Unassociated Document

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

FORM 10-Q

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

For the quarter ended June 30, 2010

OR

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

For the transition period from________to ________

Commission file number: 001-13337

STONERIDGE, INC.
(Exact name of registrant as specified in its charter)

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

 
44484
(Address of principal executive offices)
 
(Zip Code)

(330) 856-2443

Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 July 23, 2010 was 25,968,765.

 
 

 
 
STONERIDGE, INC. AND SUBSIDIARIES
 
INDEX
 
   
Page No.
PART I–FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
   
 
Condensed Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009
 
2
 
Condensed Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2010 and 2009
 
3
 
Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2010 and 2009
 
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 
 
37
Item 4.
Controls and Procedures
 
38
       
PART II–OTHER INFORMATION
       
Item 1.
Legal Proceedings 
 
38
Item 1A.
Risk Factors
 
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 
 
38
Item 3.
Defaults Upon Senior Securities
 
38
Item 4.
(Removed and Reserved)
 
38
Item 5.
Other Information 
 
38
Item 6.
Exhibits 
 
38
       
Signatures
   
39
Index to Exhibits 
 
40
EX – 31.1
EX – 31.2
EX – 32.1
EX – 32.2
 
1

 
PART I–FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
             
Current Assets:
           
Cash and cash equivalents
  $ 74,608     $ 91,907  
Accounts receivable, less reserves of $1,363 and $2,350, respectively
    106,813       81,272  
Inventories, net
    47,061       40,244  
Prepaid expenses and other current assets
    20,434       17,247  
Total current assets
    248,916       230,670  
                 
Long-Term Assets:
               
Property, plant and equipment, net
    73,424       76,991  
Investments and other long-term assets, net
    55,553       54,864  
Total long-term assets
    128,977       131,855  
Total Assets
  $ 377,893     $ 362,525  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Accounts payable
  $ 63,471     $ 50,947  
Accrued expenses and other current liabilities
    40,977       36,827  
Total current liabilities
    104,448       87,774  
                 
Long-Term Liabilities:
               
Long-term debt
    183,290       183,431  
Other long-term liabilities
    10,485       17,263  
Total long-term liabilities
    193,775       200,694  
                 
Shareholders' Equity
               
Preferred Shares, without par value, authorized 5,000 shares, none issued
    -       -  
Common Shares, without par value, authorized 60,000 shares, issued 25,969 and
               
25,301 shares and outstanding 25,440 and 25,000 shares, respectively,
               
with no stated value
    -       -  
Additional paid-in capital
    160,100       158,748  
Common Shares held in treasury, 529 and 301 shares, respectively, at cost
    (411 )     (292 )
Accumulated deficit
    (85,861 )     (91,560 )
Accumulated other comprehensive income
    1,394       2,669  
Total Stoneridge Inc. and Subsidiaries shareholders' equity
    75,222       69,565  
Noncontrolling interest
    4,448       4,492  
Total shareholders' equity
    79,670       74,057  
Total Liabilities and Shareholders' Equity
  $ 377,893     $ 362,525  

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

 
2

 
 
STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net Sales
  $ 166,262     $ 102,290     $ 314,336     $ 223,375  
                                 
Costs and Expenses:
                               
Cost of goods sold
    126,642       88,694       241,189       190,504  
Selling, general and administrative
    31,447       27,889       61,015       55,924  
                                 
Operating Income (Loss)
    8,173       (14,293 )     12,132       (23,053 )
                                 
Interest expense, net
    5,630       5,538       11,236       11,035  
Equity in earnings of investees
    (1,611 )     (903 )     (2,302 )     (1,478 )
Other expense (income), net
    (749 )     639       (1,699 )     645  
                                 
Income (Loss) Before Income Taxes
    4,903       (19,567 )     4,897       (33,255 )
                                 
Provision (benefit) for income taxes
    731       197       (758 )     (1,911 )
                                 
Net Income (Loss)
    4,172       (19,764 )     5,655       (31,344 )
                                 
Net Loss Attributable to Noncontrolling Interest
    (21 )     -       (44 )     -  
                                 
Net Income (Loss) Attributable to Stoneridge, Inc.
                               
and Subsidiaries
  $ 4,193     $ (19,764 )   $ 5,699     $ (31,344 )
                                 
Basic net income (loss) per share
  $ 0.17     $ (0.84 )   $ 0.24     $ (1.33 )
Basic weighted average shares outstanding
    23,965       23,516       23,922       23,490  
                                 
Diluted net income (loss) per share
  $ 0.17     $ (0.84 )   $ 0.23     $ (1.33 )
Diluted weighted average shares outstanding
    24,389       23,516       24,351       23,490  

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

 
3

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

   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
OPERATING ACTIVITIES:
           
Net income (loss)
  $ 5,655     $ (31,344 )
Adjustments to reconcile net income (loss) to net cash
               
used for operating activities -
               
Depreciation
    9,623       10,267  
Amortization
    577       485  
Deferred income taxes
    (1,710 )     (2,282 )
Earnings of equity method investees
    (2,302 )     (1,478 )
(Gain) loss on sale of fixed assets
    (8 )     280  
Share-based compensation expense, net
    930       597  
Changes in operating assets and liabilities -
               
Accounts receivable, net
    (27,989 )     25,974  
Inventories, net
    (7,888 )     11,584  
Prepaid expenses and other
    (8,575 )     (3,384 )
Accounts payable
    13,651       (10,333 )
Accrued expenses and other
    10,603       (2,966 )
Net cash used for operating activities
    (7,433 )     (2,600 )
                 
INVESTING ACTIVITIES:
               
Capital expenditures
    (7,063 )     (6,743 )
Proceeds from sale of fixed assets
    21       92  
Net cash used for investing activities
    (7,042 )     (6,651 )
                 
FINANCING ACTIVITIES:
               
Share-based compensation activity, net
    294       -  
Revolving credit facility borrowings, net
    477       -  
Repayments of debt
    (141 )     -  
Net cash provided by financing activities
    630       -  
                 
Effect of exchange rate changes on cash and cash equivalents
    (3,454 )     2,040  
                 
Net change in cash and cash equivalents
    (17,299 )     (7,211 )
                 
Cash and cash equivalents at beginning of period
    91,907       92,692  
                 
Cash and cash equivalents at end of period
  $ 74,608     $ 85,481  

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 three and six months ended June 30, 2010 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, 2009.
 
(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 74% and 69% of the Company’s inventories at June 30, 2010 and December 31, 2009, respectively, and by the first-in, first-out method for all other inventories.  The Company adjusts its excess and obsolescence reserve at least on a quarterly basis.  Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period.  The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage.  Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period.  Inventory cost includes material, labor and overhead.  Inventories consist of the following at:
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Raw materials
  $ 31,995     $ 26,118  
Work-in-progress
    8,776       9,137  
Finished goods
    9,524       8,226  
Total inventories
    50,295       43,481  
Less: LIFO reserve
    (3,234 )     (3,237 )
Inventories, net
  $ 47,061     $ 40,244  

(3)  Fair Value of Financial Instruments

Financial Instruments

A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument.  The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments.  The estimated fair value of the Company’s senior notes (fixed rate debt) at June 30, 2010 and December 31, 2009, per quoted market sources, was $180.3 million.  The carrying value was $183.0 million as of June 30, 2010 and December 31, 2009.

 
5

 

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

Derivative Instruments and Hedging Activities

The Company currently has open foreign currency forward contracts and commodity swaps.  These contracts are used strictly for hedging and not for speculative purposes.  Management believes that its use of these instruments to reduce risk is in the Company’s best interest.  The counterparties to these financial instruments are financial institutions with strong credit ratings.

The Company conducts business internationally and therefore is exposed to foreign currency exchange risk.  The Company uses derivative financial instruments as cash flow hedges to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other foreign currency exposures.  The currencies currently hedged by the Company include the Euro, Swedish krona and Mexican peso.  In certain instances, the foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other expense (income), net.  The Company’s foreign currency forward contracts substantially offset gains and losses on the underlying foreign currency denominated transactions.  As of June 30, 2010, the Company held foreign currency forward contracts to reduce the exposure related to the Company’s Euro-denominated and Swedish krona-denominated intercompany receivables.  These contracts expire in October 2010.  During the six months ended June 30, 2010, the Company also held a foreign currency hedge contract to reduce the exposure related to the Company’s British pound-denominated intercompany receivables prior to their repayment.  This contract expired in January 2010.  For the six months ended June 30, 2010, the Company recognized a $4,019 gain related to the Euro, British pound and Swedish krona contracts in the condensed consolidated statement of operations as a component of other expense (income), net.  The Company also holds contracts intended to reduce exposure to the Mexican peso.  These contracts were executed to hedge forecasted transactions, and therefore the contracts are accounted for as cash flow hedges.  These Mexican peso-denominated foreign currency forward contracts expire monthly throughout 2010.  The effective portion of the unrealized gain or loss is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive income.  The Company’s expectation is that the cash flow hedges will be highly effective in the future.  The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company entered into a fixed price commodity swap with a financial institution to fix the cost of copper purchases.  In June 2010, the Company entered into a fixed price swap contract for 0.5 million pounds of copper, which covers the period from August 2010 to December 2010.  Because this contract was executed to hedge forecasted transactions, the contract is accounted for as a cash flow hedge.  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 this cash flow hedge to be highly effective.  The Company’s expectation is that the cash flow hedge will be highly effective in the future. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

 
6

 

STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
 
The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:

               
Prepaid expenses
 
    
Notional amounts1
   
and other current assets
 
    
June 30,
   
December 31,
   
June 30,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
Derivatives designated as hedging instruments:
                       
Forward currency contracts
  $ 20,422     $ 43,877     $ 1,557     $ 1,710  
Commodity contracts
    1,413       -       67       -  
      21,835       43,877       1,624       1,710  
                                 
Derivatives not designated as hedging instruments:
                               
Forward currency contracts
    27,016       8,363       2,278       34  
Total derivatives
  $ 48,851     $ 52,240     $ 3,902     $ 1,744  

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

Amounts recorded in other comprehensive income in shareholders’ equity and in net income for the three months ended June 30, 2010 were as follows:

   
Amount of gain
   
Amount of gain
    
    
(loss) recorded
   
reclassified from
 
Location of gain
    
in other
   
other comprehensive
 
reclassified from other
    
comprehensive
   
income into net
 
comprehensive income
    
income
   
income
 
into net income
Derivatives designated as cash flow hedges:
             
Forward currency contracts
  $ (939 )   $ 1,043  
Cost of goods sold
Commodity contracts
    67       -  
Cost of goods sold
    $ (872 )   $ 1,043    

Amounts recorded in other comprehensive income in shareholder’s equity and in net income for the six months ended June 30, 2010 were as follows:

   
Amount of gain 
recorded in other 
comprehensive 
income
   
Amount of gain 
reclassified from 
other comprehensive 
income into net 
income
 
Location of gain 
reclassified from other 
comprehensive income 
into net income
Derivatives designated as cash flow hedges:
             
Forward currency contracts
  $ 1,784     $ 1,937  
Cost of goods sold
Commodity contracts
    67       -  
Cost of goods sold
    $ 1,851     $ 1,937  
 

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

 
7

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

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

   
June 30, 2010
   
December 31,
 
          
Fair Value Estimated Using
   
2009
 
    
Fair Value
   
Level 1 inputs(1)
   
Level 2 inputs(2)
   
Fair Value
 
                         
Financial assets carried at fair value
                       
                         
Available for sale security
  $ 255     $ 255       -     $ 261  
Forward currency contracts
    3,835       -       3,835       1,744  
Commodity contracts
    67       -       67       -  
                                 
Total financial assets carried at fair value
  $ 4,157     $ 255     $ 3,902     $ 2,005  

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

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

(4)  Share-Based Compensation

Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $699 and $33 for the three months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010 and 2009, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $1,224 and $597, respectively.  Included within financing activities within the condensed consolidated statement of cash flows for the six months ended June 30, 2010 is $294 of excess tax benefit expense related to the vesting of restricted common shares.

 
8

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

(5)  Comprehensive Income (Loss)

The components of comprehensive income (loss) attributable to Stoneridge, Inc. and subsidiaries, net of tax are as follows:

   
Three Months Ended
   
Six Months Ended
 
    
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net income (loss)
  $ 4,172     $ (19,764 )   $ 5,655     $ (31,344 )
Other comprehensive income (loss):
                               
Currency translation adjustments
    (913 )     4,784       (6,274 )     1,894  
Pension liability adjustments
    -       (292 )     5,089       (250 )
Unrealized gain (loss) on marketable securities
    (1 )     35       (4 )     (19 )
Unrecognized gain (loss) on derivatives
    (1,915 )     2,936       (86 )     4,174  
Other comprehensive income (loss)
    (2,829 )     7,463       (1,275 )     5,799  
Consolidated comprehensive income (loss)
    1,343       (12,301 )     4,380       (25,545 )
Comprehensive loss attributable to noncontrolling interest
    21       -       44       -  
Comprehensive income (loss) attributable to Stoneridge, Inc. and subsidiaries
  $ 1,364     $ (12,301 )   $ 4,424     $ (25,545 )

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

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Currency translation adjustments
  $ (202 )   $ 6,072  
Pension liability adjustments
    -       (5,089 )
Unrealized loss on marketable securities
    (28 )     (24 )
Unrecognized gain on derivatives
    1,624       1,710  
Accumulated other comprehensive income
  $ 1,394     $ 2,669  

(6)  Long-Term Debt

Senior Notes

The Company had $183.0 million of senior notes outstanding at June 30, 2010 and December 31, 2009, respectively.  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 par until the maturity date.  Interest is payable on May 1 and November 1 of each year.  The senior notes do not contain restrictive financial performance covenants.  The Company was in compliance with all non-financial covenants at June 30, 2010 and December 31, 2009.

Credit Facility

On November 2, 2007, the Company entered into an asset-based credit facility (the “credit facility”), which permits borrowing up to a maximum level of $100.0 million.  At June 30, 2010 and December 31, 2009, there were no borrowings on this credit facility.   The available borrowing capacity on this credit facility is based on eligible current assets and outstanding letters of credit, as defined.  At June 30, 2010 and December 31, 2009, the Company had borrowing capacity of $71.8 million and $54.1 million, respectively, based on eligible current assets and outstanding letters of credit.  The credit facility does not contain financial performance covenants which would constrain our borrowing capacity. However, restrictions do include limits on capital expenditures, operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15.0 million minus certain guarantees and obligations.  The credit facility expires on November 1, 2011, and requires a commitment fee of 0.375% on the unused balance.  Interest is payable quarterly at either (i) the higher of the prime rate or the Federal Funds rate plus 0.50%, plus a margin of 0.00% to 0.25% or (ii) LIBOR plus a margin of 1.00% to 1.75%, depending upon the Company’s undrawn availability, as defined.  The Company was in compliance with all covenants at June 30, 2010 and December 31, 2009.

 
9

 
 
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
   
On October 13, 2009, the Company’s majority owned consolidated subsidiary, Bolton Conductive Systems, LLC (“BCS”) entered into a master revolving note (the “Revolver”), which permits borrowing up to a maximum level of $3.0 million.  At June 30, 2010 and December 31, 2009, BCS had $1,165 and $688 in borrowings outstanding on the Revolver, respectively, which are included on the condensed consolidated balance sheets as a component of accrued expenses and other.  The Revolver expires on October 1, 2010.  Interest is payable monthly at the prime referenced rate plus a 2.25% margin.  At June 30, 2010 and December 31, 2009, the interest rate on the Revolver was 5.5%.  The Company is a guarantor of BCS as it relates to the Revolver.

Other Debt

BCS has an installment note (“installment note”) and other notes payable for the purchase of various fixed assets (“fixed asset notes”).  Interest on the installment note is the prime referenced rate plus a 2.25% margin.  At June 30, 2010 and December 31, 2009, the interest rate on the installment note was 5.5%.  The installment note calls for monthly installment payments of principal and interest and matures in 2012.  The weighted average interest rate on the fixed asset notes was 6.6% at June 30, 2010 and December 31, 2009.  At June 30, 2010 and December 31, 2009, the principal amounts due on the installment and fixed asset notes were $411 and $152 and $483 and $221, respectively.

(7)  Net Income (Loss) Per Share

Basic net income (loss) per share was computed by dividing net income (loss) by the weighted-average number of Common Shares outstanding for each respective period.  Diluted net income per share was calculated by dividing net income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented.  For all periods in which the Company recognized a net loss the Company has recognized zero dilutive effect from securities as no anti-dilution is permitted.

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

   
Three Months Ended
   
Six Months Ended
 
    
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Basic weighted-average shares outstanding
    23,964,609       23,515,543       23,922,193       23,489,561  
Effect of dilutive securities
    424,635       -       429,004       -  
Diluted weighted-average shares outstanding
    24,389,244       23,515,543       24,351,197       23,489,561  

Options not included in the computation of diluted net income (loss) per share to purchase 115,250 and 183,250 Common Shares at an average price of $12.84 and $9.57, respectively, per share were outstanding at June 30, 2010 and 2009, respectively.  These outstanding options were not included in the computation of diluted net income (loss) per share because their respective exercise prices were greater than the average market price of Common Shares. These options were excluded from the computation of diluted earnings per share under the treasury stock method.

As of June 30, 2010, 455,400 performance-based restricted shares were outstanding.  These shares were not included in the computation of diluted net income per share because not all vesting conditions were achieved as of June 30, 2010.  These shares may or may not become dilutive based on the Company’s ability to meet or exceed future earnings performance targets.

 
10

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

On October 29, 2007, the Company announced restructuring initiatives to improve manufacturing efficiency and cost position by ceasing manufacturing operations at its Sarasota, Florida and Mitcheldean, United Kingdom locations.  During 2008, the Company began additional restructuring initiatives in its Canton, Massachusetts, Orebro, Sweden and Tallinn, Estonia locations.  In response to the depressed conditions in the North American and European commercial and automotive vehicle markets, the Company also began restructuring initiatives in its Juarez, Monclova and Chihuahua, Mexico, Orebro and Bromma, Sweden, Tallinn, Estonia, Dundee, Scotland, Lexington, Ohio and Canton, Massachusetts locations during 2009.  In addition, during 2009, as part of the Company’s continuing overall restructuring initiatives, the Company consolidated certain management positions at its Lexington, Ohio and Canton, Massachusetts facilities.   During the first half of 2010, the Company continued the restructuring initiative in Dundee, Scotland which began in 2009 and made an adjustment to certain assumptions related to our cancelled lease in Mitcheldean, United Kingdom.  This lease was cancelled as part of our 2008 restructuring initiative.  In connection with these initiatives, the Company recorded restructuring charges of $223 and $1,551 in the Company’s condensed consolidated statement of operations for the three months ended June 30, 2010 and 2009, respectively.  Restructuring charges for the six months ended June 30, 2010 and 2009 were $304 and $2,532, respectively. Restructuring expenses that were general and administrative in nature were included in the Company’s condensed consolidated statement of operations as part of selling, general and administrative, while the remaining restructuring related charges were included in cost of goods sold.

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

   
Severance
Costs
   
Contract
Termination
Costs
   
Other Exit
Costs
   
Total
 
                         
Total expected restructuring charges
  $ 5,718     $ 2,137     $ 2,504     $ 10,359  
                                 
2007 charge to expense
  $ 468     $ -     $ 103     $ 571  
Cash payments
    -       -       (103 )     (103 )
                                 
Accrued balance at December 31, 2007
    468       -       -       468  
                                 
2008 charge to expense
    2,830       1,305       2,401       6,536  
Cash payments
    (2,767 )     -       (2,221 )     (4,988 )
                                 
Accrued balance at December 31, 2008
    531       1,305       180       2,016  
                                 
2009 charge to expense
    2,237       374       -       2,611  
Foreign currency translation effect
    -       400       -       400  
Cash payments
    (2,641 )     (656 )     (180 )     (3,477 )
                                 
Accrued balance at December 31, 2009
    127       1,423       -       1,550  
                                 
First quarter 2010 charge to expense
    81       -       -       81  
Second quarter 2010 charge to expense
    102       121               223  
Foreign currency translation effect
    -       (63 )     -       (63 )
Cash payments
    (187 )     (251 )     -       (438 )
                                 
Accrued balance at June 30, 2010
  $ 123     $ 1,230     $ -     $ 1,353  
 
11

 
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
    
The expenses related to the restructuring initiatives that belong to the Control Devices reportable segment included the following:

   
Severance
Costs
   
Other Exit
Costs
   
Total
 
                   
Total expected restructuring charges
  $ 3,912     $ 6,447     $ 10,359  
                         
2007 charge to expense
  $ 357     $ 99     $ 456  
                         
Accrued balance at December 31, 2007
    357       99       456  
                         
2008 charge to expense
    2,521       6,325       8,846  
Cash payments
    (1,410 )     (6,024 )     (7,434 )
                         
Accrued balance at December 31, 2008
    1,468       400       1,868  
                         
2009 charge to expense
    1,034       23       1,057  
Cash payments
    (2,463 )     (164 )     (2,627 )
                         
Accrued Balance at December 31, 2009
    39       259       298  
                         
Cash payments
    (39 )     -       (39 )
                         
Accrued balance at June 30, 2010
  $ -     $ 259     $ 259  

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

(9)  Commitments and Contingencies

In the ordinary course of business, the Company is involved in various legal proceedings, workers’ compensation 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.

On October 13, 2009, the Company acquired 51% membership interest in BCS.  The purchase agreement provides that the Company may be required to make additional payments to the previous owners of BCS for its 51% membership interest based on BCS achieving financial performance targets as defined by the purchase agreement.  The maximum amount of additional payments to the prior owners of BCS is $3,200 per year in 2011, 2012 and 2013 and is contingent upon BCS achieving profitability targets based on earnings before interest, income taxes, depreciation and amortization in each of the years 2010, 2011 and 2012.  In addition, the Company may be required to make additional payments to BCS of approximately $450 in 2011 and $500 in 2012 based on BCS achieving annual revenue targets in 2010 and 2011, respectively.  The Company recorded $893, which represents the fair value of the estimated future additional payments to the prior owners of BCS as of the acquisition date, December 31, 2009 and June 30, 2010 on the condensed consolidated balance sheets as a component of other long-term liabilities.  The purchase agreement provides the Company with the option to purchase the remaining 49% interest in BCS in 2013 at a price determined in accordance with the purchase agreement.  If the Company does not exercise this option the minority owners of BCS have the option in 2014 to purchase the Company’s 51% interest in BCS at a price determined in accordance with the purchase agreement or to jointly market BCS for sale.  

 
12

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

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

The following provides a reconciliation of changes in product warranty and recall liability for the six months ended June 30, 2010 and 2009:

   
2010
   
2009
 
Product warranty and recall at beginning of period
  $ 4,764     $ 5,527  
Accruals for products shipped during period
    1,153       293  
Aggregate changes in pre-existing liabilities due to claim developments
    652       463  
Settlements made during the period (in cash or in kind)
    (2,179 )     (2,179 )
Product warranty and recall at end of period
  $ 4,390     $ 4,104  

(10)  Employee Benefit Plans

The Company had a single defined benefit pension plan that covered certain former employees in the United Kingdom.  As a result of placing Stoneridge Pollak Limited (“SPL”) into administration during the six months ended June 30, 2010, as described in Note 12, the Company settled the defined benefit pension plan.  The components of net periodic cost under the defined benefit pension plan are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ -     $ 14     $ -     $ 28  
Interest cost
    -       219       163       438  
Expected return on plan assets
    -       (165 )     (126 )     (330 )
Amortization of actuarial loss
    -       43       62       86  
Settlement loss
    -       -       33       -  
Net periodic cost
  $ -     $ 111     $ 132     $ 222  

The Company made contributions of approximately $16 during the six months ended June 30, 2010, prior to placing SPL into administration.

In March 2009, the Company adopted the Stoneridge, Inc. Long-Term Cash Incentive Plan (“LTCIP”) and granted awards to certain officers and key employees.  Awards under the LTCIP provide recipients with the right to receive cash three years from the date of grant depending on the Company’s actual earnings per share performance for a performance period comprised of three fiscal years from the date of grant.  The Company will record an accrual for an award to be paid in the period earned based on anticipated achievement of the performance goal.  If the participant voluntarily terminates employment or is discharged for cause, as defined in the LTCIP, the award will be forfeited.  In May 2009, the LTCIP was approved by the Company’s shareholders.  The Company has not recorded an accrual for the awards granted under the LTCIP at June 30, 2010 as the achievement of the performance goals are not considered probable at this time.
 
 
13

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

The Company recognized a provision for income taxes of $731, or 14.9% of pre-tax income, and $197, or (1.0)% of pretax loss, for federal, state and foreign income taxes for the three months ended June 30, 2010 and 2009, respectively.  The Company recognized a benefit from income taxes of $758, or (15.5%) of pre-tax income, and $1,911, or 5.7% of pre-tax loss, for federal, state and foreign income taxes for the six months ended June 30, 2010 and 2009, respectively. As reported at December 31, 2009, the Company is in a cumulative loss position and provides a valuation allowance offsetting federal, state and certain foreign deferred tax assets.  The increase in tax expense for the three months ended June 30, 2010 as well as the decrease in the tax benefit for the six months ended June 30, 2010 compared to those same periods for 2009, was primarily attributable to lower losses from the foreign operations and the resulting decrease in tax benefits related to losses in those foreign jurisdictions. That reduction in benefit was partially offset with a tax benefit related to our United Kingdom operations.  As a result of placing SPL into administration, as described in Note 12, the Company recognized a tax benefit of approximately $1,170 during the six months ended June 30, 2010, from the reversal of deferred tax liabilities, primarily employee benefit related, that were previously included as a component of accumulated other comprehensive income within Shareholders’ Equity.

(12)  SPL Administration

On February 23, 2010, the Company placed its wholly-owned subsidiary, SPL into administration (a structured bankruptcy) in the United Kingdom.  The Company had previously ceased manufacturing operations at the facility as of December 2008 as part of the restructuring initiatives announced on October 29, 2007, as described in Note 8.  All SPL customer contracts were transferred to other subsidiaries of the Company at the time that SPL filed for administration.  As a result of placing SPL into administration the Company recognized a net gain of approximately $3,423 during the six months ended June 30, 2010.  This gain was primarily related to the reversal of the cumulative translation adjustment account (“CTA”) and deferred tax liabilities, which had previously been included as a component of accumulated other comprehensive income within Shareholders’ Equity.  The net gain of approximately $2,253, primarily due to reversing the CTA balance, is included as a component of other expense (income), net on the condensed consolidated statement of operations.  The benefit from reversing the deferred tax liabilities, primarily employee benefit related of approximately $1,170, is included as a component of provision (benefit) from income taxes on the condensed consolidated statement of operations, as described in Note 11.

(13)  Segment Reporting

Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance.  The Company’s chief operating decision maker is the president and chief executive officer.

The Company has two reportable segments: Electronics and Control Devices.  The Company’s operating segments are aggregated based on sharing similar economic characteristics.  Other aggregation factors include the nature of the products offered and management and oversight responsibilities.   The Electronics reportable segment produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution.  The Control Devices reportable segment produces electronic and electromechanical switches and control actuation devices and sensors.

The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s December 31, 2009 Form 10-K.  The Company’s management evaluates the performance of its reportable segments based primarily on net sales from external customers, capital expenditures and income (loss) before income taxes.  Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

 
14

 
 
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
      
A summary of financial information by reportable segment is as follows:

    
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net Sales
                       
Electronics
  $ 104,927     $ 65,894     $ 196,565     $ 148,665  
Inter-Segment sales
    3,353       1,939       6,464       3,797  
Electronics net sales
    108,280       67,833       203,029       152,462  
                                 
Control Devices
    61,335       36,396       117,771       74,710  
Inter-Segment sales
    936       676       1,784       1,385  
Control Devices net sales
    62,271       37,072       119,555       76,095  
                                 
Eliminations
    (4,289 )     (2,615 )     (8,248 )     (5,182 )
Total consolidated net sales
  $ 166,262     $ 102,290     $ 314,336     $ 223,375  
                                 
Income (Loss) Before Income Taxes
                               
Electronics (A)
  $ 4,404     $ (8,954 )   $ 38,753     $ (11,160 )
Control Devices (A)
    5,130       (5,408 )     8,286       (12,428 )
Other corporate activities (A)
    617       301       (31,733 )     1,316  
Corporate interest expense
    (5,248 )     (5,506 )     (10,409 )     (10,983 )
Total consolidated income (loss) before income taxes
  $ 4,903     $ (19,567 )   $ 4,897     $ (33,255 )
                                 
Depreciation and Amortization
                               
Electronics
  $ 2,283     $ 2,313     $ 4,525     $ 4,525  
Control Devices
    2,561       2,829       5,026       5,618  
Other corporate activities
    85       64       172       124  
Total consolidated depreciation and amortization (B)
  $ 4,929     $ 5,206     $ 9,723     $ 10,267  

 
(A)
During the six months ended June 30, 2010, the Company placed SPL into administration.  As a result of placing SPL into administration the Company recognized a gain within the Electronics reportable segment of $35,512 and losses within other corporate activities and within the Control Devices reportable segment of approximately $32,039 and $473, respectively.  These results were primarily due to eliminating SPL’s intercompany debt and equity structure.
 
 
(B)
These amounts represent depreciation and amortization on fixed and certain intangible assets.

 
15

 
 
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
    
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Interest Expense (Income), net
                       
Electronics
  $ 376     $ 33     $ 821     $ 54  
Control Devices
    6       (1 )     6       (2 )
Corporate activities
    5,248       5,506       10,409       10,983  
Total consolidated interest expense, net
  $ 5,630     $ 5,538     $ 11,236     $ 11,035  
                                 
Capital Expenditures
                               
Electronics
  $ 2,323     $ 904     $ 4,786     $ 2,414  
Control Devices
    1,040       1,741       2,324       3,676  
Corporate activities
    81       153       (47 )     653  
Total consolidated capital expenditures
  $ 3,444     $ 2,798     $ 7,063     $ 6,743  

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Total Assets
           
Electronics
  $ 188,666     $ 163,414  
Control Devices
    95,885       91,631  
Corporate (C)
    212,957       236,110  
Eliminations
    (119,615 )     (128,630 )
Total consolidated assets
  $ 377,893     $ 362,525  

 (C)  Assets located at Corporate consist primarily of cash and equity investments.

The following table presents net sales and non-current assets for each of the geographic areas in which the Company operates:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net Sales
                       
North America
  $ 135,749     $ 83,075     $ 256,492     $ 182,305  
Europe and Other
    30,513       19,215       57,844       41,070  
Total consolidated net sales
  $ 166,262     $ 102,290     $ 314,336     $ 223,375  

   
June 30,
   
December 31,
 
   
2010
   
2009
 
Non-Current Assets
           
North America
  $ 118,382     $ 121,149  
Europe and Other
    10,595       10,706  
Total non-current assets
  $ 128,977     $ 131,855  
 
 
16

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

In June 2009, the Financial Accounting Standards Board (“FASB”) revised the authoritative guidance for determining the primary beneficiary of a variable interest entity (“VIE”).  In December 2009, the FASB issued Accounting Standards Update No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which provides amendments to Accounting Standards Codification Topic No. 810, Consolidation (“ASC 810”) to reflect the revised guidance.  Among other things, the new guidance requires a qualitative rather than a quantitative assessment to determine the primary beneficiary of a VIE based on whether the entity (1) has the power to direct matters that most significantly impact the activities of the VIE and (2) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. In addition, the amended guidance requires an ongoing reconsideration of the primary beneficiary. The provisions of this new guidance were effective as of January 1, 2010, and the adoption did not have an impact on the Company’s financial statements.  The Company analyzed its joint ventures in accordance with ASC 810 to determine whether they are VIE’s and, if so, whether the Company is the primary beneficiary.  Both of the Company’s joint ventures at June 30, 2010 were determined under the provisions of ASC 810 to be unconsolidated joint ventures and were accounted for under the equity method of accounting.

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 $36,869 and $35,824 at June 30, 2010 and December 31, 2009, respectively.

Condensed financial information for PST is as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues
  $ 40,812     $ 30,588     $ 74,122     $ 51,988  
Cost of sales
  $ 21,552     $ 15,947     $ 39,166     $ 26,998  
                                 
Total pre-tax income
  $ 3,426     $ 2,046     $ 4,623     $ 3,306  
The Company's share of pre-tax income
  $ 1,713     $ 1,023     $ 2,312     $ 1,653  

Equity in earnings of PST included in the condensed consolidated statements of operations was $1,350 and $785 for the three months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010 and 2009, equity in earnings of PST was $1,833 and $1,388, 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 Company’s investment in Minda was $5,678 and $5,220 at June 30, 2010 and December 31, 2009, respectively.  Equity in earnings of Minda included in the condensed consolidated statements of operations was $261 and $118, for the three months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010 and 2009, equity in earnings of Minda was $469 and $90, respectively.

 
17

 
 
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
  
(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 and non-wholly owned domestic subsidiaries do not guarantee the senior notes (Non-Guarantor Subsidiaries).

Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, as of June 30, 2010 and December 31, 2009 and for each of the three and six months ended June 30, 2010 and 2009.

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

 
18

 
 
STONERIDGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data, unless otherwise indicated)
  
   
June 30, 2010
 
   
Parent
   
Guarantor
Subsidiaries
   
Non-
Guarantor
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
ASSETS
                             
                               
Current Assets:
                             
Cash and cash equivalents
  $ 42,085     $ 20     $ 32,503     $ -     $ 74,608  
Accounts receivable, net
    57,617       22,323       26,873       -       106,813  
Inventories, net
    26,458       8,163       12,440       -       47,061  
Prepaid expenses and other current assets
    (306,326 )     314,775       11,985       -       20,434  
Total current assets.
    (180,166 )     345,281       83,801       -       248,916