	510,465		$	501,807


(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:


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2007		2006		2007		2006
Net Sales
North America	$	132,449	$	143,391	$	266,510	$	284,415
Europe and other		51,353		42,108		102,320		80,718

Total consolidated net sales	$	183,802	$	185,499	$	368,830	$	365,133


	June 30,		December 31,
	2007		2006
Non-Current Assets
North America	$	216,406	$	215,429
Europe and other		27,057		32,346

Total consolidated non-current assets	$	243,463	$	247,775

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

(14) Investments

PST Indústria Eletrônica da Amazônia Ltda.

The Company has a 50% equity 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 $27,275 and $21,616 at June 30, 2007 and December 31, 2006, respectively.

Condensed financial information for PST is as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Revenues	$	31,279	$	21,014	$	58,630	$	42,013
Cost of sales	$	14,683	$	10,664	$	27,506	$	21,338

Total pre-tax income	$	5,040	$	3,628	$	10,365	$	7,824
The Company’s share of pre-tax income	$	2,520	$	1,814	$	5,183	$	3,912

Equity in earnings of PST included in the condensed consolidated statements of operations was $2,141 and $1,466 for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, equity in earnings of PST was $4,156 and $2,826, respectively.

Minda Instruments Ltd.

At July 1, 2006, the Company had a 30% equity interest in Minda Instruments Ltd. (“Minda”), a company based in India that manufactures electronic instrumentation equipment for the transportation market. Since then, the Company has increased its ownership interest in Minda to 49%. The investment is accounted for under the equity method of accounting. The Company’s investment in Minda was $4,209 and $3,796 at June 30, 2007 and December 31, 2006, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $157 and $84, for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, equity in earnings of Minda was $262 and $140, respectively.

(15) 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 or the credit facility (Non-Guarantor Subsidiaries).

Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, as of June 30, 2007 and December 31, 2006 and for each of the three and six months ended June 30, 2007 and July 1, 2006.

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

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


	June 30, 2007
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	28,474		$	40		$	37,552		$	—		$	66,066
Accounts receivable, net		47,693			31,933			34,192			—			113,818
Inventories, net		24,382			14,290			18,589			—			57,261
Prepaid expenses and other		(279,803	)		283,871			16,969			—			21,037
Deferred income taxes		2,939			4,634			1,247			—			8,820

Total current assets		(176,315	)		334,768			108,549			—			267,002


Long-Term Assets:
Property, plant and equipment, net		58,783			27,144			20,089			—			106,016
Other Assets:
Goodwill		44,585			20,591			—			—			65,176
Investments and other, net		35,567			363			208			—			36,138
Deferred income taxes		39,244			(3,069	)		(42	)		—			36,133
Investment in subsidiaries		426,283			—			—			(426,283	)		—

Total long-term assets		604,462			45,029			20,255			(426,283	)		243,463

Total Assets	$	428,147		$	379,797		$	128,804		$	(426,283	)	$	510,465


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	21,277		$	20,880		$	24,342		$	—		$	66,499
Accrued expenses and other		14,635			8,241			23,721			—			46,597

Total current liabilities		35,912			29,121			48,063			—			113,096


Long-Term Liabilities:
Long-term debt		200,000			—			—			—			200,000
Deferred income taxes		—			—			1,921			—			1,921
Other liabilities		482			465			2,748			—			3,695

Total long-term liabilities		200,482			465			4,669			—			205,616


Shareholders’ Equity		191,753			350,211			76,072			(426,283	)		191,753


Total Liabilities and Shareholders’ Equity	$	428,147		$	379,797		$	128,804		$	(426,283	)	$	510,465

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

Supplemental condensed consolidating financial statements (continued):


	December 31, 2006
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	28,937		$	12		$	36,933		$	—		$	65,882
Accounts receivable, net		48,187			28,376			30,422			—			106,985
Inventories, net		26,173			12,502			19,846			—			58,521
Prepaid expenses and other		(273,206	)		275,577			11,077			—			13,448
Deferred income taxes		3,724			4,379			1,093			—			9,196

Total current assets		(166,185	)		320,846			99,371			—			254,032

Long-Term Assets:
Property, plant and equipment, net		61,320			31,643			21,623			—			114,586
Other Assets:
Goodwill		44,585			20,591			—			—			65,176
Investments and other, net		30,874			131			170			(300	)		30,875
Deferred income taxes		40,713			(3,341	)		(234	)		—			37,138
Investment in subsidiaries		411,366			—			—			(411,366	)		—

Total long-term assets		588,858			49,024			21,559			(411,666	)		247,775

Total Assets		422,673			369,870			120,930			(411,666	)		501,807


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		26,690			19,044			26,759			—			72,493
Accrued expenses and other		17,291			7,314			21,019			—			45,624

Total current liabilities		43,981			26,358			47,778			—			118,117


Long-Term Liabilities:
Long-term debt		200,000			—			300			(300	)		200,000
Deferred income taxes		—			—			1,923			—			1,923
Other liabilities		70			450			2,625			—			3,145

Total long-term liabilities		200,070			450			4,848			(300	)		205,068


Shareholders’ Equity		178,622			343,062			68,304			(411,366	)		178,622


Total Liabilities and Shareholders’ Equity	$	422,673		$	369,870		$	120,930		$	(411,666	)	$	501,807

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

Supplemental condensed consolidating financial statements (continued):


	For the Three Months Ended June 30, 2007
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net Sales	$	85,017		$	54,528		$	65,096		$	(20,839	)	$	183,802

Costs and Expenses:
Cost of goods sold		69,086			46,281			49,642			(20,089	)		144,920
Selling, general and administrative		14,056			7,640			12,683			(750	)		33,629
Gain on sale of property, plant and equipment, net		(304	)		(1,349	)		—			—			(1,653	)


Operating Income		2,179			1,956			2,771			—			6,906

Interest expense (income), net		5,870			—			(251	)		—			5,619
Other income, net		(1,865	)		(26	)		(183	)		—			(2,074	)
Equity earnings from subsidiaries		(5,043	)		—			—			5,043			—


Income Before Income Taxes		3,217			1,982			3,205			(5,043	)		3,361

Provision for income taxes		522			3			141			—			666


Net Income (Loss)	$	2,695		$	1,979		$	3,064		$	(5,043	)	$	2,695


	For the Three Months Ended July 1, 2006
						Non-
				Guarantor		Guarantor
	Parent			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Net Sales	$	90,915		$	60,809	$	54,955		$	(21,180	)	$	185,499

Costs and Expenses:
Cost of goods sold		77,376			44,845		39,734			(20,451	)		141,504
Selling, general and administrative		9,605			12,031		10,244			(729	)		31,151
(Gain) Loss on sale of property, plant and equipment, net		(1,472	)		1,489		3			—			20


Operating Income		5,406			2,444		4,974			—			12,824

Interest expense (income), net		5,890			—		(57	)		—			5,833
Other (income) loss, net		(550	)		—		745			—			195
Equity earnings from subsidiaries		(5,364	)		—		—			5,364			—


Income Before Income Taxes		5,430			2,444		4,286			(5,364	)		6,796

Provision for income taxes		540			—		1,366			—			1,906


Net Income	$	4,890		$	2,444	$	2,920		$	(5,364	)	$	4,890

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

Supplemental condensed consolidating financial statements (continued):


	For the Six Months Ended June 30, 2007
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net Sales	$	173,868		$	106,599		$	129,071		$	(40,708	)	$	368,830

Costs and Expenses:
Cost of goods sold		147,630			82,862			95,909			(39,300	)		287,101
Selling, general and administrative		27,122			15,673			25,415			(1,408	)		66,802
(Gain) Loss on sale of property, plant and equipment, net		(347	)		(1,349	)		8			—			(1,688	)


Operating Income (Loss)		(537	)		9,413			7,739			—			16,615

Interest expense (income), net		11,668			—			(565	)		—			11,103
Other income, net		(3,898	)		—			(8	)		—			(3,906	)
Equity earnings from subsidiaries		(16,534	)		—			—			16,534			—


Income Before Income Taxes		8,227			9,413			8,312			(16,534	)		9,418

Provision for income taxes		662			7			1,184			—			1,853


Net Income (Loss)	$	7,565		$	9,406		$	7,128		$	(16,534	)	$	7,565


	For the Six Months Ended July 1, 2006
						Non-
				Guarantor		Guarantor
	Parent			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Net Sales	$	181,242		$	119,669	$	107,555		$	(43,333	)	$	365,133

Costs and Expenses:
Cost of goods sold		155,174			88,209		78,986			(41,922	)		280,447
Selling, general and administrative		26,318			18,820		19,244			(1,411	)		62,971
(Gain) Loss on sale of property, plant and equipment, net		(1,472	)		—		3			—			(1,469	)


Operating Income		1,222			12,640		9,322			—			23,184

Interest expense (income), net		11,770			—		(18	)		—			11,752
Other (income) loss, net		(1,696	)		—		480			—			(1,216	)
Equity earnings from subsidiaries		(18,611	)		—		—			18,611			—


Income Before Income Taxes		9,759			12,640		8,860			(18,611	)		12,648

Provision for income taxes		1,104			20		2,869			—			3,993


Net Income	$	8,655		$	12,620	$	5,991		$	(18,611	)	$	8,655

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

Supplemental condensed consolidating financial statements (continued):


	For the Six Months Ended June 30, 2007
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net cash provided by (used for) operating activities	$	3,730		$	(1,949	)	$	3,038		$	(800	)	$	4,019


INVESTING ACTIVITIES:
Capital expenditures		(6,090	)		(2,380	)		(2,344	)		—			(10,814	)
Proceeds from the sale of fixed assets		308			4,643			—			—			4,951
Business acquisitions and other		(207	)		(286	)		(7	)		500			—

Net cash provided by (used for) investing activities		(5,989	)		1,977			(2,351	)		500			(5,863	)


FINANCING ACTIVITIES:
Borrowings (repayments) of long-term debt		—			—			(300	)		300			—
Share-based compensation activity, net		1,796			—			—			—			1,796
Other financing costs		—			—			—			—			—

Net cash provided by (used for) financing activities		1,796			—			(300	)		300			1,796


Effect of exchange rate changes on cash and cash equivalents		—			—			232			—			232

Net change in cash and cash equivalents		(463	)		28			619			—			184
Cash and cash equivalents at beginning of period		28,937			12			36,933			—			65,882

Cash and cash equivalents at end of period	$	28,474		$	40		$	37,552		$	—		$	66,066


	For the Six Months Ended July 1, 2006
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net cash provided by (used for) operating activities	$	(6,911	)	$	6,028		$	24,116		$	(11,018	)	$	12,215


INVESTING ACTIVITIES:
Capital expenditures		(6,586	)		(3,213	)		(3,351	)		—			(13,150	)
Proceeds from sale of fixed assets		2,266			—			—			—			2,266
Business acquisitions and other		1,018			(33	)		—			(1,658	)		(673	)

Net cash used for investing activities		(3,302	)		(3,246	)		(3,351	)		(1,658	)		(11,557	)


FINANCING ACTIVITIES:
Repayments of long-term debt		1,556			—			(12,619	)		11,019			(44	)
Share-based compensation activity		13			—			—			—			13
Shareholder distributions		11,614			—			(11,614	)		—			—
Other financing costs		4,234			(2,779	)		(3,262	)		1,657			(150	)

Net cash provided by (used for) financing activities		17,417			(2,779	)		(27,495	)		12,676			(181	)


Effect of exchange rate changes on cash and cash equivalents		—			—			1,730			—			1,730

Net change in cash and cash equivalents		7,204			3			(5,000	)		—			2,207
Cash and cash equivalents at beginning of period		7,754			47			32,983			—			40,784

Cash and cash equivalents at end of period	$	14,958		$	50		$	27,983		$	—		$	42,991

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

We recognized net income for the second quarter ended June 30, 2007 of $2.7 million, or $0.11 per diluted share, compared with net income of $4.9 million, or $0.21 per diluted share, for the second quarter of 2006.

We recognized net income for the six-month period ended June 30, 2007 of $7.6 million, or $0.32 per diluted share, compared with net income of $8.7 million, or $0.38 per diluted share, for the comparable period of 2006.

Our second quarter 2007 revenue was unfavorably affected by the substantial decline in North American medium- and heavy-duty truck production and a decline in North American light vehicle production. Medium- and heavy-duty truck production in the second quarter was unfavorably impacted by the new 2007 diesel emissions regulations that were implemented on January 1 in the U.S. The decline in revenue from North American medium- and heavy-duty truck and light vehicle production was offset by increased European commercial vehicle production and new program launches in both North America and Europe.

Our second quarter operating income was $6.9 million compared with $12.8 million in the previous year. Our results were unfavorably affected by increased depreciation expense and direct material costs as well as operational inefficiencies related to new product launches and supply chain management. In addition, the Company’s selling, general and administrative (“SG&A”) expenses increased in the areas of design and development and selling and marketing. Our SG&A expense increase resulted from additional spending in sales and marketing support for a new product launch, higher design and development expenses and increased systems implementation costs. Partially offsetting these variances was a $1.7 million pretax gain on the sale of fixed assets. Our PST Indústria Eletrônica da Amazônia Ltda (“PST”) joint venture in Brazil continued to perform well during the quarter, resulting in equity earnings of $2.1 million compared to $1.5 million in the previous year.

On July 29, 2006, we announced that we would begin work on our second major instrument panel assembly contract for the North American commercial vehicle market. Production began in the first quarter of 2007 and the contract is expected to contribute net sales of approximately $40.0 million annually at full production. We expect that the program will reach full production levels by 2009.

During the second quarter, our results were unfavorably affected by a significant decline in medium- and heavy-duty truck production as the U.S. adopted more stringent diesel emissions standards beginning in 2007. We currently expect this decline to continue for the remainder of the year. We expect our overall sales decline will be less than the industry production decline as our second instrument panel award and stable demand outside of the U.S. partially offsets reduced medium- and heavy-duty truck production. Our expected performance will be based on our continued drive toward operational excellence across the organization, ongoing cost reduction initiatives and successful launches of several key products in 2007.

Significant factors inherent to our markets that could affect our results for the remainder of 2007 include the financial stability of our customers and suppliers as well as our ability to successfully execute our planned productivity and cost reduction initiatives. We are undertaking these initiatives to mitigate commodity price increases and customer-demanded price reductions. Our results for 2007 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 organizational structure, our operations have been aggregated into two reportable segments: Electronics and Control Devices. The Electronics reportable segment, formerly known as 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. Until October 30, 2006, our fiscal quarters were comprised of 13-week periods. On October 30, 2006, we changed back to a calendar (December 31) fiscal year-end; therefore, the 2006 fiscal year ended on December 31, 2006. Our fiscal quarters are now comprised of 3-month periods. Throughout this document, “three months” and “six months” will be used to reference the 3- and 6-month periods of 2007 and the comparable 13- and 26-week periods of 2006.

Three Months Ended June 30, 2007 Compared to Three Months Ended July 1, 2006

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the three months ended June 30, 2007 and July 1, 2006 are summarized in the following table (in thousands):


	Three Months Ended								$ Increase /			% Increase /
	June 30, 2007				July 1, 2006				(Decrease)			(Decrease)
Electronics	$	98,248	53.5	%	$	105,543	56.9	%	$	(7,295	)		(6.9	)%
Control Devices		85,554	46.5			79,956	43.1			5,598			7.0	%

Total net sales	$	183,802	100.0	%	$	185,499	100.0	%	$	(1,697	)		(0.9	)%

The decrease in net sales for our Electronics segment was primarily due to a substantial decline in medium- and heavy-duty truck production in North America. Offsetting the unfavorable North American production were increased production volume in our European commercial vehicle operations, favorable foreign currency exchange rates and new program revenues in our European operations. Favorable foreign currency exchange rates contributed $3.0 million to sales in the second quarter compared with the prior year. We continue to expect our North American commercial vehicle business to be unfavorably affected by the new 2007 diesel emissions regulations for the balance of 2007.

The increase in net sales for our Control Devices segment was primarily attributable to new product launches in our temperature and speed sensor businesses. The increase was partially offset by production volume reductions at our major customers. In addition, the impact from foreign currency exchange rate translation increased our sales by $0.7 million during the quarter compared with the prior year.

Net sales by geographic location for the three months ended June 30, 2007 and July 1, 2006 are summarized in the following table (in thousands):


	Three Months Ended								$ Increase /			% Increase /
	June 30, 2007				July 1, 2006				(Decrease)			(Decrease)
North America	$	132,449	72.1	%	$	143,391	77.3	%	$	(10,942	)		(7.6	)%
Europe and other		51,353	27.9			42,108	22.7			9,245			22.0	%

Total net sales	$	183,802	100.0	%	$	185,499	100.0	%	$	(1,697	)		(0.9	)%

The decrease in North American sales was primarily attributable to lower sales to our commercial vehicle customers as a result of the new U.S. diesel emission regulations and lower production volume from our North American light vehicle customers. The decrease was partially offset by new program launches of temperature and speed sensor products. Our increase in sales outside of North America for the quarter was primarily due to increased production volume, new product revenues and favorable foreign currency exchange rates. The favorable effect of foreign currency exchange rates affected net sales outside North America by $3.7 million in the second quarter of 2007 compared with the prior year.

Condensed consolidated statements of operations as a percentage of net sales for the three months ended June 30, 2007 and July 1, 2006 are presented in the following table (in thousands):


	Three Months Ended										$ Increase /
	June 30, 2007					July 1, 2006					(Decrease)
Net Sales	$	183,802		100.0	%	$	185,499		100.0	%	$	(1,697	)

Costs and Expenses:
Cost of goods sold		144,920		78.8			141,504		76.3			3,416
Selling, general and administrative		33,629		18.3			31,151		16.8			2,478
(Gain) loss on sale of property, plant & equipment, net		(1,653	)	(0.9	)		20		0.0			(1,673	)


Operating Income		6,906		3.8			12,824		6.9			(5,918	)

Interest expense, net		5,619		3.1			5,833		3.1			(214	)
Equity in earnings of investees		(2,298	)	(1.3	)		(1,550	)	(0.8	)		(748	)
Other loss, net		224		0.1			1,745		0.9			(1,521	)


Income Before Income Taxes		3,361		1.9			6,796		3.7			(3,435	)
Provision for income taxes		666		0.4			1,906		1.0			(1,240	)


Net Income	$	2,695		1.5	%	$	4,890		2.7	%	$	(2,195	)

Cost of Goods Sold. The increase in cost of goods sold as a percentage of sales was due to unfavorable material costs, operational inefficiencies related to new product launches and higher depreciation expense. These higher costs were partially offset by favorable gains from our commodity and foreign exchange hedging activities and ongoing procurement initiatives.

Selling, General and Administrative Expenses. Product development expenses included in SG&A were $10.9 million and $10.3 million for the second quarters ended June 30, 2007 and July 1, 2006, respectively. The increase relates to development spending in the areas of tachographs and instrumentation. In the future, the Company intends to reallocate its resources to focus on the design and development of new products rather than primarily focusing on sustaining existing product programs.

The increase in SG&A expenses, excluding product development expenses, for the second quarter 2007 compared with the second quarter of 2006 is primarily attributable to additional marketing resources for a new aftermarket product launch in Europe.

(Gain) Loss on Sale of Property, Plant and Equipment, net. The increase was attributable to the sale of two closed facilities during the second quarter of 2007.

Equity in Earnings of Investees. Equity in earnings of investees was $2.3 million and $1.6 million for the second quarters ended June 30, 2007 and July 1, 2006, respectively. The increase was predominately attributable to the increase in equity earnings recognized from our PST joint venture. The increase primarily reflects higher volume for PST’s security product lines.

Income Before Income Taxes. Income before income taxes is summarized in the following table by reportable segment (in thousands).


	Three Months Ended						$ Increase /			% Increase /
	June 30, 2007			July 1, 2006			(Decrease)			(Decrease)
Electronics	$	1,884		$	8,847		$	(6,963	)		(78.7	)%
Control Devices		5,510			4,497			1,013			22.5	%
Other corporate activities		1,572			(735	)		2,307			313.9	%
Corporate interest expense		(5,605	)		(5,813	)		208			3.6	%

Income before income taxes	$	3,361		$	6,796		$	(3,435	)		(50.5	)%

The decrease in income before income taxes in the Electronics segment is related to reduced volume and increased SG&A expenses. The increased SG&A expenses were predominantly due to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.

The increase in income before income taxes in the Control Devices reportable segment was primarily due to the recognition of a pretax gain of approximately $1.3 million on the sale of a vacant building in the second quarter of 2007. In addition, operating inefficiencies related to a new product launch and additional China start-up expenses unfavorably affected income before income taxes for the second quarter of 2007. These factors were offset by increased volume resulting from new product launches.

The increase in income before income taxes from other corporate activities was primarily due to an increase of $0.7 million in equity earnings from our PST joint venture and a reduction in foreign exchange losses recorded in the previous year.

Income before income taxes by geographic location for the three months ended June 30, 2007 and July 1, 2006 is summarized in the following table (in thousands):


	Three Months Ended								$ Increase /			% Increase /
	June 30, 2007				July 1, 2006				(Decrease)			(Decrease)
North America	$	1,431	42.6	%	$	2,448	36.0	%	$	(1,017	)		(41.5	)%
Europe and other		1,930	57.4			4,348	64.0			(2,418	)		(55.6	)%

Income before income taxes	$	3,361	100.0	%	$	6,796	100.0	%	$	(3,435	)		(50.5	)%

The decrease in our profitability in North America was primarily attributable to unfavorable variances related to new product launches, lower North American light and commercial vehicle production and unfavorable product mix. The decrease was offset by increased revenue from new temperature and speed sensor product launches. The decrease in our profitability outside North America was primarily due to increased SG&A expenses related to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.

Provision for Income Taxes. We recognized a provision for income taxes of $0.7 million, or 19.8% of pre-tax income, and $1.9 million, or 28.1% of the pre-tax income, for federal, state and foreign income taxes for the second quarters ended June 30, 2007 and July 1, 2006, respectively. The decrease in the effective tax rate for the three months ended June 30, 2007 compared to the three months ended July 1, 2006 was primarily attributable to the benefit of the federal research and development tax credit which had not been extended at July 1, 2006 and a more favorable mix of domestic and lower taxed foreign earnings.

Six Months Ended June 30, 2007 Compared to Six Months Ended July 1, 2006

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the six months ended June 30, 2007 and July 1, 2006 are summarized in the following table (in thousands):


	Six Months Ended								$ Increase /			% Increase /
	June 30, 2007				July 1, 2006				(Decrease)			(Decrease)
Electronics	$	199,049	54.0	%	$	205,907	56.4	%	$	(6,858	)		(3.3	)%
Control Devices		169,781	46.0			159,226	43.6			10,555			6.6	%

Total net sales	$	368,830	100.0	%	$	365,133	100.0	%	$	3,697			1.0	%

The decrease in net sales for our Electronics segment was primarily due to a substantial decline in medium- and heavy-duty truck production in North America. As referenced above, medium- and heavy-duty truck production in the second quarter was unfavorably impacted by the new 2007 diesel emissions regulations that were implemented on January 1 in the U.S. Offsetting the unfavorable North American production were increased production volume in our European commercial vehicle operations, favorable foreign currency exchange rates and new business wins in our European operations. Favorable foreign currency exchange rates contributed $7.1 million to sales in the first 6 months compared with the prior year. We continue to expect our North American commercial vehicle business to be unfavorably affected by the new 2007 diesel emissions regulations for the balance of 2007.

major customers. In addition, the impact from foreign currency exchange rate translation increased our sales by $1.7 million during 2007 compared with the prior year.

Net sales by geographic location for the six months ended June 30, 2007 and July 1, 2006 are summarized in the following table (in thousands):


	Six Months Ended								$ Increase /			% Increase /
	June 30, 2007				July, 2006				(Decrease)			(Decrease)
North America	$	266,510	72.3	%	$	284,415	77.9	%	$	(17,905	)		(6.3)	%
Europe and other		102,320	27.7			80,718	22.1			21,602			26.8	%

Total net sales	$	368,830	100.0	%	$	365,133	100.0	%	$	3,697			1.0	%

The decrease in North American sales was primarily attributable to lower sales to our commercial vehicle customers as a result of the new U.S. diesel emission regulations and lower production volume from our North American light vehicle customers. The decrease was partially offset by new program launches of temperature and speed sensor products. Our increase in sales outside of North America for the first half of 2007 was primarily due to new product revenues, increased commercial vehicle production and favorable foreign currency exchange rates. The favorable effect of foreign currency exchange rates affected net sales outside North America by $8.8 million for the first half of 2007 compared with the prior year.

Condensed consolidated statements of operations as a percentage of net sales for the six months ended June 30, 2007 and July 1, 2006 are presented in the following table (in thousands):


	Six Months Ended										$ Increase /
	June 30, 2007					July 1, 2006					(Decrease)
Net Sales	$	368,830		100.0	%	$	365,133		100.0	%	$	3,697

Costs and Expenses:
Cost of goods sold		287,101		77.8			280,447		76.8			6,654
Selling, general and administrative		66,802		18.1			62,971		17.2			3,831
Gain on sale of property, plant & equipment, net		(1,688	)	(0.4	)		(1,469	)	(0.4	)		(219	)


Operating Income		16,615		4.5			23,184		6.4			(6,569	)

Interest expense, net		11,103		3.0			11,752		3.2			(649	)
Equity in earnings of investees		(4,418	)	(1.2	)		(2,966	)	(0.8	)		(1,452	)
Other loss, net		512		0.1			1,750		0.5			(1,238	)


Income Before Income Taxes		9,418		2.6			12,648		3.5			(3,230	)

Provision for income taxes		1,853		0.5			3,993		1.1			(2,140	)


Net Income	$	7,565		2.1	%	$	8,655		2.4	%	$	(1,090	)

Cost of Goods Sold. The increase in cost of goods sold as a percentage of sales was due to unfavorable material costs, operational inefficiencies related to new product launches and higher depreciation expense. These costs were partially offset by favorable gains from our commodity and foreign exchange hedging activities and ongoing procurement initiatives.

Selling, General and Administrative Expenses. Product development expenses included in SG&A were $21.8 million and $20.6 million for the six months ended June 30, 2007 and July 1, 2006, respectively. The increase relates to development spending in the areas of tachographs and instrumentation. Mitigating the overall increase in spending were reductions in development costs at lower productivity locations. In the future, the Company intends to reallocate its resources to focus on the design and development of new products rather than primarily focusing on sustaining existing product programs.

The increase in SG&A expenses, excluding product development expenses, in 2007 compared with 2006 is primarily attributable to the increase in our selling and marketing activity to support new products in Europe and the increase in systems implementation expenses related to a new information system in Europe.

Gain on Sale of Property, Plant and Equipment, net. The increase was attributable to a $1.6 million gain on the sale of two closed facilities during the second quarter of 2007 exceeding the $1.5 million gain on the sale of land and a building during the first quarter of 2006.

Equity in Earnings of Investees. The increase was predominately attributable to the increase in equity earnings recognized from our PST joint venture. The increase primarily reflects higher volume for PST’s security product lines

Income Before Income Taxes. Income before income taxes is summarized in the following table by reportable segment (in thousands).


	Six Months Ended						$ Increase /			% Increase /
	June 30, 2007			July 1, 2006			(Decrease)			(Decrease)
Electronics	$	8,990		$	15,044		$	(6,054	)		(40.2	)%
Control Devices		8,038			8,906			(868	)		(9.7	)%
Other corporate activities		3,521			197			3,324			1,687.3	%
Corporate interest expense		(11,131	)		(11,499	)		368			3.2	%

Income before income taxes	$	9,418		$	12,648		$	(3,230	)		(25.5	)%

The decrease in income before income taxes in the Control Devices reportable segment was primarily due to operating inefficiencies related to a new product launch and additional China start-up expenses. These factors were offset by increased volume resulting from new product launches.

The increase in income before income taxes from other corporate activities was primarily due to a reduction in foreign exchange losses recorded in the previous year and an increase in equity earnings from our PST joint venture of $1.3 million.

Income before income taxes by geographic location for the six months ended June 30, 2007 and July 1, 2006 is summarized in the following table (in thousands):


	Six Months Ended								$ Increase /			% Increase /
	June 30, 2007				July 1, 2006				(Decrease)			(Decrease)
North America	$	3,825	40.6	%	$	5,337	42.2	%	$	(1,512	)		(28.3	)%
Europe and other		5,593	59.4			7,311	57.8			(1,718	)		(23.5	)%

Income before income taxes	$	9,418	100.0	%	$	12,648	100.0	%	$	(3,230	)		(25.5	)%

The decrease in our profitability in North America was primarily attributable to unfavorable variances related to new product launches, lower North American light and commercial vehicle production and unfavorable product mix. The decrease was offset by increased revenue from new temperature and speed sensor product launches. The decrease in our profitability outside North America was primarily due to increased SG&A related to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.

Provision for Income Taxes. We recognized a provision for income taxes of $1.9 million, or 19.7% of pre-tax income, and $4.0 million, or 31.6% of the pre-tax income, for federal, state and foreign income taxes for the six months ended June 30, 2007 and July 1, 2006, respectively. The decrease in the effective tax rate for the six months ended June 30, 2007 compared to the six months ended July 1, 2006 was primarily attributable to the benefit of the Federal research and development tax credit which had not been extended at July 1, 2006, a reduction in accrued income taxes and a more favorable mix of domestic and lower taxed foreign earnings.

Liquidity and Capital Resources

Summary of Cash Flows (in thousands):


	Six Months Ended						$ Increase /
	June 30, 2007			July 1, 2006			(Decrease)
Cash provided by (used for):
Operating activities	$	4,019		$	12,215		$	(8,196	)
Investing activities		(5,863	)		(11,557	)		5,694
Financing activities		1,796			(181	)		1,977
Effect of exchange rate changes on cash and cash equivalents		232			1,730			(1,498	)

Net change in cash and cash equivalents	$	184		$	2,207		$	(2,023	)

The decrease in net cash provided by operating activities was primarily due to lower earnings and a larger investment in working capital. Specifically, cash used to finance movements in working capital asset and liability accounts, in particular accounts receivable, accounts payable and prepaid expenses and other, gave rise to a use of funds in the current period of $14.9 million versus a use of funds of $8.6 million in the prior year.

The decrease in net cash used for investing activities reflects an increase in cash received from the sale of fixed assets in 2007 and decreases in cash used for capital projects and business investment.

The increase in net cash provided by financing activities was due, principally, to the exercise of stock options during 2007 and the fees associated with amending our credit agreement during the first quarter of 2006.

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 June 30, 2007. 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 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 6 to our condensed consolidated 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 June 30, 2007, $96.4 million of the $100.0 million was available.

There have been no material changes to the table of contractual obligations presented on page 24 of the Company’s 2006 Form 10-K. The table excludes the liability for unrecognized income tax benefits, since the Company cannot predict with reasonable reliability the timing of cash settlements with the respective taxing authorities. The unrecognized income tax benefits totaled $5.6 million as of January 1, 2007, including interest and penalties of $0.8 million.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies, which include management’s best estimates and judgments, are included in Item 7, Part II to the consolidated financial statements of the Company’s 2006 Form 10-K. Certain of these accounting policies are considered critical as disclosed in the Critical Accounting Policies and Estimates section of Management’s Discussion and Analysis of the Company’s 2006 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. Other than the adoption of Financial Accounting Standards Board interpretation No. 48, as discussed in Note 11, there have been no significant changes in the Company’s critical accounting policies since December 31, 2006.

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 2006 Form 10-K.

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 June 30, 2007, 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. 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.

In December 2006, we entered into fixed price swap contracts for 480 metric tonnes of copper. In January 2007, we entered into an additional fixed price swap for 420 metric tonnes of copper. The purpose of these contracts is to reduce our price risk as it relates to copper prices.

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. A hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in commodity prices would not significantly affect our results of operations, financial position or cash flows.

Foreign Currency Exchange Risk

We have currency exposures related to buying, selling and financing in currencies other than the local currency in which we operate. In some instances, we choose to reduce our exposures through financial instruments that provide offsets or limits to our exposures. Currently, our most significant currency exposures relate to the Mexican peso, Swedish krona, and British pound. 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 3 to our condensed consolidated financial statements, we have entered into foreign currency forward contracts related to our Mexican peso, Swedish krona and British pound exposures. These foreign currency forward contracts had a notional value of $33,268 and $16,003 at June 30, 2007 and July 1, 2006, respectively. The estimated net fair value of these contracts at June 30, 2007 and July 1, 2006, per quoted market sources, was approximately $676 and $(235), respectively. In 2006, the Company used foreign currency options contracts to reduce the risk of exposures to the Mexican peso. As of July 1, 2006, the Company’s foreign currency options contracts had a notional value of $167 and an estimated fair value of $43. The Company’s foreign currency options have expired as of December 31, 2006.

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. A hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted foreign currencies would not significantly affect our results of operations, financial position or cash flows.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2007, 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 June 30, 2007.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the six months ended June 30, 2007 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 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 government-imposed or other instituted recalls involving such products. The Company maintains insurance against such liability claims.

Item 1A. Risk Factors.

There were no material changes from risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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.

(a)		The Annual Meeting of Shareholders of Stoneridge, Inc. was held on May 7, 2007.

(b)		The following matters were submitted to a vote at the meeting:

		The election of the following nominees as directors of the Company. The vote with respect to each nominee was as follows:


Nominee	For		Withheld
Avery S. Cohen		21,421,415		683,042
John C. Corey		22,051,531		52,926
Jeffrey P. Draime		22,059,221		45,236
Sheldon J. Epstein		22,056,721		47,736
Douglas C. Jacobs		22,100,641		3,816
Kim Korth		22,100,641		3,816
William M. Lasky		22,100,621		3,836
Earl L. Linehan		22,057,721		46,736

The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ended December 31, 2007. The results of the vote were as follows:


	For		Against		Abstain
Ratify Appointment of Accounting Firm		22,103,620		400		438

The proposal to approve the adoption of the Annual Incentive Plan. The results of the vote were as follows:


	For		Against		Abstain
Adopt Annual Incentive Plan		19,551,824		66,318		1,132

The proposal to approve an amendment to the Company’s Code of Regulations. The results of the vote were as follows:


	For		Against		Abstain
Amend Code of Regulations		19,613,772		4,202		1,300

Item 5. Other Information.

None.

Item 6. Exhibits.

Reference is made to the separate, “Index to Exhibits,” filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	STONERIDGE, INC.
Date: August 9, 2007	/s/ John C. Corey
	John C. Corey
	President, Chief Executive Officer and Director (Principal Executive Officer)



Date: August 9, 2007	/s/ George E. Strickler
	George E. Strickler
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

INDEX TO EXHIBITS


Exhibit
Number		Exhibit
3. 1		Amended Code of Regulations, filed herewith.

10. 1		Annual Incentive Plan, filed herewith.

10. 2		Severance Agreement and Release for Edward F. Mosel, dated May 22, 2007, (incorporated by reference to Exhibit 99. 1 to the Company’s Current Report on Form 8-K filed on May 25, 2007).

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.

STONERIDGE INC - Quarter Report: 2007 June (Form 10-Q)

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