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STONERIDGE INC - Quarter Report: 2009 June (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 June 30, 2009

OR

¨
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.   
x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
o 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):

 
Accelerated filer x
 
Non-accelerated filer o
 
Smaller reporting company o
       
(Do not check if a smaller reporting company)
   

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

The number of Common Shares, without par value, outstanding as of July 24, 2009 was 25,175,801.

 
 

 

STONERIDGE, INC. AND SUBSIDIARIES
 
INDEX
 
Page No.
PART I–FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2009 and December 31, 2008
2
 
Condensed Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2009 and 2008
3
 
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2009 and 2008
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
24
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
Item 4.
Controls and Procedures
34
     
PART II–OTHER INFORMATION
     
Item 1.
Legal Proceedings
34
Item 1A.
Risk Factors
34
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
Item 3.
Defaults Upon Senior Securities
34
Item 4.
Submission of Matters to a Vote of Security Holders
35
Item 5.
Other Information
35
Item 6.
Exhibits
35
     
Signatures
36
Index to Exhibits
37
EX – 10.1
 
EX – 10.2
 
EX – 10.3
 
EX – 31.1
 
EX – 31.2
 
EX – 32.1
 
EX – 32.2
 

 
1

 
 
PART I–FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

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

   
June 30,
   
December 31,
 
   
2009
   
2008
 
 
 
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current Assets:
           
Cash and cash equivalents
  $ 85,481     $ 92,692  
Accounts receivable, less reserves of $4,186 and $4,204, respectively
    70,689       96,535  
Inventories, net
    43,683       54,800  
Prepaid expenses and other
    16,453       9,069  
Deferred income taxes
    1,957       1,495  
Total current assets
    218,263       254,591  
                 
Long-Term Assets:
               
Property, plant and equipment, net
    80,287       87,701  
Other Assets:
               
Investments and other, net
    43,279       40,145  
Total long-term assets
    123,566       127,846  
Total Assets
  $ 341,829     $ 382,437  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Current Liabilities:
               
Accounts payable
  $ 41,020     $ 50,719  
Accrued expenses and other
    39,040       43,485  
Total current liabilities
    80,060       94,204  
                 
Long-Term Liabilities:
               
Long-term debt
    183,000       183,000  
Deferred income taxes
    5,379       7,002  
Other liabilities
    6,987       6,473  
Total long-term liabilities
    195,366       196,475  
                 
Shareholders' Equity:
               
Preferred Shares, without par value, authorized 5,000 shares, none issued.
    -       -  
Common Shares, without par value, authorized 60,000 shares, issued 25,286 and 24,772 shares and outstanding 25,176 and 24,665 shares, respectively, with no stated value
    -       -  
Additional paid-in capital.
    158,232       158,039  
Common Shares held in treasury, 110 and 107 shares, respectively, at cost
    (132 )     (129 )
Accumulated deficit
    (90,499 )     (59,155 )
Accumulated other comprehensive loss
    (1,198 )     (6,997 )
Total shareholders’ equity
    66,403       91,758  
Total Liabilities and Shareholders' Equity
  $ 341,829     $ 382,437  

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

 
2

 

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net Sales
  $ 102,290     $ 213,229     $ 223,375     $ 416,299  
                                 
Costs and Expenses:
                               
Cost of goods sold
    88,694       163,875       190,504       315,128  
Selling, general and administrative
    26,338       36,884       53,415       73,166  
Restructuring charges
    1,551       1,713       2,509       3,135  
                                 
Operating Income (Loss)
    (14,293 )     10,757       (23,053 )     24,870  
                                 
Interest expense, net
    5,538       4,880       11,035       10,252  
Equity in earnings of investees
    (903 )     (3,016 )     (1,478 )     (6,835 )
Loss on early extinguishment of debt
    -       271       -       770  
Other expense (income), net.
    639       (124 )     645       278  
                                 
Income (Loss) Before Income Taxes
    (19,567 )     8,746       (33,255 )     20,405  
                                 
Provision (benefit) for income taxes
    197       4,062       (1,911 )     9,174  
                                 
Net Income (Loss)
  $ (19,764 )   $ 4,684     $ (31,344 )   $ 11,231  
                                 
Basic net income (loss) per share
  $ (0.84 )   $ 0.20     $ (1.33 )   $ 0.48  
Basic weighted average shares outstanding
    23,516       23,286       23,490       23,327  
                                 
Diluted net income (loss) per share
  $ (0.84 )   $ 0.20     $ (1.33 )   $ 0.47  
Diluted weighted average shares outstanding
    23,516       23,690       23,490       23,722  

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

 
3

 

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

   
Six Months Ended
 
   
June 30,
 
   
2009
   
2008
 
OPERATING ACTIVITIES:
           
Net income (loss)
  $ (31,344 )   $ 11,231  
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities -
               
Depreciation
    10,267       14,316  
Amortization.
    485       784  
Deferred income taxes
    (2,282 )     7,281  
Equity in earnings of investees
    (1,478 )     (6,835 )
Loss on sale of property, plant and equipment
    280       145  
Share-based compensation expense
    597       1,903  
Changes in operating assets and liabilities -
               
Accounts receivable, net
    25,974       (17,924 )
Inventories, net.
    11,584       (11,739 )
Prepaid expenses and other
    (3,384 )     (625 )
Accounts payable
    (10,333 )     6,081  
Accrued expenses and other
    (2,966 )     7,956  
Net cash provided by (used for) operating activities
    (2,600 )     12,574  
                 
INVESTING ACTIVITIES:
               
Capital expenditures
    (6,743 )     (11,641 )
Proceeds from sale of property, plant and equipment
    92       307  
Business acquisitions and other
    -       (980 )
Net cash used for investing activities
    (6,651 )     (12,314 )
                 
FINANCING ACTIVITIES:
               
Repayments of long-term debt
    -       (17,000 )
Share-based compensation activity, net
    -       1,162  
Premiums related to early extinguishment of debt
    -       (553 )
Net cash used for financing activities
    -       (16,391 )
                 
Effect of exchange rate changes on cash and cash equivalents
    2,040       1,549  
                 
Net change in cash and cash equivalents
    (7,211 )     (14,582 )
                 
Cash and cash equivalents at beginning of period
    92,692       95,924  
                 
Cash and cash equivalents at end of period
  $ 85,481     $ 81,342  

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

 
4

 

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.The results of operations for the six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year.

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, 2008.

(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 72% of the Company’s inventories at June 30, 2009 and December 31, 2008, respectively, and by the first-in, first-out (“FIFO”) method for all other inventories.The Company adjusts its excess and obsolescence reserve at least on a quarterly basis.Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period.The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage.Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period.Inventory cost includes material, labor and overhead.Inventories consist of the following:

   
June 30,
   
December 31,
 
    
2009
   
2008
 
             
Raw materials
  $ 21,926     $ 32,981  
Work-in-progress
    3,138       8,876  
Finished goods
    22,103       15,890  
Total inventories
    47,167       57,747  
Less: LIFO reserve
    (3,484 )     (2,947 )
Inventories, net
  $ 43,683     $ 54,800  

(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, 2009 and December 31, 2008, per quoted market sources, was $146.4 million and $124.4 million, respectively.The carrying value was $183.0 million as of June 30, 2009 and December 31, 2008.

Derivative Instruments and Hedging Activities

  Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, which expands the quarterly and annual disclosure requirements about the Company’s derivative instruments and hedging activities.The adoption of SFAS 161 did not have an effect on the Company’s financial position, results of operations or cash flows.

 
5

 

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

We make use of derivative instruments in foreign exchange and commodity price hedging programs.Derivatives currently in use are foreign currency forward contracts and commodity swaps.These contracts are used strictly for hedging and not for speculative purposes.They are used to mitigate uncertainty and volatility and to cover underlying exposures.Management believes that its use of these instruments to reduce risk is in the Company’s best interest.The counterparties to these financial instruments are financial institutions with strong credit ratings.

The Company conducts business internationally and therefore is exposed to foreign currency exchange risk.The Company uses derivative financial instruments as cash flow hedges 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 foreign currency exposures.The currencies hedged by the Company include the 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 expense (income), net.The Company’s foreign currency forward contracts substantially offset gains and losses on the underlying foreign currency denominated transactions.As of June 30, 2009 and December 31, 2008, the Company held foreign currency forward contracts to reduce the exposure related to the Company’s British pound-denominated intercompany receivables.These contracts expire in September 2009.For the six months ended June 30, 2009, the Company recognized a $191 loss related to the British pound contract in the condensed consolidated statement of operations as a component of other expense (income), net.The Company also holds contracts intended to reduce exposure to the Mexican peso.These contracts were executed to hedge forecasted transactions, and therefore the contracts are accounted for as cash flow hedges.These Mexican peso-denominated foreign currency option contracts expire monthly throughout 2009.The effective portion of the unrealized gain or loss is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive loss.The Company’s expectation is that the cash flow hedges will be highly effective in the future.The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

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 financial institution to fix the cost of copper purchases. In December 2007, the Company entered into a fixed price swap contract for 1.0 million pounds of copper, which expired on December 31, 2008.In September 2008, the Company entered into a fixed price swap contract for 1.4 million pounds of copper, which covers the period from January 2009 to December 2009.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 in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive loss. The Company deems these cash flow hedges to be highly effective.The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

 
6

 

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

The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
 
               
Prepaid expenses
   
Accrued expenses and
 
    
Notional amounts1
   
and other assets
   
other liabilities
 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Derivatives designated as hedging instruments under SFAS 133:
                                   
Forward currency contracts
  $ 17,258     $ 35,457     $ -     $ -     $ 396     $ 2,930  
Commodity contracts
    2,042       4,085       -       -       464       2,104  
      19,300       39,542       -       -       860       5,034  
                                                 
Derivatives not designated as hedging instruments under SFAS 133:
                                               
Forward currency contracts.
    6,686       8,762       22       2,101       -       -  
Total derivatives.
  $ 25,986     $ 48,304     $ 22     $ 2,101     $ 860     $ 5,034  

  1 - Notional amounts represent the gross contract / notional amount of the derivatives outstanding.

Amounts recorded in other comprehensive loss in shareholders’ equity and in net loss for the three months ended June 30, 2009 were as follows:

   
Amount of gain
recorded in other
comprehensive loss
   
Amount of loss
reclassified from 
other comprehensive 
loss into net loss
 
Location of loss
reclassified from other
comprehensive loss into
net loss
Derivatives designated as cash flow hedges
             
Forward currency contracts
  $ 2,273     $ -    
Commodity contracts
    663       (281 )
Cost of goods sold
    $ 2,936     $ (281 )  

Amounts recorded in other comprehensive loss in shareholders’ equity and in net loss for the six months ended June 30, 2009 were as follows:

   
Amount of gain
recorded in other
comprehensive loss
   
Amount of loss
reclassified from 
other comprehensive
loss into net loss
 
Location of loss
reclassified from other
comprehensive loss into
net loss
Derivatives designated as cash flow hedges
             
Forward currency contracts
  $ 2,534     $ -    
Commodity contracts
    1,640       (758 )
Cost of goods sold
    $ 4,174     $ (758 )  

These derivatives will be reclassified from other comprehensive loss to the consolidated statement of operations over the next six months.

 
7

 

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

Statement of Financial Accounting Standard No. 157, Fair Value Measurements
 
Effective January 1, 2009, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”) as it relates to nonfinancial assets and nonfinancial liabilities measured on a non-recurring basis.The Company adopted SFAS 157 for financial assets and financial liabilities on January 1, 2008.SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements.The adoption of SFAS 157 did not have a material effect on the Company’s fair value measurements.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

   
June 30, 2009
   
December 31,
 
          
Fair Value Estimated Using
   
2008
 
    
Fair Value
   
Level 1 inputs(1)
   
Level 2 inputs(2)
   
Fair Value
 
                         
Financial assets carried at fair value
                       
                         
Available for sale security
  $ 223     $ 223     $ -     $ 252  
Forward currency contracts
    22       -       22       2,101  
                                 
Total financial assets carried at fair value.
  $ 245     $ 223     $ 22     $ 2,353  
                                 
Financial liabilities carried at fair value
                               
                                 
Forward currency contracts
  $ 396     $ -     $ 396     $ 2,930  
Commodity hedge contracts
    464       -       464       2,104  
                                 
Total financial liabilities carried at fair value
  $ 860     $ -     $ 860     $ 5,034  

(1) 
Fair values estimated using Level 1 inputs, which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.The available for sale security is an equity security that is publically traded.

(2) 
Fair values estimated using Level 2 inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable.For forward currency and commodity hedge contracts, inputs include foreign currency exchange rates and commodity indexes.

 
8

 

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

(4)  Share-Based Compensation

Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $33 and $822 for the three months ended June 30, 2009 and 2008, respectively.For the six months ended June 30, 2009 and 2008, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $597 and $1,903, respectively.

(5)  Comprehensive Income (Loss)

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

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Net income (loss).
  $ (19,764 )   $ 4,684     $ (31,344 )   $ 11,231  
Other comprehensive income (loss):
                               
Currency translation adjustments
    4,784       1,294       1,894       5,110  
Pension liability adjustments.
    (292 )     (1 )     (250 )     (10 )
Unrealized gain (loss) on marketable securities
    35       5       (19 )     (12 )
Unrecognized gain (loss) on derivatives
    2,936       (170 )     4,174       348  
Total other comprehensive income
    7,463       1,128       5,799       5,436  
Comprehensive income (loss).
  $ (12,301 )   $ 5,812     $ (25,545 )   $ 16,667  

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

   
June 30,
   
December 31,
 
   
2009
   
2008
 
             
Foreign currency translation adjustments
  $ 1,900     $ 6  
Pension liability adjustments
    (2,209 )     (1,959 )
Unrealized loss on marketable securities
    (49 )     (30 )
Unrecognized loss on derivatives
    (840 )     (5,014 )
Accumulated other comprehensive loss
  $ (1,198 )   $ (6,997 )

6)  Long-Term Debt

Senior Notes

The Company had $183.0 million of senior notes outstanding at June 30, 2009 and December 31, 2008, respectively.During the first half of 2008, the Company repurchased and retired $17.0 million in face value of the senior notes.The outstanding senior notes bear interest at an annual rate of 11.50% and mature on May 1, 2012.The senior notes are redeemable, at the Company’s option, at 101.917 until April 30, 2010.The senior notes will remain redeemable at various levels until the maturity date.Interest is payable on May 1 and November 1 of each year.The senior notes do not contain financial covenants.The Company was in compliance with all non-financial covenants at June 30, 2009 and December 31, 2008.


 
9

 

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

Credit Facility

On November 2, 2007, the Company entered into an asset-based credit facility (the “credit facility”), which permits borrowing up to a maximum level of $100.0 million.At June 30, 2009 and December 31, 2008, there were no borrowings on this credit facility. The available borrowing capacity on this credit facility is based on eligible current assets, as defined.At June 30, 2009 and December 31, 2008, the Company had borrowing capacity of $45.5 million and $57.7 million, respectively based on eligible current assets.The credit facility does not contain financial performance covenants which would constrain our borrowing capacity. However, restrictions do include limits on capital expenditures, operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15.0 million minus certain guarantees and obligations.The credit facility expires on November 1, 2011, and requires a commitment fee of 0.25% on the unused balance.Interest is payable quarterly at either (i) the higher of the prime rate or the Federal Funds rate plus 0.50%, plus a margin of 0.00% to 0.25% or (ii) LIBOR plus a margin of 1.00% to 1.75%, depending upon the Company’s undrawn availability, as defined.The Company was in compliance with all covenants at June 30, 2009 and December 31, 2008.

(7)  Net Income (Loss) Per Share

Basic net income (loss) per share was computed by dividing net income (loss) 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.For all periods in which the Company recognized a net loss the Company has recognized zero dilutive effect from securities as no anti-dilution is permitted under SFAS No. 128, Earnings Per Share.

Actual weighted-average shares outstanding used in calculating basic and diluted net income (loss) per share are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Basic weighted-average shares outstanding
    23,515,543       23,285,848       23,489,561       23,327,024  
Effect of dilutive securities
    -       403,988       -       394,793  
Diluted weighted-average shares outstanding
    23,515,543       23,689,836       23,489,561       23,721,817  

Options not included in the computation of diluted net income (loss) per share to purchase 183,250 and 50,000 Common Shares at an average price of $9.57 and $15.73, respectively, per share were outstanding at June 30, 2009 and June 30, 2008, respectively.These outstanding options were not included in the computation of diluted net income (loss) per share because their respective exercise prices were greater than the average market price of Common Shares.

As of June 30, 2009 and 2008, 628,275 performance-based restricted shares were outstanding.These shares were not included in the computation of diluted net income (loss) per share because not all vesting conditions were achieved as of June 30, 2009 and 2008.These shares may or may not become dilutive based on the Company’s ability to exceed future earnings thresholds.

(8)  Restructuring

On October 29, 2007, the Company announced restructuring initiatives to improve manufacturing efficiency and cost position by ceasing manufacturing operations at its Sarasota, Florida and Mitcheldean, United Kingdom locations.In the third quarter of 2008, the Company announced restructuring initiatives in our Canton, Massachusetts location. In the fourth quarter of 2008, the Company announced restructuring initiatives in our Orebro, Sweden and Tallinn, Estonia locations as well as additional initiatives in our Canton, Massachusetts location.In response to the depressed conditions in the North American and European commercial vehicle and automotive markets, the Company began additional restructuring initiatives in our Juarez, Mexico, Tallinn, Estonia and Canton, Massachusetts locations during the first quarter of 2009.The Company began additional restructuring initiatives during the second quarter of 2009 in our Lexington, Ohio, Orebro and Bromma, Sweden and Juarez and Monclova, Mexico locations as a result of decline in the North American and European commercial vehicle and automotive market conditions.In connection with these initiatives, the Company recorded restructuring charges of $1,551 and $3,657 in the Company’s condensed consolidated statement of operations for the three months ended June 30, 2009 and 2008, respectively.Restructuring charges for the six months ended June 30, 2009 and 2008 were $2,532 and $6,177, respectively.Restructuring expenses that were general and administrative in nature were included in the Company’s condensed consolidated statement of operations as part of restructuring charges, while the remaining restructuring related charges were included in cost of goods sold.
 
In 2009, the Company has classified the Sarasota, Florida facility as an asset held for sale and has included the net book value of the facility within the June 30, 2009 Balance Sheet as a component of prepaid expense and other.
 
 
10

 

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

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

   
Severance
Costs
   
Contract
Termination
Costs
   
Other
Associated
Costs
   
Total
 
                         
Total expected restructuring charges
  $ 5,555     $ 1,720     $ 2,504     $ 9,779  
                                 
2007 charge to expense
  $ 468     $ -     $ 103     $ 571  
Cash payments
    -       -       (103 )     (103 )
                                 
Accrued balance at December 31, 2007
    468       -       -       468  
                                 
2008 charge to expense.
    2,830       1,305       2,401       6,536  
Cash payments
    (2,767 )     -       (2,221 )     (4,988 )
                                 
Accrued balance at December 31, 2008
    531       1,305       180       2,016  
                                 
First quarter 2009 charge to expense
    369       92       -       461  
Second quarter 2009 charge to expense
    1,435       -       -       1,435  
Foreign currency translation effect
    -       323       -       323  
Cash payments
    (1,519 )     (241 )     (180 )     (1,940 )
                                 
Accrued Balance at June 30, 2009
  $ 816     $ 1,479     $ -     $ 2,295  
                                 
Remaining expected restructuring charge
  $ 453     $ -     $ -     $ 453  


 
11

 

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

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

   
Severance
Costs
   
Other
Associated
Costs
   
Total (A)
 
                   
Total expected restructuring charges
  $ 3,491     $ 6,449     $ 9,940  
                         
2007 charge to expense
  $ 357     $ 99     $ 456  
Cash payments
    -       -       -  
                         
Accrued balance at December 31, 2007
    357       99       456  
                         
2008 charge to expense
    2,521       6,325       8,846  
Cash payments
    (1,410 )     (6,024 )     (7,434 )
                         
Accrued balance at December 31, 2008
    1,468       400       1,868  
                         
First quarter 2009 charge to expense
    497       25       522  
Second quarter 2009 charge to expense
    116       -       116  
Cash payments
    (2,060 )     (135 )     (2,195 )
                         
Accrued Balance at June 30, 2009
  $ 21     $ 290     $ 311  
                         
Remaining expected restructuring charge
  $ -     $ -     $ -  

(A)
Total expected restructuring charges does not include the expected gain from the future sale of the Company’s Sarasota, Florida, facility.

All restructuring charges, except for asset-related charges, result in cash outflows. Severance costs relate to a reduction in workforce.Contract termination costs represent costs associated with long-term lease obligations that were cancelled as part of the restructuring initiatives.Other associated costs include premium direct labor, inventory and equipment move costs, relocation expense, increased inventory carrying cost and miscellaneous expenditures associated with exiting business activities.No fixed-asset impairment charges were incurred because assets are being transferred to other locations for continued production.

(9)  Commitments and Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings, workers’ compensation disputes and other commercial matters. 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 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.

 
12

 

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

The following provides a reconciliation of changes in product warranty and recall liability for the six months ended June 30, 2009 and 2008:

   
2009
   
2008
 
             
Product warranty and recall at beginning of period
  $ 5,527     $ 5,306  
Accruals for products shipped during period
    293       3,417  
Aggregate changes in pre-existing liabilities due to claims developments
    463       745  
Settlements made during the period (in cash or in kind)
    (2,179 )     (2,157 )
Product warranty and recall at end of period
  $ 4,104     $ 7,311  

(10)  Employee Benefit Plans

The Company has a single defined benefit pension plan that covers certain former employees in the United Kingdom.The components of net periodic cost (benefit) under the defined benefit pension plan are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service cost
  $ 14     $ 35     $ 28     $ 70  
Interest cost
    219       316       438       632  
Expected return on plan assets
    (165 )     (361 )     (330 )     (722 )
Amortization of actuarial loss
    43       -       86       -  
Net periodic cost (benefit)
  $ 111     $ (10 )   $ 222     $ (20 )

The Company expects to contribute $94 to its pension plan in 2009.Of this amount, contributions of $53 have been made to the pension plan as of June 30, 2009.

Effective June 1, 2009 the Company discontinued matching contributions to the Company’s 401(k) plan covering substantially all of its employees in the United States.

(11)  Income Taxes

The Company recognized a provision from income taxes of $197, or (1.0)% of pre-tax loss, and $4,062, or 46.4% of pre-tax income, for federal, state and foreign income taxes for the three months ended June 30, 2009 and 2008, respectively.The Company recognized a provision (benefit) for income taxes of $(1,911), or 5.7% of pre-tax loss, and $9,174, or 45.0% of pre-tax income, for federal, state and foreign income taxes for the six months ended June 30, 2009 and 2008, respectively. As reported at December 31, 2008, the Company is in a cumulative loss position and provides a valuation allowance offsetting federal, state and certain foreign deferred tax assets. As a result, a tax benefit is not being provided for losses incurred in the first half of 2009, for federal, state and certain foreign jurisdictions. The inability to recognize a tax benefit for these losses and other deferred tax assets has a significant impact on our effective tax rate as well as the comparability of the current quarter and year-to-date effective tax rate to prior periods in which the Company had not recorded a federal valuation allowance.The difference in the effective tax rate for the three and six month periods ended June 30, 2009 compared to the three and six month periods ended June 30, 2008, was primarily attributable to the valuation allowance for federal and state deferred tax assets provided against the current year domestic loss which was partially offset by recording a tax benefit related to current period losses in certain foreign jurisdictions in which it is more likely than not that the benefit of those losses will be realized in the current year.

 
13

 

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

(12)  Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”).This standard improves reporting by creating greater consistency in the accounting and financial reporting of business combinations.Additionally, SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.SFAS 141(R) was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) did not have a material effect on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”).This standard improves the relevance, comparability and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way.Additionally, SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions.SFAS 160 was effective for financial statements issued for fiscal years beginning after December 15, 2008.The adoption of SFAS 160 did not have a material effect on the Company’s financial position, results of operations or cash flows.

In December 2008, the FASB issued Staff Position 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”).FSP 132(R)-1 requires entities to provide enhanced disclosures about how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets.FSP 132(R)-1 is effective for the Company beginning with its year ending December 31, 2009.The Company is currently assessing the potential effect, if any, on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140, (“SFAS 166”). SFAS 166 amends various provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125, by removing the concept of a qualifying special-purpose entity and removes the exception from applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities—an interpretation of ARB No. 51, (“FIN 46(R)”)to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. SFAS 166 becomes effective for the Company on January 1, 2010. Management does not currently expect SFAS 166 to have a material effect on the Company’s financial position, results of operations or cash flow.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (“SFAS 167”). SFAS 167 amends FIN 46(R), to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. SFAS 167 becomes effective for the Company on January 1, 2010. Management does not currently expect SFAS 167 to have a material effect on the Company’s financial position, results of operations or cash flow.

 
14

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

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162, (“SFAS 168”). SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards CodificationTM (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. The issuance of SFAS 168 and the Codification does not change GAAP. SFAS 168 becomes effective for the Company for the period ending September 30, 2009. Management has determined that the adoption of SFAS 168 will not have an effect on the Company’s financial position, results of operations or cash flow.

(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.  The Company’s operating segments are aggregated based on sharing similar economic characteristics.  Other aggregation factors include the nature of the products offered and management and oversight responsibilities.   The Electronics 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, 2008 Form 10-K.  The Company’s management evaluates the performance of its reportable segments based primarily on net sales from external customers, capital expenditures and income (loss) before income taxes.  Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

 
15

 

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

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

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Net Sales                         
Electronics
  $ 65,894     $ 149,416     $ 148,665     $ 282,632  
Inter-segment sales
    1,939       4,004       3,797       7,747  
Electronics net sales
    67,833       153,420       152,462       290,379  
                                 
Control Devices
    36,396       63,813       74,710       133,667  
Inter-segment sales
    676       1,284       1,385       2,604  
Control Devices net sales
    37,072       65,097       76,095       136,271  
                                 
Eliminations
    (2,615 )     (5,288 )     (5,182 )     (10,351 )
Total consolidated net sales
  $ 102,290     $ 213,229     $ 223,375     $ 416,299  
                                 
Income (Loss) Before Income Taxes
                               
Electronics
  $ (8,954 )   $ 12,984     $ (11,160 )   $ 25,975  
Control Devices
    (5,408 )     (985 )     (12,428 )     1,091  
Other corporate activities
    301       1,739       1,316       3,646  
Corporate interest expense, net
    (5,506 )     (4,992 )     (10,983 )     (10,307 )
Total consolidated income (loss) before income taxes
  $ (19,567 )   $ 8,746     $ (33,255 )   $ 20,405  
                                 
Depreciation and Amortization
                               
Electronics
  $ 2,313     $ 3,406     $ 4,525     $ 6,922  
Control Devices
    2,829       3,672       5,618       7,501  
Corporate activities
    64       1       124       (5 )
Total consolidated depreciation and amortization(A)
  $ 5,206     $ 7,079     $ 10,267     $ 14,418  

(A)  These amounts represent depreciation and amortization on fixed and certain intangible assets.

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Interest Expense (Income), net                                 
Electronics
  $ 33     $ (110 )   $ 54     $ (53 )
Control Devices
    (1 )     (2 )     (2 )     (2 )
Corporate activities
    5,506       4,992       10,983       10,307  
Total consolidated interest expense, net
  $ 5,538     $ 4,880     $ 11,035     $ 10,252  
                                 
Capital Expenditures
                               
Electronics
  $ 904     $ 2,973     $ 2,414     $ 4,744  
Control Devices
    1,741       3,238       3,676       6,932  
Corporate activities
    153       (83 )     653       (35 )
Total consolidated capital expenditures
  $ 2,798     $ 6,128     $ 6,743     $ 11,641  

 
16

 

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

   
June 30,
   
December 31,
 
 
 
2009
   
2008
 
Total Assets             
Electronics
  $ 158,187     $ 183,574  
Control Devices
    88,014       98,608  
Corporate(B)
    242,023       239,425  
Eliminations
    (146,395 )     (139,170 )
Total consolidated assets
  $ 341,829     $ 382,437  

(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,
   
June 30,
 
 
 
2009
   
2008
   
2009
   
2008
 
Net Sales                         
North America
  $ 83,075     $ 156,101     $ 182,305     $ 303,299  
Europe and other
    19,215       57,128       41,070       113,000  
Total consolidated net sales
  $ 102,290     $ 213,229     $ 223,375     $ 416,299  

   
June 30,
   
December 31,
 
 
 
2009
   
2008
 
Non-Current Assets             
North America
  $ 105,398     $ 110,507  
Europe and other
    18,168       17,339  
Total consolidated non-current assets
  $ 123,566     $ 127,846  

(14)  Investments

PST Eletrônica S.A.

The Company has a 50% equity interest in PST Eletrônica S.A. (“PST”), a Brazilian electronic system provider focused on security and convenience applications primarily for the vehicle and motorcycle industry.  The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $34,639 and $31,021 at June 30, 2009 and December 31, 2008, respectively.

Condensed financial information for PST is as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues
  $ 30,588     $ 46,446     $ 51,988     $ 90,392  
Cost of sales
  $ 15,947     $ 21,921     $ 26,998     $ 42,969  
                                 
Total pre-tax income
  $ 2,046     $ 7,036     $ 3,306     $ 15,799  
The Company's share of pre-tax income
  $ 1,023     $ 3,518     $ 1,653     $ 7,900  

 
17

 

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

Equity in earnings of PST included in the condensed consolidated statements of operations was $785 and $2,848 for the three months ended June 30, 2009 and 2008, respectively.  For the six months ended June 30, 2009 and 2008, equity in earnings of PST was $1,388 and $6,442, respectively.

Minda Stoneridge Instruments Ltd.

The Company has a 49% interest in Minda Stoneridge Instruments Ltd. (“Minda”), a company based in India that manufactures electronics and instrumentation equipment for the motorcycle and commercial vehicle market.  The investment is accounted for under the equity method of accounting.  The Company’s investment in Minda was $4,778 and $4,808 at June 30, 2009 and December 31, 2008, respectively.  Equity in earnings of Minda included in the condensed consolidated statements of operations were $118 and $168, for the three months ended June 30, 2009 and 2008, respectively.  For the six months ended June 30, 2009 and 2008, equity in earnings of Minda was $90 and $393, 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 (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, 2009 and December 31, 2008 and for each of the three and six months ended June 30, 2009 and 2008.

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.

 
18

 

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

   
June 30, 2009
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
ASSETS
                             
                               
Current Assets:
                             
Cash and cash equivalents
  $ 45,938     $ 124     $ 39,419     $ -     $ 85,481  
Accounts receivable, net
    39,007       14,304       17,378       -       70,689  
Inventories, net
    21,745       8,620       13,318       -       43,683  
Prepaid expenses and other
    (302,030 )     299,437       19,046       -       16,453  
Deferred income taxes, net of valuation allowance
    -       -       1,957       -       1,957  
Total current assets
 
(195,340)
      322,485       91,118       -       218,263  
                                         
Long-Term Assets:
                                       
Property, plant and equipment, net
    45,854       22,494       11,939       -       80,287  
Other Assets:
                                       
Investments and other, net
    42,137       281       861       -       43,279  
Investment in subsidiaries
    390,439       -       -       (390,439 )     -  
Total long-term assets
    478,430       22,775       12,800       (390,439 )     123,566  
Total Assets
  $ 283,090     $ 345,260     $ 103,918     $ (390,439 )   $ 341,829  
                                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
                                         
Current Liabilities:
                                       
Accounts payable
  $ 19,581     $ 11,292     $ 10,147     $ -     $ 41,020  
Accrued expenses and other
    6,168       9,873       22,999       -       39,040  
Total current liabilities
    25,749       21,165       33,146       -       80,060  
                                         
Long-Term Liabilities:
                                       
Long-term debt
    183,000       -       -       -       183,000  
Deferred income taxes
    4,828       -       551       -       5,379  
Other liabilities
    3,110       360       3,517       -       6,987  
Total long-term liabilities
    190,938       360       4,068       -       195,366  
                                         
Shareholders' Equity
    66,403       323,735       66,704       (390,439 )     66,403  
                                         
Total Liabilities and Shareholders' Equity
  $ 283,090     $ 345,260     $ 103,918     $ (390,439 )   $ 341,829  
 
 
19

 

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, 2008
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
ASSETS
                             
                               
Current Assets:
                             
Cash and cash equivalents
  $ 55,237     $ 27     $ 37,428     $ -     $ 92,692  
Accounts receivable, net
    51,274       15,888       29,373       -       96,535  
Inventories, net
    28,487       10,927       15,386       -       54,800  
Prepaid expenses and other
    (304,638 )     301,387       12,320       -       9,069  
Deferred income taxes, net of valuation allowance
    -       -       1,495       -       1,495  
Total current assets
    (169,640 )     328,229       96,002       -       254,591  
                                         
Long-Term Assets:
                                       
Property, plant and equipment, net
    50,458       24,445       12,798       -       87,701  
Other Assets:
                                       
Investments and other, net
    38,984       319       842       -       40,145  
Investment in subsidiaries
    407,199       -       -       (407,199 )     -  
Total long-term assets
    496,641       24,764       13,640       (407,199 )     127,846  
Total Assets
  $ 327,001     $ 352,993     $ 109,642     $ (407,199 )   $ 382,437  
                                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
                                         
Current Liabilities:
                                       
Accounts payable
  $ 23,778     $ 13,652     $ 13,289     $ -     $ 50,719  
Accrued expenses and other
    21,429       5,065       16,991       -       43,485  
Total current liabilities
    45,207       18,717       30,280       -       94,204  
                                         
Long-Term Liabilities:
                                       
Long-term debt
    183,000       -       -       -       183,000  
Deferred income taxes
    3,873       41       3,088       -       7,002  
Other liabilities
    3,163       360       2,950       -       6,473  
Total long-term liabilities
    190,036       401       6,038       -       196,475  
                                         
Shareholders' Equity
    91,758       333,875       73,324       (407,199 )     91,758  
                                         
Total Liabilities and Shareholders' Equity
  $ 327,001     $ 352,993     $ 109,642     $ (407,199 )   $ 382,437  

 
20

 

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, 2009
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net Sales
  $ 60,063     $ 28,541     $ 31,006     $ (17,320 )   $ 102,290  
                                         
Costs and Expenses:
                                       
Cost of goods sold
    54,502       24,940       25,814       (16,562 )     88,694  
Selling, general and administrative
    11,927       6,123       9,046       (758 )     26,338  
Restructuring charges
    306       6       1,239       -       1,551  
                                         
Operating Loss
    (6,672 )     (2,528 )     (5,093 )     -       (14,293 )
                                         
Interest expense (income), net
    5,566       (1 )     (27 )     -       5,538  
Other expense (income), net
    (3,969 )     1,323       2,382       -       (264 )
Equity earnings from subsidiaries
    10,102       -       -       (10,102 )     -  
                                         
Loss Before Income Taxes
    (18,371 )     (3,850 )     (7,448 )     10,102       (19,567 )
                                         
Provision (benefit) for income taxes
    1,393       -       (1,196 )     -       197  
                                         
Net Loss
  $ (19,764 )   $ (3,850 )   $ (6,252 )   $ 10,102     $ (19,764 )

   
For the Three Months Ended June 30, 2008
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net Sales
  $ 113,800     $ 53,800     $ 73,534     $ (27,905 )   $ 213,229  
                                         
Costs and Expenses:
                                       
Cost of goods sold
    92,680       43,041       55,318       (27,164 )     163,875  
Selling, general and administrative
    13,809       7,910       15,753       (741 )     36,731  
Loss on sale of property, plant and equipment, net
    88       23       42       -       153  
Restructuring charges
    884       -       829       -       1,713  
                                         
Operating Income
    6,339       2,826       1,592       -       10,757  
                                         
Interest expense (income), net
    5,183       -       (303 )     -       4,880  
Other income, net
    (2,744 )     -       (125 )     -       (2,869 )
Equity earnings from subsidiaries
    (4,341 )     -       -       4,341       -  
                                         
Income Before Income Taxes
    8,241       2,826       2,020       (4,341 )     8,746  
                                         
Provision for income taxes
    3,557       19       486       -       4,062  
                                         
Net Income
  $ 4,684     $ 2,807     $ 1,534     $ (4,341 )   $ 4,684  

 
21

 

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, 2009
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net Sales
  $ 132,635     $ 60,167     $ 65,598     $ (35,025 )   $ 223,375  
                                         
Costs and Expenses:
                                       
Cost of goods sold
    117,895       52,734       53,521       (33,646 )     190,504  
Selling, general and administrative
    23,969       12,689       18,136       (1,379 )     53,415  
Restructuring charges
    322       488       1,699       -       2,509  
                                         
Operating Loss
    (9,551 )     (5,744 )     (7,758 )     -       (23,053 )
                                         
Interest expense (income), net
    11,110       (1 )     (74 )     -       11,035  
Other expense (income), net
    (4,541 )     1,323       2,385       -       (833 )
Equity earnings from subsidiaries
    15,204       -       -       (15,204 )     -  
                                         
Loss Before Income Taxes
    (31,324 )     (7,066 )     (10,069 )     15,204       (33,255 )
                                         
Provision (benefit) for income taxes
    20       -       (1,931 )     -       (1,911 )
                                         
Net Loss
  $ (31,344 )   $ (7,066 )   $ (8,138 )   $ 15,204     $ (31,344 )

   
For the Six Months Ended June 30, 2008
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net Sales
  $ 217,846     $ 106,367     $ 143,865     $ (51,779 )   $ 416,299  
                                         
Costs and Expenses:
                                       
Cost of goods sold
    175,237       83,300       106,985       (50,394 )     315,128  
Selling, general and administrative
    28,083       16,354       29,969       (1,385 )     73,021  
Loss on sale of property, plant and equipment, net
    79       24       42       -       145  
Restructuring charges
    1,425       -       1,710       -       3,135  
                                         
Operating Income
    13,022       6,689       5,159       -       24,870  
                                         
Interest expense (income), net
    10,706       -       (454 )     -       10,252  
Other (income) expense, net
    (6,065 )     -       278       -       (5,787 )
Equity earnings from subsidiaries
    (10,466 )     -       -       10,466       -  
                                         
Income Before Income Taxes
    18,847       6,689       5,335       (10,466 )     20,405  
                                         
Provision for income taxes
    7,616       82       1,476       -       9,174  
                                         
Net Income
  $ 11,231     $ 6,607     $ 3,859     $ (10,466 )   $ 11,231  

 
22

 

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, 2009
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net cash provided by (used for) operating activities
  $ (4,863 )   $ 1,483     $ 780     $ -     $ (2,600 )
                                         
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (4,439 )     (1,440 )     (864 )     -       (6,743 )
Proceeds from the sale of fixed assets
    3       54       35       -       92  
Net cash used for investing activities
    (4,436 )     (1,386 )     (829 )     -       (6,651 )
                                         
Effect of exchange rate changes on cash and cash equivalents
    -       -       2,040       -       2,040  
Net change in cash and cash equivalents
    (9,299 )     97       1,991       -       (7,211 )
Cash and cash equivalents at beginning of period
    55,237       27       37,428       -       92,692  
Cash and cash equivalents at end of period
  $ 45,938     $ 124     $ 39,419     $ -     $ 85,481  

   
For the Six Months Ended June 30, 2008
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Net cash provided by operating activities
  $ 8,318     $ 2,224     $ 2,032     $ -     $ 12,574  
                                         
INVESTING ACTIVITIES:
                                       
Capital expenditures
    (6,831 )     (2,435 )     (2,375 )     -       (11,641 )
Proceeds from the sale of fixed assets
    141       1       165       -       307  
Business acquisitions and other
    -       -       (980 )     -       (980 )
Net cash used for investing activities
    (6,690 )     (2,434 )     (3,190 )     -       (12,314 )
                                         
FINANCING ACTIVITIES:
                                       
Repayments of long-term debt
    (17,000 )     -       -       -       (17,000 )
Share-based compensation activity, net
    1,162       -       -       -       1,162  
Premiums related to early extinguishment of debt
    (553 )     -       -       -       (553 )
Net cash used for financing activities
    (16,391 )     -       -       -       (16,391 )
                                         
Effect of exchange rate changes on cash and cash equivalents
    -       -       1,549       -       1,549  
Net change in cash and cash equivalents
    (14,763 )     (210 )     391       -       (14,582 )
Cash and cash equivalents at beginning of period
    48,705       255       46,964       -       95,924  
Cash and cash equivalents at end of period
  $ 33,942     $ 45     $ 47,355     $ -     $ 81,342  

(16)  Subsequent Events

Management evaluated all activity of the Company through August 6, 2009 (the issue date of the financial statements) and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the Notes thereto.
 
23


STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
 
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 medium- and heavy-duty truck, agricultural, automotive and off-highway vehicle markets.

We recognized a net loss for the quarter ended June 30, 2009 of $19.8 million, or $(0.84) per diluted share, compared with net income of $4.7 million, or $0.20 per diluted share, for the second quarter of 2008.

Our second quarter 2009 results were negatively affected by the continued dramatic decline in the global commercial and North American automotive vehicle markets as well as the economy as a whole.  Production volumes in North American passenger car/light truck declined by 49.6% during the quarter ended June 30, 2009.  The commercial vehicle market production volumes in Europe and North America declined by 70.0% and 50.3%, respectively during the current quarter.  In addition, our results were affected by foreign currency exchange rates.  Foreign exchange translation adversely affected our revenues by approximately $5.1 million during the quarter ended June 30, 2009 when compared to the quarter ended June 30, 2008.  In addition, the results of our PST Eletrônica S.A. (“PST”) joint venture in Brazil declined between the two periods.  Equity earnings in the joint venture declined from $2.8 million for the second quarter of 2008 to $0.8 million in the second quarter of 2009 due to lower demand for PST’s security products.  Foreign currency fluctuations negatively affected our equity earnings from PST by approximately $0.2 million during the quarter ended June 30, 2009 as compared to the quarter ended June 30, 2008.

The decrease in selling, general and administrative expenses (“SG&A”) was primarily due to decreased design and development and reduced compensation and compensation related expenses incurred during the quarter ended June 30, 2009.  The decrease in design and development costs were caused by customers delaying new product launches in the near term as well as planned reductions in our design activities.

Also affecting our results were our restructuring initiatives. Costs incurred during the quarter ended June 30, 2009 related to these restructuring initiatives amounted to approximately $1.6 million and were primarily comprised of one-time termination benefits.  These restructuring actions were in response to the depressed conditions in the North American and European commercial vehicle and North American light vehicle markets.  Second quarter 2008 restructuring expenses were approximately $3.7 million and were comprised of one-time termination benefits and line-transfer expenses related to our initiative to improve the Company’s manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida, and Mitcheldean, United Kingdom locations.

At June 30, 2009 and December 31, 2008, we maintained a cash and equivalents balance of $85.5 million and $92.7 million, respectively.  As discussed in Note 6 to the condensed consolidated financial statements, we have no borrowings under our asset-based credit facility.  At June 30, 2009 and December 31, 2008, we had borrowing capacity of $45.5 million and $57.7 million, respectively.

Significant factors inherent to our markets that could affect our results for the remainder of 2009 include the financial stability of our customers and suppliers.  Our results for 2009 also depend on conditions in the commercial and automotive vehicle markets, which are generally dependent on domestic and global economies.

On April 24, 2009, we entered into the United State Treasury’s Auto Supplier Program (the “Program”).  Entrance into the Program was retroactive to March 18, 2009.  As part of entrance into the Program, we were required to amend our credit facility, to allow us to sell certain accounts receivables due from General Motors Corporation (“GM”) or Chrysler, LLC (“Chrysler”) to GM Supplier Receivables LLC and Chrysler Receivables SPV LLC, respectively, special purpose entities created by the United States Treasury Department.  The Program guarantees these receivables, net of a two percent administrative fee imposed on the receivables included in the Program.  As a result of GM and Chrysler exiting bankruptcy, we opted out of the GM Program on June 25, 2009 and the Chrysler Program was terminated upon their exit from bankruptcy.

 
24

 

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 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.
 
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the three months ended June 30, 2009 and 2008 are summarized in the following table (in thousands):

   
Three Months Ended
           
   
June 30,
 
Dollar
   
Percent
   
2009
 
2008
 
Decrease
   
Decrease
Electronics
  $ 65,894       64.4 %   $ 149,416       70.1 %   $ (83,522 )     (55.9 ) %
Control Devices
    36,396       35.6       63,813       29.9       (27,417 )     (43.0 ) %
Total net sales
  $ 102,290       100.0 %   $ 213,229       100.0 %   $ (110,939 )     (52.0 ) %

The decrease in net sales for our Electronics segment was primarily due to volume declines in North American and European commercial vehicle production.  Our net sales were negatively affected by foreign currency exchange rates of approximately $5.1 million between the two periods.

The decrease in net sales for our Control Devices segment was primarily attributable to production volume reductions at our major customers in the North American light vehicle market.

Net sales by geographic location for the three months ended June 30, 2009 and 2008 are summarized in the following table (in thousands):

   
Three Months Ended
           
   
June 30,
 
Dollar
   
Percent
   
2009
 
2008
 
Decrease
   
Decrease
                                     
North America
  $ 83,075       81.2 %   $ 156,101       73.2 %   $ (73,026 )     (46.8 ) %
Europe and other
    19,215       18.8       57,128       26.8       (37,913 )     (66.4 ) %
Total net sales
  $ 102,290       100.0 %   $ 213,229       100.0 %   $ (110,939 )     (52.0 ) %

The decrease in North American sales was primarily attributable to lower sales volume in our North American light vehicle and commercial vehicle markets.  Our decrease in sales outside North America was primarily due to lower sales volume in the European commercial vehicle market and adverse foreign exchange rate movements.

 
25

 

Condensed consolidated statements of operations as a percentage of net sales for the three months ended June 30, 2009 and 2008 are presented in the following table (in thousands):

   
Three Months Ended
       
   
June 30,
   
$ Increase /
 
   
2009
   
2008
   
(Decrease)
 
                               
Net Sales
  $ 102,290       100.0 %   $ 213,229       100.0 %   $ (110,939 )
                                         
Costs and Expenses:
                                       
Cost of goods sold
    88,694       86.7       163,875       76.9       (75,181 )
Selling, general and administrative
    26,338       25.7       36,884       17.3       (10,546 )
Restructuring charges
    1,551       1.5       1,713       0.8       (162 )
                                         
Operating Income (Loss)
    (14,293 )     (13.9 )     10,757       5.0       (25,050 )
                                         
Interest expense, net
    5,538       5.4       4,880       2.3       658  
Equity in earnings of investees
    (903 )     (0.9 )     (3,016 )     (1.4 )     2,113  
Loss on early extinguishment of debt
    -       -       271       0.1       (271 )
Other expense (income), net
    639       0.6       (124 )     (0.1 )     763  
                                         
Income (Loss) Before Income Taxes
    (19,567 )     (19.0 )     8,746       4.1       (28,313 )
                                         
Provision for income taxes
    197       0.2       4,062       1.9       (3,865 )
                                         
Net Income (Loss)
  $ (19,764 )     (19.2 ) %   $ 4,684       2.2 %   $ (24,448 )

Cost of Goods Sold. The increase in cost of goods sold as a percentage of sales was due to the significant decline in volume and a less favorable product mix related to our European commercial vehicle and North American commercial and light vehicle products during the quarter ended June 30, 2009.

Selling, General and Administrative Expenses. Product development expenses included in SG&A were $9.5 million and $13.3 million for the second quarters ended June 30, 2009 and 2008, respectively.  The decrease in design and development costs was caused by customers delaying new product launches in the near term as well as planned reductions in our design activities. The decrease in SG&A costs excluding product development expenses was due to lower employee related costs, primarily incentive compensation.

Restructuring Charges. Costs from our restructuring initiatives for the quarter ended June 30, 2009 decreased compared to the second quarter of 2008. Costs incurred during the quarter ended June 30, 2009 related to restructuring initiatives amounted to approximately $1.6 million and were primarily comprised of one-time termination benefits.  These restructuring actions were in response to the depressed conditions in the European and North American commercial vehicle markets as well as the North American automotive market.  Second quarter 2008 restructuring expenses were approximately $3.7 million and were comprised of one-time termination benefits and line-transfer expenses related to our initiative to improve the Company’s manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida, and Mitcheldean, United Kingdom locations.  Restructuring expenses that were general and administrative in nature were included in the Company’s condensed consolidated statements of operations as restructuring charges, while the remaining restructuring related expenses were included in cost of goods sold.

 
26

 

Restructuring charges, general and administrative in nature, recorded by reportable segment during the three months ended June 30, 2009 were as follows (in thousands):

   
Electronics
   
Control
Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 1,435     $ 116     $ 1,551  

Severance costs relate to a reduction in workforce.

Restructuring charges, general and administrative in nature, recorded by reportable segment during the three months ended June 30, 2008 were as follows (in thousands):

   
Electronics
   
Control
Devices
   
Total
Consolidated
Restructuring
Charges
 
Severance costs.
  $ 819     $ 375     $ 1,194  
Other exit costs.
    10       509       519  
Total general and administrative restructuring charges
  $ 829     $ 884     $ 1,713  

Other exit costs include miscellaneous expenditures associated with exiting business activities.

Equity in Earnings of Investees.  The decrease in equity earnings of investees was predominately attributable to the decrease in equity earnings recognized from our PST joint venture.  Equity earnings for PST declined from $2.8 million for the quarter ended June 30, 2008 to $0.8 million for the quarter ended June 30, 2009. The decrease primarily reflects lower volumes for PST’s product lines and unfavorable exchange rates during the quarter ended June 30, 2009.  Foreign currency fluctuations negatively affected our equity earnings from PST by approximately $0.2 million during the quarter ended June 30, 2009 as compared to the quarter ended June 30, 2008.

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

   
Three Months Ended
             
   
June 30,
   
Dollar
   
Percent
 
   
2009
   
2008
   
Decrease
   
Decrease
 
                         
Electronics
  $ (8,954 )   $ 12,984     $ (21,938 )     (169.0 ) %
Control Devices
    (5,408 )     (985 )     (4,423 )     (449.0 ) %
Other corporate activities
    301       1,739       (1,438 )     (82.7 ) %
Corporate interest expense, net
    (5,506 )     (4,992 )     (514 )     (10.3 ) %
Income (loss) before income taxes
  $ (19,567 )   $ 8,746     $ (28,313 )     (323.7 ) %

The decrease in income (loss) before income taxes in the Electronics segment was primarily related to decreased revenue within our North American and European commercial vehicle markets and unfavorable product mix.  Additionally, these factors were favorably affected by foreign exchange rates during the quarter ended June 30, 2009 when converting functional currency to United States Dollars.

The increase in loss before income taxes in the Control Devices reportable segment was primarily due to lower revenue within our North American light vehicle market.

 
27

 

The decrease in income before income taxes from other corporate activities was primarily due to the $2.0 million decrease in equity earnings from our PST joint venture.  The decrease is partially offset by a decrease in compensation related expenses and the loss recognized on the purchase and retirement of $6.0 million in face value of our senior notes in the second quarter of 2008.

Income (loss) before income taxes by geographic location for the three months ended June 30, 2009 and 2008 is summarized in the following table (in thousands):

   
Three Months Ended
           
   
June 30,
 
Dollar
   
Percent
   
2009
 
2008
 
Decrease
   
Decrease
                                     
North America
  $ (13,053 )     66.7 %   $ 8,215       93.9 %   $ (21,268 )     (258.9 ) %
Europe and other
    (6,514 )     33.3       531       6.1       (7,045 )  
NM
 
Income (loss) before income taxes
  $ (19,567 )     100.0 %   $ 8,746       100.0 %   $ (28,313 )     (323.7 ) %

NM - not meaningful

The decrease in our profitability in North America was primarily attributable to lower sales volumes within our North American commercial and light vehicle markets during the quarter ended June 30, 2009.  The decrease in profitability outside North America was primarily due to lower sales volumes during the quarter ended June 30, 2009.

Provision for Income Taxes. We recognized a provision for income taxes of $0.2 million, or (1.0)% of pre-tax loss, and $4.1 million, or 46.4% of the pre-tax income, for federal, state and foreign income taxes for the second quarters ended June 30, 2009 and 2008, respectively. As reported at December 31, 2008, the Company is in a cumulative loss position and provides a valuation allowance offsetting federal, state and certain foreign deferred tax assets. As a result, a tax benefit is not being provided for losses incurred in the first half of 2009, for federal, state and certain foreign jurisdictions. The inability to recognize a tax benefit for these losses and other deferred tax assets has a significant impact on our effective tax rate as well as the comparability of the current quarter and year-to-date effective tax rate to prior periods in which the Company had not recorded a federal valuation allowance.  The difference in the effective tax rate for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, was primarily attributable to the federal valuation allowance provided against the current year domestic loss which was partially offset by recording a tax benefit related to current period losses in certain foreign jurisdictions in which it is more likely than not that the benefit of those losses will be realized in the current year.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the six months ended June 30, 2009 and 2008 are summarized in the following table (in thousands):

   
Six Months Ended
           
   
June 30,
 
Dollar
   
Percent
   
2009
 
2008
 
Decrease
   
Decrease
Electronics
  $ 148,665       66.6 %   $ 282,632       67.9 %   $ (133,967 )     (47.4 ) %
Control Devices
    74,710       33.4       133,667       32.1       (58,957 )     (44.1 ) %
Total net sales
  $ 223,375       100.0 %   $ 416,299       100.0 %   $ (192,924 )     (46.3 ) %
 
The decrease in net sales for our Electronics segment was primarily due to volume declines in commercial vehicle production.  Our net sales were negatively affected by foreign currency exchange rates of approximately $11.8 million between the two periods.
 
 
28

 

The decrease in net sales for our Control Devices segment was primarily attributable to production volume reductions at our major customers in the North American light vehicle market.
 
Net sales by geographic location for the six months ended June 30, 2009 and 2008 are summarized in the following table (in thousands):

   
Six Months Ended
           
   
June 30,
 
Dollar
   
Percent
   
2009
 
2008
 
Decrease
   
Decrease
                                     
North America
  $ 182,305       81.6 %   $ 303,299       72.9 %   $ (120,994 )     (39.9 ) %
Europe and other
    41,070       18.4       113,000       27.1       (71,930 )     (63.7 ) %
Total net sales
  $ 223,375       100.0 %   $ 416,299       100.0 %   $ (192,924 )     (46.3 ) %

The decrease in North American sales was primarily attributable to lower sales volume in our North American light vehicle and commercial vehicle markets.  Our decrease in sales outside North America was primarily due to lower sales volume in the European commercial vehicle market and adverse foreign exchange rate movements.

Condensed consolidated statements of operations as a percentage of net sales for the six months ended June 30, 2009 and 2008 are presented in the following table (in thousands):

   
Six Months Ended
       
   
June 30,
   
$ Increase /
 
   
2009
   
2008
   
(Decrease)
 
                               
Net Sales
  $ 223,375       100.0 %   $ 416,299       100.0 %   $ (192,924 )
                                         
Costs and Expenses:
                                       
Cost of goods sold
    190,504       85.3       315,128       75.7       (124,624 )
Selling, general and administrative
    53,415       23.9       73,166       17.6       (19,751 )
Restructuring
    2,509       1.1       3,135       0.8       (626 )
              -                          
Operating Income (Loss)
    (23,053 )     (10.3 )     24,870       5.9       (47,923 )
                                         
Interest expense, net
    11,035       4.9       10,252       2.5       783  
Equity in earnings of investees
    (1,478 )     (0.7 )     (6,835 )     (1.6 )     5,357  
Loss on early extinguishment of debt
    -       -       770       0.2       (770 )
Other expense, net
    645       0.3       278       0.1       367  
              -                          
Income (Loss) Before Income Taxes
    (33,255 )     (14.8 )     20,405       4.7       (53,660 )
                                         
Provision (benefit) for income taxes
    (1,911 )     (0.9 )     9,174       2.2       (11,085 )
                                         
Net Income (Loss)
  $ (31,344 )     (13.9 ) %   $ 11,231       2.5 %   $ (42,575 )

Cost of Goods Sold.  The increase in cost of goods sold as a percentage of sales was due to the significant decline in volume and a less favorable product mix related to our European commercial vehicle and North American commercial and light vehicle products during the six months ended June 30, 2009.

Selling, General and Administrative Expenses.  Product development expenses included in SG&A were $18.0 million and $25.5 million for the six months ended June 30, 2009 and 2008, respectively.  The decrease in design and development costs was caused by customers delaying new product launches in the near term as well as planned reductions in our design activities. The decrease in SG&A costs excluding product development expenses was due to lower employee related costs, primarily incentive compensation.

 
29

 
 
Restructuring Charges. Costs from our restructuring initiatives for the six months ended June 30, 2009 decreased compared to the first six months of 2008. Costs incurred during the six months ended June 30, 2009 related to restructuring initiatives amounted to approximately $2.5 million and were primarily comprised of one-time termination benefits.  These restructuring actions were in response to the depressed conditions in the European and North American commercial vehicle markets as well as the North American automotive market.  Restructuring charges for the first six months of 2008 were approximately $3.7 million and were comprised of one-time termination benefits and line-transfer expenses related to our initiative to improve the Company’s manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida, and Mitcheldean, United Kingdom locations.  Restructuring expenses that were general and administrative in nature were included in the Company’s condensed consolidated statements of operations as restructuring charges, while the remaining restructuring related expenses were included in cost of goods sold.

Restructuring charges, general and administrative in nature, recorded by reportable segment during the six months ended June 30, 2009 were as follows (in thousands):

   
Electronics
   
Control Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 1,804     $ 613     $ 2,417  
Contract termination costs
    92       -       92  
Total general and administrative restructuring charges
  $ 1,896     $ 613     $ 2,509  

Severance costs related to a reduction in workforce.  Contract termination cost represent costs associated with long-term lease objectives that were cancelled as part of the restructuring initiatives.

Restructuring charges, general and administrative in nature, recorded by reportable segment during the six months ended June 30, 2008 were as follows (in thousands):

   
Electronics
   
Control Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 1,692     $ 740     $ 2,432  
Other exit costs
    18       685       703  
Total general and administrative restructuring charges
  $ 1,710     $ 1,425     $ 3,135  

Other exit costs include miscellaneous expenditures associated with exiting business activities.

Equity in Earnings of Investees.  The decrease in equity earnings of investees was predominately attributable to the decrease in equity earnings recognized from our PST joint venture.  Equity earnings for PST declined from $6.4 million for the six months ended June 30, 2008 to $1.4 million for the six months ended June 30, 2009. The decrease primarily reflects lower volumes for PST’s product lines and unfavorable exchange rates during the six months ended June 30, 2009.  Foreign currency fluctuations negatively affected the Company’s equity earnings in PST by approximately $0.4 million for the six months ended June 30, 2009 as compared to the first six months of 2008.

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

 
30

 

   
Six Months Ended
             
   
June 30,
   
Dollar
   
Percent
 
   
2009
   
2008
   
Decrease
   
Decrease
 
                         
Electronics
  $ (11,160 )   $ 25,975     $ (37,135 )     (143.0 ) %
Control Devices
    (12,428 )     1,091       (13,519 )  
NM
 
Other corporate activities
    1,316       3,646       (2,330 )     (63.9 ) %
Corporate interest expense, net
    (10,983 )     (10,307 )     (676 )     (6.6 ) %
Income (loss) before income taxes
  $ (33,255 )   $ 20,405     $ (53,660 )     (263.0 ) %

NM - Not meaningful

The decrease in income (loss) before income taxes in the Electronics segment was primarily related to decreased revenue from the North American and European commercial vehicle markets, as well as an unfavorable product mix during the six months ended June 30, 2009 when compared to the first six months of 2008.  Additionally, these factors were favorably affected by foreign exchange rates during the six months ended June 30, 2009 when converting functional currency to United States Dollars.

The decrease in income (loss) before income taxes in the Control Devices reportable segment was primarily due to lower revenue within our North American light vehicle market.

The decrease in income before income taxes from other corporate activities was primarily due to the $5.0 million decrease in equity earnings from our PST joint venture and a decrease in compensation related expenses.  This was partially offset by the loss recognized on the purchase and retirement of $17.0 million in face value of our senior notes in the six months ended June 30, 2008.

Income (loss) before income taxes by geographic location for the six months ended June 30, 2009 and 2008 is summarized in the following table (in thousands):

   
Six Months Ended
   
Dollar
   
Percent
 
   
June 30, 2009
   
June 30, 2008
   
Decrease
   
Decrease
 
                                     
North America
  $ (22,129 )     66.5 %   $ 18,136       88.9 %   $ (40,265 )     (222.0 ) %
Europe and other
    (11,126 )     33.5       2,269       11.1       (13,395 )     (590.3 ) %
Income (loss) before income taxes
  $ (33,255 )     100.0 %   $ 20,405       100.0 %   $ (53,660 )     (263.0 ) %

The decrease in our profitability in North America was primarily attributable to lower commercial and light vehicle sales volumes during the six months ended June 30, 2009.  The decrease in profitability outside North America was primarily due to lower sales volumes which was offset by favorable foreign exchange rates during the six months ended June 30, 2009.

Provision (Benefit) for Income Taxes. We recognized a benefit for income taxes of $1.9 million, or 5.7% of pre-tax loss, and a provision for income taxes of $9.2 million, or 45.0% of the pre-tax income, for federal, state and foreign income taxes for the six months ended June 30, 2009 and 2008, respectively. As reported at December 31, 2008, the Company is in a cumulative loss position and provides a valuation allowance offsetting federal, state and certain foreign deferred tax assets. As a result, a tax benefit is not being provided for losses incurred in the first half of 2009, for federal, state and certain foreign jurisdictions. The inability to recognize a tax benefit for these losses and other deferred tax assets has a significant impact on our effective tax rate as well as the comparability of the current quarter and year-to-date effective tax rate to prior periods in which the Company had not recorded a federal valuation allowance.  The difference in the effective tax rate for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, was primarily attributable to the federal valuation allowance provided against the current year domestic loss which was partially offset by recording a tax benefit related to current period losses in certain foreign jurisdictions in which it is more likely than not that the benefit of those losses will be realized in the current year.

 
31

 

Liquidity and Capital Resources

Summary of Cash Flows (in thousands):
   
Six Months Ended
       
   
June 30,
   
$ Increase /
 
   
2009
   
2008
   
(Decrease)
 
Cash provided by (used for):
                 
Operating activities
  $ (2,600 )   $ 12,574     $ (15,174 )
Investing activities
    (6,651 )     (12,314 )     5,663  
Financing activities
    -       (16,391 )     16,391  
Effect of exchange rate changes on cash and cash equivalents
    2,040       1,549       491  
Net change in cash and cash equivalents
  $ (7,211 )   $ (14,582 )   $ 7,371  

The decrease in net cash provided by operating activities was primarily due to lower earnings offset by lower accounts receivable balances at June 30, 2009.

The decrease in net cash used for investing activities reflects a decrease in cash used for capital projects and $1.1 million of cash used to acquire a Swedish aftermarket distributor of Stoneridge products in the first quarter of 2008.

The decrease in net cash used by financing activities was due to the cash purchase and retirement of $17.0 million in face value of the Company’s senior notes in the first six months of 2008.  There was no similar activity during the first six months of 2009.

Future capital expenditures are expected to be slightly lower than our recent expenditures, due to lower expected demand in the markets that we serve.  Our business plan continues to emphasize conserving cash while investing in near-term product launches and selectively investing in longer-term development projects.  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 asset-based credit facility will provide sufficient liquidity to meet our future growth and operating needs.

As outlined in Note 6 to our condensed consolidated financial statements, our asset-based credit facility, permits borrowing up to a maximum level of $100.0 million.  At June 30, 2009, there were no borrowings on this asset-based credit facility.  The available borrowing capacity on this credit facility is based on eligible current assets, as defined.  At June 30, 2009, the Company had borrowing capacity of $45.5 million based on eligible current assets.  The credit facility does not contain financial performance covenants which would constrain our borrowing capacity. However, restrictions do include limits on capital expenditures, operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15.0 million minus certain guarantees and obligations.  The Company was in compliance with all covenants at June 30, 2009.

As of June 30, 2009, the Company’s $183.0 million of senior notes were redeemable at 101.917 percent of the principal amount.  Given that the Company’s senior notes are redeemable, we may seek to retire the senior notes through redemptions, cash purchases, open market purchases, privately negotiated transactions or otherwise.  Such redemptions, purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved may be material.  During the first half of 2008, we purchased and retired $17.0 million in face value of the Company’s senior notes.

We are currently developing plans to consolidate our control devices business from two business units to one during the third quarter with the intent of further lowering our cost structure.  We anticipate that we will announce the projected costs and benefits of this consolidation during the third quarter.

There have been no material changes to the table of contractual obligations presented in Part II, Item 7 (“Liquidity and Capital Resources”) of the Company’s 2008 Form 10-K.

 
32

 

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 2008 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 2008 Form 10-K because of the potential for a significant impact on the financial statements due to the inherent uncertainty in such estimates. There have been no significant changes in the Company’s critical accounting policies since December 31, 2008.

Inflation

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, 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 medium- and heavy-duty, agricultural, automotive 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 2008 Form 10-K.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in market risk presented within Part II, Item 7A of the Company’s 2008 Form 10-K.

 
33

 

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of June 30, 2009, 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, 2009.

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, 2009 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, 2008.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities.

None.

 
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Item 4.  Submission of Matters to a Vote of Security Holders.

(a)
The Annual Meeting of Shareholders of Stoneridge, Inc. was held on May 4, 2009.

(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    
John C. Corey
 
23,048,467
 
     341,713
Jeffrey P. Draime
 
23,031,236
 
    358,944
Douglas C. Jacobs
 
22,637,030
 
    753,150
Ira C. Kaplan
 
23,030,803
 
    359,377
Kim Korth
 
14,448,019
 
  8,942,161
William M. Lasky
 
13,110,944
 
10,279,236
Paul J. Schlather
 
23,030,812
 
    359,368

The ratification of the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the year ended December 31, 2009. The results of the vote were as follows:

   
For
 
Against
 
Abstain
Ratify Appointment of Accounting Firm
   
22,762,389
     
621,603
     
6,190
 

The proposal to approve the Long-Term Cash Incentive Plan. The results of the vote were as follows:

   
For
 
Against
 
Abstain
Adopt Annual Incentive Plan
   
23,123,692
     
249,833
     
16,653
 

Item 5.  Other Information.

None.

Item 6.  Exhibits.

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

 
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SIGNATURES

Pursuant to the requirements of the 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 4, 2009
/s/ John C. Corey
 
John C. Corey
President and Chief Executive Officer and Director
 
(Principal Executive Officer)
   
Date:  August 4, 2009
/s/ George E. Strickler
 
George E. Strickler
 
Executive Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial and Accounting Officer)

 
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INDEX TO EXHIBITS

Exhibit
Number
 
Exhibit
     
10.1
 
Stoneridge, Inc. Long-Term Incentive Plan - 2007 form of amendment to the restricted shares grant agreement, filed herewith.
     
10.2
 
Stoneridge, Inc. Long-Term Incentive Plan - 2008 form of amendment to the restricted shares grant agreement, filed herewith.
     
10.3
 
Stoneridge, Inc. Long-Term Cash Incentive Plan, filed herewith.
     
31.1
 
Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
31.2
 
Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
32.1
 
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
     
32.2
 
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 
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