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 September 30, 2009

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

For the transition period from________to ________

Commission file number: 001-13337

STONERIDGE, INC.

(Exact name of registrant as specified in its charter)

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

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

(330) 856-2443

Registrant’s telephone number, including area code

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

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

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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

The number of Common Shares, without par value, outstanding as of October 23, 2009 was 25,294,335.

STONERIDGE, INC. AND SUBSIDIARIES

INDEX
		Page No.
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008	2
	Condensed Consolidated Statements of Operations (Unaudited) For the Three and Nine Months Ended September 30, 2009 and 2008	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2009 and 2008	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II–OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Submission of Matters to a Vote of Security Holders	36
Item 5.	Other Information	36
Item 6.	Exhibits	36

Signatures		37
Index to Exhibits		38
EX – 31.1
EX – 31.2
EX – 32.1
EX – 32.2

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30,		December 31,
	2009		2008
	(Unaudited)
ASSETS

Current Assets:
Cash and cash equivalents	$	84,442	$	92,692
Accounts receivable, less reserves of $3,492 and $4,204, respectively		86,245		96,535
Inventories, net		37,541		54,800
Prepaid expenses and other		16,789		9,069
Deferred income taxes		1,868		1,495
Total current assets		226,885		254,591

Long-Term Assets:
Property, plant and equipment, net		77,941		87,701
Other Assets:
Investments and other, net		48,575		40,145
Total long-term assets		126,516		127,846
Total Assets	$	353,401	$	382,437

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	44,104	$	50,719
Accrued expenses and other		42,427		43,485
Total current liabilities		86,531		94,204

Long-Term Liabilities:
Long-term debt		183,000		183,000
Deferred income taxes		7,073		7,002
Other liabilities		6,905		6,473
Total long-term liabilities		196,978		196,475

Shareholders' Equity:
Preferred Shares, without par value, authorized 5,000 shares, none issued		-		-
Common Shares, without par value, authorized 60,000 shares, issued 25,294 and 24,772 shares and outstanding 25,010 and 24,665 shares, respectively, with no stated value		-		-
Additional paid-in capital		158,489		158,039
Common Shares held in treasury, 284 and 107 shares, respectively, at cost		(289)		(129)
Accumulated deficit		(91,342)		(59,155)
Accumulated other comprehensive income (loss)		3,034		(6,997)
Total shareholders’ equity		69,892		91,758
Total Liabilities and Shareholders' Equity	$	353,401	$	382,437

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				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Net Sales	$	117,992	$	178,434	$	341,367	$	594,733

Costs and Expenses:
Cost of goods sold		90,909		143,089		281,413		458,217
Selling, general and administrative		23,139		31,668		76,554		104,834
Restructuring charges		1,310		2,742		3,819		5,877

Operating Income (Loss)		2,634		935		(20,419)		25,805

Interest expense, net		5,559		5,049		16,594		15,301
Equity in earnings of investees		(3,386)		(4,371)		(4,864)		(11,206)
Loss on early extinguishment of debt		-		-		-		770
Other expense (income), net		(198)		(234)		447		44

Income (Loss) Before Income Taxes		659		491		(32,596)		20,896

Provision (benefit) for income taxes		1,502		855		(409)		10,029

Net Income (Loss)	$	(843)	$	(364)	$	(32,187)	$	10,867

Basic net income (loss) per share	$	(0.04)	$	(0.02)	$	(1.37)	$	0.47
Basic weighted average shares outstanding		23,761		23,405		23,580		23,353

Diluted net income (loss) per share	$	(0.04)	$	(0.02)	$	(1.37)	$	0.46
Diluted weighted average shares outstanding		23,761		23,405		23,580		23,728

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)

	Nine Months Ended
	September 30,
	2009		2008
OPERATING ACTIVITIES:
Net income (loss)	$	(32,187)	$	10,867
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities -
Depreciation		15,251		20,706
Amortization		733		1,050
Deferred income taxes		(1,207)		7,039
Equity in earnings of investees		(4,864)		(11,206)
Loss (gain) on sale of property, plant and equipment		292		(42)
Share-based compensation expense		854		2,666
Loss on extinguishment of debt		-		770
Changes in operating assets and liabilities -
Accounts receivable, net		11,228		5,235
Inventories, net		18,272		(12,179)
Prepaid expenses and other		(2,704)		(1,654)
Accounts payable		(7,995)		(1,652)
Accrued expenses and other		(251)		9,068
Net cash provided by (used for) operating activities		(2,578)		30,668

INVESTING ACTIVITIES:
Capital expenditures		(8,779)		(17,956)
Proceeds from sale of property, plant and equipment		88		435
Business acquisitions and other		-		(980)
Net cash used for investing activities		(8,691)		(18,501)

FINANCING ACTIVITIES:
Repayments of long-term debt		-		(17,000)
Share-based compensation activity, net		-		1,305
Premiums related to early extinguishment of debt		-		(553)
Other financing costs		(50)		-
Net cash used for financing activities		(50)		(16,248)

Effect of exchange rate changes on cash and cash equivalents		3,069		(2,232)

Net change in cash and cash equivalents		(8,250)		(6,313)

Cash and cash equivalents at beginning of period		92,692		95,924

Cash and cash equivalents at end of period	$	84,442	$	89,611

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 “SEC”). 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 (“GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2008.

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 67% and 72% of the Company’s inventories at September 30, 2009 and December 31, 2008, respectively, and by the first-in, first-out (“FIFO”) method for all other inventories. The Company adjusts its excess and obsolescence reserve at least on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. Inventory cost includes material, labor and overhead. Inventories consist of the following:

	September 30,		December 31,
	2009		2008

Raw materials	$	18,377	$	32,981
Work-in-progress		7,406		8,876
Finished goods		14,981		15,890
Total inventories		40,764		57,747
Less: LIFO reserve		(3,223)		(2,947)
Inventories, net	$	37,541	$	54,800

(3) Fair Value of Financial Instruments

Financial Instruments

A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The estimated fair value of the Company’s senior notes (fixed rate debt) at September 30, 2009 and December 31, 2008, per quoted market sources, was $173.9 million and $124.4 million, respectively. The carrying value was $183.0 million as of September 30, 2009 and December 31, 2008.

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

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (Accounting Standards Codification TM (“ASC”) Topic 815) which expands the quarterly and annual disclosure requirements about the Company’s derivative instruments and hedging activities. The adoption of ASC Topic 815 did not have an effect on the Company’s financial position, results of operations or cash flows.

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

The Company conducts business internationally and therefore is exposed to foreign currency exchange risk. The Company uses derivative financial instruments as cash flow hedges to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the affect of such fluctuations on foreign currency denominated intercompany transactions and other foreign currency exposures. The currencies hedged by the Company include the British pound, 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 September 30, 2009 and December 31, 2008, the Company held foreign currency forward contracts to reduce the exposure related to the Company’s British pound-denominated intercompany receivables. In addition, at September 30, 2009 the Company held a foreign currency hedge contract to reduce the exposure related to the Company’s Swedish krona-denominated intercompany receivables. These contracts expire in December 2009. For the nine months ended September 30, 2009, the Company recognized a $548 loss related to the 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 option contracts expire monthly throughout 2009. The effective portion of the unrealized gain or loss is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive income (loss). The Company’s expectation is that the cash flow hedges will be highly effective in the future. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company entered into fixed price commodity swaps with a financial institution to fix the cost of copper purchases. In December 2007, the Company entered into a fixed price swap contract for 1.0 million pounds of copper, which expired on December 31, 2008. In September 2008, the Company entered into a fixed price swap contract for 1.4 million pounds of copper, which covers the period from January 2009 to December 2009. Because these contracts were executed to hedge forecasted transactions, the contracts are accounted for as cash flow hedges. The unrealized gain or loss for the effective portion of the hedge is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive income (loss). The Company deems these cash flow hedges to be highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis.

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 are as follows:

	Notional amounts1				Prepaid expenses and other assets				Accrued expenses and other liabilities
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2009		2008		2009		2008		2009		2008
Derivatives designated as hedging instruments:
Forward currency contracts	$	8,748	$	35,457	$	-	$	-	$	323	$	2,930
Commodity contracts		1,021		4,085		-		-		44		2,104
		9,769		39,542		-		-		367		5,034

Derivatives not designated as hedging instruments:
Forward currency contracts		8,239		8,762		-		2,101		23		-
Total derivatives	$	18,008	$	48,304	$	-	$	2,101	$	390	$	5,034

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 loss for the three months ended September 30, 2009 are as follows:

	Amount of gain recorded in other comprehensive income		Amount of gain (loss) reclassified from other comprehensive income into net loss		Location of loss reclassified from other comprehensive income into net loss
Derivatives designated as cash flow hedges:
Forward currency contracts	$	73	$	217	Cost of goods sold
Commodity contracts		420		(91)	Cost of goods sold
	$	493	$	126

Amounts recorded in other comprehensive income in shareholder’s equity and in net loss for the nine months ended September 30, 2009 are as follows:

	Amount of gain recorded in other comprehensive income		Amount of loss reclassified from other comprehensive income into net loss		Location of loss reclassified from other comprehensive income into net loss
Derivatives designated as cash flow hedges:
Forward currency contracts	$	2,607	$	(1,748)	Cost of goods sold
Commodity contracts		2,060		(849)	Cost of goods sold
	$	4,667	$	(2,597)

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Effective January 1, 2009, the Company adopted SFAS No. 157, Fair Value Measurements (ASC Topic 820) as it relates to nonfinancial assets and nonfinancial liabilities measured on a non-recurring basis. The Company adopted ASC Topic 820 for financial assets and financial liabilities on January 1, 2008. This guidance clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. The adoption of ASC Topic 820 did not have a material effect on the Company’s fair value measurements.

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

	September 30, 2009						December 31,
			Fair Value Estimated Using				2008
	Fair Value		Level 1 inputs(1)		Level 2 inputs(2)		Fair Value

Financial assets carried at fair value

Available for sale security	$	242	$	242	$	-	$	252
Forward currency contracts		-		-		-		2,101

Total financial assets carried at fair value	$	242	$	242	$	-	$	2,353

Financial liabilities carried at fair value

Forward currency contracts	$	323	$	-	$	323	$	2,930
Commodity hedge contracts		44		-		44		2,104

Total financial liabilities carried at fair value	$	367	$	-	$	367	$	5,034

(1)

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

(2)

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

(4) Share-Based Compensation

Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $257 and $764 for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $854 and $2,666, respectively.

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), net of tax are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Net income (loss)	$	(843)	$	(364)	$	(32,187)	$	10,867
Other comprehensive income (loss):
Currency translation adjustments		3,669		(11,230)		5,563		(6,120)
Pension liability adjustments		61		48		(189)		38
Unrealized gain (loss) on marketable securities		9		11		(10)		(1)
Unrecognized gain (loss) on derivatives		493		(332)		4,667		16
Total other comprehensive income (loss)		4,232		(11,503)		10,031		(6,067)
Comprehensive income (loss)	$	3,389	$	(11,867)	$	(22,156)	$	4,800

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

	September 30,		December 31,
	2009		2008

Currency translation adjustments	$	5,569	$	6
Pension liability adjustments		(2,148)		(1,959)
Unrealized loss on marketable securities		(40)		(30)
Unrecognized loss on derivatives		(347)		(5,014)
Accumulated other comprehensive income (loss)	$	3,034	$	(6,997)

6) Long-Term Debt

Senior Notes

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

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 September 30, 2009 and December 31, 2008, there were no borrowings on this credit facility. The available borrowing capacity on this credit facility is based on eligible current assets, as defined. At September 30, 2009 and December 31, 2008, the Company had borrowing capacity of $51.5 million and $57.7 million, respectively based on eligible current assets. The credit facility does not contain financial performance covenants which would constrain our borrowing capacity. However, restrictions do include limits on capital expenditures, operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15.0 million minus certain guarantees and obligations. The credit facility expires on November 1, 2011 and requires a commitment fee of 0.25% on the unused balance. Interest is payable quarterly at either (i) the higher of the prime rate or the Federal Funds rate plus 0.50%, plus a margin of 0.00% to 0.25% or (ii) LIBOR plus a margin of 1.00% to 1.75%, depending upon the Company’s undrawn availability, as defined. The Company was in compliance with all covenants at September 30, 2009 and December 31, 2008.

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

On October 9, 2009, the Company entered into Amendment No. 3 (the “Amendment”) to the credit facility. The Amendment enabled the Company to acquire a 51% equity interest in New Bolton Conductive Systems, LLC (“New BCS”), a wiring business located in Walled Lake, Michigan and have an option to purchase the remaining 49% of New BCS, with New BCS being excluded from certain restrictive covenants in the credit facility applicable to subsidiaries. The acquisition of New BCS is discussed within Note 16, Subsequent Events. In addition, the Amendment redefines certain foreign subsidiaries of the Company as non borrowers and permits certain internal transactions that will facilitate the implementation of a more efficient cash management structure. The Amendment did not change the Company’s borrowing capacity.

(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				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Basic weighted-average shares outstanding		23,761,019		23,405,209		23,580,024		23,353,085
Effect of dilutive securities		-		-		-		374,829
Diluted weighted-average shares outstanding		23,761,019		23,405,209		23,580,024		23,727,914

Options not included in the computation of diluted net income (loss) per share to purchase 180,250 and 50,000 Common Shares at an average price of $9.57 and $15.73, respectively, per share were outstanding at September 30, 2009 and September 30, 2008, respectively. These outstanding options were not included in the computation of diluted net income (loss) per share because their respective exercise prices were greater than the average market price of Common Shares.

There were 400,425 and 628,275 performance-based restricted shares outstanding at September 30, 2009 and September 30, 2008, respectively. These shares were not included in the computation of diluted net income (loss) per share because not all vesting conditions were achieved as of September 30, 2009 and 2008. These shares may or may not become dilutive based on the Company’s ability to exceed future earnings thresholds.

(8) Restructuring

On October 29, 2007, the Company announced restructuring initiatives to improve manufacturing efficiency and cost position by ceasing manufacturing operations at its Sarasota, Florida and Mitcheldean, United Kingdom locations. In the third quarter of 2008, the Company began additional restructuring initiatives in our Canton, Massachusetts location and in the fourth quarter of 2008, the Company began additional restructuring initiatives in our Orebro, Sweden and Tallinn, Estonia locations as well as additional initiatives in our Canton, Massachusetts location. In response to the depressed conditions in the North American and European commercial vehicle and automotive markets, the Company also began restructuring initiatives in our Juarez, Mexico, Tallinn, Estonia and Canton, Massachusetts locations during the first quarter of 2009. The Company began additional restructuring initiatives during the second quarter of 2009 in our Lexington, Ohio, Orebro and Bromma, Sweden and Juarez and Monclova, Mexico locations as a result of decline in the North American and European commercial vehicle and automotive market conditions. In the third quarter of 2009, as part of the Company’s continuing overall restructuring initiatives the Company consolidated of certain management positions at our Lexington, Ohio and Canton, Massachusetts facilities and the Company began further restructuring initiatives at our Juarez, Chihuahua and Monclova, Mexico locations as a result of the continued decline of the North American commercial vehicle market. The Company continued restructuring initiatives begun during the second quarter of 2009 in our Bromma, Sweden location. In connection with these initiatives, the Company recorded restructuring charges of $1,310 and $4,828 in the Company’s condensed consolidated statement of operations for the three months ended September 30, 2009 and 2008, respectively. Restructuring charges for the nine months ended September 30, 2009 and 2008 were $3,843 and $11,005, respectively. Restructuring expenses that were general and administrative in nature were included in the Company’s condensed consolidated statement of operations as part of restructuring charges, while the remaining restructuring related charges were included in cost of goods sold.

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

In 2009, the Company has classified the Sarasota, Florida facility as an asset held for sale and has included the net book value of the facility within the September 30, 2009 condensed consolidated balance sheet as a component of prepaid expenses and other.

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

	Severance Costs		Contract Termination Costs		Other Associated Costs		Total

Total expected restructuring charges	$	5,608	$	1,685	$	2,401	$	9,694

Accrued balance at December 31, 2007		468		-		-		468

2008 charge to expense		2,830		1,305		2,401		6,536
Cash payments		(2,767)		-		(2,221)		(4,988)

Accrued balance at December 31, 2008		531		1,305		180		2,016

First quarter 2009 charge to expense		369		91		-		460
Second quarter 2009 charge to expense		1,435		-		-		1,435
Third quarter 2009 charge to expense		939		-		-		939
Foreign currency translation effect		-		289		-		289
Cash payments		(2,891)		(464)		(180)		(3,535)

Accrued balance at September 30, 2009	$	383	$	1,221	$	-	$	1,604

Remaining expected restructuring charge	$	35	$	-	$	-	$	35

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

	Severance Costs		Other Associated Costs		Total (A)

Total expected restructuring charges	$	3,505	$	6,350	$	9,855

Accrued balance at December 31, 2007		357		99		456

2008 charge to expense		2,521		6,325		8,846
Cash payments		(1,410)		(6,024)		(7,434)

Accrued balance at December 31, 2008		1,468		400		1,868

First quarter 2009 charge to expense		497		25		522
Second quarter 2009 charge to expense		116		-		116
Third quarter 2009 charge to expense		371		-		371
Cash payments		(2,137)		(166)		(2,303)

Accrued balance at September 30, 2009	$	315	$	259	$	574

Remaining expected restructuring charge	$	-	$	-	$	-

(A)

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

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

(9) Commitments and Contingencies

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

Product Warranty and Recall

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

	2009		2008

Product warranty and recall at beginning of period	$	5,527	$	5,306
Accruals for products shipped during period		1,747		4,257
Aggregate changes in pre-existing liabilities due to claims developments		440		988
Settlements made during the period (in cash or in kind)		(4,053)		(4,262)
Product warranty and recall at end of period	$	3,661	$	6,289

(10) Employee Benefit Plans

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Service cost	$	14	$	35	$	42	$	105
Interest cost		219		316		657		948
Expected return on plan assets		(165)		(361)		(495)		(1,083)
Amortization of actuarial loss		43		-		129		-
Net periodic cost (benefit)	$	111	$	(10)	$	333	$	(30)

The Company expects to contribute $94 to its pension plan in 2009. Of this amount, contributions of $78 have been made to the pension plan as of September 30, 2009.

In March 2009, the Company adopted the Stoneridge, Inc. Long-Term Cash Incentive Plan (“LTCIP”) and granted awards to certain officers and key employees. For 2009, the 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 2009, 2010 and 2011 fiscal years. 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 September 30, 2009 as the achievement of the performance goal is not considered probable at this time.

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

(11) Income Taxes

The Company recognized a provision for income taxes of $1,502, or 228.3% of pre-tax income, and $855, or 174.1% of pre-tax income, for federal, state and foreign income taxes for the three months ended September 30, 2009 and 2008, respectively. The Company recognized a provision (benefit) for income taxes of $(409), or (1.3)% of pre-tax loss, and $10,029, or 48.0% of pre-tax income, for federal, state and foreign income taxes for the nine months ended September 30, 2009 and 2008, respectively. As reported at December 31, 2008, the Company is in a cumulative loss position and provides a valuation allowance offsetting federal, state and certain foreign deferred tax assets. As a result, a tax benefit is not being provided for losses incurred during the first nine months of 2009, for federal, state and certain foreign jurisdictions. The inability to recognize a tax benefit for these losses and other deferred tax assets has a significant negative affect on our effective tax rate as well as the comparability of the current quarter and year-to-date effective tax rate to prior periods in which the Company had not recorded a federal valuation allowance. The difference in the effective tax rate for the three and nine month periods ended September 30, 2009 compared to the three and nine month periods ended September 30, 2008, was primarily attributable to the valuation allowance for federal and state deferred tax assets provided against the current year domestic loss which was partially offset by recording a tax benefit related to current period losses in certain foreign jurisdictions in which it is more likely than not that the benefit of those losses will be realized.

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(12) Accounting Pronouncements

In June 2009, the FASB issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles (ASC Topic 105), which establishes the FASB Accounting Standards CodificationTM (“Codification”) as the official single source of authoritative U.S. GAAP. All existing accounting standards are superseded. All other accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant SEC guidance organized using the same topical structure in separate sections within the Codification. The Codification is effective for the Company’s financial statements for the quarter ended September 30, 2009 and the principal effect on our financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In order to ease the transition to the Codification, the Company is providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (ASC Topic 805). This guidance improves reporting by creating greater consistency in the accounting and financial reporting of business combinations. Additionally, it 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. We adopted this guidance effective January 1, 2009. We do not expect the adoption of ASC Topic 805 to have a material effect on the Company’s financial position, results of operations or cash flows from the acquisition of New BCS, which is discussed further in Note 16, Subsequent Events.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51 (ASC Topic 810-10-65). This guidance 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, it eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. We adopted this guidance effective January 1, 2009. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

In December 2008, the FASB issued Staff Position 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (ASC Topic 715-20-65). This guidance will require entities to provide enhanced disclosures about how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. This guidance is effective for the Company beginning with its year ending December 31, 2009. The Company is currently assessing the potential effect, if any, on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (ASC Topic 810-10). This updated guidance requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. This update becomes effective for the Company on January 1, 2010. Management does not currently expect that the update will have a material effect on the Company’s financial position, results of operations or cash flow.

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

(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, 2008 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on net sales from external customers, capital expenditures and income (loss) before income taxes. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Net Sales
Electronics	$	70,165	$	126,636	$	218,830	$	409,268
Inter-segment sales		2,734		2,464		6,531		10,211
Electronics net sales		72,899		129,100		225,361		419,479

Control Devices		47,827		51,798		122,537		185,465
Inter-segment sales		852		1,067		2,237		3,671
Control Devices net sales		48,679		52,865		124,774		189,136

Eliminations		(3,586)		(3,531)		(8,768)		(13,882)
Total consolidated net sales	$	117,992	$	178,434	$	341,367	$	594,733


Income (Loss) Before Income Taxes
Electronics	$	(348)	$	7,001	$	(11,508)	$	32,976
Control Devices		2,035		(6,523)		(10,393)		(5,432)
Other corporate activities		4,459		5,129		5,775		8,775
Corporate interest expense, net		(5,487)		(5,116)		(16,470)		(15,423)
Total consolidated income (loss) before income taxes	$	659	$	491	$	(32,596)	$	20,896


Depreciation and Amortization
Electronics	$	2,179	$	2,724	$	6,704	$	9,646
Control Devices		2,725		3,690		8,343		11,191
Corporate activities		80		26		204		21
Total consolidated depreciation and amortization(A)	$	4,984	$	6,440	$	15,251	$	20,858

(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				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Interest Expense (Income), net
Electronics	$	73	$	(60)	$	127	$	(113)
Control Devices		(1)		(7)		(3)		(9)
Corporate activities		5,487		5,116		16,470		15,423
Total consolidated interest expense, net	$	5,559	$	5,049	$	16,594	$	15,301


Capital Expenditures
Electronics	$	900	$	2,736	$	3,314	$	7,480
Control Devices		989		3,580		4,665		10,512
Corporate activities		148		(1)		800		(36)
Total consolidated capital expenditures	$	2,037	$	6,315	$	8,779	$	17,956

	September 30,		December 31,
Total Assets	2009		2008
Electronics	$	160,617	$	183,574
Control Devices		93,905		98,608
Corporate(B)		247,584		239,425
Eliminations		(148,705)		(139,170)
Total consolidated assets	$	353,401	$	382,437

(B) Assets contained at Corporate consist primarily of cash, intercompany receivables and equity investments.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Net Sales	2009		2008		2009		2008
North America	$	95,212	$	131,966	$	277,517	$	435,265
Europe and other		22,780		46,468		63,850		159,468
Total consolidated net sales	$	117,992	$	178,434	$	341,367	$	594,733

	September 30,		December 31,
Non-Current Assets	2009		2008
North America	$	108,659	$	110,507
Europe and other		17,857		17,339
Total consolidated non-current assets	$	126,516	$	127,846

(14) Investments

PST Eletrônica S.A.

The Company has a 50% equity interest in PST Eletrônica S.A. (“PST”), a Brazilian electronic system provider focused on security and convenience applications primarily for the vehicle and motorcycle industry. The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $39,957 and $31,021 at September 30, 2009 and December 31, 2008, 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				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Revenues	$	38,596	$	50,846	$	90,584	$	141,238
Cost of sales	$	19,231	$	20,073	$	46,229	$	66,042

Total pre-tax income	$	6,018	$	10,503	$	9,324	$	26,301
The Company's share of pre-tax income	$	3,009	$	5,251	$	4,662	$	13,151

Equity in earnings of PST included in the condensed consolidated statements of operations was $3,241 and $4,192 for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, equity in earnings of PST was $4,629 and $10,634, 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 $4,887 and $4,673 at September 30, 2009 and December 31, 2008, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations were $145 and $179, for the three months ended September 30, 2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, equity in earnings of Minda was $235 and $572, respectively.

(15) Guarantor Financial Information

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

Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis as of September 30, 2009 and December 31, 2008 and for each of the three and nine months ended September 30, 2009 and 2008.

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

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

	September 30, 2009
	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations		Consolidated

ASSETS

Current Assets:
Cash and cash equivalents	$	47,997	$	26	$	36,419	$	-	$	84,442
Accounts receivable, net		50,203		19,047		16,995		-		86,245
Inventories, net		18,416		6,749		12,376		-		37,541
Prepaid expenses and other		(305,234)		301,199		20,824		-		16,789
Deferred income taxes,		-		-		1,868		-		1,868
Total current assets		(188,618)		327,021		88,482		-		226,885

Long-Term Assets:
Property, plant and equipment, net		45,013		21,071		11,857		-		77,941
Other Assets:
Investments and other, net		47,317		295		963		-		48,575
Investment in subsidiaries		394,175		-		-		(394,175)		-
Total long-term assets		486,505		21,366		12,820		(394,175)		126,516
Total Assets	$	297,887	$	348,387	$	101,302	$	(394,175)	$	353,401

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	23,048	$	13,276	$	7,780	$	-	$	44,104
Accrued expenses and other