UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2008

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
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 October 24, 2008 was 24,668,295.


 
STONERIDGE, INC. AND SUBSIDIARIES

INDEX

 
Page No.
PART I–FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2008 and December 31, 2007
2
 
Condensed Consolidated Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2008 and September 30, 2007
3
 
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2008 and September 30, 2007
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
30
Item 4.
Controls and Procedures
31
     
PART II–OTHER INFORMATION
     
Item 1.
Legal Proceedings
32
Item 1A.
Risk Factors
32
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 3.
Defaults Upon Senior Securities
32
Item 4.
Submission of Matters to a Vote of Security Holders
32
Item 5.
Other Information
32
Item 6.
Exhibits
32
     
Signatures
 
33
Index to Exhibits
34

1


PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

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

   
September 30,
 
December 31,
 
   
2008
 
2007
 
ASSETS
         
           
Current Assets:
         
Cash and cash equivalents
 
$
89,611
 
$
95,924
 
Accounts receivable, less reserves of $5,029 and $4,736, respectively
   
115,324
   
122,288
 
Inventories, net
   
67,543
   
57,392
 
Prepaid expenses and other
   
16,812
   
15,926
 
Deferred income taxes
   
10,150
   
9,829
 
Total current assets
   
299,440
   
301,359
 
               
Long-Term Assets:
             
Property, plant and equipment, net
   
88,882
   
92,752
 
Other Assets:
             
Goodwill
   
65,656
   
65,176
 
Investments and other, net
   
46,435
   
39,454
 
Deferred income taxes
   
21,714
   
29,028
 
Total long-term assets
   
222,687
   
226,410
 
Total Assets
 
$
522,127
 
$
527,769
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
               
Current Liabilities:
             
Accounts payable
 
$
66,465
 
$
69,373
 
Accrued expenses and other
   
53,864
   
47,198
 
Total current liabilities
   
120,329
   
116,571
 
               
Long-Term Liabilities:
             
Long-term debt
   
183,000
   
200,000
 
Deferred income taxes
   
2,521
   
2,665
 
Other liabilities
   
1,926
   
2,344
 
Total long-term liabilities
   
187,447
   
205,009
 
               
Shareholders' Equity:
             
Preferred Shares, without par value, authorized 5,000 shares, none issued
   
-
   
-
 
Common Shares, without par value, authorized 60,000 shares, issued 24,772 and 24,601 shares and outstanding 24,668 and 24,209 shares, respectively, with no stated value
             
Additional paid-in capital
   
157,281
   
154,173
 
Common Shares held in treasury, 104 and 373 shares, respectively, at cost
   
(129
)
 
(383
)
Retained earnings
   
49,239
   
38,372
 
Accumulated other comprehensive income
   
7,960
   
14,027
 
Total shareholders’ equity
   
214,351
   
206,189
 
Total Liabilities and Shareholders' Equity
 
$
522,127
 
$
527,769
 

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
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Net Sales
 
$
178,434
 
$
172,814
 
$
594,733
 
$
541,644
 
                           
Costs and Expenses:
                         
Cost of goods sold
   
143,089
   
134,944
   
458,217
   
422,045
 
Selling, general and administrative
   
31,855
   
32,405
   
104,876
   
99,135
 
(Gain) Loss on sale of property, plant and equipment, net
   
(187
)
 
223
   
(42
)
 
(1,465
)
Restructuring charges
   
2,742
   
2
   
5,877
   
74
 
                           
Operating Income
   
935
   
5,240
   
25,805
   
21,855
 
                           
Interest expense, net
   
5,049
   
5,467
   
15,301
   
16,570
 
Equity in earnings of investees
   
(4,371
)
 
(3,506
)
 
(11,206
)
 
(7,924
)
Loss on early extinguishment of debt
   
-
   
-
   
770
   
-
 
Other expense (income), net
   
(234
)
 
273
   
44
   
785
 
                           
Income Before Income Taxes
   
491
   
3,006
   
20,896
   
12,424
 
                           
Provision for income taxes
   
855
   
381
   
10,029
   
2,234
 
                           
Net Income (Loss)
 
$
(364
)
$
2,625
 
$
10,867
 
$
10,190
 
                           
Basic net income (loss) per share
 
$
(0.02
)
$
0.11
 
$
0.47
 
$
0.44
 
Basic weighted average shares outstanding
   
23,405
   
23,213
   
23,353
   
23,106
 
                           
Diluted net income (loss) per share
 
$
(0.02
)
$
0.11
 
$
0.46
 
$
0.43
 
Diluted weighted average shares outstanding
   
23,405
   
23,694
   
23,728
   
23,656
 

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)

    
Nine Months Ended
 
   
September 30,
 
   
2008
 
2007
 
OPERATING ACTIVITIES:
         
Net income
 
$
10,867
 
$
10,190
 
Adjustments to reconcile net income to net cash provided by (used for) operating activities -
             
Depreciation
   
20,706
   
21,775
 
Amortization
   
1,050
   
1,196
 
Deferred income taxes
   
7,039
   
(1,272
)
Equity in earnings of investees
   
(11,206
)
 
(7,924
)
(Gain) Loss on sale of property, plant and equipment
   
(42
)
 
(1,465
)
Share-based compensation expense
   
2,666
   
1,858
 
Loss on extinguishment of debt
   
770
   
-
 
Changes in operating assets and liabilities -
             
Accounts receivable, net
   
5,235
   
(15,197
)
Inventories, net
   
(12,179
)
 
756
 
Prepaid expenses and other
   
(1,654
)
 
(1,777
)
Accounts payable
   
(1,652
)
 
(8,446
)
Accrued expenses and other
   
9,068
   
8,215
 
Net cash provided by operating activities
   
30,668
   
7,909
 
               
INVESTING ACTIVITIES:
             
Capital expenditures
   
(17,956
)
 
(14,259
)
Proceeds from sale of property, plant and equipment
   
435
   
5,042
 
Business acquisitions and other
   
(980
)
 
-
 
Net cash used for investing activities
   
(18,501
)
 
(9,217
)
               
FINANCING ACTIVITIES:
             
Repayments of long-term debt
   
(17,000
)
 
-
 
Share-based compensation activity, net
   
1,305
   
1,956
 
Premiums related to early extinguishment of debt
   
(553
)
 
-
 
Net cash provided by (used for) financing activities
   
(16,248
)
 
1,956
 
               
Effect of exchange rate changes on cash and cash equivalents
   
(2,232
)
 
1,119
 
               
Net change in cash and cash equivalents
   
(6,313
)
 
1,767
 
               
Cash and cash equivalents at beginning of period
   
95,924
   
65,882
 
               
Cash and cash equivalents at end of period
 
$
89,611
 
$
67,649
 

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 nine months ended September 30, 2008 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, 2007.

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

(2) Inventories

Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 64% and 66% of the Company’s inventories at September 30, 2008 and December 31, 2007, respectively, and by the first-in, first-out (“FIFO”) method for all other inventories. Inventory cost includes material, labor and overhead. Inventories consist of the following:

    
September 30,
 
December 31,
 
   
2008
 
2007
 
Raw materials
 
$
35,741
 
$
36,678
 
Work-in-progress
   
11,394
   
9,065
 
Finished goods
   
23,065
   
13,700
 
Total inventories
   
70,200
   
59,443
 
Less: LIFO reserve
   
(2,657
)
 
(2,051
)
Inventories, net
 
$
67,543
 
$
57,392
 
 
(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 September 30, 2008 and December 31, 2007, per quoted market sources, was $179.3 million and $199.2 million, respectively. The carrying value was $183.0 million and $200.0 million as of September 30, 2008 and December 31, 2007, respectively.

Derivative Instruments and Hedging Activities

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

5


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

As a result of the Company’s international business presence it is exposed to foreign currency exchange risk. The Company uses derivative instruments, including foreign currency forward contracts, to mitigate the effect that fluctuations in foreign currency exchange rates have on foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currency hedged by the Company is the British pound. In certain instances, 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 underlying foreign currency denominated transactions.

The Company’s foreign currency forward contracts had a notional value of $8,239 and $8,551 at September 30, 2008 and December 31, 2007, respectively. At September 30, 2008, the purpose of the foreign currency forward contracts is to reduce the exposure related to the Company’s British pound-denominated receivables. At December 31, 2007, the Company also used forward currency contracts to reduce the exposure related to the Company’s Mexican peso- and Swedish krona-denominated receivables. The estimated fair value of the existing contracts at September 30, 2008 and December 31, 2007, per quoted market sources, was approximately $760 and $(28), respectively. For the nine months ended September 30, 2008, the Company recognized an $854 gain related to these contracts in the condensed consolidated statement of operations as a component of other expense (income), net. In 2007, the Company used foreign currency option contracts to reduce the exposure to the Mexican peso. The Company’s foreign currency option contracts expired as of December 31, 2007.

To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company has entered into fixed price commodity swaps with a bank to fix the cost of a portion of its copper purchases. In December 2007, we entered into a fixed price swap contract for 1.0 million pounds of copper, which will last through December 2008. In September 2008, we entered into a fixed price swap contract for 1.4 million pounds of copper, which will last 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 income. 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. The ineffectiveness of the transactions is measured using the dollar-offset test. The fair value of the fixed price commodity swap contract, per quoted market sources, was approximately $32 and $57 at September 30, 2008 and December 31, 2007, respectively. For the nine months ended September 30, 2008, the Company recognized a $523 gain related to these contracts in the condensed consolidated statement of operations as a component of cost of goods sold.

Statement of Financial Accounting Standard No. 157, Fair Value Measurements
 
Effective January 1, 2008, we adopted Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). 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. In accordance with Financial Accounting Standards Board Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 ("FSP FAS 157-2”), we have deferred the adoption of SFAS 157 for our nonfinancial assets and nonfinancial liabilities until January 1, 2009. Deferring adoption is not expected to have a material impact on the Company’s financial statements. On October 10, 2008, FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP FAS 157-3”),was issued. FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 became effective upon issuance and was adopted by the Company for the reporting period ending September 30, 2008 without material impact on the Company’s financial statements.

The following table presents the Company’s assets that are measured at fair value on a recurring basis and that are categorized using the fair value hierarchy. As of September 30, 2008 the Company does not have liabilities that are measured at fair value. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

    
Fair Value Measurements at September 30, 2008
 
       
Quoted Prices
 
Significant Other
 
Significant
 
       
in Active Markets
 
Observable
 
Unobservable
 
       
for Identical Assets
 
Inputs
 
Inputs
 
Assets
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Available-for-sale equity investments
 
$
267
 
$
267
 
$
-
 
$
-
 
Derivatives
   
792
   
-
   
792
   
-
 
Total fair value of assets
 
$
1,059
 
$
267
 
$
792
 
$
-
 

6


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

Equity investments are valued using a market approach based on the quoted market prices of identical instruments when available or other observable inputs such as trading prices of identical instruments in active markets.  Our foreign currency forward contracts are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount. Commodity swap contracts are valued using an income approach based on the present value of the commodity index prices less the contract rate multiplied by the notional amount.
 
(4) Share-Based Compensation

Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $764 and $606 for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $2,666 and $1,858, respectively.

(5) Comprehensive Income (Loss)

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

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

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Net income (loss)
 
$
(364
)
$
2,625
 
$
10,867
 
$
10,190
 
Other comprehensive income (loss):
                         
Currency translation adjustments
   
(11,230
)
 
3,019
   
(6,120
)
 
5,001
 
Pension and postretirement liability adjustments
   
48
   
(24
)
 
38
   
(60
)
Unrealized gain (loss) on marketable securities
   
11
   
(22
)
 
(1
)
 
39
 
Unrecognized gain (loss) on derivatives
   
(332
)
 
(547
)
 
16
   
554
 
Total other comprehensive income (loss)
   
(11,503
)
 
2,426
   
(6,067
)
 
5,534
 
Comprehensive income (loss)
 
$
(11,867
)
$
5,051
 
$
4,800
 
$
15,724
 

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

   
September 30,
 
December 31,
 
   
2008
 
2007
 
Foreign currency translation adjustments
 
$
8,392
 
$
14,512
 
Pension and postretirement liability adjustments
   
(390
)
 
(428
)
Unrealized loss on marketable securities
   
(21
)
 
(20
)
Unrecognized loss on derivatives
   
(21
)
 
(37
)
Accumulated other comprehensive income
 
$
7,960
 
$
14,027
 

(6) Long-Term Debt

Senior Notes

The Company had $183.0 million and $200.0 million of senior notes outstanding at September 30, 2008 and December 31, 2007, respectively. During 2008, the Company purchased 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 103.833 percent of the principal amount until April 30, 2009. 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.

7


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, which permits borrowing up to a maximum level of $100.0 million. At September 30, 2008, 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 September 30, 2008, the Company had borrowing capacity of $67.8 million based on eligible current assets. The asset-based credit facility does not contain financial performance covenants; however, restrictions include limits on capital expenditures, operating leases and dividends. The asset-based credit facility expires on November 1, 2011. The credit facility provides that a commitment fee of 0.25% is due on the unused balance and that 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. 

(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 (loss) per share was calculated by dividing net income (loss) by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented.

Actual weighted-average shares outstanding used in calculating basic and diluted net income (loss) per share are as follows:
 
    
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Basic weighted-average shares outstanding
   
23,405,209
   
23,213,240
   
23,353,085
   
23,105,561
 
Effect of dilutive securities
   
-
   
481,190
   
374,829
   
550,038
 
Diluted weighted-average shares outstanding
   
23,405,209
   
23,694,430
   
23,727,914
   
23,655,599
 

For the three months ended September 30, 2008 and 2007, options to purchase 50,000 and 139,500 Common Shares at an average price of $15.73 and $15.56, respectively, 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 and, therefore, their effect would have been anti-dilutive. Share options not included in the computation of diluted net income (loss) per share to purchase 61,000 and 139,500 Common Shares at an average price of $15.54 and $15.56, respectively, were outstanding during the nine months ended September 30, 2008 and 2007, respectively. In addition, the calculation of diluted earnings per share for  the quarter ended September 30, 2008, would have included 147,500 shares for assumed exercise of options under the Company’s share incentive plans, except that the Company was in a net loss position and no anti-dilution is permitted under SFAS No. 128, Earnings Per Share.

As of September 30, 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 September 30, 2008. These shares may or may not become dilutive based on the Company’s ability to exceed future earnings thresholds.
 
(8) Restructuring

In January 2005, the Company announced restructuring initiatives related to the rationalization of certain manufacturing facilities in Europe and North America. These restructuring initiatives were completed in 2007.

8


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

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 at our Canton, Massachusetts, location. These rationalizations are part of the Company’s cost reduction initiatives. In connection with these initiatives, the Company recorded restructuring expenses of $4,828 for the three months ended September 30, 2008. Restructuring expenses for the nine months ended September 30, 2008 were $11,005. 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.

The expenses related to the restructuring initiatives announced on October 29, 2007 that belong to the Electronics reportable segment include the following:

   
Severance
Costs
 
Contract
Termination
Costs
 
Other
Associated
Costs
 
Total
 
Total expected restructuring charges
 
$
3,331
 
$
1,681
 
$
2,863
 
$
7,875
 
                           
Fourth quarter 2007 charge to expense
 
$
468
 
$
-
 
$
103
 
$
571
 
Cash payments
   
-
   
-
   
(103
)
 
(103
)
                           
Accrued balance at December 31, 2007
   
468
   
-
   
-
   
468
 
                           
First quarter 2008 charge to expense
   
873
   
-
   
614
   
1,487
 
Second quarter 2008 charge to expense
   
819
   
-
   
822
   
1,641
 
Third quarter 2008 charge to expense
   
590
   
703
   
570
   
1,863
 
Cash payments
   
(649
)
 
-
   
(1,737
)
 
(2,386
)
                           
Accrued balance at September 30, 2008
 
$
2,101
 
$
703
 
$
269
 
$
3,073
 
                           
Remaining expected restructuring charge
 
$
581
 
$
978
 
$
754
 
$
2,313
 

The expenses related to the restructuring initiatives announced on October 29, 2007 that belong to the Control Devices reportable segment include the following:

   
Severance
Costs
 
Fixed-Asset
Costs
 
Other
Associated
Costs
 
Total (A)
 
Total expected restructuring charges
 
$
2,352
 
$
-
 
$
5,711
 
$
8,063
 
                           
Fourth quarter 2007 charge to expense
 
$
357
 
$
-
 
$
99
 
$
456
 
Cash payments
   
-
   
-
   
-
   
-
 
                           
Accrued balance at December 31, 2007
   
357
   
-
   
99
   
456
 
                           
First quarter 2008 charge to expense
   
365
   
-
   
668
   
1,033
 
Second quarter 2008 charge to expense
   
375
   
-
   
1,641
   
2,016
 
Third quarter 2008 charge to expense
   
694
   
-
   
2,271
   
2,965
 
Cash payments
   
(274
)
 
-
   
(4,168
)
 
(4,442
)
                           
Accrued balance at September 30, 2008
 
$
1,517
 
$
-
 
$
511
 
$
2,028
 
                           
Remaining expected restructuring charge
 
$
561
 
$
-
 
$
1,032
 
$
1,593
 

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

All restructuring expenses, except for asset-related charges, result in cash outflows. Severance costs relate to a reduction in workforce. Other associated costs include premium direct labor, inventory and equipment move costs, relocation expenses, increased inventory carrying costs 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


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

(9) Commitments and Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings and workers’ compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, cash flows or the financial position of the Company.
 
Product Warranty and Recall

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

The following provides a reconciliation of changes in product warranty and recall liability for the nine months ended September 30, 2008 and 2007:

   
2008
 
2007
 
Product warranty and recall at beginning of period
 
$
5,306
 
$
5,825
 
Accruals for products shipped during period
   
4,257
   
2,131
 
Aggregate changes in pre-existing liabilities due to claims developments
   
988
   
1,197
 
Settlements made during the period (in cash or in kind)
   
(4,262
)
 
(2,518
)
Product warranty and recall at end of period
 
$
6,289
 
$
6,635
 

(10) Employee Benefit Plans

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

    
Defined Benefit  Pension Plan
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Service cost
 
$
35
 
$
44
 
$
105
 
$
129
 
Interest cost
   
316
   
523
   
948
   
1,544
 
Expected return on plan assets
   
(361
)
 
(585
)
 
(1,083
)
 
(1,725
)
Amortization of actuarial loss
   
-
   
114
   
-
   
335
 
Net periodic (benefit) cost
 
$
(10
)
$
96
 
$
(30
)
$
283
 

The Company previously disclosed in its financial statements for the year ended December 31, 2007 that it expected to contribute $259 to its defined benefit pension plan in 2008. Of this amount, contributions of $194 have been made to the defined benefit pension plan as of September 30, 2008.

(11) Income Taxes

The Company recognized a provision for income taxes of $855, or 174.1% of pre-tax income, and $381, or 12.7% of pre-tax income, for federal, state and foreign income taxes for the three months ended September 30, 2008 and 2007, respectively. The Company recognized a provision for income taxes of $10,029, or 48.0% of pre-tax income, and $2,234, or 18.0% of pre-tax income, for federal, state and foreign income taxes for the nine months ended September 30, 2008 and 2007, respectively. The increase in the effective tax rate for both the three and nine months ended September 30, 2008 compared to similar periods in 2007 was primarily attributable to the costs incurred to restructure the Company’s United Kingdom operations. As the Company does not believe that the related tax benefit of those losses will be realized, a valuation allowance was recorded against the deferred tax assets associated with those foreign losses. In addition, the effective tax rate was unfavorably impacted due to the expiration of the federal research and development tax credit at December 31, 2007.

10


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

As of December 31, 2007, the Company provided a liability of $4,618, excluding interest and penalties, for unrecognized tax benefits related to various federal, state and foreign income tax matters. The liability for uncertain tax positions is classified as a non-current income tax liability unless it is expected to be paid within one year. At September 30, 2008 the Company has classified $1,032 as a current liability and $3,415 as a reduction to non-current deferred income tax assets. The liability for unrecognized tax positions decreased by $408 for the three months ended September 30, 2008 and decreased by $557 for the nine months ended September 30, 2008 resulting in a balance at September 30, 2008 of $4,061. Through a combination of anticipated state audit settlements and the expiration of certain statutes of limitation, the amount of unrecognized tax benefits could decrease by approximately $70 to $200 within the next 12 months.

If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, approximately $3,907 would reduce the Company’s provision for income taxes.

The Company classifies interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the nine months ended September 30, 2008 and 2007, the Company recognized approximately $52 and $6 of gross interest and penalties, respectively. The Company has accrued approximately $724 and $672 for the payment of interest and penalties at September 30, 2008 and December 31, 2007, respectively.

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

Jurisdiction
 
Open Tax Years
U.S. Federal
 
2004-2007
France
 
2003-2007
Mexico
 
2002-2007
Spain
 
2003-2007
Sweden
 
2002-2007
United Kingdom
 
2003-2007

During the third quarter of 2007 the U.S. Internal Revenue Service commenced an examination of the Company’s 2005 federal income tax return. It is anticipated that this examination should be completed during the fourth quarter of 2008. The Company is also under examination for income and non-income tax filings in various state and foreign jurisdictions that should be completed at various times throughout 2008.

(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) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption of this standard is prohibited. In the absence of any planned future business combinations, management does not currently expect SFAS 141(R) to have a material impact on the Company’s financial position, results of operations or cash flows.

11


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

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 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption of this standard is prohibited. In the absence of any noncontrolling (minority) interests, management does not currently expect SFAS 160 to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This standard becomes effective on January 1, 2009. Earlier adoption of SFAS 161 and, separately, comparative disclosures for earlier periods at initial adoption are encouraged. As SFAS 161 only requires enhanced disclosures, this standard will have no impact on the Company’s financial position, results of operations or cash flows.

In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. Unlike Statement on Auditing Standards (SAS) No. 69, “The Meaning of Present in Conformity With GAAP,” FAS No. 162 is directed to the entity rather than the auditor. The statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with GAAP,” and is not expected to have any impact on the Company’s financial position, results of operations or cash flows.

12


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

(13) Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the president and chief executive officer.

The Company has two reportable segments: Electronics and Control Devices. 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, 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, 2007 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

A summary of financial information by reportable segment is as follows:
 
    
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
Net Sales
                 
Electronics
 
$
126,636
 
$
103,021
 
$
409,268
 
$
321,497
 
Inter-segment sales
   
2,464
   
3,806
   
10,211
   
13,139
 
Electronics net sales
   
129,100
   
106,827
   
419,479
   
334,636
 
                           
Control Devices
   
51,798
   
69,793
   
185,465
   
220,147
 
Inter-segment sales
   
1,067
   
1,077
   
3,671
   
3,560
 
Control Devices net sales
   
52,865
   
70,870
   
189,136
   
223,707
 
                           
Eliminations
   
(3,531
)
 
(4,883
)
 
(13,882
)
 
(16,699
)
Total consolidated net sales
 
$
178,434
 
$
172,814
 
$
594,733
 
$
541,644
 
                           
Income (Loss) Before Income Taxes
                 
Electronics
 
$
7,001
 
$
3,005
 
$
32,976
 
$
9,146
 
Control Devices
   
(6,523
)
 
2,714
   
(5,432
)
 
13,601
 
Other corporate activities
   
5,129
   
2,827
   
8,775
   
6,348
 
Corporate interest expense, net
   
(5,116
)
 
(5,540
)
 
(15,423
)
 
(16,671
)
Total consolidated income before income taxes
 
$
491
 
$
3,006
 
$
20,896
 
$
12,424
 
                           
Depreciation and Amortization
                 
Electronics
 
$
2,724
 
$
3,400
 
$
9,646
 
$
10,164
 
Control Devices
   
3,690
   
3,812
   
11,191
   
11,495
 
Corporate activities
   
26
   
96
   
21
   
270
 
Total consolidated depreciation and amortization(A)
 
$
6,440
 
$
7,308
 
$
20,858
 
$
21,929
 

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

13


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

    
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
Interest Expense (Income)
                 
Electronics
 
$
(60
)
$
(69
)
$
(113
)
$
(96
)
Control Devices
   
(7
)
 
(4
)
 
(9
)
 
(5
)
Corporate activities
   
5,116
   
5,540
   
15,423
   
16,671
 
Total consolidated interest expense, net
 
$
5,049
 
$
5,467
 
$
15,301
 
$
16,570
 
                           
Capital Expenditures, Net
                         
Electronics
 
$
2,736
 
$
1,569
 
$
7,480
 
$
6,562
 
Control Devices
   
3,580
   
1,641
   
10,512
   
7,051
 
Corporate activities
   
(1
)
 
235
   
(36
)
 
646
 
Total consolidated capital expenditures, net
 
$
6,315
 
$
3,445
 
$
17,956
 
$
14,259
 

    
September 30,
 
December 31,
 
 
 
2008
 
2007
 
Total Assets
         
Electronics
 
$
215,761
 
$
214,119
 
Control Devices
   
176,741
   
180,785
 
Corporate(B)
   
287,930
   
282,695
 
Eliminations
   
(158,305
)
 
(149,830
)
Total consolidated assets
 
$
522,127
 
$
527,769
 

(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
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
 
 
2008
 
2007
 
2008
 
2007
 
Net Sales
                 
North America
 
$
131,966
 
$
126,882
 
$
435,265
 
$
393,392
 
Europe and other
   
46,468
   
45,932
   
159,468
   
148,252
 
Total consolidated net sales
 
$
178,434
 
$
172,814
 
$
594,733
 
$
541,644
 

   
September 30,
 
December 31,
 
 
 
2008
 
2007
 
Non-Current Assets
         
North America
 
$
202,718
 
$
204,556
 
Europe and other
   
19,969
   
21,854
 
Total consolidated non-current assets
 
$
222,687
 
$
226,410
 

(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 $37,593 and $29,663 at September 30, 2008 and December 31, 2007, respectively.

14


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

Condensed financial information for PST is as follows:

   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
Revenues
 
$
50,846
 
$
36,278
 
$
141,238
 
$
94,908
 
Cost of sales
 
$
23,073
 
$
16,704
 
$
66,042
 
$
44,210
 
                           
Pre-tax income
 
$
10,503
 
$
7,462
 
$
26,301
 
$
17,827
 
The Company's share of pre-tax income
 
$
5,251
 
$
3,731
 
$
13,151
 
$
8,914
 

Equity in earnings of PST included in the condensed consolidated statements of operations were $4,192 and $3,401 for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, equity in earnings of PST was $10,634 and $7,557, 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 $4,673 and $4,547 at September 30, 2008 and December 31, 2007, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations were $179 and $105, for the three months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007, equity in earnings of Minda was $572 and $367, respectively.

(15) Guarantor Financial Information

The senior notes and the credit facility are fully and unconditionally guaranteed, jointly and severally, by each of the Company’s existing and future domestic wholly owned subsidiaries (Guarantor Subsidiaries). The Company’s non-U.S. subsidiaries do not guarantee the senior notes or the credit facility (Non-Guarantor Subsidiaries).

Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, as of September 30, 2008 and December 31, 2007 and for each of the three and nine months ended September 30, 2008 and 2007.

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.

15


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

   
September 30, 2008
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
ASSETS
                     
                       
Current Assets:
                     
Cash and cash equivalents
 
$
47,844
 
$
254
 
$
41,513
 
$
-
 
$
89,611
 
Accounts receivable, net
   
60,743
   
21,368
   
33,213
   
-
   
115,324
 
Inventories, net
   
32,141
   
11,251
   
24,151
   
-
   
67,543
 
Prepaid expenses and other
   
(299,865
)
 
304,054
   
12,623
   
-
   
16,812
 
Deferred income taxes
   
3,759
   
4,501
   
1,890
   
-
   
10,150
 
Total current assets
   
(155,378
)
 
341,428
   
113,390
   
-
   
299,440
 
                                 
Long-Term Assets:
                               
Property, plant and equipment, net
   
48,716
   
25,293
   
14,873
   
-
   
88,882
 
Other Assets:
                               
Goodwill
   
44,584
   
20,591
   
481
   
-
   
65,656
 
Investments and other, net
   
45,692
   
321
   
422
   
-
   
46,435
 
Deferred income taxes
   
25,766
   
(2,790
)
 
(1,262
)
 
-
   
21,714
 
Investment in subsidiaries
   
438,935
   
-
   
-
   
(438,935
)
 
-
 
Total long-term assets
   
603,693
   
43,415
   
14,514
   
(438,935
)
 
222,687
 
Total Assets
 
$
448,315
 
$
384,843
 
$
127,904
 
$
(438,935
)
$
522,127
 
                                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                               
                                 
Current Liabilities:
                               
Accounts payable
 
$
26,366
 
$
18,625
 
$
21,474
 
$
-
 
$
66,465
 
Accrued expenses and other
   
24,075
   
9,246
   
20,543
   
-
   
53,864
 
Total current liabilities
   
50,441
   
27,871
   
42,017
   
-
   
120,329
 
                                 
Long-Term Liabilities:
                               
Long-term debt
   
183,000
   
-
   
-
   
-
   
183,000
 
Deferred income taxes
   
-
   
-
   
2,521
   
-
   
2,521
 
Other liabilities
   
523
   
393
   
1,010
   
-
   
1,926
 
Total long-term liabilities
   
183,523
   
393
   
3,531
   
-
   
187,447
 
                                 
Shareholders' Equity
   
214,351
   
356,579
   
82,356
   
(438,935
)
 
214,351
 
                                 
Total Liabilities and Shareholders’ Equity
 
$
448,315
 
$
384,843
 
$
127,904
 
$
(438,935
)
$
522,127
 

16


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, 2007
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
ASSETS
                     
                       
Current Assets:
                     
Cash and cash equivalents
 
$
48,705
 
$
255
 
$
46,964
 
$
-
 
$
95,924
 
Accounts receivable, net
   
53,456
   
26,798
   
42,034
   
-
   
122,288
 
Inventories, net
   
25,472
   
12,637
   
19,283
   
-
   
57,392
 
Prepaid expenses and other
   
(293,632
)
 
294,298
   
15,260
   
-
   
15,926
 
Deferred income taxes
   
3,152
   
4,591
   
2,086
   
-
   
9,829
 
Total current assets
   
(162,847
)
 
338,579
   
125,627
   
-
   
301,359
 
                                 
Long-Term Assets:
                               
Property, plant and equipment, net
   
48,294
   
25,632
   
18,826
   
-
   
92,752
 
Other Assets:
                               
Goodwill
   
44,585
   
20,591
   
-
   
-
   
65,176
 
Investments and other, net
   
38,783
   
331
   
340
   
-
   
39,454
 
Deferred income taxes
   
33,169
   
(2,843
)
 
(1,298
)
 
-
   
29,028
 
Investment in subsidiaries
   
438,271
   
-
   
-
   
(438,271
)
 
-
 
Total long-term assets
   
603,102
   
43,711
   
17,868
   
(438,271
)
 
226,410
 
Total Assets
 
$
440,255
 
$
382,290
 
$
143,495
 
$
(438,271
)
$
527,769
 
                                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                               
                                 
Current Liabilities:
                               
Accounts payable
 
$
20,924
 
$
19,533
 
$
28,916
 
$
-
 
$
69,373
 
Accrued expenses and other
   
12,546
   
9,198
   
25,454
   
-
   
47,198
 
Total current liabilities
   
33,470
   
28,731
   
54,370
   
-
   
116,571
 
                                 
Long-Term Liabilities:
                               
Long-term debt
   
200,000
   
-
   
-
   
-
   
200,000
 
Deferred income taxes
   
-
   
-
   
2,665
   
-
   
2,665
 
Other liabilities
   
596
   
393
   
1,355
   
-
   
2,344
 
Total long-term liabilities
   
200,596
   
393
   
4,020
   
-
   
205,009
 
                                 
Shareholders' Equity
   
206,189
   
353,166
   
85,105
   
(438,271
)
 
206,189
 
                                 
Total Liabilities and Shareholders’ Equity
 
$
440,255
 
$
382,290
 
$
143,495
 
$
(438,271
)
$
527,769
 

17


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 September 30, 2008
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
Net Sales
 
$
98,697
 
$
42,054
 
$
62,368
 
$
(24,685
)
$
178,434
 
                                 
Costs and Expenses:
                               
Cost of goods sold
   
83,677
   
34,053
   
49,205
   
(23,846
)
 
143,089
 
Selling, general and administrative
   
12,380
   
7,588
   
12,726
   
(839
)
 
31,855
 
(Gain) Loss on sale of property, plant and equipment, net
   
119
   
(3
)
 
(303
)
 
-
   
(187
)
Restructuring charges
   
1,448
   
-
   
1,294
   
-
   
2,742
 
                                 
Operating Income (Loss)
   
1,073
   
416
   
(554
)
 
-
   
935
 
                                 
Interest expense (income), net
   
5,313
   
-
   
(264
)
 
-
   
5,049
 
Other income, net
   
(4,371
)
 
-
   
(234
)
 
-
   
(4,605
)
Equity earnings from subsidiaries
   
(223
)
 
-
   
-
   
223
   
-
 
                                 
Income (Loss) Before Income Taxes
   
354
   
416
   
(56
)
 
(223
)
 
491
 
                                 
Provision for income taxes
   
718
   
-
   
137
   
-
   
855
 
                                 
Net Income (Loss)
 
$
(364
)
$
416
 
$
(193
)
$
(223
)
$
(364
)

   
For the Three Months Ended September 30, 2007
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
Net Sales
 
$
83,251
 
$
50,588
 
$
57,843
 
$
(18,868
)
$
172,814
 
                                 
Costs and Expenses:
                               
Cost of goods sold
   
69,451
   
40,369
   
43,342
   
(18,218
)
 
134,944
 
Selling, general and administrative
   
13,595
   
7,417
   
12,043
   
(650
)
 
32,405
 
(Gain) Loss on sale of property, plant and equipment, net
   
231
   
-
   
(8
)
 
-
   
223
 
Restructuring charges
   
2
   
-
   
-
   
-
   
2
 
                                 
Operating Income (Loss)
   
(28
)
 
2,802
   
2,466
   
-
   
5,240
 
                                 
Interest expense (income), net
   
5,830
   
-
   
(363
)
 
-
   
5,467
 
Other (income) expense, net
   
(3,696
)
 
-
   
463
   
-
   
(3,233
)
Equity earnings from subsidiaries
   
(4,285
)
 
-
   
-
   
4,285
   
-
 
                                 
Income Before Income Taxes
   
2,123
   
2,802
   
2,366
   
(4,285
)
 
3,006
 
                                 
Provision (benefit) for income taxes
   
(502
)
 
4
   
879
   
-
   
381
 
                                 
Net Income
 
$
2,625
 
$
2,798
 
$
1,487
 
$
(4,285
)
$
2,625
 

18


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 Nine Months Ended September 30, 2008
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
Net Sales
 
$
316,543
 
$
148,421
 
$
206,233
 
$
(76,464
)
$
594,733
 
                                 
Costs and Expenses:
                               
Cost of goods sold
   
258,914
   
117,353
   
156,190
   
(74,240
)
 
458,217
 
Selling, general and administrative
   
40,463
   
23,942
   
42,695
   
(2,224
)
 
104,876
 
(Gain) Loss on sale of property, plant and equipment, net
   
198
   
21
   
(261
)
 
-
   
(42
)
Restructuring charges
   
2,873
   
-
   
3,004
   
-
   
5,877
 
                                 
Operating Income
   
14,095
   
7,105
   
4,605
   
-
   
25,805
 
                                 
Interest expense (income), net
   
16,019
   
-
   
(718
)
 
-
   
15,301
 
Other (income) expense, net
   
(10,436
)
 
-
   
44
   
-
   
(10,392
)
Equity earnings from subsidiaries
   
(10,689
)
 
-
   
-
   
10,689
   
-
 
                                 
Income Before Income Taxes
   
19,201
   
7,105
   
5,279
   
(10,689
)
 
20,896
 
                                 
Provision for income taxes
   
8,334
   
82
   
1,613
   
-
   
10,029
 
                                 
Net Income
 
$
10,867
 
$
7,023
 
$
3,666
 
$
(10,689
)
$
10,867
 

   
For the Nine Months Ended September 30, 2007
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
Net Sales
 
$
257,119
 
$
157,187
 
$
186,914
 
$
(59,576
)
$
541,644
 
                                 
Costs and Expenses:
                               
Cost of goods sold
   
217,081
   
123,231
   
139,251
   
(57,518
)
 
422,045
 
Selling, general and administrative
   
40,645
   
23,090
   
37,458
   
(2,058
)
 
99,135
 
Gain on sale of property, plant and equipment, net
   
(116
)
 
(1,349
)
 
-
   
-
   
(1,465
)
Restructuring charges
   
74
   
-
   
-
   
-
   
74
 
                                 
Operating Income (Loss)
   
(565
)
 
12,215
   
10,205
   
-
   
21,855
 
                                 
Interest expense (income), net
   
17,498
   
-
   
(928
)
 
-
   
16,570
 
Other (income) expense, net
   
(7,594
)
 
-
   
455
   
-
   
(7,139
)
Equity earnings from subsidiaries
   
(20,819
)
 
-
   
-
   
20,819
   
-
 
                                 
Income Before Income Taxes
   
10,350
   
12,215
   
10,678
   
(20,819
)
 
12,424
 
                                 
Provision for income taxes
   
160
   
11
   
2,063
   
-
   
2,234
 
                                 
Net Income
 
$
10,190
 
$
12,204
 
$
8,615
 
$
(20,819
)
$
10,190
 


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):

    
For the Nine Months Ended September 30, 2008
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
Net cash provided by operating activities
 
$
25,365
 
$
4,658
 
$
645
 
$
-
 
$
30,668
 
                                 
INVESTING ACTIVITIES:
                               
Capital expenditures
   
(10,119
)
 
(4,663
)
 
(3,174
)
 
-
   
(17,956
)
Proceeds from the sale of fixed assets
   
141
   
4
   
290
   
-
   
435
 
Business acquisitions and other
   
-
   
-
   
(980
)
 
-
   
(980
)
Net cash used for investing activities
   
(9,978
)
 
(4,659
)
 
(3,864
)
 
-
   
(18,501
)
                                 
FINANCING ACTIVITIES:
                               
Repayments of long-term debt
   
(17,000
)
 
-
   
-
   
-
   
(17,000
)
Share-based compensation activity, net
   
1,305
   
-
   
-
   
-
   
1,305
 
Premiums related to early extinguishment of debt
   
(553
)
 
-
   
-
   
-
   
(553
)
Net cash used for financing activities
   
(16,248
)
 
-
   
-
   
-
   
(16,248
)
                                 
Effect of exchange rate changes on cash and cash equivalents
   
-
   
-
   
(2,232
)
 
-
   
(2,232
)
Net change in cash and cash equivalents
   
(861
)
 
(1
)
 
(5,451
)
 
-
   
(6,313
)
Cash and cash equivalents at beginning of period
   
48,705
   
255
   
46,964
   
-
   
95,924
 
Cash and cash equivalents at end of period
 
$
47,844
 
$
254
 
$
41,513
 
$
-
 
$
89,611
 

   
For the Nine Months Ended September 30, 2007
 
   
Parent
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
Net cash provided by (used for) operating activities
 
$
8,237
 
$
(1,561
)
$
1,533
 
$
(300
)
$
7,909
 
                                 
INVESTING ACTIVITIES:
                               
Capital expenditures
   
(7,772
)
 
(3,038
)
 
(3,449
)
 
-
   
(14,259
)
Proceeds from sale of fixed assets
   
392
   
4,643
   
7
   
-
   
5,042
 
Business acquisitions and other
   
-
   
-
   
-
   
-
   
-
 
Net cash (used for) provided by investing activities
   
(7,380
)
 
1,605
   
(3,442
)
 
-
   
(9,217
)
                                 
FINANCING ACTIVITIES:
                               
Repayments of long-term debt
   
-
   
-
   
(300
)
 
300
   
-
 
Share-based compensation activity, net
   
1,956
   
-
   
-
   
-
   
1,956
 
Net cash provided by (used for) financing activities
   
1,956
   
-
   
(300
)
 
300
   
1,956
 
                                 
Effect of exchange rate changes on cash and cash equivalents
   
-
   
-
   
1,119
   
-
   
1,119
 
Net change in cash and cash equivalents
   
2,813
   
44
   
(1,090
)
 
-
   
1,767
 
Cash and cash equivalents at beginning of period
   
28,937
   
12
   
36,933
   
-
   
65,882
 
Cash and cash equivalents at end of period
 
$
31,750
 
$
56
 
$
35,843
 
$
-
 
$
67,649
 

20

 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The following Management Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of the Company. This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.

We are an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

Our revenue for the third quarter of 2008 was affected by increased sales in our commercial vehicle and agricultural markets and lower sales volumes to our North American automotive market.

We recognized net loss for the third quarter ended September 30, 2008 of $0.4 million, or $0.02 per diluted share, compared with net income of $2.6 million, or $0.11 per diluted share, for the third quarter of 2007.

We recognized net income for the nine-month period ended September 30, 2008 of $10.9 million, or $0.46 per diluted share, compared with net income of $10.2 million, or $0.43 per diluted share, for the comparable period of 2007.

Our third quarter 2008 results were affected by our PST Eletrônica S.A. (“PST”) joint venture in Brazil which continued to perform well. Equity earnings were $4.2 million for the third quarter of 2008 compared to $3.4 million in the third quarter of 2007.

Also affecting our profitability were restructuring initiatives that began in the fourth quarter of 2007 to improve the Company’s manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida, and Mitcheldean, United Kingdom, locations. Related third quarter 2008 expenses were approximately $4.8 million, primarily comprised of one-time termination benefits and line-transfer expenses. 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. We anticipate incurring total pre-tax charges of approximately $13.0 million to $15.0 million in 2008 for the restructuring.

We believe the recent decline in North American light vehicle production will have an impact on our sales volumes for the remainder of 2008 and may continue into 2009. Also, significant factors inherent to our markets that could affect our results include the financial stability of our customers and suppliers as well as our ability to successfully execute our planned restructuring initiatives. Our results also depend on conditions in the automotive and commercial vehicle industries, which are generally dependent on domestic and global economies.

Outlook for the Remainder of 2008

We are cautious about the remainder of 2008. The recent crisis in the financial sector and deteriorating global economic conditions have increased uncertainty about automotive and commercial vehicle production levels in North America and Europe. We expect this unprecedented current economic environment to continue to affect near-term results and to create difficult conditions through 2009. We are responding to these conditions by continuing to execute our previously announced restructuring programs. We remain optimistic about the long-term outlook for our business.

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 from our 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.

21


Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the three months ended September 30, 2008 and 2007 are summarized in the following table (in thousands):

   
Three Months Ended
         
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
Electronics
 
$
126,636
   
71.0
%  
$
103,021
   
59.6
%  
$
23,615
   
22.9
%
Control Devices
   
51,798
   
29.0
   
69,793
   
40.4
   
(17,995
)
 
(25.8)
%
Total net sales
 
$
178,434
   
100.0
%
$
172,814
   
100.0
%
$
5,620
   
3.3
%
 
The increase in net sales for our Electronics segment was primarily due to new business sales in North America, increased sales volume in our European commercial vehicle operations and favorable foreign currency exchange rates. Favorable foreign currency exchange rates contributed $4.0 million to sales in the third quarter compared with the prior year. The increase was partially offset by contractual price reductions and the loss of a heated switch product at our Mitcheldean, United Kingdom, facility.

The decrease in net sales for our Control Devices segment was primarily attributable to production volume reductions at our major customers in the automotive vehicle market and the loss of a sensor product revenue at our Sarasota, Florida, facility.

Net sales by geographic location for the three months ended September 30, 2008 and 2007 are summarized in the following table (in thousands):

   
Three Months Ended
         
   
September 30,
         
   
2008
 
2007
 
$ Increase
 
% Increase
 
                           
North America
 
$
131,966
   
74.0
%  
$
126,882
   
73.4
%  
$
5,084
   
4.0
%
Europe and other
   
46,468
   
26.0
   
45,932
   
26.6
   
536
   
1.2
%
Total net sales
 
$
178,434
   
100.0
%
$
172,814
   
100.0
%
$
5,620
   
3.3
%
 
The increase in North American sales was primarily attributable to new business sales of electronics products. The increase was partially offset by lower sales volume in our North American automotive market. Our increase in sales outside North America for the third quarter was primarily due to favorable foreign currency exchange rates. The favorable effect of foreign currency exchange rates affected net sales outside North America by $4.0 million in the third quarter of 2008 compared with the prior year.

22


Condensed consolidated statements of operations as a percentage of net sales for the three months ended September 30, 2008 and 2007 are presented in the following table (in thousands):

   
Three Months Ended
     
   
September 30,
 
$ Increase /
 
   
2008
 
2007
 
(Decrease)
 
Net Sales
 
$
178,434
   
100.0
%  
$
172,814
   
100.0
%  
$
5,620
 
Costs and Expenses:
                               
Cost of goods sold
   
143,089
   
80.2
   
134,944
   
78.1
   
8,145
 
Selling, general and administrative
   
31,855
   
17.9
   
32,405
   
18.8
   
(550
)
(Gain) Loss on sale of property, plant
                               
and equipment, net
   
(187
)
 
(0.1
)
 
223
   
0.1
   
(410
)
Restructuring charges
   
2,742
   
1.5
   
2
   
0.0
   
2,740
 
Operating Income
   
935
   
0.5
   
5,240
   
3.0
   
(4,305
)
Interest expense, net
   
5,049
   
2.8
   
5,467
   
3.2
   
(418
)
Equity in earnings of investees
   
(4,371
)
 
(2.5
)
 
(3,506
)
 
(2.0
)
 
(865
)
Other expense (income), net
   
(234
)
 
(0.1
)
 
273
   
0.2
   
(507
)
Income Before Income Taxes
   
491
   
0.2
   
3,006
   
1.6
   
(2,515
)
Provision for income taxes
   
855
   
0.5
   
381
   
0.2
   
474
 
Net Income
 
$
(364
)
 
(0.2)
%
$
2,625
   
1.4
%
$
(2,989
)
 
Cost of Goods Sold. The increase in cost of goods sold as a percentage of sales was primarily due to $2.1 million of restructuring expenses included in cost of goods sold in the third quarter of 2008 and the loss of overhead recoveries because of lower production volumes which were the result of restructuring inventories built during 2008.

Selling, General and Administrative Expenses. Product development expenses included in SG&A were $10.2 million and $10.5 million for the third quarters ended September 30, 2008 and 2007, respectively.

Restructuring Charges. The increase in restructuring charges that were general and administrative in nature, was primarily the result of the ratable recognition of costs associated with moving production equipment out of our Sarasota, Florida, and Mitcheldean, United Kingdom, locations. No fixed-asset impairment charges were incurred because assets are expected to be transferred to our other locations for continued production. 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. We expect these initiatives to be substantially completed in 2008.

Restructuring charges, general and administrative in nature, recorded by reportable segment during the three months ended September 30, 2008 were as follows (in thousands):
 
   
Three Months Ended
 
   
September 30, 2008
 
   
Electronics
 
Control Devices
 
Total
Consolidated
Restructuring
Charges
 
               
Severance costs
 
$
590
 
$
486
 
$
1,076
 
Contract termination costs
   
703
   
-
   
703
 
Other exit costs
   
1
   
962
   
963
 
Total general and administrative restructuring charges
 
$
1,294
 
$
1,448
 
$
2,742
 

Severance costs relate to a reduction in workforce. Other exit costs include miscellaneous expenditures associated with exiting business activities.

23

 
No significant restructuring charges were incurred at either the Electronics or Control Devices reportable segment for the three months ended September 30, 2007.

Restructuring related expenses, general and administrative in nature, for the third quarter of 2007 were due to severance costs related to the rationalization of certain manufacturing facilities in North America that were previously announced in 2005. These restructuring initiatives were completed in 2007.
 
Equity in Earnings of Investees. The increase in equity earnings of investees was predominately attributable to the increase in equity earnings recognized from our PST joint venture. The increase primarily reflects higher volume for PST’s security product lines and favorable exchange rates.

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

   
Three Months Ended
         
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
                   
Electronics income
 
$
7,001
 
$
3,005
 
$
3,996
   
133.0
%
Control Devices income (loss)
   
(6,523
)
 
2,714
   
(9,237
)
 
(340.3)
%
Other corporate activities
   
5,129
   
2,827
   
2,302
   
81.4
%
Corporate interest expense, net
   
(5,116
)
 
(5,540
)
 
424
   
7.7
%
Income before income taxes
 
$
491
 
$
3,006
 
$
(2,515
)
 
(83.7)
%
 
The increase in income before income taxes in the Electronics segment was related to increased revenue and favorable product mix. These factors were partially offset by higher restructuring related expenses.

The decrease in income before income taxes in the Control Devices reportable segment was primarily due to lower revenue and increased restructuring related expenses.

The decrease in income before income taxes was also attributable to the loss of overhead recoveries because of lower production volumes which were the result of restructuring inventories built primarily in the first half of 2008.

Income before income taxes by geographic location for the three months ended September 30, 2008 and 2007 is summarized in the following table (in thousands): 

   
Three Months Ended
         
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
                           
North America
 
$
2,688
   
547.5
%  
$
1,842
   
61.3
%  
$
846
   
45.9
%
Europe and other
   
(2,197
)
 
(447.5
)
 
1,164
   
38.7
   
(3,361
)
 
(288.7)
%
Income before income taxes
 
$
491
   
100.0
%
$
3,006
   
100.0
%
$
(2,515
)
 
(83.7)
%

The increase in our profitability in North America was primarily attributable to new business sales and additional sales volume to existing customers, mostly from electronics products. The increase was primarily offset by increased restructuring related expenses and lower North American automotive production. The decrease in profitability outside North America was primarily due to increased restructuring related and selling expenses.

Provision for Income Taxes. We recognized a provision for income taxes of $0.9 million, or 174.1% of pre-tax income, and $0.4 million, or 12.7% of the pre-tax income, for federal, state and foreign income taxes for the third quarters ended September 30, 2008 and 2007, respectively. The increase in the effective tax rate for the third quarter ended September 30, 2008 compared to the third quarter ended September 30, 2007, was primarily attributable to the costs incurred to restructure our United Kingdom operations. Since we do not believe that the related tax benefit of those losses will be realized, a valuation allowance was recorded against the deferred tax assets associated with those foreign losses. In addition, the effective tax rate was unfavorably impacted by the expiration of the federal research and development tax credit at December 31, 2007.

24


Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the nine months ended September 30, 2008 and 2007 are summarized in the following table (in thousands):

   
Nine Months Ended
         
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
Electronics
 
$
409,268
   
68.8
%  
$
321,497
   
59.4
%  
$
87,771
   
27.3
%
Control Devices
   
185,465
   
31.2
   
220,147
   
40.6
   
(34,682
)
 
(15.8)
%
Total net sales
 
$
594,733
   
100.0
%
$
541,644
   
100.0
%
$
53,089
   
9.8
%

The increase in net sales for our Electronics segment was primarily due to new business sales in North America, increased sales volume in our European commercial vehicle operations and favorable foreign currency exchange rates. Favorable foreign currency exchange rates contributed $12.5 million to sales in the first nine months of 2008 compared with the first nine months of the prior year.

The decrease in net sales for our Control Devices segment was primarily attributable to production volume reductions at our major customers in the automotive vehicle market and the loss of sensor product revenue at our Sarasota, Florida, facility.

Net sales by geographic location for the nine months ended September 30, 2008 and 2007 are summarized in the following table (in thousands):
 
   
Nine Months Ended
         
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
                           
North America
 
$
435,265
   
73.2
%  
$
393,392
   
72.6
%  
$
41,873
   
10.6
%
Europe and other
   
159,468
   
26.8
   
148,252
   
27.4
   
11,216
   
7.6
%
Total net sales
 
$
594,733
   
100.0
%
$
541,644
   
100.0
%
$
53,089
   
9.8
%
 
The increase in North American sales was primarily attributable to new business sales of electronics products. The increase was partially offset by lower sales volume in our North American automotive market. Our increase in sales outside North America for the first nine months was primarily due to increased European commercial vehicle sales volume and favorable foreign currency exchange rates. The favorable effect of foreign currency exchange rates affected net sales outside North America by $12.8 million in the first nine months of 2008 compared with the first nine months of the prior year.

25


Condensed consolidated statements of operations as a percentage of net sales for the nine months ended September 30, 2008 and 2007 are presented in the following table (in thousands):

   
Nine Months Ended
     
   
September 30,
 
$ Increase /
 
   
2008
 
2007
 
(Decrease)
 
Net Sales
 
$
594,733
   
100.0
%  
$
541,644
   
100.0
%  
$
53,089
 
Costs and Expenses:
                               
Cost of goods sold
   
458,217
   
77.0
   
422,045
   
77.9
   
36,172
 
Selling, general and administrative
   
104,876
   
17.6
   
99,135
   
18.3
   
5,741
 
Gain on sale of property, plant
                               
and equipment, net
   
(42
)
 
(0.0
)
 
(1,465
)
 
(0.2
)
 
1,423
 
Restructuring
   
5,877
   
1.0
   
74
   
0.0
   
5,803
 
Operating Income
   
25,805
   
4.4
   
21,855
   
4.0
   
3,950
 
Interest expense, net
   
15,301
   
2.6
   
16,570
   
3.1
   
(1,269
)
Equity in earnings of investees
   
(11,206
)
 
(1.9
)
 
(7,924
)
 
(1.5
)
 
(3,282
)
Loss on early extinguishment of debt
   
770
   
0.1
   
-
   
-
   
770
 
Other expense, net
   
44
   
0.0
   
785
   
0.1
   
(741
)
Income Before Income Taxes
   
20,896
   
3.6
   
12,424
   
2.3
   
8,472
 
Provision for income taxes
   
10,029
   
1.7
   
2,234
   
0.4
   
7,795
 
Net Income
 
$
10,867
   
1.9
%
$
10,190
   
1.8
%
$
677
 

Cost of Goods Sold. The decrease in cost of goods sold as a percentage of sales was due to a more favorable product mix and new business sales. The decrease was partially offset by $5.1 million of restructuring expenses included in cost of goods sold in the first nine months of 2008.

Selling, General and Administrative Expenses. Product development expenses included in SG&A were $35.8 million and $32.3 million for the nine months ended September 30, 2008 and 2007, respectively. The increase was primarily due to development spending in the areas of instrumentation and wiring.

The increase in SG&A expenses, excluding product development expenses, for the first nine months of 2008 compared with the first nine months of 2007 was primarily attributable to the increase in compensation related expenses.

Gain on Sale of Property, Plant and Equipment, net. The gain during the first nine months of 2007 was primarily attributable to the sale of two closed facilities.

Restructuring Charges. The increase in restructuring charges that were general and administrative in nature, was primarily the result of the ratable recognition of one-time termination benefits that will be due to employees upon the closure of our Sarasota, Florida, and Mitcheldean, United Kingdom, locations. No fixed-asset impairment charges were incurred because assets are expected to be transferred to our other locations for continued production. 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. We expect these initiatives to be substantially completed in 2008.

26


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

   
Nine Months Ended
 
   
September 30, 2008
 
   
Electronics
 
Control
Devices
 
Total
Consolidated
Restructuring
Charges
 
               
Severance costs
 
$
2,282
 
$
1,226
 
$
3,508
 
Contract termination costs
   
703
   
-
   
703
 
Other exit costs
   
19
   
1,647
   
1,666
 
Total general and administrative restructuring charges
 
$
3,004
 
$
2,873
 
$
5,877
 

Severance costs related to a reduction in workforce. Other exit costs include miscellaneous expenditures associated with exiting business activities.

Within the Electronics reportable segment, the Company incurred restructuring charges of approximately $0.1 that were general and administrative in nature during the nine months ended September 30, 2007. There were no such charges incurred within the Control Devices reportable segment for the nine months ended September 30, 2007.

Restructuring related expenses, general and administrative in nature, for the first nine months of 2007 were due to severance costs related to the rationalization of certain manufacturing facilities in North America that were previously announced in 2005. These restructuring initiatives were completed in 2007.

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

Income Before Income Taxes. Income before income taxes is summarized in the following table by reportable segment (in thousands).
 
   
Nine Months Ended
         
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
                   
Electronics income
 
$
32,976
 
$
9,146
 
$
23,830
   
260.6
%
Control Devices income (loss)
   
(5,432
)
 
13,601
   
(19,033
)
 
(139.9)
%
Other corporate activities
   
8,775
   
6,348
   
2,427
   
38.2
%
Corporate interest expense, net
   
(15,423
)
 
(16,671
)
 
1,248
   
7.5
%
Income before income taxes
 
$
20,896
 
$
12,424
 
$
8,472
   
68.2
%

The increase in income before income taxes in the Electronics segment was related to increased revenue and favorable product mix. These factors were partially offset by higher restructuring related expenses and higher SG&A expenses due to increased development spending in the areas of instrumentation and wiring.

The decrease in income before income taxes in the Control Devices reportable segment was primarily due to lower revenue and increased restructuring related expenses. The decrease was partially offset by operating inefficiencies related to a new product launch in the first quarter of 2007.

27


Income before income taxes by geographic location for the nine months ended September 30, 2008 and 2007 is summarized in the following table (in thousands):

   
Nine Months Ended
 
 
 
 
 
   
September 30,
 
$ Increase /
 
% Increase /
 
   
2008
 
2007
 
(Decrease)
 
(Decrease)
 
                           
North America
 
$
20,824
   
99.7
%  
$
5,667
   
45.6
%  
$
15,157
   
267.5
%
Europe and other
   
72
   
0.3
   
6,757
   
54.4
   
(6,685
)
 
(98.9)
%
Income before income taxes
 
$
20,896
   
100.0
%
$
12,424
   
100.0
%
$
8,472
   
68.2
%

The increase in our profitability in North America was primarily attributable to new business sales and additional sales volume to existing customers, primarily from electronic products. The increase was primarily offset by increased restructuring related expenses and lower North American automotive production. The decrease in profitability outside North America was primarily due to increased restructuring related and design and development expenses. The decrease was partially offset by increased European commercial vehicle production.

Provision for Income Taxes. We recognized a provision for income taxes of $10.0 million, or 48.0% of pre-tax income, and $2.2 million, or 18.0% of the pre-tax income, for federal, state and foreign income taxes for the nine months ended September 30, 2008 and 2007, respectively. The increase in the effective tax rate for the third quarter ended September 30, 2008 compared to the third quarter ended September 30, 2007, was primarily attributable to the costs incurred to restructure our United Kingdom operations. Since we do not believe that the related tax benefit of those losses will be realized, a valuation allowance was recorded against the deferred tax assets associated with those foreign losses. In addition, the effective tax rate was unfavorably impacted by the expiration of the federal research and development tax credit at December 31, 2007.

Liquidity and Capital Resources

Summary of Cash Flows (in thousands):

   
Nine Months Ended
     
   
September 30,
 
$ Increase /
 
   
2008
 
2007
 
(Decrease)
 
Cash provided by (used for):
                   
Operating activities
 
$
30,668
 
$
7,909
 
$
22,759
 
Investing activities
   
(18,501
)
 
(9,217
)
 
(9,284
)
Financing activities
   
(16,248
)
 
1,956
   
(18,204
)
Effect of exchange rate changes on cash and cash equivalents
   
(2,232
)
 
1,119
   
(3,351
)
Net change in cash and cash equivalents
 
$
(6,313
)
$
1,767
 
$
(8,080
)

The increase in net cash provided by operating activities was primarily due to higher earnings and lower accounts receivable balances in the current year. The increase in cash provided by operating activities was partially offset by cash used for our restructuring initiatives, primarily to build inventory levels for line-transfers, which will decline as production transfers to our other facilities.

The increase in net cash used for investing activities reflects an increase in cash used for capital projects. In addition, 2007 net cash used for investing activities includes the proceeds from the sale of two facilities.

The increase in net cash used by financing activities was primarily due to cash used to purchase and retire $17.0 million in par value of the Company’s senior notes during 2008.

Our consolidated cash and cash equivalents were $89.6 million as of September 30, 2008. Approximately $62.9 million of our cash and cash equivalents were in North America; the majority of which was invested in U.S. Government guaranteed funds.

Future capital expenditures are expected to be consistent with recent levels. Management will continue to focus on reducing its weighted average cost of capital and believes that cash flows from operations and the availability of funds from our credit facilities will provide sufficient liquidity to meet our future growth and operating needs.

28


As outlined in Note 6 to our condensed consolidated financial statements, on November 2, 2007, we finalized our new asset-based credit facility, which permits borrowing up to a maximum level of $100.0 million. This facility provides us with lower borrowing rates and allows us the flexibility to refinance our outstanding debt. At September 30, 2008, there were no borrowings on this asset-based credit facility. At September 30, 2008, the Company had borrowing capacity of $67.8 million based on eligible current assets, as defined by the credit agreement. As of June 30, 2008 our borrowing capacity was $90.0 million. The decrease in borrowing capacity was due primarily to lower accounts receivable balances. The Company was in compliance with all covenants at September 30, 2008.

As of September 30, 2008, the Company’s $183.0 million of senior notes were redeemable at 103.833 percent of the principal amount. Given 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 2008, we purchased and retired $17.0 million in face value of the Company’s senior notes.

We announced restructuring initiatives in the fourth quarter of 2007 and expect them to be substantially complete by December 31, 2008. We anticipate incurring total pre-tax charges of approximately $13.0 million to $15.0 million in 2008 for the restructuring.

There have been no material changes to the table of contractual obligations as disclosed in the Company’s 2007 Form 10-K.

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 2007 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 2007 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, 2007.

Inflation and International Presence

Given the current economic climate and recent increases in certain commodity prices, we believe that a continuation of such price increases would significantly affect our profitability. Furthermore, by operating internationally, we are affected by the economic conditions of certain countries.

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 automotive, medium- and heavy-duty, agricultural or off-highway vehicle production;
 
·
our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
 
·
a significant change in general economic conditions in any of the various countries in which we operate;
 
·
labor disruptions at our facilities or at any of our significant customers or suppliers;

29


 
·
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 2007 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

From time to time, we are exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At September 30, 2008, however, all of our debt was fixed rate debt. At this time, we do not intend to use financial instruments to manage this risk.

Commodity Price Risk

Given the current economic climate and the recent increases in certain commodity costs, we presently are experiencing an increased risk, particularly with respect to the purchase of copper, zinc, resins and certain other commodities. We manage this risk through a combination of fixed price agreements, staggered short-term contract maturities and commercial negotiations with our suppliers. We may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. The recent increases in certain commodity costs have negatively affected our operating results, and a continuation of such price increases could significantly affect our profitability.

In December 2007, we entered into a fixed price swap contract for 1.0 million pounds of copper, which will last through December 2008. In September 2008, we entered into a fixed price swap contract for 1.4 million pounds of copper, which will last from January 2009 to December 2009. The purpose of these contracts is to reduce our price risk as it relates to copper prices.

Going forward, we believe that our mitigation efforts will offset a substantial portion of the financial impact of these increased costs. However, no assurances can be given that the magnitude or duration of these increased costs will not have a material impact on our future operating results. A hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in commodity prices would not significantly affect our results of operations, financial position or cash flows.

Foreign Currency Exchange Risk

We have currency exposures related to buying, selling and financing in currencies other than the local currency in which we operate. In some instances, we choose to reduce our exposures through financial instruments that provide offsets or limits to our exposures. Currently, our most significant currency exposures relate to the British pound. We have used derivative financial instruments, including foreign currency forward and option contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures.

As discussed in Note 3 to our condensed consolidated financial statements, we have entered into foreign currency forward contracts related to our British pound exposures. The existing foreign currency forward contracts at September 30, 2008 and December 31, 2007 had a notional value of $8,239 and $8,551, respectively. The estimated net fair value of these contracts at September 30, 2008 and December 31, 2007, per quoted market sources, was approximately $760 and $(28), respectively.

We do not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries in which we operate. A hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted foreign currencies would not significantly affect our results of operations, financial position or cash flows.

30


Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
As of September 30, 2008, 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 September 30, 2008.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2008 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

31


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, 2007.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

32


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: November 7, 2008
/s/ John C. Corey
 
John C. Corey
President and Chief Executive Officer
 
(Principal Executive Officer)
   
Date: November 7, 2008
/s/ George E. Strickler
 
George E. Strickler
 
Executive Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial and Accounting Officer)

33


INDEX TO EXHIBITS

Exhibit
Number
 
 
Exhibit
     
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.

34