Edgar Filing: STONERIDGE INC

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, 2008

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

For the transition period from________to ________

Commission file number: 001-13337

STONERIDGE, INC.

(Exact name of registrant as specified in its charter)

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

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

	(330) 856-2443
Registrant’s telephone number, including area code

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

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

Large accelerated filer o	Accelerated filer 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 25, 2008 was 24,668,595.

STONERIDGE, INC. AND SUBSIDIARIES

INDEX
PART I-FINANCIAL INFORMATION		Page No.

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2008 and December 31, 2007		2
	Condensed Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2008 and June 30, 2007		3
	Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2008 and June 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

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands)

	June 30,			December 31,
	2008			2007
ASSETS

Current Assets:
Cash and cash equivalents	$	81,342		$	95,924
Accounts receivable, less reserves of $5,587 and $4,736, respectively		142,472			122,288
Inventories, net		70,175			57,392
Prepaid expenses and other		17,365			15,926
Deferred income taxes		9,963			9,829
Total current assets		321,317			301,359

Long-Term Assets:
Property, plant and equipment, net		90,611			92,752
Other Assets:
Goodwill		65,730			65,176
Investments and other, net		47,962			39,454
Deferred income taxes		20,774			29,028
Total long-term assets		225,077			226,410
Total Assets	$	546,394		$	527,769

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	76,809		$	69,373
Accrued expenses and other		56,104			47,198
Total current liabilities		132,913			116,571

Long-Term Liabilities:
Long-term debt		183,000			200,000
Deferred income taxes		2,909			2,665
Other liabilities		2,168			2,344
Total long-term liabilities		188,077			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 24,755 and 24,601
shares and outstanding 24,660 and 24,209 shares, respectively, with no stated value		-			-
Additional paid-in capital		156,467			154,173
Common Shares held in treasury, 95 and 373 shares, respectively, at cost		(129	)		(383	)
Retained earnings		49,603			38,372
Accumulated other comprehensive income		19,463			14,027
Total shareholders’ equity		225,404			206,189
Total Liabilities and Shareholders' Equity	$	546,394		$	527,769

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

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Net Sales	$	213,229		$	183,802		$	416,299		$	368,830

Costs and Expenses:
Cost of goods sold		163,875			144,920			315,128			287,101
Selling, general and administrative		36,731			33,598			73,021			66,730
(Gain) Loss on sale of property, plant and equipment, net		153			(1,653	)		145			(1,688	)
Restructuring charges		1,713			31			3,135			72

Operating Income		10,757			6,906			24,870			16,615

Interest expense, net		4,880			5,619			10,252			11,103
Equity in earnings of investees		(3,016	)		(2,298	)		(6,835	)		(4,418	)
Loss on early extinguishment of debt		271			-			770			-
Other expense (income), net		(124	)		224			278			512

Income Before Income Taxes		8,746			3,361			20,405			9,418

Provision for income taxes		4,062			666			9,174			1,853

Net Income	$	4,684		$	2,695		$	11,231		$	7,565

Basic net income per share	$	0.20		$	0.12		$	0.48		$	0.33
Basic weighted average shares outstanding		23,286			23,114			23,327			23,052

Diluted net income per share	$	0.20		$	0.11		$	0.47		$	0.32
Diluted weighted average shares outstanding		23,690			23,702			23,722			23,603

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

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended
	June 30,
	2008			2007
OPERATING ACTIVITIES:
Net income	$	11,231		$	7,565
Adjustments to reconcile net income to net cash provided by (used for)
operating activities -
Depreciation		14,316			14,513
Amortization		784			799
Deferred income taxes		7,281			(325	)
Equity in earnings of investees		(6,835	)		(4,418	)
(Gain) Loss on sale of property, plant and equipment		145			(1,688	)
Share-based compensation expense		1,903			1,252
Changes in operating assets and liabilities -
Accounts receivable, net		(17,924	)		(6,506	)
Inventories, net		(11,739	)		1,538
Prepaid expenses and other		(625	)		(3,916	)
Accounts payable		6,081			(6,112	)
Accrued expenses and other		7,956			1,317
Net cash provided by operating activities		12,574			4,019

INVESTING ACTIVITIES:
Capital expenditures		(11,641	)		(10,814	)
Proceeds from sale of property, plant and equipment		307			4,951
Business acquisitions and other		(980	)		-
Net cash used for investing activities		(12,314	)		(5,863	)

FINANCING ACTIVITIES:
Repayments of long-term debt		(17,000	)		-
Share-based compensation activity, net		1,162			1,796
Premiums related to early extinguishment of debt		(553	)		-
Net cash provided by (used for) financing activities		(16,391	)		1,796

Effect of exchange rate changes on cash and cash equivalents		1,549			232

Net change in cash and cash equivalents		(14,582	)		184

Cash and cash equivalents at beginning of period		95,924			65,882

Cash and cash equivalents at end of period	$	81,342		$	66,066

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the Commission’s rules and regulations. The results of operations for the six months ended June 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 62% and 66% of the Company’s inventories at June 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:

	June 30,			December 31,
	2008			2007

Raw materials	$	39,138		$	36,678
Work-in-progress		10,605			9,065
Finished goods		22,857			13,700
Total inventories		72,600			59,443
Less: LIFO reserve		(2,425	)		(2,051	)
Inventories, net	$	70,175		$	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 June 30, 2008 and December 31, 2007, per quoted market sources, was $186.7 million and $199.2 million, respectively. The carrying value was $183.0 million and $200.0 million as of June 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. Derivatives 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 to reduce risk is in the Company’s best interest.

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 financial instruments, including foreign currency forward contracts, to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currency hedged by the Company is the British pound. In certain instances, the foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other income. The Company’s foreign currency forward contracts substantially offset gains and losses on the underlying foreign currency denominated transactions.

The Company’s foreign currency forward contracts had a notional value of $8,239 and $8,551 at June 30, 2008 and December 31, 2007, respectively. As of June 30, 2008, the purpose of the foreign currency forward contracts is to reduce the risk of exposure related to the Company’s British pound-denominated receivables. At December 31, 2007, the Company also used forward currency contracts to reduce the risk of exposure related to the Company’s Mexican peso- and Swedish krona-denominated receivables. The estimated fair value of the existing contracts at June 30, 2008 and December 31, 2007, per quoted market sources, was approximately $124 and $(28), respectively. For the six months ended June 30, 2008, the Company recognized a $30 loss 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 risk of exposures 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. We entered into fixed price swap contracts for 480 and 420 metric tonnes of copper in December 2006 and January 2007, respectively. These contracts fixed the cost of copper purchases in 2007 and expired on December 31, 2007. In December 2007, we entered into a fixed price swap contract for 1.0 million pounds of copper, which will last through December 2008. 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 fair value of the fixed price commodity swap contract, per quoted market sources, was approximately $486 and $57 at June 30, 2008 and December 31, 2007, respectively. For the six months ended June 30, 2008, the Company recognized a $382 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, we will defer the adoption of SFAS 157 for our nonfinancial assets and nonfinancial liabilities until January 1, 2009 which is not expected to have a material impact on the Company’s financial statements.

The following table presents our assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. As of June 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 June 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	$	249	$	249	$	-	$	-
Derivatives		610		-		610		-
Total	$	859	$	249	$	610	$	-

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 swaps 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 $822 and $665 for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $1,903 and $1,252, 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, net of tax are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Net income	$	4,684		$	2,695		$	11,231		$	7,565
Other comprehensive income:
Currency translation adjustments		1,294			1,533			5,110			1,982
Pension and postretirement liability adjustments		(1	)		(28	)		(10	)		(36	)
Unrealized gain (loss) on marketable securities		5			10			(12	)		61
Unrecognized gain (loss) on derivatives		(170	)		629			348			1,101
Total other comprehensive income		1,128			2,144			5,436			3,108
Comprehensive income	$	5,812		$	4,839		$	16,667		$	10,673

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

	June 30,			December 31,
	2008			2007

Foreign currency translation adjustments	$	19,622		$	14,512
Pension and postretirement liability adjustments		(438	)		(428	)
Unrealized loss on marketable securities		(32	)		(20	)
Unrecognized gain (loss) on derivatives		311			(37	)
Accumulated other comprehensive income	$	19,463		$	14,027

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(6) Long-Term Debt

Senior Notes

The Company had $183.0 million and $200.0 million of senior notes outstanding at June 30, 2008 and December 31, 2007, respectively. During the first half of 2008, the Company repurchased and retired $17.0 million in face value of the senior notes. The outstanding senior notes bear interest at an annual rate of 11.50% and mature on May 1, 2012. The senior notes are redeemable, at the Company’s option, at 103.833 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.

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 June 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 June 30, 2008, the Company had borrowing capacity of $90.9 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, and requires a commitment fee of 0.25% on the unused balance. Interest is payable quarterly at either (i) the higher of the prime rate or the Federal Funds rate plus 0.50%, plus a margin of 0.00% to 0.25% or (ii) LIBOR plus a margin of 1.00% to 1.75%, depending upon the Company’s undrawn availability, as defined.

(7) Net Income Per Share

Basic net income per share was computed by dividing net income by the weighted-average number of Common Shares outstanding for each respective period. Diluted net income per share was calculated by dividing net income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007

Basic weighted-average shares outstanding		23,285,848		23,113,827		23,327,024		23,051,721
Effect of dilutive securities		403,988		588,522		394,793		551,096
Diluted weighted-average shares outstanding		23,689,836		23,702,349		23,721,817		23,602,817

For the three months ended June 30, 2008 and 2007, options to purchase 50,000 and 234,000 Common Shares at an average price of $15.73 and $16.71, respectively, were not included in the computation of diluted net income per share because their respective exercise prices were greater than the average market price of Common Shares and, therefore, their effect would have been anti-dilutive. Share options not included in the computation of diluted net income per share to purchase 61,000 and 260,000 Common Shares at an average price of $15.22 and $16.20, respectively, were outstanding during the six months ended June 30, 2008 and 2007, respectively.

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(8) Restructuring

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

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. These rationalizations are part of the Company’s cost reduction initiatives. In connection with these initiatives, the Company recorded restructuring charges of $3,657 for the three months ended June 30, 2008. Restructuring charges for the six months ended June 30, 2008 were $6,177. 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 charges related to the restructuring initiatives announced on October 29, 2007 that belong to the Electronics reportable segment included the following:

	Severance Costs		Contract Termination Costs		Other Associated Costs			Total

Total expected restructuring charges	$	3,454	$	978	$	5,385		$	9,817

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
Cash Payments		-		-		(1,307	)		(1,307	)
Accrued balance at June 30, 2008	$	2,160	$	-	$	129		$	2,289

Remaining expected restructuring charge	$	1,294	$	978	$	3,846		$	6,118

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

	Severance Costs			Fixed-Asset Costs		Other Associated Costs			Total (A)

Total expected restructuring charges	$	1,857		$	296	$	4,483		$	6,636

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
Cash Payments		(12	)		-		(2,218	)		(2,230	)
Accrued balance at June 30, 2008	$	1,085		$	-	$	190		$	1,275

Remaining expected restructuring charge	$	760		$	296	$	2,075		$	3,131

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

All restructuring charges, 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 expense, increased inventory carrying cost and miscellaneous expenditures associated with exiting business activities. No fixed-asset impairment charges were incurred because assets are being transferred to other locations for continued production.

(9) Commitments and Contingencies

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

Product Warranty and Recall

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

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

	2008			2007

Product warranty and recall at beginning of period	$	5,306		$	5,825
Accruals for products shipped during period		3,417			1,228
Aggregate changes in pre-existing liabilities due to claims developments		745			847
Settlements made during the period (in cash or in kind)		(2,157	)		(2,069	)
Product warranty and recall at end of period	$	7,311		$	5,831

(10) Employee Benefit Plans

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

	Defined Benefit Pension Plan
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Service cost	$	35		$	43		$	70		$	85
Interest cost		316			514			632			1,021
Expected return on plan assets		(361	)		(574	)		(722	)		(1,140	)
Amortization of actuarial loss		-			111			-			221
Net periodic (benefit) cost	$	(10	)	$	94		$	(20	)	$	187

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 $130 have been made to the defined benefit pension plan as of June 30, 2008.

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 $4,062, or 46.4% of pre-tax income, and $666, or 19.8% of pre-tax income, for federal, state and foreign income taxes for the three months ended June 30, 2008 and 2007, respectively. The Company recognized a provision for income taxes of $9,174, or 45.0% of pre-tax income, and $1,853, or 19.7% of pre-tax income, for federal, state and foreign income taxes for the six months ended June 30, 2008 and 2007, respectively. The increase in the effective tax rate for both the three and six months ended June 30, 2008 compared to similar periods in 2007 were 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.

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 June 30, 2008 the Company has classified $1,412 as a current liability and $3,412 as a reduction to non-current deferred income tax assets. The liability for unrecognized tax positions decreased by $143 for the second quarter ended June 30, 2008 and decreased by $148 for the six months ended June 30, 2008 resulting in a balance at June 30, 2008 of $4,470. 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 $226 to $614 within the next 12 months.

If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, approximately $4,313 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 six months ended June 30, 2008 and 2007, the Company recognized approximately $10 and $(43) of gross interest and penalties, respectively. The Company has accrued approximately $682 and $672 for the payment of interest and penalties at June 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 important 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 second half 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.

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(12) Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). This standard improves reporting by creating greater consistency in the accounting and financial reporting of business combinations. Additionally, SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141(R) 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.

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 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.

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. During the third quarter of 2007, a European business unit in the Control Devices reportable segment experienced a change in future business prospects due to the loss of a significant customer contract. As a result, the Company announced that it would cease manufacturing at this location and transfer remaining production to a business unit in the Electronics reportable segment. In addition, management and oversight responsibilities for this business were realigned to the Electronics reportable segment. Because the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change, the corresponding information for prior periods has been reclassified to conform to the current year reportable segment presentation.

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						Six Months Ended
	June 30,						June 30,
Net Sales	2008			2007			2008			2007
Electronics	$	149,416		$	107,911		$	282,632		$	218,476
Inter-segment sales		4,004			4,748			7,747			9,333
Electronics net sales		153,420			112,659			290,379			227,809

Control Devices		63,813			75,891			133,667			150,354
Inter-segment sales		1,284			1,117			2,604			2,483
Control Devices net sales		65,097			77,008			136,271			152,837

Eliminations		(5,288	)		(5,865	)		(10,351	)		(11,816	)
Total consolidated net sales	$	213,229		$	183,802		$	416,299		$	368,830

Income Before Income Taxes
Electronics	$	12,984		$	988		$	25,975		$	6,141
Control Devices		(985	)		6,405			1,091			10,887
Other corporate activities		1,739			1,573			3,646			3,521
Corporate interest expense, net		(4,992	)		(5,605	)		(10,307	)		(11,131	)
Total consolidated income before income taxes	$	8,746		$	3,361		$	20,405		$	9,418

Depreciation and Amortization
Electronics	$	3,406	$	3,596	$	6,922		$	6,764
Control Devices		3,672		3,716		7,501			7,683
Corporate activities		1		88		(5	)		173
Total consolidated depreciation and amortization(A)	$	7,079	$	7,400	$	14,418		$	14,620

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

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,
Interest Expense (Income)	2008			2007		2008			2007
Electronics	$	(110	)	$	14	$	(53	)	$	(27	)
Control Devices		(2	)		-		(2	)		(1	)
Corporate activities		4,992			5,605		10,307			11,131
Total consolidated interest expense, net	$	4,880		$	5,619	$	10,252		$	11,103

Capital Expenditures
Electronics	$	2,973		$	1,657		$	4,744		$	4,994
Control Devices		3,238			2,606			6,932			5,410
Corporate activities		(83	)		(256	)		(35	)		410
Total consolidated capital expenditures	$	6,128		$	4,007		$	11,641		$	10,814

	June 30,			December 31,
Total Assets	2008			2007
Electronics	$	245,434		$	214,119
Control Devices		183,898			180,785
Corporate(B)		275,547			282,695
Eliminations		(158,485	)		(149,830	)
Total consolidated assets	$	546,394		$	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				Six Months Ended
	June 30,				June 30,
Net Sales	2008		2007		2008		2007
North America	$	156,101	$	132,449	$	303,299	$	266,510
Europe and other		57,128		51,353		113,000		102,320
Total consolidated net sales	$	213,229	$	183,802	$	416,299	$	368,830

	June 30,		December 31,
Non-Current Assets	2008		2007
North America	$	202,993	$	204,556
Europe and other		22,084		21,854
Total consolidated non-current assets	$	225,077	$	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 $38,620 and $29,663 at June 30, 2008 and December 31, 2007, respectively.

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Condensed financial information for PST is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007

Revenues	$	46,446	$	31,279	$	90,392	$	58,630
Cost of sales	$	21,921	$	14,683	$	42,969	$	27,506

Total pre-tax income	$	7,036	$	5,040	$	15,799	$	10,365
The Company's share of pre-tax income	$	3,518	$	2,520	$	7,900	$	5,183

Equity in earnings of PST included in the condensed consolidated statements of operations were $2,848 and $2,141 for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, equity in earnings of PST were $6,442 and $4,156, 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 $4,879 and $4,547 at June 30, 2008 and December 31, 2007, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations were $168 and $157, for the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, equity in earnings of Minda were $393 and $262, respectively.

(15) Guarantor Financial Information

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

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	June 30, 2008
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated

ASSETS

Current Assets:
Cash and cash equivalents	$	33,942		$	45		$	47,355		$	-		$	81,342
Accounts receivable, net		75,247			25,784			41,441			-			142,472
Inventories, net		31,994			11,180			27,001			-			70,175
Prepaid expenses and other		(299,418	)		303,945			12,838			-			17,365
Deferred income taxes		3,339			4,339			2,285			-			9,963
Total current assets		(154,896	)		345,293			130,920			-			321,317

Long-Term Assets:
Property, plant and equipment, net		48,687			24,674			17,250			-			90,611
Other Assets:
Goodwill		44,584			20,591			555			-			65,730
Investments and other, net		47,192			303			467			-			47,962
Deferred income taxes		24,809			(2,753	)		(1,282	)		-			20,774
Investment in subsidiaries		448,119			-			-			(448,119	)		-
Total long-term assets		613,391			42,815			16,990			(448,119	)		225,077
Total Assets	$	458,495		$	388,108		$	147,910		$	(448,119	)	$	546,394

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	30,369		$	19,704		$	26,736		$	-		$	76,809
Accrued expenses and other		19,151			10,644			26,309			-			56,104
Total current liabilities		49,520			30,348			53,045			-			132,913

Long-Term Liabilities:
Long-term debt		183,000			-			-			-			183,000
Deferred income taxes		-			-			2,909			-			2,909
Other liabilities		571			393			1,204			-			2,168
Total long-term liabilities		183,571			393			4,113			-			188,077

Shareholders' Equity		225,404			357,367			90,752			(448,119	)		225,404

Total Liabilities and Shareholders’ Equity	$	458,495		$	388,108		$	147,910		$	(448,119	)	$	546,394

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Supplemental condensed consolidating financial statements (continued):

	For the Three Months Ended June 30, 2008
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net Sales	$	113,800		$	53,800	$	73,534		$	(27,905	)	$	213,229

Costs and Expenses:
Cost of goods sold		92,680			43,041		55,318			(27,164	)		163,875
Selling, general and administrative		13,809			7,910		15,753			(741	)		36,731
Loss on sale of property, plant
and equipment, net		88			23		42			-			153
Restructuring charges		884			-		829			-			1,713

Operating Income		6,339			2,826		1,592			-			10,757

Interest expense (income), net		5,183			-		(303	)		-			4,880
Other income, net		(2,744	)		-		(125	)		-			(2,869	)
Equity earnings from subsidiaries		(4,341	)		-		-			4,341			-

Income Before Income Taxes		8,241			2,826		2,020			(4,341	)		8,746

Provision for income taxes		3,557			19		486			-			4,062

Net Income	$	4,684		$	2,807	$	1,534		$	(4,341	)	$	4,684

	For the Three Months Ended June 30, 2007
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated

Net Sales	$	85,017		$	54,528		$	65,096		$	(20,839	)	$	183,802

Costs and Expenses:
Cost of goods sold		69,086			46,281			49,642			(20,089	)		144,920
Selling, general and administrative		14,025			7,640			12,683			(750	)		33,598
Gain on sale of property, plant
and equipment, net		(304	)		(1,349	)		-			-			(1,653	)
Restructuring charges		31			-			-			-			31

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

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

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

Provision for income taxes		522			3			141			-			666

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Supplemental condensed consolidating financial statements (continued):

For the Six Months Ended June 30, 2008

Parent

Guarantor Subsidiaries