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

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended March 31, 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.

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

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

Registrant’s telephone number, including area code

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

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

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

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

     The number of Common Shares, without par value, outstanding as of April 27, 2007 was 24,307,167.

 

 

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

				Page No.
PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December 31, 2006 (Audited)			2
		Condensed Consolidated Statements of Operations (Unaudited) For the 3 Months Ended March 31, 2007 and 13 Weeks Ended April 1, 2006			3
		Condensed Consolidated Statements of Cash Flows (Unaudited) For the 3 Months Ended March 31, 2007 and 13 Weeks Ended April 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			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			25
Item 4.		Controls and Procedures			26
PART II—OTHER INFORMATION
Item 1.		Legal Proceedings			27
Item 1A.		Risk Factors			27
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3.		Defaults Upon Senior Securities			27
Item 4.		Submission of Matters to a Vote of Security Holders			27
Item 5.		Other Information			27
Item 6.		Exhibits			27
Signatures					28
Index to Exhibits					29
EX-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)

		March 31,				December 31,
		2007				2006
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash and cash equivalents		$	54,267			$	65,882
Accounts receivable, less allowances for doubtful accounts of $6,069 and $5,243, respectively			119,838				106,985
Inventories, net			60,200				58,521
Prepaid expenses and other			15,855				13,448
Deferred income taxes			8,177				9,196
Total current assets			258,337				254,032
Long-Term Assets:
Property, plant and equipment, net			114,043				114,586
Other Assets:
Goodwill			65,176				65,176
Investments and other, net			33,005				30,875
Deferred income taxes			37,734				37,138
Total long-term assets			249,958				247,775
Total Assets		$	508,295			$	501,807
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	66,621			$	72,493
Accrued expenses and other			50,860				45,624
Total current liabilities			117,481				118,117
Long-Term Liabilities:
Long-term debt			200,000				200,000
Deferred income taxes			1,883				1,923
Other liabilities			3,557				3,145
Total long-term liabilities			205,440				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 24,483 and 23,990 shares and outstanding 24,280 and 23,804 shares, respectively, with no stated value			—				—
Additional paid-in capital			151,102				150,078
Common Shares held in treasury, 203 and 186 shares, respectively, at cost			(277	)			(151	)
Retained earnings			26,591				21,701
Accumulated other comprehensive income			7,958				6,994
Total shareholders’ equity			185,374				178,622
Total Liabilities and Shareholders’ Equity		$	508,295			$	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
		March 31,				April 1,
		2007				2006
Net Sales		$	185,028			$	179,634
Costs and Expenses:
Cost of goods sold			142,181				138,942
Selling, general and administrative			33,173				31,819
Gain on sale of property, plant and equipment, net			(35	)			(1,489	)
Operating Income			9,709				10,362
Interest expense, net			5,484				5,919
Equity in earnings of investees			(2,120	)			(1,416	)
Other loss, net			288				7
Income Before Income Taxes			6,057				5,852
Provision for income taxes			1,187				2,085
Net Income		$	4,870			$	3,767
Basic net income per share		$	0.21			$	0.17
Basic weighted average shares outstanding			22,990				22,766
Diluted net income per share		$	0.21			$	0.16
Diluted weighted average shares outstanding			23,403				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)

		Three Months Ended
		March 31,				April 1,
		2007				2006
OPERATING ACTIVITIES:
Net income		$	4,870			$	3,767
Adjustments to reconcile net income to net cash provided by (used for) operating activities —
Depreciation			7,165				6,246
Amortization			398				403
Deferred income taxes			434				1,143
Earnings of equity method investees, less dividends received			(2,120	)			(1,416	)
Gain on sale of property, plant and equipment			(35	)			(1,489	)
Share-based compensation expense			587				634
Changes in operating assets and liabilities —
Accounts receivable, net			(13,325	)			(20,674	)
Inventories, net			(1,748	)			(1,093	)
Prepaid expenses and other			(2,462	)			(276	)
Other assets			324				204
Accounts payable			(5,544	)			13,140
Accrued expenses and other			6,400				5,632
Net cash provided by (used for) operating activities			(5,056	)			6,221
INVESTING ACTIVITIES:
Capital expenditures			(6,807	)			(6,563	)
Proceeds from sale of property, plant and equipment			35				2,266
Business acquisitions and other			—				(1,034	)
Net cash used for investing activities			(6,772	)			(5,331	)
FINANCING ACTIVITIES:
Repayments of long-term debt			—				(44	)
Share-based compensation activity, net			355				(69	)
Other financing costs			—				(150	)
Net cash provided by (used for) financing activities			355				(263	)
Effect of exchange rate changes on cash and cash equivalents			(142	)			363
Net change in cash and cash equivalents			(11,615	)			990
Cash and cash equivalents at beginning of period			65,882				40,784
Cash and cash equivalents at end of period		$	54,267			$	41,774

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 three months ended March 31, 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, “first quarter” will be used to reference the first 3-month period of 2007 and the comparable 13-week period 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 70% and 67% of the Company’s inventories at March 31, 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:

		March 31,				December 31,
		2007				2006
Raw materials		$	33,959			$	39,832
Work in progress			9,544				8,196
Finished goods			18,185				12,614
Total inventories			61,688				60,642
Less: LIFO reserve			(1,488	)			(2,121	)
Inventories, net		$	60,200			$	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 March 31, 2007 and April 1, 2006, per quoted market sources, was $208.0 million and $172.0 million, respectively. On both dates, the carrying value was $200.0 million.

     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 strictly for

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

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 our international business presence, we are exposed to foreign currency exchange risk. The Company uses derivative financial instruments, including foreign currency forward and option contracts, to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currencies hedged by the Company include the Swedish krona, British pound and 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 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 hedge 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 $42,894 and $24,500 at March 31, 2007 and April 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 receivables. The estimated fair value of these contracts at March 31, 2007 and April 1, 2006, per quoted market sources, was approximately $576 and $(43), respectively.

     To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company has entered into fixed price swaps with a bank to fix the cost of copper purchases with the objective of minimizing changes in cost due to market price fluctuations. 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 hedge will be highly effective in the future; however, as of December 31, 2006 it was not deemed effective and had no impact on other comprehensive income. The effectiveness of the transaction will be measured on an ongoing basis using the hypothetical operative method. As of March 31, 2007, the fair value of the fixed price swap agreements was approximately $493.

(4) Share-Based Compensation

     Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $587 and $634 for the first quarters ended March 31, 2007 and April 1, 2006, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $205 and $222 for the first quarters ended March 31, 2007 and April 1, 2006, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

(5) Comprehensive Income (Loss)

     SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and disclosure of comprehensive income.

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

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

		First Quarter Ended
		March 31,				April 1,
		2007				2006
Net income		$	4,870			$	3,767
Other comprehensive income:
Currency translation adjustments			449				1,223
Pension liability adjustments			(8	)			(37	)
Unrealized loss on marketable securities			51				(147	)
Unrecognized gain on derivatives			472				—
Total other comprehensive income			964				1,039
Comprehensive income		$	5,834			$	4,806

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

		March 31,				December 31,
		2007				2006
Foreign currency translation adjustments		$	8,974			$	8,525
Pension liability adjustments			(1,475	)			(1,467	)
Unrealized loss on marketable securities			(13	)			(64	)
Unrecognized gain on derivatives			472				—
Accumulated other comprehensive income		$	7,958			$	6,994

(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 in May 2007 at 105.75. Interest is payable on May 1 and November 1 of each year. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.

     Credit Agreement

     On March 7, 2006, the Company amended the existing credit agreement, which provided the Company with substantially all of its borrowing capacity on the $100.0 million credit facility. The credit agreement contains various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment utilizes a borrowing base composed of accounts receivable and inventory. The borrowing base limitation expires June 30, 2007. In addition, the Company is prohibited from repurchasing, repaying or redeeming subordinated notes until certain covenant levels are met. As of March 31, 2007, $96.6 million of the $100.0 million credit facility was available to the Company. The revolving facility expires on April 30, 2008 and requires a commitment fee of 0.375% to 0.500% on the unused balance. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.25% to 1.25% or (ii) LIBOR plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined. Interest on the swing line facility is payable monthly at the quoted overnight borrowing rate plus a margin of 1.75% to 2.75%, depending upon the Company’s ratio of consolidated total debt to consolidated EBITDA, as defined.

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

(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:

		First Quarter Ended
		March 31,				April 1,
		2007				2006
Basic weighted-average shares outstanding			22,989,615				22,766,293
Effect of dilutive securities			413,185				117,911
Diluted weighted-average shares outstanding			23,402,800				22,884,204

     Options not included in the computation of diluted net income per share to purchase 410,250 and 681,850 Common Shares at an average price of $14.07 and $12.13 per share were outstanding at March 31, 2007 and April 1, 2006, respectively. These outstanding options were not included in the computation of diluted net income per share because their respective exercise prices were greater than the average market price of Common Shares and, therefore, their effect would have been anti-dilutive.

     As of March 31, 2007, 609,675 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 as of March 31, 2007. 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.

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

(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 $41 and $224 for the first quarters ended March 31, 2007 and April 1, 2006, 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:

		Severance					Asset-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
Cash payments			(42	)			—				(42	)
Balance at March 31, 2007		$	437			$	—			$	437
Remaining expected restructuring charge		$	31			$	—			$	31

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			—				—				—				—				—
Cash payments			—				—				(319	)			—				(319	)
Balance at March 31, 2007		$	—			$	—			$	109			$	—			$	109
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. The Company expects that these restructuring efforts will be substantially completed during the second quarter of 2007.

(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.

     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

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

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 first quarters ended March 31, 2007 and April 1, 2006:

		2007				2006
Product warranty and recall at beginning of period		$	5,825			$	6,220
Accruals for products shipped during period			557				715
Changes in estimates of existing liabilities			510				584
Settlements made during the period (in cash or in kind)			(1,021	)			(813	)
Product warranty and recall at end of period		$	5,871			$	6,706

(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:

		Pension Benefit Plan								Postretirement Benefit Plan
		First Quarter Ended								First Quarter Ended
		March 31,				April 1,				March 31,				April 1,
		2007				2006				2007				2006
Service cost		$	42			$	28			$	3			$	4
Interest cost			507				254				6				4
Expected return on plan assets			(566	)			(273	)			—				—
Amortization of actuarial loss (gain)			110				65				(1	)			—
Net periodic benefit cost		$	93			$	74			$	8			$	8

     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 $64 have been made to the pension plan as of March 31, 2007.

(11) Income Taxes

     The Company recognized a provision for income taxes of $1,187, or 19.6% of pre-tax income, and $2,085, or 35.6% of pre-tax income, for federal, state and foreign income taxes for the first quarters ended March 31, 2007 and April 1, 2006, respectively. The decrease in the effective tax rate for the first quarter ended March 31, 2007 compared to the first quarter ended April 1, 2006 was primarily attributable to the benefit of the Federal research and development tax credit which had not been extended at April 1, 2006, a reduction in accrued income taxes, as well as lower foreign tax expense due to a more favorable mix of foreign earnings.

     In June 2006, the Financial Accounting Standards Board issued FASB interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. 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.

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

     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 decreased by $187 in the quarter ended March 31, 2007 resulting in a balance at March 31, 2007 of $4,544. 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 $4,347 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 in income tax expense. For the three months ended March 31, 2007 and 2006, the Company recognized approximately $(92) and $9 of gross interest and penalties, respectively. The Company has accrued approximately $730 and $821 for the payment of interest and penalties at March 31, 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

(12) Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), Fair Value Measurements, 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 (“FSP No. AUG AIR-1”), Accounting for Planned Major Maintenance Activities. 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.

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 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:

		First Quarter Ended
		March 31,				April 1,
		2007				2006
Net Sales
Electronics		$	100,801			$	100,364
Inter-segment sales			5,131				4,469
Electronics net sales			105,932				104,833
Control Devices			84,227				79,270
Inter-segment sales			801				918
Control Devices net sales			85,028				80,188
Eliminations			(5,932	)			(5,387	)
Total consolidated net sales		$	185,028			$	179,634
Income Before Income Taxes
Electronics		$	6,135			$	6,197
Control Devices			2,381				4,409
Other corporate activities			3,067				932
Corporate interest expense			(5,526	)			(5,686	)
Total consolidated income before income taxes		$	6,057			$	5,852
Depreciation and Amortization
Electronics		$	2,330			$	1,790
Control Devices			4,805				4,430
Corporate activities			85				91
Total consolidated depreciation and amortization(A)		$	7,220			$	6,311

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

		First Quarter Ended
		March 31,				April 1,
		2007				2006
Interest Expense (Income)
Electronics		$	(88	)		$	(106	)
Control Devices			46				339
Corporate activities			5,526				5,686
Total consolidated interest expense, net		$	5,484			$	5,919
Capital Expenditures
Electronics		$	2,727			$	2,200
Control Devices			3,414				4,317
Corporate activities			666				46
Total consolidated capital expenditures		$	6,807			$	6,563

		March 31,				December 31,
		2007				2006
Total Assets
Electronics		$	176,096			$	184,327
Control Devices			225,281				216,523
Corporate(B)			267,347				265,986
Eliminations			(160,429	)			(165,029	)
Total consolidated assets		$	508,295			$	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:

		First Quarter Ended
		March 31,				April 1,
		2007				2006
Net Sales
North America		$	134,061			$	141,024
Europe and other			50,967				38,610
Total consolidated net sales		$	185,028			$	179,634

		March 31,				December 31,
		2007				2006
Non-Current Assets
North America		$	221,575			$	215,429
Europe and other			28,383				32,346
Total consolidated non-current assets		$	249,958			$	247,775

(14) Investments

     PST Indústria Eletrônica da Amazônia Ltda.

     The Company has a 50% interest in PST Indústria Eletrônica da Amazônia Ltda. (“PST”), a Brazilian electronic components business that specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $24,079 and $21,616 at March 31, 2007 and December 31, 2006, respectively.

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

     Condensed financial information for PST is as follows:

		Three Months Ended
		March 31,
		2007				2006
Revenues		$	27,351			$	20,999
Cost of sales		$	12,823			$	10,674
Total pre-tax income		$	5,325			$	4,196
The Company’s share of pre-tax income		$	2,663			$	2,098

     Equity in earnings of PST included in the condensed consolidated statements of operations was $2,015 and $1,360 for the first quarters ended March 31, 2007 and April 1, 2006, respectively.

     Minda Instruments Ltd.

     At April 1, 2006, the Company had a 30% ownership 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 $3,914 and $3,796 at March 31, 2007 and December 31, 2006, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $105 and $56, for the first quarters ended March 31, 2007 and April 1, 2006, 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 and the credit facility (Non-Guarantor Subsidiaries).

     Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, as of March 31, 2007 and December 31, 2006 and for each of the first quarters ended March 31, 2007 and April 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)

		March 31, 2007
						Guarantor				Non-Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	23,171			$	44			$	31,052			$	—			$	54,267
Accounts receivable, net			53,309				32,054				34,475				—				119,838
Inventories, net			26,505				14,850				18,845				—				60,200
Prepaid expenses and other			(274,791	)			274,937				15,709				—				15,855
Deferred income taxes			2,793				4,244				1,140				—				8,177
Total current assets			(169,013	)			326,129				101,221				—				258,337
Long-Term Assets:
Property, plant and equipment, net			61,398				31,068				21,577				—				114,043
Other Assets:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			32,476				363				166				—				33,005
Deferred income taxes			40,688				(3,055	)			101				—				37,734
Investment in subsidiaries			417,485				—				—				(417,485	)			—
Total long-term assets			596,632				48,967				21,844				(417,485	)			249,958
Total Assets		$	427,619			$	375,096			$	123,065			$	(417,485	)		$	508,295
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	21,280			$	22,581			$	22,760			$	—			$	66,621
Accrued expenses and other			20,533				6,884				23,443				—				50,860
Total current liabilities			41,813				29,465				46,203				—				117,481
Long-Term Liabilities:
Long-term debt			200,000				—				—				—				200,000
Deferred income taxes			—				—				1,883				—				1,883
Other liabilities			432				457				2,668				—				3,557
Total long-term liabilities			200,432				457				4,551				—				205,440
Shareholders’ Equity			185,374				345,174				72,311				(417,485	)			185,374
Total Liabilities and Shareholders’ Equity		$	427,619			$	375,096			$	123,065			$	(417,485	)		$	508,295

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
						Guarantor				Non-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 First Quarter Ended March 31, 2007
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net Sales		$	88,851			$	52,071			$	63,975			$	(19,869	)		$	185,028
Costs and Expenses:
Cost of goods sold			78,544				36,581				46,267				(19,211	)			142,181
Selling, general and administrative			13,066				8,033				12,732				(658	)			33,173
(Gain) Loss on sale of property, plant and equipment, net			(43	)			—				8				—				(35	)
Operating Income (Loss)			(2,716	)			7,457				4,968				—				9,709
Interest expense (income), net			5,798				—				(314	)			—				5,484
Other (income) loss, net			(2,033	)			26				175				—				(1,832	)
Equity earnings from subsidiaries			(11,491	)			—				—				11,491				—
Income Before Income Taxes			5,010				7,431				5,107				(11,491	)			6,057
Provision for income taxes			140				4				1,043				—				1,187
Net Income (Loss)		$	4,870			$	7,427			$	4,064			$	(11,491	)		$	4,870