Stoneridge, Inc. 10-K
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
         
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from            to              Commission file number: 001-13337
 
STONERIDGE, INC.
(Exact name of registrant as specified in its charter)
 
     
Ohio   34-1598949
 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Shares, without par value
  New York Stock Exchange
 
Securities registered pursuant to section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes      þ No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes     þ No
 
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.
þ Yes     o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                       o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes     þ No
 
As of June 30, 2007, the aggregate market value of the registrant’s Common Shares, without par value, held by non-affiliates of the registrant was approximately $174.5 million. The closing price of the Common Shares on June 29, 2007 as reported on the New York Stock Exchange was $12.34 per share. As of June 30, 2007, the number of Common Shares outstanding was 24,223,817.
 
The number of Common Shares, without par value, outstanding as of February 22, 2008 was 24,207,708.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2008, into Part III, Items 10, 11, 12, 13 and 14.
 


 

 
STONERIDGE, INC. AND SUBSIDIARIES
 
INDEX
 
             
        Page No.
 
  Business     2  
  Risk Factors     7  
  Unresolved Staff Comments     10  
  Properties     11  
  Legal Proceedings     12  
  Submission of Matters to a Vote of Security Holders     12  
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     13  
  Selected Financial Data     14  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     15  
  Quantitative and Qualitative Disclosures About Market Risk     30  
  Financial Statements and Supplementary Data     31  
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     71  
  Controls and Procedures     71  
  Other Information     73  
 
  Directors, Executive Officers and Corporate Governance     73  
  Executive Compensation     73  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     73  
  Certain Relationships and Related Transactions, and Director Independence     73  
  Principal Accounting Fees and Services     73  
 
  Exhibits, Financial Statement Schedules     74  
    Signatures     75  
 EX-21.1
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1


1


Table of Contents

 
PART I
 
ITEM 1.   BUSINESS.
 
Overview
 
Founded in 1965, Stoneridge, Inc. (the “Company”) is an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Our custom-engineered products are predominantly sold on a sole-source basis and consist of application-specific control devices, sensors, vehicle management electronics and power and signal distribution systems. These products comprise the elements of every vehicle’s electrical system, and individually interface with a vehicle’s mechanical and electrical systems to (i) activate equipment and accessories, (ii) display and monitor vehicle performance and (iii) control and distribute electrical power and signals. Our products improve the performance, safety, convenience and environmental monitoring capabilities of our customers’ vehicles. As such, the growth in many of the product areas in which we compete is driven by the increasing consumer desire for safety, security and convenience coupled with the need for original equipment manufacturers (“OEM”) to meet safety requirements in addition to the general trend of increased electrical and electronic content per vehicle. Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and to excel in the transition from mechanical-based components and systems to electrical and electronic components, modules and systems.
 
Products
 
We conduct our business in two reportable segments: Electronics and Control Devices. Under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company’s operating segments are aggregated based on sharing similar economic characteristics. Other aggregation factors include the nature of products offered and management and oversight responsibilities. The core products of the Electronics reportable segment include vehicle electrical power and distribution systems and electronic instrumentation and information display products. The core products of the Control Devices reportable segment include electronic and electrical switch products, control actuation devices and sensors. We design and manufacture the following vehicle parts:
 
Electronics.  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. These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled and driver messages related to vehicle performance. In addition, power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle compartment. These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
 
Control Devices.  The Control Devices reportable segment produces products that monitor, measure or activate a specific function within the vehicle. Product lines included within the Control Devices segment are sensors, switches, actuators, as well as other electronic products. Sensor products are employed in most major vehicle systems, including the emissions, safety, powertrain, braking, climate control, steering and suspension systems. Switches transmit a signal that activates specific functions. Hidden switches are not typically seen by vehicle passengers, but are used to activate or deactivate selected functions. Customer activated switches are used by a vehicle’s operator or passengers to manually activate headlights, rear defrosters and other accessories. In addition, the Control Devices segment designs and manufactures electromechanical actuator products that enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. We sell these products principally to the automotive market.


2


Table of Contents

The following table presents net sales by reportable segment, as a percentage of total net sales:
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Electronics
    61 %     62 %     57 %
Control Devices
    39       38       43  
                         
Total
    100 %     100 %     100 %
                         
 
For further information related to our reportable segments and financial information about geographic areas, see Note 13, “Segment Reporting,” to the consolidated financial statements included in this report.
 
Production Materials
 
The principal production materials used in the manufacturing process for both reportable segments include: copper wire, zinc, cable, resins, plastics, printed circuit boards and certain electrical components such as microprocessors, memories, resistors, capacitors, fuses, relays and connectors. We purchase such materials pursuant to both annual contract and spot purchasing methods. Such materials are readily available from multiple sources, but we generally establish collaborative relationships with a qualified supplier for each of our key production materials in order to lower costs and enhance service and quality. Any change in the supply of, or price for, these raw materials could materially affect our results of operations and financial condition.
 
Patents and Intellectual Property
 
Both of our reportable segments maintain and have pending various U.S. and foreign patents and other rights to intellectual property relating to our business, which we believe are appropriate to protect the Company’s interests in existing products, new inventions, manufacturing processes and product developments. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or ability to compete. We are not currently engaged in any material infringement litigation, nor are there any material infringement claims pending by or against the Company.
 
Industry Cyclicality and Seasonality
 
The markets for products in both of our reportable segments have historically been cyclical. Because these products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets, sales, and therefore results of operations, are significantly dependent on the general state of the economy and other factors, like the impact of environmental regulations on our customers, which affect these markets. A decline in automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle production of our principal customers could adversely impact the Company. Approximately 40%, 38% and 43% of our net sales in 2007, 2006 and 2005, respectively, were made to the automotive market. Approximately 60%, 62% and 57% of our net sales in 2007, 2006 and 2005, respectively, were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
 
We typically experience decreased sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is similarly impacted by plant shutdowns for the holidays.
 
Customers
 
We are dependent on a small number of principal customers for a significant percentage of our sales. The loss of any significant portion of our sales to these customers or the loss of a significant customer would have a material adverse impact on the financial condition and results of operations of the Company. We supply numerous different parts to each of our principal customers. Contracts with several of our customers provide for supplying their requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models


3


Table of Contents

sold by any of our major customers could have a material adverse impact on the Company. We may also enter into contracts to supply parts, the introduction of which may then be delayed or not used at all. We also compete to supply products for successor models and are therefore subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on the financial condition and results of operations of the Company. In addition, we sell products to other customers that are ultimately sold to our principal customers.
 
The following table presents the Company’s principal customers, as a percentage of net sales:
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Navistar International
    20 %     25 %     22 %
Ford Motor Company
    8       6       7  
Deere & Company
    7       6       6  
MAN AG
    6       6       2  
General Motors
    6       5       5  
Chrysler LLC
    5       5       9  
Other
    48       47       49  
                         
Total
    100 %     100 %     100 %
                         
 
Backlog
 
Our products are produced from readily available materials and have a relatively short manufacturing cycle; therefore our products are not on backlog status. Each of our production facilities maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and can be expanded to handle increased growth if needed.
 
Competition
 
Markets for our products in both reportable segments are highly competitive. The principal methods of competition are technological innovation, price, quality, service and timely delivery. We compete for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM customer will usually continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns.
 
Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. We compete based on strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price. We compete against the following primary competitors:
 
Electronics.  Our primary competitors include Continental AG/Siemens VDO, AFL Automotive, Yazaki, Delphi, and Leoni.
 
Control Devices.  Our primary competitors include TRW, Methode, Sensata, Denso, Delphi, Bosch, Continental AG/Siemens VDO, Aisin, and Alps.
 
Product Development
 
Our research and development efforts are largely product development oriented and consist primarily of applying known technologies to customer generated problems and situations. We work closely with our customers to creatively solve problems using innovative approaches. The majority of our development expenses are related to customer-sponsored programs where we are involved in designing custom-engineered solutions for specific applications or for next generation technology. To further our vehicles platform penetration, we have also developed collaborative relationships with the design and engineering departments of key customers. These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.


4


Table of Contents

Development work at the Company is largely performed on a decentralized basis. We have engineering and product development departments located at a majority of our manufacturing facilities. To ensure knowledge sharing among decentralized development efforts, we have instituted a number of mechanisms and practices whereby innovation and best practices are shared. The decentralized product development operations are complimented by larger technology groups in Canton, Massachusetts and Stockholm, Sweden.
 
We use efficient and quality oriented work processes to address our customers’ high standards. Our product development technical resources include a full complement of computer-aided design and engineering (“CAD/CAE”) software systems, including (i) virtual three-dimensional modeling, (ii) functional simulation and analysis capabilities and (iii) data links for rapid prototyping. These CAD/CAE systems enable the Company to expedite product design and the manufacturing process to shorten the development time and ultimately time to market.
 
We are further strengthening our electrical engineering competencies through investment in equipment such as (i) automotive electro-magnetic compliance test chambers, (ii) programmable automotive and commercial vehicle transient generators, (iii) circuit simulators and (iv) other environmental test equipment. Additional investment in product machining equipment has allowed us to fabricate new product samples in a fraction of the time required historically. Our product development and validation efforts are supported by full service, on-site test labs at most manufacturing facilities, thus enabling cross-functional engineering teams to optimize the product, process and system performance before tooling initiation.
 
We have invested, and will continue to invest in technology to develop new products for our customers. Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses, as incurred. Such costs amounted to approximately $44.2 million, $40.8 million and $39.2 million for 2007, 2006 and 2005, respectively, or 6.1%, 5.8% and 5.8% of net sales for these periods.
 
We will continue shifting our investment spending toward the design and development of new products rather than focusing on sustaining existing product programs for specific customers. This shift is essential to the future growth of the Company. However, the typical product development process takes three to five years to show tangible results. As part of our effort to shift our investment spending, we reviewed our current product portfolio and adjusted our spending to either accelerate or eliminate our investment in these products, based on our position in the market and the potential of the market and product.
 
Environmental and Other Regulations
 
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
 
Employees
 
As of December 31, 2007, we had approximately 5,600 employees, approximately 1,300 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in Mexico, Sweden, and the United Kingdom, our employees are not represented by a union. Our unionized workers are not covered by collective bargaining agreements. We believe that relations with our employees are good.
 
Joint Ventures
 
We form joint ventures in order to achieve several strategic objectives including gaining access to new markets, exchanging technology and intellectual capital, broadening our customer base and expanding our product offerings. Specifically we have formed joint ventures in Brazil, PST Eletrônica S.A. (“PST”), and India, Minda Stoneridge Instruments Ltd. (“Minda”), and continue to explore similar business opportunities in other global markets. We have a 50% interest in PST and a 49% interest in Minda. We entered into our PST joint venture in October 1997


5


Table of Contents

and our Minda joint venture in August 2004. Each of these investments is accounted for using the equity method of accounting.
 
Our joint ventures have contributed positively to our financial results in 2007, 2006 and 2005. Equity earnings by joint venture for the fiscal years ended December 31, 2007, 2006 and 2005 are summarized in the following table (in thousands):
 
                         
    For the Fiscal Years Ended December 31,  
    2007     2006     2005  
 
PST
  $ 10,351     $ 6,771     $ 3,976  
Minda
    542       354       76  
                         
Total equity earnings of investees
  $ 10,893     $ 7,125     $ 4,052  
                         
 
In Brazil, our PST joint venture, which is an electronic system provider focused on security and convenience applications primarily for the vehicle and motorcycle industry, generated net sales of $133.1 million, $94.1 million and $70.8 million in 2007, 2006 and 2005, respectively. We also received dividend payments of $5.6 million, $3.7 million and $2.2 million from PST in 2007, 2006 and 2005, respectively. During 2006, we increased our ownership in Minda, which produces electronics and instrumentation products for the motorcycle and commercial vehicle markets in India, from 20% to 49% for $2.6 million in cash.
 
Available Information
 
We make available, free of charge through our website (www.stoneridge.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, Whistleblower Policy and Procedures and the charters of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees are posted on our website as well. Copies of these documents will be available to any shareholder upon request. Requests should be directed in writing to Investor Relations at 9400 East Market Street, Warren, Ohio 44484.
 
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.


6


Table of Contents

ITEM 1A.   RISK FACTORS.
 
Our business is cyclical and seasonal in nature and downturns in the automotive, medium- and heavy-duty truck, agricultural and off-road vehicle markets could reduce the sales and profitability of our business.
 
The demand for our products is largely dependent on the domestic and foreign production of automobiles, medium- and heavy-duty trucks, agricultural and off-road vehicles. The markets for our products have historically been cyclical, because new vehicle demand is dependent on, among other things, consumer spending and is tied closely to the overall strength of the economy. Because our products are used principally in the production of vehicles for the automotive, medium- and heavy-duty truck, agricultural and off-road vehicle markets, our sales, and therefore our results of operations, are significantly dependent on the general state of the economy and other factors which affect these markets. A decline in automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle production could adversely impact our results of operations and financial condition. In 2007, approximately 40% of our net sales were made to the automotive market and approximately 60% were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Seasonality experienced by the automotive industry also impacts our operations. We typically experience decreased sales during the third quarter of each year due to the impact of scheduled OEM customer plant shutdowns in July for vacations and new model changeovers. The fourth quarter is also impacted by plant shutdowns for the holidays.
 
Our business is very competitive and increased competition could reduce our sales.
 
Markets for our products are highly competitive and the Company can offer no assurance that we can maintain our product pricing levels with our customers. We compete based on technological innovation, price, quality, service and timely delivery. Many of our competitors are more diversified and have greater financial and other resources than we do. We cannot assure you that our business will not be adversely affected by competition or that we will be able to maintain our profitability if the competitive environment changes.
 
The prices that we can charge some of our customers are predetermined and we bear the risk of costs in excess of our estimates.
 
Our supply agreements with some of our customers require us to provide our products at predetermined prices. In some cases, these prices decline over the course of the contract and may require us to meet certain productivity and cost reduction targets. In addition, our customers may require us to share productivity savings in excess of our cost reduction targets. The costs that we incur in fulfilling these contracts may vary substantially from our initial estimates. Unanticipated cost increases or the inability to meet certain cost reduction targets may occur as a result of several factors, including increases in the costs of labor, components or materials. In some cases, we are permitted to pass on to our customers the cost increases associated with specific materials. Cost overruns that we cannot pass on to our customers could adversely affect our business, results of operations and financial condition.
 
We are dependent on the availability and price of raw materials.
 
We require substantial amounts of raw materials and substantially all raw materials we require are purchased from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Any change in the supply of, or price for, these raw materials could materially affect our results of operations and financial condition.
 
Our strategic initiatives may be unsuccessful, may take longer than anticipated, or may result in unanticipated costs.
 
Our future strategic initiatives include restructuring activities. We announced restructuring initiatives in fiscal year 2007. There is no assurance that the total costs and total cash costs associated with the restructuring initiatives will not exceed our estimates, or that we will be able to achieve the intended benefits of these restructurings activities.


7


Table of Contents

The loss or insolvency of any of our major customers would adversely affect our future results.
 
We are dependent on a small number of principal customers for a significant percentage of our net sales. In 2007, Navistar International, Ford Motor Company, Deere & Company, MAN AG, General Motors and Chrysler LLC accounted for 20%, 8%, 7%, 6%, 6%, and 5% of our net sales, respectively. The loss of any significant portion of our sales to these customers or any other customers would have a material adverse impact on our results of operations and financial condition. The contracts we have entered into with many of our customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. These contracts are subject to renegotiation, which may affect product pricing and generally may be terminated by our customers at any time. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of our major customers could have a material adverse impact on our results of operations and financial condition by reducing cash flows and our ability to spread costs over a larger revenue base. We also compete to supply products for successor models and are subject to the risk that the customer will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition. In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy.
 
Consolidation among vehicle parts customers and suppliers could make it more difficult for us to compete favorably.
 
The vehicle part supply industry has undergone a significant consolidation as OEM customers have sought to lower costs, improve quality and increasingly purchase complete systems and modules rather than separate components. As a result of the cost focus of these major customers, we have been, and expect to continue to be, required to reduce prices. Because of these competitive pressures, we cannot assure you that we will be able to increase or maintain gross margins on product sales to our customers. The trend toward consolidation among vehicle parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future with these larger, consolidated companies, our results of operations and financial condition could be adversely affected.
 
Our physical properties and information systems are subject to damage as a result of disasters, outages or similar events.
 
Our offices and facilities, including those used for design and development, material procurement, manufacturing, logistics and sales are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events. If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.
 
In addition, network and information system shutdowns caused by unforeseen events such as power outages, disasters, hardware or software defects, computer viruses and computer hacking pose increasing risks. Such an event could also result in the disruption of our operations, delay production, shipments and revenue, and result in large expenditures necessary to repair or replace such network and information systems.
 
We must implement and sustain a competitive technological advantage in producing our products to compete effectively.
 
Our products are subject to changing technology, which could place us at a competitive disadvantage relative to alternative products introduced by competitors. Our success will depend on our ability to continue to meet customers’ changing specifications with respect to quality, service, price, timely delivery and technological innovation by implementing and sustaining competitive technological advances. Our business may, therefore, require significant ongoing and recurring additional capital expenditures and investment in research and development and manufacturing and management information systems. We cannot assure you that we will be able to achieve the technological advances or introduce new products that may be necessary to remain competitive. Our inability to continuously


8


Table of Contents

improve existing products and to develop new products and to achieve technological advances could have a material adverse effect on our results of operations and financial condition.
 
We may experience increased costs associated with labor unions that could adversely affect our financial performance and results of operations.
 
As of December 31, 2007, we had approximately 5,600 employees, approximately 1,300 of whom were salaried and the balance of whom were paid on an hourly basis. Certain employees located in Mexico, Sweden, and the United Kingdom are represented by a union but not collective bargaining agreements. We cannot assure you that our employees will not be covered by collective bargaining agreements in the future or that any of our facilities will not experience a work stoppage or other labor disruption. Any prolonged labor disruption involving our employees, employees of our customers, a large percentage of which are covered by collective bargaining agreements, or employees of our suppliers could have a material adverse impact on our results of operations and financial condition by disrupting our ability to manufacture our products or the demand for our products.
 
Compliance with environmental and other governmental regulations could be costly and require us to make significant expenditures.
 
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things:
 
  •  the discharge of pollutants into the air and water;
  •  the generation, handling, storage, transportation, treatment, and disposal of waste and other materials;
  •  the cleanup of contaminated properties; and
  •  the health and safety of our employees.
 
We believe that our business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. The operation of our manufacturing facilities entails risks and we cannot assure you that we will not incur material costs or liabilities in connection with these operations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.
 
We may incur material product liability costs.
 
We are subject to the risk of exposure to product liability claims in the event that the failure of any of our products results in personal injury or death and we cannot assure you that we will not experience material product liability losses in the future. In addition, if any of our products prove to be defective, we may be required to participate in government-imposed or OEM- instituted recalls involving such products. We maintain insurance against such product liability claims, but we cannot assure you that such coverage will be adequate for liabilities ultimately incurred or that it will continue to be available on terms acceptable to us. A successful claim brought against us that exceeds available insurance coverage or a requirement to participate in any product recall could have a material adverse effect on our results of operations and financial condition.


9


Table of Contents

We are subject to risks related to our international operations.
 
Approximately 28.1% of our net sales in 2007 were derived from our European and other international operations, and European and other international non-current assets accounted for approximately 9.7% of our non-current assets as of December 31, 2007. International sales and operations are subject to significant risks, including, among others:
 
  •  political and economic instability;
  •  restrictive trade policies;
  •  economic conditions in local markets;
  •  currency exchange controls;
  •  labor unrest;
  •  difficulty in obtaining distribution support and potentially adverse tax consequences; and
  •  the imposition of product tariffs and the burden of complying with a wide variety of international and U.S. export laws.
 
Additionally, to the extent any portion of our net sales and expenses are denominated in currencies other than the U.S. dollar, changes in exchange rates could have a material adverse effect on our results of operations and financial condition.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS.
 
None.


10


Table of Contents

ITEM 2.   PROPERTIES.
 
The Company and our joint ventures currently own or lease 20 manufacturing facilities, which together contain approximately 1.5 million square feet of manufacturing space. Of these manufacturing facilities, 11 are used by our Electronics reportable segment, 6 are used by our Control Devices reportable segment and 3 are owned by our joint venture companies. The following table provides information regarding our facilities:
 
                     
    Owned/
        Square
 
Location
  Leased    
Use
  Footage  
 
Electronics
                   
Portland, Indiana
    Owned     Manufacturing     182,000  
Juarez, Mexico
    Owned     Manufacturing/Division Office     178,000  
Chihuahua, Mexico
    Owned     Manufacturing     135,569  
El Paso, Texas
    Leased     Warehouse     93,000  
Orebro, Sweden
    Leased     Manufacturing     77,472  
Mitcheldean, England
    Leased     Manufacturing     74,790  
Monclova, Mexico
    Leased     Manufacturing     68,436  
Chihuahua, Mexico
    Leased     Manufacturing     49,805  
Stockholm, Sweden
    Leased     Engineering Office/Division Office     37,714  
Dundee, Scotland
    Leased     Manufacturing     32,753  
Tallinn, Estonia
    Leased     Manufacturing     28,352  
Warren, Ohio
    Leased     Engineering Office/Division Office     24,570  
Tallinn, Estonia
    Leased     Manufacturing/Warehouse     21,635  
Chihuahua, Mexico
    Leased     Manufacturing     10,000  
Bayonne, France
    Leased     Sales Office     8,267  
Madrid, Spain
    Leased     Sales Office/Warehouse     1,560  
Rome, Italy
    Leased     Sales Office     1,216  
Stuttgart, Germany
    Leased     Sales Office/Engineering Office     1,000  
                     
Control Devices
                   
Lexington, Ohio
    Owned     Manufacturing/Division Office     152,742  
Canton, Massachusetts
    Owned     Manufacturing/Division Office     132,560  
Sarasota, Florida
    Owned     Manufacturing     115,000  
Canton, Massachusetts
    Leased     Manufacturing     58,077  
Suzhou, China
    Leased     Manufacturing     24,412  
Lexington, Ohio
    Owned     Manufacturing     10,120  
Sarasota, Florida
    Owned     Warehouse     7,500  
Lexington, Ohio
    Leased     Warehouse     5,000  
                     
Corporate
                   
Novi, Michigan
    Leased     Sales Office/Engineering Office     9,400  
Warren, Ohio
    Owned     Headquarters     7,500  
Shanghai, China
    Leased     Sales Office     270  
Seoul, South Korea
    Leased     Sales Office     107  
                     
Joint Ventures
                   
Pune, India
    Owned     Manufacturing/Engineering Office/Sales Office     76,000  
Manaus, Brazil
    Owned     Manufacturing     73,550  
São Paulo, Brazil
    Owned     Manufacturing/Engineering Office/Sales Office     41,323  
Buenos Aires, Argentina
    Leased     Sales Office     3,551  


11


Table of Contents

ITEM 3.   LEGAL PROCEEDINGS.
 
The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company, however, does not believe that any of the litigation in which it is currently engaged, either individually or in the aggregate, will have a material adverse effect on its business, consolidated financial position or results of operations. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company’s products and there can be no assurance that the Company will not experience any material product liability losses in the future. The Company maintains insurance against such product liability claims. In addition, if any of the Company’s products prove to be defective, the Company may be required to participate in the government-imposed or OEM customer-instituted recall involving such products.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
 
Executive Officers of the Company
 
Each executive officer of the Company is appointed by the Board of Directors, serves at its pleasure and holds office until a successor is appointed, or until the earlier of death, resignation or removal. The Board of Directors generally appoints executive officers annually. The executive officers of the Company are as follows:
 
             
Name
 
Age
 
Position
 
John C. Corey
    60     President, Chief Executive Officer and Director
George E. Strickler
    60     Executive Vice President, Chief Financial Officer and Treasurer
Thomas A. Beaver
    54     Vice President of Global Sales and Systems Engineering
Mark J. Tervalon
    41     Vice President of the Company and President of the Stoneridge Electronics Division
 
John C. Corey, President, Chief Executive Officer and Director.  Mr. Corey has served as President and Chief Executive Officer since being appointed by the Board of Directors in January 2006. Mr. Corey has served as a Director on the Board of Directors since January 2004. Prior to his employment with the Company, Mr. Corey served from October 2000, as President and Chief Executive Officer and Director of Safety Components International, a supplier of airbags and components, with worldwide operations.
 
George E. Strickler, Executive Vice President, Chief Financial Officer and Treasurer.  Mr. Strickler has served as Executive Vice President and Chief Financial Officer since joining the Company in January of 2006. Mr. Strickler was appointed Treasurer of the Company in February 2007. Prior to his employment with the Company, Mr. Strickler served as Executive Vice President and Chief Financial Officer for Republic Engineered Products, Inc. (“Republic”), from February 2004 to January of 2006. Before joining Republic, Mr. Strickler was BorgWarner Inc.’s Executive Vice President and Chief Financial Officer from February 2001 to November 2003.
 
Thomas A. Beaver, Vice President of Global Sales and Systems Engineering.  Mr. Beaver has served as Vice President of Global Sales and Systems Engineering of the Company since January of 2005. Prior to this time, Mr. Beaver served as Vice President of Stoneridge Sales and Marketing from January 2000 to January 2005.
 
Mark J. Tervalon, Vice President of the Company and President of the Stoneridge Electronics Division.  Mr. Tervalon has served as President of the Stoneridge Electronics Division and Vice President of the Company since August of 2006. Prior to that, Mr. Tervalon served as Vice President and General Manager of the Electronic Products Division from May 2002 to December 2003 when he became Vice President and General Manager of the Stoneridge Electronics Group.


12


Table of Contents

 
PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “SRI.” As of February 22, 2008, we had 24,207,708 Common Shares without par value, issued and outstanding, which were owned by approximately 300 registered holders, including Common Shares held in the names of brokers and banks (so-called “street name” holdings) who are record holders with approximately 2,000 beneficial owners.
 
The Company has not historically paid or declared dividends, which are restricted under both the senior notes and the asset-based credit facility, on our Common Shares. We may only pay cash dividends in the future if immediately prior to and immediately after the payment is made no event of default shall have occurred and outstanding indebtedness under our asset-based credit facility is not greater than or equal to $20.0 million before and after the payment of the dividend. We currently intend to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness. Accordingly, we do not expect to pay cash dividends in the foreseeable future.
 
High and low sales prices (as reported on the NYSE composite tape) for our Common Shares for each quarter ended during 2007 and 2006 are as follows:
 
                         
     
Quarter Ended
  High     Low  
 
  2007     March 31   $ 12.17     $ 8.25  
        June 30   $ 13.53     $ 10.29  
        September 30   $ 13.76     $ 9.15  
        December 31   $ 10.98     $ 8.00  
  2006     April 1   $ 7.11     $ 4.95  
        July 1   $ 8.45     $ 5.60  
        September 30   $ 9.89     $ 7.05  
        December 31   $ 8.32     $ 6.71  
 
The Company did not repurchase any Common Shares in 2007 or 2006.
 
Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in our Common Shares with the cumulative total return of hypothetical investments in the Hemscott Group — Industry Group 333 (Automotive Parts) Index and the NYSE Market Index based on the respective market price of each investment at December 31, 2002, 2003, 2004, 2005, 2006 and 2007 assuming in each case an initial investment of $100 on December 31, 2002, and reinvestment of dividends.
 
(PERFORMANCE GRAPH)
 
                                                 
    2002     2003     2004     2005     2006     2007  
 
Stoneridge, Inc. 
    100.00       126.47       127.14       55.63       68.82       67.56  
Hemscott Group—Industry Group 333 Index
    100.00       147.67       151.99       135.13       152.24       163.56  
NYSE Market Index
    100.00       129.55       146.29       158.37       185.55       195.46  
 
For information on “Related Stockholder Matters” required by Item 201(d) of Regulation S-K, refer to Item 12 of this report.


13


Table of Contents

ITEM 6.   SELECTED FINANCIAL DATA.
 
The following table sets forth selected historical financial data and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. In 2007, the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change; and therefore, the corresponding information for prior periods has been reclassified to conform to the current year reportable segment presentation. The selected historical data was derived from our consolidated financial statements.
 
                                         
    For the Fiscal Years Ended December 31,  
    2007     2006     2005     2004     2003  
    (in thousands, except per share data)  
 
Statement of Operations Data:
                                       
Net sales:
                                       
Electronics
  $ 458,672     $ 456,932     $ 401,663     $ 403,322     $ 324,905  
Control Devices
    289,979       271,943       291,434       299,408       299,791  
Eliminations
    (21,531 )     (20,176 )     (21,513 )     (20,935 )     (18,031 )
                                         
Consolidated
  $ 727,120     $ 708,699     $ 671,584     $ 681,795     $ 606,665  
                                         
Gross profit
  $ 167,723     $ 158,906     $ 148,588     $ 174,987     $ 156,030  
Operating income (loss)(A)
  $ 34,799     $ 35,063     $ 23,303     $ (125,570 )   $ 58,370  
Income (loss) before income taxes and cumulative effect of accounting change(A) 
                                       
Electronics
  $ 20,692     $ 20,882     $ (216 )   $ 27,562     $ 15,578  
Control Devices
    15,825       13,987       19,429       (147,960 )     46,227  
Other corporate activities
    8,676       6,392       8,217       (4,477 )     (3,644 )
Corporate interest
    (21,969 )     (21,622 )     (22,994 )     (24,281 )     (27,141 )
                                         
Consolidated
  $ 23,224     $ 19,639     $ 4,436     $ (149,156 )   $ 31,020  
                                         
Net income (loss)(A)
  $ 16,671     $ 14,513     $ 933     $ (92,503 )   $ 21,379  
                                         
Basic net income (loss) per share(A)
  $ 0.72     $ 0.63     $ 0.04     $ (4.09 )   $ 0.95  
                                         
Diluted net income (loss) per share(A)
  $ 0.71     $ 0.63     $ 0.04     $ (4.09 )   $ 0.94  
                                         
Other Data:
                                       
Product development expenses
  $ 44,203     $ 40,840     $ 39,193     $ 36,145     $ 28,714  
Capital expenditures
    18,141       25,895       28,934       23,917       26,382  
Depreciation and amortization(B)
    28,503       26,180       26,157       24,802       22,188  
Balance Sheet Data (at period end):
                                       
Working capital
  $ 184,788     $ 135,915     $ 116,689     $ 123,317     $ 72,832  
Total assets
    527,769       501,807       463,038       473,001       573,001  
Long-term debt, less current portion
    200,000       200,000       200,000       200,052       200,245  
Shareholders’ equity
    206,189       178,622       153,991       155,605       243,406  
 
 
(A) Our 2004 operating loss, loss before income taxes and cumulative effect of accounting change, net loss, and related basic and diluted loss per share amounts include a non-cash, pre-tax goodwill impairment loss of $183,450, which was recorded in the fourth quarter of 2004.
 
(B) These amounts represent depreciation and amortization on fixed and finite-lived intangible assets.


14


Table of Contents

 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview
 
The following Management Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Stoneridge, Inc. (the “Company”). This MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements.
 
We are an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
 
For the year ended December 31, 2007, net sales were $727.1 million, an increase of $18.4 million compared with $708.7 million for the year ended December 31, 2006.
 
Our net income for the year ended December 31, 2007 was $16.7 million, or $0.71 per diluted share, compared with net income of $14.5 million, or $0.63 per diluted share, for 2006.
 
Our increase in net sales was predominantly attributable to increased European commercial vehicle production, new program launches in both North America and Europe and favorable foreign currency exchange rates. The increase was partially offset by the substantial decline in North American medium- and heavy-duty truck production and a decline in North American light vehicle production. Medium- and heavy-duty truck production was unfavorably impacted by the new diesel emissions regulations that were implemented on January 1, 2007 in the U.S.
 
Our 2007 profitability was positively affected by new program sales during the year, especially in the third and fourth quarters. During 2007, our sensor business launched over $26.0 million in new business revenue and our aftermarket business in Europe grew by approximately $9.0 million in revenue as we continued to penetrate new geographic markets and expand our product offerings. We received new business to supply electronic products to a military vehicle program, which is expected to continue through the first half of 2008. We were also able to partially offset direct material cost increases through hedging transactions for copper and fixed-price supplier agreements for zinc. In addition, we received cash and recorded gains from the divestiture of non-strategic assets, which included two idle facilities and the Company’s airplane in 2007.
 
Our increase in profitability was partially offset by increased depreciation expense and direct material costs as well as operational inefficiencies related to new product launches and supply chain management. In addition, the Company’s selling, general and administrative (“SG&A”) expenses increased due to additional spending in sales and marketing support for a new product launch, higher design and development expenses, increased systems implementation costs and a $1.2 million one-time gain related to the settlement of the life insurance benefits portion of a postretirement plan in 2006.
 
Also affecting our profitability were restructuring initiatives that began in the fourth quarter of 2007 to improve the Company’s manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida and Mitcheldean, England locations. Related 2007 expenses, primarily comprised of one-time termination benefits, were approximately $1.0 million. We anticipate incurring total pre-tax charges of approximately $9.0 million to $13.0 million in 2008 for the restructuring, net of an expected gain from a future Sarasota facility sale. We expect these initiatives to be substantially completed in 2008 and are expecting projected benefits to be in the range of $8.0 million to $12.0 million in 2009 and beyond.
 
Also in 2007, our PST Eletrônica S.A. (“PST”) joint venture in Brazil, which is an electronic system provider focused on security and convenience applications primarily for the vehicle and motorcycle industry, continued to perform well, resulting in equity earnings of $10.4 million compared to $6.8 million in the previous year. We also received dividend payments from PST of $5.6 million and $3.7 million in 2007 and 2006, respectively. On October 23, 2007, we announced that our PST joint venture filed certain financial information with the Brazilian Securities Commission (Comissão de Valores Mobiliários). We currently hold a 50% equity interest in PST.


15


Table of Contents

Outlook
 
We expect 2008 production levels in the North American automotive and commercial vehicle markets to be slightly lower than 2007 and the European commercial vehicle market to be comparable to 2007. We also expect that our 2008 sales will be favorably affected by new program sales.
 
We expect that the U.S. diesel emissions regulations adopted in 2007 will continue to negatively impact medium- and heavy-duty truck production in the U.S. and our financial results through the first half of 2008. For our Electronics reportable segment, we anticipate that new program sales and stable demand outside of the U.S. will offset the continued downturn in the U.S. medium- and heavy-duty truck production.
 
We expect our 2008 automotive related sales to be stagnant or slightly decline compared to 2007 levels. For our Control Devices reportable segment, we expect continued growth in our emissions sensing and other new products; however, these increases will be offset by customer-demanded price reductions and forecasted lower market-share for our traditional North American automotive original equipment manufacturers.
 
Significant factors inherent to our markets that could affect our results for 2008 include general economic conditions and the financial stability of our customers and suppliers as well as our ability to successfully execute our planned restructuring, productivity and cost reduction initiatives. We are undertaking these initiatives to mitigate commodity price increases and customer-demanded price reductions. Our management team is focused on improving operational efficiency while adapting to the needs of our customers. Our results for 2008 also depend on conditions in the automotive and commercial vehicle markets, which are generally dependent on domestic and international economies.
 
We continue our transition to low-cost manufacturing locations. Initially, this initiative will result in restructuring costs stemming from facility closures and production relocations. However, the longer-term effects of such an initiative will enable us to reduce our operating costs and increase global sourcing capacity to our customers.
 
Results of Operations
 
We are primarily organized by markets served and products produced. Under this organizational structure, our operations have been aggregated into two reportable segments: Electronics and Control Devices. The Electronics reportable segment, formerly known as the Vehicle Management & Power Distribution reportable segment, includes results of operations that design and manufacture electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment includes results from our operations that design and manufacture electronic and electromechanical switches, control actuation devices and sensors.
 
During the third quarter of 2007, a European operating segment 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 an operating segment 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.
 
Beginning in 2005, we changed from a calendar year-end to a 52-53 week fiscal year-end. Since then, our fiscal quarters were comprised of 13-week periods. On October 30, 2006, we changed back to a calendar (December 31) fiscal year end, and therefore the 2007 and 2006 fiscal years ended on December 31, 2007 and December 31, 2006, respectively. Our fiscal quarters are now comprised of three month periods.


16


Table of Contents

Fiscal Year Ended December 31, 2007 Compared To Fiscal Year Ended December 31, 2006
 
Net Sales.  Net sales for our reportable segments, excluding inter-segment sales, for the fiscal years ended December 31, 2007 and 2006 are summarized in the following table (in thousands):
 
                                                 
    For the Fiscal Years Ended December 31,     $ Increase/
    % Increase/
 
    2007     2006     (Decrease)     (Decrease)  
 
Electronics
  $ 441,717       60.7 %   $ 442,427       62.4 %   $ (710 )     (0.2 )%
Control Devices
    285,403       39.3       266,272       37.6       19,131       7.2  %
                                                 
Total net sales
  $ 727,120       100.0 %   $ 708,699       100.0 %   $ 18,421       2.6  %
                                                 
 
The decrease in net sales for our Electronics segment was primarily due to a substantial decline in medium- and heavy-duty truck production in North America. As referenced above, medium- and heavy-duty truck production in 2007 was unfavorably impacted by the new 2007 diesel emissions regulations that were implemented on January 1, 2007 in the U.S. Offsetting the unfavorable impact of the new diesel emissions standards were new program revenues in North America and Europe, increased production volume in our European commercial vehicle operations and favorable foreign currency exchange rates. Favorable foreign currency exchange rates contributed $18.6 million to net sales for the fiscal year ended December 31, 2007.
 
The increase in net sales for our Control Devices segment was primarily attributable to new product launches in our temperature and speed sensor businesses. The increase was partially offset by production volume reductions at our major customers.
 
Net sales by geographic location for the fiscal years ended December 31, 2007 and 2006 are summarized in the following table (in thousands):
 
                                                 
    For the Fiscal Years Ended December 31,     $ Increase/
    % Increase/
 
    2007     2006     (Decrease)     (Decrease)  
 
North America
  $ 522,730       71.9 %   $ 541,479       76.4 %   $ (18,749 )     (3.5 )%
Europe and other
    204,390       28.1       167,220       23.6       37,170       22.2  %
                                                 
Total net sales
  $ 727,120       100.0 %   $ 708,699       100.0 %   $ 18,421       2.6  %
                                                 
 
The decrease in North American sales was primarily attributable to lower sales to our commercial vehicle customers as a result of lower demand because of the new 2007 U.S. diesel emission regulations and lower production volume from our North American light vehicle customers. The decrease was partially offset by sales related to new program launches of sensor products and new electronic products supplied for the production of military vehicles. Our increase in sales outside of North America for the year was primarily due to increased production volume, new product revenues and favorable foreign currency exchange rates. The favorable effect of foreign currency exchange rates affected net sales outside North America by $18.6 million for the fiscal year ended December 31, 2007.


17


Table of Contents

Consolidated statements of operations as a percentage of net sales for the fiscal years ended December 31, 2007 and 2006 are presented in the following table (in thousands):
 
                                         
    For the Fiscal Years Ended December 31,     $ Increase/
 
    2007     2006     (Decrease)  
 
Net Sales
  $ 727,120       100.0 %   $ 708,699       100.0 %   $ 18,421  
Costs and Expenses:
                                       
Cost of goods sold
    559,397       76.9       549,793       77.6       9,604  
Selling, general and administrative
    133,708       18.4       124,538       17.6       9,170  
Gain on sale of property, plant & equipment, net
    (1,710 )     (0.2 )     (1,303 )     (0.2 )     (407 )
Restructuring charges
    926       0.1       608       0.1       318  
                                         
Operating Income
    34,799       4.8       35,063       4.9       (264 )
                                         
Interest expense, net
    21,759       3.0       21,744       3.1       15  
Equity in earnings of investees
    (10,893 )     (1.5 )     (7,125 )     (1.0 )     (3,768 )
Other loss, net
    709       0.1       805       0.1       (96 )
                                         
Income Before Income Taxes
    23,224       3.2       19,639       2.7       3,585  
Provision for income taxes
    6,553       0.9       5,126       0.7       1,427  
                                         
Net Income
  $ 16,671       2.3 %   $ 14,513       2.0 %   $ 2,158  
                                         
 
Cost of Goods Sold.  The decrease in cost of goods sold as a percentage of sales was due to increased sales volume from new business awards, ongoing procurement initiatives and favorable product mix. The decrease was partially offset by unfavorable material costs, operational inefficiencies related to new product launches and higher depreciation expense.
 
Selling, General and Administrative Expenses.  Product development expenses included in SG&A were $44.2 million and $40.8 million for the fiscal years ended December 31, 2007 and 2006, respectively. The increase related to development spending in the areas of tachographs and instrumentation. In the future, the Company intends to reallocate its resources to focus on the design and development of new products rather than primarily focusing on sustaining existing product programs.
 
The increase in SG&A expenses, excluding product development expenses, in 2007 compared with 2006 was primarily attributable to the increase in our selling and marketing activity to support new products in Europe, the increase in systems implementation expenses related to a new information system in Europe, and a $1.2 million one-time gain in the third quarter of 2006 related to the settlement of the life insurance benefits portion of a postretirement plan.
 
Restructuring Charges.  The increase in restructuring charges was primarily the result of one-time termination benefits related to the restructuring initiatives announced in 2007 to improve manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida and Mitcheldean, England locations. No fixed-asset impairment charges were incurred because assets are primarily being transferred to our other locations for continued production. We expect these initiatives to be substantially completed in 2008.


18


Table of Contents

Restructuring charges recorded by reportable segment during the year ended December 31, 2007 were as follows (in thousands):
 
                         
    For the Fiscal Year Ended
 
    December 31, 2007  
                Total
 
                Consolidated
 
                Restructuring
 
    Electronics     Control Devices     Charges  
 
Severance costs
  $ 542     $ 357     $ 899  
Other costs
          27       27  
                         
Total restructuring charges
  $ 542     $ 384     $ 926  
                         
 
Also included in severance costs for the Electronics reporting segment in 2007 was $0.1 million of expense related to the rationalization of certain manufacturing facilities in Europe and North America announced in 2005. These restructuring initiatives were completed in 2007.
 
Restructuring charges recorded by reportable segment during the year ended December 31, 2006 were as follows (in thousands):
 
                         
    For the Fiscal Year Ended
 
    December 31, 2006  
                Total
 
                Consolidated
 
                Restructuring
 
    Electronics     Control Devices     Charges  
 
Severance costs
  $ 369     $ 156     $ 525  
Other costs
          83       83  
                         
Total restructuring charges
  $ 369     $ 239     $ 608  
                         
 
Severance costs related to a reduction in workforce. Other associated costs include miscellaneous expenditures associated with exiting business activities.
 
Gain on Sale of Property, Plant and Equipment, net.  The increase was primarily attributable to a gain on the sale of two closed facilities during 2007 exceeding the gain on the sale of land during the first quarter of 2006.
 
Equity in Earnings of Investees.  The increase was predominately attributable to the increase in equity earnings recognized from our PST joint venture. The increase primarily reflects higher volume for PST’s security product lines.
 
Income Before Income Taxes.  Income before income taxes is summarized in the following table by reportable segment (in thousands):
 
                         
    For the Fiscal Years
       
    Ended December 31,     $ Increase/
 
    2007     2006     (Decrease)  
 
Electronics
  $ 20,692     $ 20,882     $ (190 )
Control Devices
    15,825       13,987       1,838  
Other corporate activities
    8,676       6,392       2,284  
Corporate interest expense
    (21,969 )     (21,622 )     (347 )
                         
Income before income taxes
  $ 23,224     $ 19,639     $ 3,585  
                         
 
The decrease in income before income taxes in the Electronics segment was related to reduced volume and increased SG&A expenses. The increased SG&A expenses were predominantly due to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.


19


Table of Contents

The increase in income before income taxes in the Control Devices reportable segment was primarily due to increased sales volume and new product launches. These factors were offset by operating inefficiencies related to a new product launch.
 
The increase in income before income taxes from other corporate activities was primarily due to a reduction in foreign exchange losses recorded in the previous year and an increase in equity earnings from our PST joint venture of $3.6 million.
 
Income before income taxes by geographic location for the fiscal years ended December 31, 2007 and 2006 are summarized in the following table (in thousands):
 
                                                 
    For the Fiscal Years Ended December 31,     $ Increase/
    % Increase/
 
    2007     2006     (Decrease)     (Decrease)  
 
North America
  $ 12,405       53.4 %   $ 10,847       55.2 %   $ 1,558       14.4 %
Europe and other
    10,819       46.6       8,792       44.8       2,027       23.1 %
                                                 
Income before income taxes
  $ 23,224       100.0 %   $ 19,639       100.0 %   $ 3,585       18.3 %
                                                 
 
The increase in our profitability in North America was primarily attributable to increased revenue from new sensor product launches and new electronic products supplied for the production of military vehicles, which is expected to continue through the first half of 2008. The increase was primarily offset by unfavorable variances related to a new product launch, lower North American automotive and commercial vehicle production and contractual price reductions with our customers. The increase in our profitability outside North America was primarily due to increased European commercial vehicle production and revenue from new program launches. The increase was offset by higher SG&A related to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.
 
Provision for Income Taxes.  We recognized a provision for income taxes of $6.6 million, or 28.2% of pre-tax income, and $5.1 million, or 26.1% of the pre-tax income, for federal, state and foreign income taxes for the years ended December 31, 2007 and 2006, respectively. The increase in the effective tax rate was primarily attributable to the increase in higher taxed domestic earnings and the increase over the prior year of the valuation allowance recorded against deferred tax assets in the United Kingdom. These increases were partially offset by a deferred tax benefit related to a change in state tax law.
 
Fiscal Year Ended December 31, 2006 Compared To Fiscal Year Ended December 31, 2005
 
Net Sales.  Net sales for our reportable segments, excluding inter-segment sales, for the fiscal years ended December 31, 2006 and 2005 are summarized in the following table (in thousands):
 
                                                 
    For the Fiscal Years Ended December 31,     $ Increase/
    % Increase/
 
    2006     2005     (Decrease)     (Decrease)  
 
Electronics
  $ 442,427       62.4 %   $ 384,943       57.3 %   $ 57,484       14.9  %
Control Devices
    266,272       37.6       286,641       42.7       (20,369 )     (7.1 )%
                                                 
Total net sales
  $ 708,699       100.0 %   $ 671,584       100.0 %   $ 37,115       5.5  %
                                                 
 
The increase in net sales for our Electronics segment was primarily due to increased sales to our commercial vehicle customers because North American demand was strong during the year. The most significant factor behind the increase in demand was related to the 2007 implementation of more stringent diesel emissions standards in the U.S. Overall commercial vehicle demand increased in 2006 in anticipation of the 2007 emission changes. In addition to the North American volume increase, our revenues also increased as a result of new product sales in Europe and a $1.6 million impact from foreign currency exchange rates for the year. Net sales for our Control Devices segment declined as a result of lower production volumes at the traditional domestic automakers and product price reductions. These declines were partially offset by new product sales in our European operations.


20


Table of Contents

Net sales by geographic location for the fiscal years ended December 31, 2006 and 2005 are summarized in the following table (in thousands):
 
                                                 
    For the Fiscal Years Ended December 31,     $ Increase/
    % Increase/
 
    2006     2005     (Decrease)     (Decrease)  
 
North America
  $ 541,479       76.4 %   $ 532,523       79.3 %   $ 8,956       1.7 %
Europe and other
    167,220       23.6       139,061       20.7       28,159       20.2 %
                                                 
Total net sales
  $ 708,699       100.0 %   $ 671,584       100.0 %   $ 37,115       5.5 %
                                                 
 
The increase in North American sales was primarily attributable to increased sales to our commercial vehicle customers as a result of strong North American demand. The increase was substantially offset by unfavorable North American light vehicle production and product price reductions. The increase in sales outside North America was primarily due to new product revenues and favorable foreign currency exchange rates. The favorable effect of foreign currency exchange rates impacted net sales outside North America by $1.6 million for the fiscal year ended December 31, 2006.
 
Consolidated statements of operations as a percentage of net sales for the fiscal years ended December 31, 2006 and 2005 are presented in the following table (in thousands):
 
                                         
    For the Fiscal Years Ended December 31,     $ Increase/
 
    2006     2005     (Decrease)  
 
Net Sales
  $ 708,699       100.0 %   $ 671,584       100.0 %   $ 37,115  
Costs and Expenses:
                                       
Cost of goods sold
    549,793       77.6       522,996       77.9       26,797  
Selling, general and administrative
    124,302       17.5       116,836       17.4       7,466  
Provision for doubtful accounts
    236       0.0       3,711       0.6       (3,475 )
Gain on sale of property, plant and equipment, net
    (1,303 )     (0.2 )     (360 )     (0.1 )     (943 )
Restructuring charges
    608       0.1       5,098       0.7       (4,490 )
                                         
Operating Income
    35,063       5.0       23,303       3.5       11,760  
                                         
Interest expense, net
    21,744       3.1       23,872       3.6       (2,128 )
Equity in earnings of investees
    (7,125 )     (1.0 )     (4,052 )     (0.6 )     (3,073 )
Other (income) loss, net
    805       0.1       (953 )     (0.1 )     1,758  
                                         
Income Before Income Taxes
    19,639       2.8       4,436       0.6       15,203  
Provision for income taxes
    5,126       0.7       3,503       0.5       1,623  
                                         
Net Income
  $ 14,513       2.1 %   $ 933       0.1 %   $ 13,580  
                                         
 
Cost of Goods Sold.  This decrease in cost of goods sold as a percentage of sales was predominately due to operational improvements and increased sales volume. Offsetting these factors were unfavorable material price variances resulting from raw material price increases and product price reductions.
 
Selling, General and Administrative Expenses.  The increase in non-product development SG&A expenses in 2006 compared with 2005 was primarily attributable to the increase in sales and infrastructure costs related to a new product launch and costs related to a consulting agreement for a former employee. These increases were partially offset by a $1.2 million one-time gain related to the settlement of the life insurance benefits portion of a postretirement benefit plan. During 2005, our SG&A costs benefited from non-recurring legal and commercial settlements. Product development expenses included in SG&A were $40.8 million and $39.2 million for the fiscal years ended December 31, 2006 and 2005, respectively.
 
Provision for Doubtful Accounts.  The decrease in the provision for doubtful accounts was primarily a function of bad debt charges associated with customer bankruptcies in 2005 exceeding the bad debt charges associated with customer bankruptcies in 2006.


21


Table of Contents

Restructuring Charges.  In January 2005, we announced that we would undertake restructuring efforts related to the rationalization of certain manufacturing facilities in Europe and North America. The restructuring was a result of our cost reduction initiatives. The decrease in restructuring charges was a result of the substantial completion of our previously announced restructuring initiatives.
 
Interest Expense, Net.  The decrease in interest expense, net was primarily due to an increase in interest income in 2006. Interest income in 2006 and 2005 was $2.9 million and $0.9 million, respectively. This increase was related to a $1.2 million past due interest payment from PST and increased interest generated from our cash and cash equivalents.
 
Equity in Earnings of Investees.  The increase in equity earnings from investees was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil. The increase primarily reflects higher volume and pricing for PST’s security product lines.
 
Other (Income) Loss, Net.  The decrease in other income was primarily the result of unfavorable foreign exchange contract variances. The decrease was offset by a $1.6 million gain on the sale of our partnership interest in Industrial Development Associates (“IDA”).
 
Income Before Income Taxes.  Income before income taxes is summarized in the following table by reportable segment for the fiscal years ended December 31, 2006 and 2005 (in thousands):
 
                         
    For the Fiscal Years
       
    Ended December 31,     $ Increase/
 
    2006     2005     (Decrease)  
 
Electronics
  $ 20,882     $ (216 )   $ 21,098  
Control Devices
    13,987       19,429       (5,442 )
Other corporate activities
    6,392       8,217       (1,825 )
Corporate interest expense
    (21,622 )     (22,994 )     1,372  
                         
Income before income taxes
  $ 19,639     $ 4,436     $ 15,203  
                         
 
The increase in income before income taxes at the Electronics reportable segment was primarily the result of increased sales volume, a reduction in bad debt expense, and operational improvements at our United Kingdom operation. Offsetting these gains were unfavorable raw material purchase price variances and product price reductions.
 
The decrease in income before income taxes at the Control Devices reportable segment was primarily the result of ongoing product price reductions and increased raw material costs. These factors were partially offset by a reduction in restructuring and bad debt expenses.
 
Income before income taxes by geographic location for the fiscal years ended December 31, 2006 and 2005 is summarized in the following table (in thousands):
 
                                                 
    For the Fiscal Years Ended December 31,     $ Increase/
    % Increase/
 
    2006     2005     (Decrease)     (Decrease)  
 
North America
  $ 10,847       55.2 %   $ 7,208       162.5 %   $ 3,639       50.5 %
Europe and other
    8,792       44.8       (2,772 )     (62.5 )     11,564       417.2 %
                                                 
Income before income taxes
  $ 19,639       100.0 %   $ 4,436       100.0 %   $ 15,203       342.7 %
                                                 
 
The increase in our profitability in North America was primarily attributable to increased North American commercial vehicle volume and lower bad debt expenses. The positive variance was partially offset by unfavorable raw material variances and product price reductions. The increase in our profitability outside North America was primarily due to the operational improvement at our United Kingdom operations, which experienced significant operational inefficiencies in 2005, and increased sales volume. These improvements were partially offset by costs related to the start-up of our Suzhou, China, manufacturing facility.


22


Table of Contents

Provision for Income Taxes.  We recognized a provision for income taxes of $5.1 million, or 26.1% of pre-tax income, and $3.5 million, or 79.0% of the pre-tax income, for federal, state and foreign income taxes for the years ended December 31, 2006 and 2005, respectively. The decrease in the effective tax rate was primarily attributable to an increase in pre-tax earnings and a corresponding reduction in the amount of additional valuation allowance needed that resulted from the improved performance of our United Kingdom operations.
 
Liquidity and Capital Resources
 
Summary of Cash Flows (in thousands):
 
                         
    For the Fiscal Years
       
    Ended December 31,     $ Increase/
 
    2007     2006     (Decrease)  
 
Cash provided by (used for):
                       
Operating activities
  $ 33,525     $ 46,540     $ (13,015 )
Investing activities
    (5,826 )     (24,609 )     18,783  
Financing activities
    900       107       793  
Effect of exchange rate changes on cash and cash equivalents
    1,443       3,060       (1,617 )
                         
Net change in cash and cash equivalents
  $ 30,042     $ 25,098     $ 4,944  
                         
 
The decrease in net cash provided by operating activities was primarily due to a larger investment in working capital. Specifically, cash used to finance movements in working capital asset and liability accounts was a use of funds in the current year of $15.6 million versus an increase of funds of $6.7 million in the prior year. Higher working capital requirements in 2007 were driven by our restructuring initiatives and increased sales in the fourth quarter of 2007 to customers with contractually longer payment terms.
 
The decrease in net cash used by investing activities was attributable to the $12.3 million in proceeds from the divestiture of non-strategic assets, which included two idle facilities and the Company airplane in 2007. In addition, we used $7.7 million less cash for capital projects in 2007 compared to the prior period. In 2006, we invested $2.6 million in our Minda Stoneridge Instruments Limited joint venture and received cash of $1.2 million from the sale of our partnership interest in IDA.
 
Cash provided by financing activities for the years ended December 31, 2007 and 2006 was primarily related to proceeds from the exercise of share options, partially offset by cash used for fees related to the completion of our credit agreement amendment during the first quarter of 2006 and the completion of our new asset-based credit facility in the fourth quarter of 2007. See Note 4 to the Company’s consolidated financial statements for further information regarding the Company’s senior notes and credit facilities.
 
As discussed in Note 9 to our consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $8.6 million and $16.1 million at December 31, 2007 and 2006, respectively. The purpose of these investments is to reduce exposure related to our British pound-denominated receivables. The estimated fair value of these contracts at December 31, 2007 and 2006, per quoted market sources, was approximately $(0.03) million and $(0.5) million, respectively. In 2007 and 2006, the Company used foreign currency option contracts to reduce the risk of exposures to the Mexican peso. The Company’s foreign currency option contracts were expired as of December 31, 2007 and 2006, respectively. As discussed in Note 9, 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 another fixed price swap contract for 1.0 million pounds of copper, which will last through December 2008. The purpose of these contracts is to reduce our price risk as it relates to copper prices. As of December 31, 2007, the fair value of the fixed price commodity swap contract, per quoted market sources, was approximately $0.1 million.


23


Table of Contents

The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2007 (in thousands):
 
                                         
          Less than
                After
 
Contractual Obligations:
  Total     1 Year     2-3 Years     4-5 Years     5 Years  
 
Long-term debt
  $ 200,000     $     $     $ 200,000     $  
Operating leases
    21,772       5,631       6,828       3,231       6,082  
Employee benefit plans
    9,546       757       1,674       1,834       5,281  
Uncertain income tax benefits(1)
    1,008       1,008                    
                                         
Total contractual obligations
  $ 232,326     $ 7,396     $ 8,502     $ 205,065     $ 11,363  
                                         
 
 
(1) See Note 5 to the accompanying consolidated financial statements for further information with respect to our uncertain income tax benefits.
 
Future capital expenditures are expected to be consistent with recent levels. Management will continue to focus on reducing its weighted average cost of capital and believes that cash flows from operations and the availability of funds from our credit facilities will provide sufficient liquidity to meet our future growth and operating needs.
 
As outlined in Note 4 to our consolidated financial statements, on November 2, 2007, we finalized our new asset-based credit facility, which permits borrowing up to a maximum level of $100.0 million. This facility provides us with lower borrowing rates and allows us the flexibility to refinance our outstanding debt. At December 31, 2007, 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 December 31, 2007, the Company had borrowing capacity of $73.5 million based on eligible current assets. The Company was in compliance with all covenants at December 31, 2007.
 
As of May 2007, the Company’s $200.0 million senior notes were redeemable at 105.75. Given the Company’s senior notes are redeemable, we may seek to retire the senior notes through a redemption, cash purchases, open market purchases, privately negotiated transactions or otherwise. Such redemptions, purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In 2008, we have purchased and retired $11.0 million in face value of our senior notes.
 
In the fourth quarter of 2007, the Company announced that its PST joint venture filed certain financial information with the Brazilian Securities Commission (Comissão de Valores Mobiliários). The Company currently holds a 50% equity interest in PST. We also received dividend payments from PST of $5.6 million and $3.7 million in 2007 and 2006, respectively. In future years, we expect (but cannot guarantee) that we will receive dividend payments from PST.
 
We continue our transition to low-cost manufacturing locations that will enable us to reduce our operating costs and provide global sourcing capacity to our customers. Such initiatives will result in restructuring costs stemming from facility closures and production relocations. We are presently having a new facility constructed, which will expand our leased manufacturing capacity in Estonia.
 
We announced restructuring initiatives in the fourth quarter of 2007 and expect them to be substantially complete by December 31, 2008. We anticipate incurring total pre-tax charges of approximately $9.0 million to $13.0 million in 2008 for the restructuring, net of the gain on the future sale of our Sarasota facility.
 
Inflation and International Presence
 
Given the current economic climate and recent increases or fluctuations in certain commodity prices, we believe that a continuation of such price increases would significantly affect our profitability. Furthermore, by operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Based on the current economic conditions in these countries, we believe we are not significantly exposed to adverse exchange rate risk or economic conditions.


24


Table of Contents

Critical Accounting Policies and Estimates
 
Estimates.  The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
 
On an ongoing basis, we evaluate estimates and assumptions used in our financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
 
We believe the following are “critical accounting policies” — those most important to the financial presentation and those that require the most difficult, subjective or complex judgments.
 
Revenue Recognition and Sales Commitments.  We recognize revenues from the sale of products, net of actual and estimated returns of products sold based on authorized returns and historical trends in sales returns, at the point of passage of title, which is generally at the time of shipment. We often enter into agreements with our customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is our obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to renegotiation, which may affect product pricing. In certain limited instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses immediately. These agreements generally may also be terminated by our customers at any time.
 
On an ongoing basis, we receive blanket purchase orders from our customers, which include pricing terms. Purchase orders do not always specify quantities. We recognize revenue based on the pricing terms included in our purchase orders as our products are shipped to our customers. We are asked to provide our customers with annual cost reductions as part of certain agreements. In addition, we have ongoing adjustments to our pricing arrangements with our customers based on the related content, the cost of our products and other commercial factors. Such pricing adjustments are recognized as they are negotiated with our customers.
 
Warranties.  Our warranty reserve is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet dates. This estimate is based on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims. To estimate the warranty reserve, we are required to forecast the resolution of existing claims as well as expected future claims on products previously sold. Although we believe that our warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. Our customers are increasingly seeking to hold suppliers responsible for product warranties, which could negatively impact our exposure to these costs.
 
Allowance for Doubtful Accounts.  We have concentrations of sales and trade receivable balances with a few key customers. Therefore, it is critical that we evaluate the collectibility of accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet their financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. Additionally, we review historical trends for collectibility in determining an estimate for our allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. We do not have collateral requirements with our customers.
 
Contingencies.  We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters.


25


Table of Contents

We have accrued for estimated losses in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating that amount of probable loss. The reserves may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
 
Inventory Valuation.  Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for U.S. inventories and by the first-in, first-out (“FIFO”) method for non-U.S. inventories. Where appropriate, standard cost systems are utilized for purposes of determining cost and the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of the lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.
 
Goodwill.  Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The valuation methodologies employed by the Company use subjective measures including forward looking financial information and discount rates that directly impact the resulting fair values used to test the Company’s business units for impairment. See Note 2 to our consolidated financial statements for more information on our application of this accounting standard, including the valuation techniques used to determine the fair value of goodwill.
 
Share-Based Compensation.  The estimate for our share-based compensation expense involves a number of assumptions. We believe each assumption used in the valuation is reasonable because it takes into account the experience of the plan and reasonable expectations. We estimate volatility and forfeitures based on historical data, future expectations and the expected term of the share-based compensation awards. The assumptions, however, involve inherent uncertainties. As a result, if other assumptions had been used, share-based compensation expense could have varied.
 
Pension and Other Postretirement Benefits.  The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2007, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note 8 to the consolidated financial statements.
 
The expected long-term return on assets is determined as a weighted average of the expected returns for each asset class held by the defined-benefit pension plan at the date. The expected return on bonds has been based on the yield available on similar bonds (by currency, issuer and duration) at that date. The expected return on equities is based on an equity risk premium of return above that available on long-term government bonds of a similar duration and the same currency as the liabilities.
 
Discount rates for our defined benefit pension plan in the United Kingdom are determined using the average long-term sterling AA corporate bond. On December 31, 2007, the yield was approximately 5.8%, with the individual yields on most of these yields of most of the bonds being within a range of 5.4% - 6.2%.
 
Discount rates for our other postretirement benefit plan in the U.S. are determined using the Moody’s Aa Corporate Bond Index. The average equivalent annual rate on a Aa Corporate bond at December 31, 2007 was 5.9%.
 
Deferred Income Taxes.  Deferred income taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred tax assets include, among other items, net operating loss carryforwards and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Due to the length of the carryforward period it is unlikely that the deferred tax assets will expire prior to being utilized. The Company does not provide deferred income taxes on unremitted earnings of certain non-U.S. subsidiaries, which are deemed permanently reinvested.


26


Table of Contents

SFAS No. 109, Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment, and in making this evaluation, the Company considers available positive and negative evidence, including past results, the existence of cumulative losses in recent periods, and our forecast of taxable income for the current year and future years. A valuation allowance may need to be recorded against U.S. deferred tax assets in the event that future U.S. taxable income is materially different than estimated amounts. The primary risk factor is a more than expected severe downturn in the U.S. automotive and commercial vehicle segments of which the Company has significant U.S. operations.
 
Effective January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”) interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
 
Restructuring.  We have recorded restructuring charges in the recent period in connection with improving manufacturing efficiency and cost position by transferring production to other locations. These charges are recorded when management has committed to a plan and incurred a liability related to the plan. Also in connection with this initiative, we recorded liabilities for severance costs. No fixed-asset impairment charges were incurred because assets are primarily being transferred to our other locations for continued production. Estimates for work force reductions and other costs savings are recorded based upon estimates of the number of positions to be terminated, termination benefits to be provided and other information as necessary. Management evaluates the estimates on a quarterly basis and will adjust the reserve when information indicates that the estimate is above or below the initial estimate.
 
For further discussion of our restructuring activities, see Note 12 to our consolidated financial statements included in this report.
 
Recently Issued Accounting Standards
 
New accounting standards to be implemented:
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The provisions of SFAS 157 will be applied prospectively. Subsequently, the FASB provide for a one-year deferral of the effective date for nonfinancial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The adoption of SFAS 157 did not have a significant impact on the Company’s financial position, results of operations or cash flows.
 
In December 2007, the 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 condition or results of operations.


27


Table of Contents

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 condition or results of operations.
 
New accounting standards implemented:
 
In June 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted the provisions of FIN 48 as of the January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
 
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which expresses the SEC’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB 108 was effective for the first quarter of 2007. The adoption of SAB 108 did not have an impact on our consolidated financial statements.
 
In May 2007, the FASB issued FASB Staff Position (“FSP”), Definition of Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on determining whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 159 is effective for the first quarter of 2008. We did not elect to use the Fair Value Option for any financial assets and financial liabilities that were not currently recorded at fair value.


28


Table of Contents

Forward-Looking Statements
 
Portions of this report contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, our directors or officers with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, and (iv) growth opportunities related to awarded business. Forward-looking statements may be identified by the words “will,” “may,” “designed to,” “believes,” “plans,” “expects,” “continue,” and similar words and expressions. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
 
  •  the loss or bankruptcy of a major customer;
 
  •  the costs and timing of facility closures, business realignment, or similar actions;
 
  •  a significant change in automotive, medium- and heavy-duty or agricultural and off-highway vehicle production;
 
  •  our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
 
  •  a significant change in general economic conditions in any of the various countries in which we operate;
 
  •  labor disruptions at our facilities or at any of our significant customers or suppliers;
 
  •  the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis;
 
  •  the amount of debt and the restrictive covenants contained in our credit facility;
 
  •  customer acceptance of new products;
 
  •  capital availability or costs, including changes in interest rates or market perceptions;
 
  •  the successful integration of any acquired businesses;
 
  •  the occurrence or non-occurrence of circumstances beyond our control; and
 
  •  those items described in Part I, Item IA (“Risk Factors”).


29


Table of Contents

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Interest Rate Risk
 
From time to time, we are exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At December 31, 2007, however, all of our debt was fixed rate debt. At this time, we do not use financial instruments to manage this risk.
 
Commodity Price Risk
 
Given the current economic climate and the recent increases in certain commodity costs, we currently are experiencing an increased risk, particularly with respect to the purchase of copper, zinc, resins and certain other commodities. We manage this risk through a combination of fixed price agreements, staggered short-term contract maturities and commercial negotiations with our suppliers. We may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. The recent increases in certain commodity costs have negatively affected our operating results, and a continuation of such price increases could significantly affect our profitability.
 
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 another fixed price swap contract for 1.0 million pounds of copper, which will last through December 2008. The purpose of these contracts is to reduce our price risk as it relates to copper prices.
 
Going forward, we believe that our mitigation efforts will offset a substantial portion of the financial impact of these increased costs. However, no assurances can be given that the magnitude or duration of these increased costs will not have a material impact on our future operating results. A hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in commodity prices would not significantly affect our results of operations, financial position or cash flows.
 
Foreign Currency Exchange Risk
 
Our risks related to foreign currency exchange rates have historically not been material; however, given the current economic climate, we are more closely monitoring this risk. We use derivative financial instruments, including foreign currency forward and option contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other foreign currency exposures. As discussed in Note 9 to our consolidated financial statements, we have entered into foreign currency forward contracts that had a notional value of $8.6 million and $16.1 million at December 31, 2007 and 2006, respectively. The purpose of these investments is to reduce exposure related to the Company’s British pound- denominated receivables. The estimated fair value of these contracts at December 31, 2007 and 2006, per quoted market sources, was approximately $(0.03) million and $(0.5) million, respectively. The Company’s foreign currency option contracts expired as of December 31, 2007. We do not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries in which we operate.
 
A hypothetical pre-tax gain (loss) in fair value from a 10.0% favorable or adverse change in quoted currency exchange rates would be approximately $0.8 million or $(0.9) million as of December 31, 2007. For foreign currency contracts outstanding at December 31, 2006, a hypothetical pre-tax gain (loss) in fair value from a 10.0% favorable or adverse change in quoted currency exchange rates would be approximately $1.5 million or $(1.8) million as of December 31, 2006. It is important to note that gains and losses indicated in the sensitivity analysis would generally be offset by gains and losses on the underlying exposures being hedged. Therefore, a hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted foreign currencies would not significantly affect our results of operations, financial position or cash flows.


30


Table of Contents

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 
         
    Page  
 
Consolidated Financial Statements:
       
    32  
    33  
    34  
    35  
    36  
    37  
Financial Statement Schedule:
       
    70  


31


Table of Contents

 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of Stoneridge, Inc.
 
We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stoneridge, Inc. and Subsidiaries at December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 2 to the consolidated financial statements, effective at the beginning of the second quarter of 2005, the Company adopted FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS123(R)) using the modified-prospective-transition method. As discussed in Note 5 to the consolidated financial statements, effective January 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stoneridge, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2008 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Cleveland, Ohio
March 17, 2008


32


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
                 
    December 31,  
    2007     2006  
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $ 95,924     $ 65,882  
Accounts receivable, less reserves of $4,736 and $5,243, respectively
    122,288       106,985  
Inventories, net
    57,392       58,521  
Prepaid expenses and other
    15,926       13,448  
Deferred income taxes
    9,829       9,196  
                 
Total current assets
    301,359       254,032  
                 
Long-Term Assets:
               
Property, plant and equipment, net
    92,752       114,586  
Other Assets:
               
Goodwill
    65,176       65,176  
Investments and other, net
    39,454       30,875  
Deferred income taxes
    29,028       37,138  
                 
Total long-term assets
    226,410       247,775  
                 
Total Assets
  $ 527,769     $ 501,807  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
               
Accounts payable
  $ 69,373     $ 72,493  
Accrued expenses and other
    47,198       45,624  
                 
Total current liabilities
    116,571       118,117  
                 
Long-Term Liabilities:
               
Long-term debt
    200,000       200,000  
Deferred income taxes
    2,665       1,923  
Other liabilities
    2,344       3,145  
                 
Total long-term liabilities
    205,009       205,068  
                 
Shareholders’ Equity:
               
Preferred Shares, without par value, authorized 5,000 shares, none issued
           
Common Shares, without par value, authorized 60,000 shares, issued 24,601 and 23,990 shares and outstanding 24,209 and 23,804 shares, respectively, with no stated value
           
Additional paid-in capital
    154,173       150,078  
Common Shares held in treasury, 392 and 186 shares, respectively, at cost
    (383 )     (151 )
Retained earnings
    38,372       21,701  
Accumulated other comprehensive income
    14,027       6,994  
                 
Total shareholders’ equity
    206,189       178,622  
                 
Total Liabilities and Shareholders’ Equity
  $ 527,769     $ 501,807  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


33


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Net Sales
  $ 727,120     $ 708,699     $ 671,584  
                         
Costs and Expenses:
                       
Cost of goods sold
    559,397       549,793       522,996  
Selling, general and administrative
    133,614       124,302       116,836  
Provision for doubtful accounts
    94       236       3,711  
Gain on sale of property, plant and equipment, net
    (1,710 )     (1,303 )     (360 )
Restructuring charges
    926       608       5,098  
                         
                         
Operating Income
    34,799       35,063       23,303  
                         
Interest expense, net
    21,759       21,744       23,872  
Equity in earnings of investees
    (10,893 )     (7,125 )     (4,052 )
Other (income) loss, net
    709       805       (953 )
                         
                         
Income Before Income Taxes
    23,224       19,639       4,436  
                         
Provision for income taxes
    6,553       5,126       3,503  
                         
                         
Net Income
  $ 16,671     $ 14,513     $ 933  
                         
                         
Basic net income per share
  $ 0.72     $ 0.63     $ 0.04  
                         
Basic weighted average shares outstanding
    23,133       22,866       22,709  
                         
                         
Diluted net income per share
  $ 0.71     $ 0.63     $ 0.04  
                         
Diluted weighted average shares outstanding
    23,548       23,062       22,775  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


34


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
OPERATING ACTIVITIES:
                       
Net income
  $ 16,671     $ 14,513     $ 933  
Adjustments to reconcile net income to net cash provided (used) by operating activities —
                       
Depreciation
    28,299       25,904       25,861  
Amortization
    1,522       1,657       1,560  
Deferred income taxes
    3,823       3,466       815  
Earnings of equity method investees, less dividends received
    (5,299 )     (3,455 )     (1,894 )
Gain on sale of fixed assets
    (1,710 )     (1,303 )     (360 )
Gain on sale of partnership interest
          (1,627 )      
Share-based compensation expense
    2,431       1,953       1,695  
Postretirement benefit settlement gain
          (1,242 )      
Changes in operating assets and liabilities —
                       
Accounts receivable, net
    (13,424 )     (2,739 )     (3,516 )
Inventories, net
    933       (2,350 )     517  
Prepaid expenses and other
    1,563       1,742       (3,744 )
Other assets
    (89 )     2,228       (1,762 )
Accounts payable
    (4,881 )     14,084       505  
Accrued expenses and other
    3,686       (6,291 )     (1,549 )
                         
Net cash provided by operating activities
    33,525       46,540       19,061  
                         
INVESTING ACTIVITIES:
                       
Capital expenditures
    (18,141 )     (25,895 )     (28,934 )
Proceeds from sale of fixed assets
    12,315       2,266       1,664  
Proceeds from sale of partnership interest
          1,153        
Business acquisitions and other
          (2,133 )     (282 )
                         
Net cash used by investing activities
    (5,826 )     (24,609 )     (27,552 )
                         
FINANCING ACTIVITIES:
                       
Repayments of long-term debt
          (44 )     (118 )
Share-based compensation activity
    2,119       301       1  
Other financing costs
    (1,219 )     (150 )     (241 )
                         
Net cash provided (used) by financing activities
    900       107       (358 )
                         
Effect of exchange rate changes on cash and cash equivalents
    1,443       3,060       (2,699 )
                         
Net change in cash and cash equivalents
    30,042       25,098       (11,548 )
Cash and cash equivalents at beginning of period
    65,882       40,784       52,332  
                         
Cash and cash equivalents at end of period
  $ 95,924     $ 65,882     $ 40,784  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for interest, net
  $ 20,637     $ 20,565     $ 22,683  
                         
Cash paid for income taxes, net
  $ 3,672     $ 2,394     $ 4,891  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


35


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
 
                                                                 
                      Common
          Accumulated
             
    Number of
    Number of
    Additional
    Shares
          Other
    Total
       
    Common
    Treasury
    Paid-In
    Held
    Retained
    Comprehensive
    Shareholders’
    Comprehensive
 
    Shares     Shares     Capital     in Treasury     Earnings     Income (Loss)     Equity     Income (Loss)  
 
BALANCE, DECEMBER 31, 2004
    22,780       8     $ 145,764     $     $ 6,255     $ 3,586     $ 155,605          
Net income
                            933             933     $ 933  
Exercise of share options
    10             48                         48        
Issuance of restricted Common Shares
    434                                            
Forfeited restricted Common Shares
    (39 )     39                                      
Repurchased Common Shares for treasury
    (7 )     7             (65 )                 (65 )      
Share-based compensation matters
                1,628                         1,628        
Other comprehensive income (loss):
                                                               
Minimum pension liability adjustments
                                  396       396       396  
Unrealized loss on marketable securities
                                  89       89       89  
Currency translation adjustments
                                  (4,643 )     (4,643 )     (4,643 )
                                                                 
Comprehensive loss
                                                          $ (3,225 )
                                                                 
BALANCE, DECEMBER 31, 2005
    23,178       54       147,440       (65 )     7,188       (572 )     153,991          
Net income
                            14,513             14,513     $ 14,513  
Exercise of share options
    64             393                         393        
Issuance of restricted Common Shares
    694                                            
Forfeited restricted Common Shares
    (118 )     118                                      
Repurchased Common Shares for treasury
    (14 )     14             (86 )                 (86 )      
Share-based compensation matters
                2,245                         2,245        
Other comprehensive income (loss):
                                                               
Minimum pension liability adjustments
                                  1,625       1,625       1,625  
Cumulative effect of adopting SFAS No. 158
                                               
Unrealized gain on marketable securities
                                  (84 )     (84 )     (84 )
Currency translation adjustments
                                  6,025       6,025       6,025  
                                                                 
Comprehensive income
                                                          $ 22,079  
                                                                 
BALANCE, DECEMBER 31, 2006
    23,804       186       150,078       (151 )     21,701       6,994       178,622          
Net income
                            16,671             16,671     $ 16,671  
Exercise of share options
    164             1,552                         1,552        
Issuance of restricted Common Shares
    447                                            
Forfeited restricted Common Shares
    (181 )     181                                      
Repurchased Common Shares for treasury
    (25 )     25             (232 )                 (232 )      
Share-based compensation matters
                2,543                         2,543        
Other comprehensive income:
                                                               
Pension liability adjustments
                                  983       983       983  
Unrealized loss on marketable securities
                                  44       44       44  
Unrealized gain on derivatives
                                  (37 )     (37 )     (37 )
Currency translation adjustments
                                  6,043       6,043       6,043  
                                                                 
Comprehensive income
                                                          $ 23,704  
                                                                 
BALANCE, DECEMBER 31, 2007
    24,209       392     $ 154,173     $ (383 )   $ 38,372     $ 14,027     $ 206,189          
                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


36


Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
 
1.   Organization and Nature of Business
 
Stoneridge, Inc. and its subsidiaries are independent designers and manufacturers of highly engineered electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets.
 
2.   Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying consolidated financial statements include the accounts of Stoneridge, Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). Intercompany transactions and balances have been eliminated in consolidation. Joint ventures in which the Company does not have control, but does have the ability to exercise influence over operating and principal policies are accounted for under the equity method (Note 3).
 
Beginning in 2005, we changed from a calendar year-end to a 52-53 week fiscal year-end. Since then, our fiscal quarters were comprised of 13-week periods. On October 30, 2006, we changed back to a calendar (December 31) fiscal year end, and therefore the 2007 and 2006 fiscal years ended on December 31, 2007 and December 31, 2006, respectively. Our fiscal quarters are now comprised of three month periods.
 
Cash and Cash Equivalents
 
The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value, due to the highly liquid nature and short-term duration of the underlying securities.
 
Accounts Receivable and Concentration of Credit Risk
 
Revenues are principally generated from the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets. Due to the nature of these industries, a significant portion of sales and related accounts receivable are concentrated in a relatively small number of customers. The following table presents the Company’s principal customers, as a percentage of net sales:
 
                         
    For the Fiscal Years Ended December 31,  
    2007     2006     2005  
 
Navistar International
    20 %     25 %     22 %
Ford Motor Company
    8       6       7  
Deere & Company
    7       6       6  
MAN AG
    6       6       2  
General Motors
    6       5       5  
Chrysler LLC
    5       5       9  
Other
    48       47       49  
                         
Total
    100 %     100 %     100 %
                         
 
Accounts receivable from the Company’s five largest customer balances aggregated to approximately $63,932, $57,376 and $50,507 at December 31, 2007, 2006 and 2005, respectively.
 
During 2007, 2006 and 2005, some of the Company’s customers filed for Chapter 11 bankruptcy protection. As a result, the Company established reserves for estimated losses that were expected to result from the bankruptcies


37


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
of approximately $132, $627 and $3,570 for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. The expenses related to the established reserves for estimated losses expected to result from the bankruptcies were recorded in the Company’s consolidated statement of operations as a component of provision for doubtful accounts.
 
Inventories
 
Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 66% of the Company’s inventories at December 31, 2007 and 2006, 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 at December 31:
 
                 
    2007     2006  
 
Raw materials
  $ 36,678     $ 39,832  
Work in progress
    9,065       8,196  
Finished goods
    13,700       12,614  
                 
Total inventories
    59,443       60,642  
Less: LIFO reserve
    (2,051 )     (2,121 )
                 
Inventories, net
  $ 57,392     $ 58,521  
                 
 
Property, Plant and Equipment
 
Property, plant and equipment are recorded at cost and consist of the following at December 31:
 
                 
    2007     2006  
 
Land and land improvements
  $ 3,956     $ 4,654  
Buildings and improvements
    35,869       44,526  
Machinery and equipment
    132,501       130,323  
Office furniture and fixtures
    31,394       36,103  
Tooling
    81,976       80,579  
Vehicles
    403       470  
Leasehold improvements
    2,981       2,190  
Construction in progress
    10,909       18,835  
                 
Total property, plant and equipment
    299,989       317,680  
Less: Accumulated depreciation
    (207,237 )     (203,094 )
                 
Property, plant and equipment, net
  $ 92,752     $ 114,586  
                 


38


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
Depreciation is provided by both the straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation expense for the fiscal years ended December 31, 2007, 2006 and 2005 was $28,299, $25,904 and $25,861, respectively. Depreciable lives within each property classification are as follows:
 
         
Buildings and improvements
    10–40 years  
Machinery and equipment
    3–20 years  
Office furniture and fixtures
    3–10 years  
Tooling
    2–5 years  
Vehicles
    3–5 years  
Leasehold improvements
    3–8 years  
 
Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of property are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income.
 
Goodwill and Other Intangible Assets
 
Under Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill is subject to an annual assessment for impairment (or more frequently if impairment indicators arise) by applying a fair value-based test.
 
The Company performs its annual impairment test of goodwill as of the beginning of the fourth quarter. The Company uses a combination of valuation techniques, which include consideration of market-based approaches and an income approach, in determining the fair value of the Company’s applicable reporting units in the annual impairment test of goodwill. The Company believes that the combination of the valuation models provides a more appropriate valuation of the Company’s reporting units by taking into account different marketplace participant assumptions. The Company, in its estimates of fair value of the Company’s reporting units being tested, utilizes market and income approaches, specifically: the guideline company method (market), the transaction method (market), and the discounted cash flow method (income). An equal weight is given to each of these three methods. In addition, all three methods utilize market data in the derivation of a value estimate and are forward-looking in nature. The guideline assessment of future performance and the discounted cash flow method utilize a market-derived rate of return to discount anticipated performance.
 
These methodologies are applied to the reporting units’ historical and projected financial performance. The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumption of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows.
 
As of the beginning of the fourth quarter, the goodwill balance of $65.2 million was related entirely to the Control Devices reportable segment. The Company completed its assessment of any potential goodwill impairment as of October 1, 2007 and October 1, 2006 and determined that no impairment existed as of either date.
 
The net carrying amount of the Company’s patents at December 31, 2007 and 2006 was $203 and $407, respectively, and was included in the Company’s consolidated balance sheets as a component of other assets. Aggregate amortization expense on patents was $204 and $270 for the fiscal years ended December 31, 2007 and December 31, 2006, respectively. Estimated amortization expense for the fiscal year ended December 31, 2008 based upon the Company’s intangible asset portfolio at December 31, 2007 is $203.


39


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities consist of the following at December 31:
 
                 
    2007     2006  
 
Compensation-related obligations
  $ 19,053     $ 15,128  
Insurance-related obligations
    4,084       4,178  
Warranty-and recall-related obligations
    5,306       5,825  
Other(1)
    18,755       20,493  
                 
Total accrued expenses and other current liabilities
  $ 47,198     $ 45,624  
                 
 
 
(1) “Other” is comprised of miscellaneous accruals; none of which contributed a significant portion of the total.
 
Income Taxes
 
The Company accounts for income taxes using the provisions of SFAS No. 109, Accounting for Income Taxes. Deferred income taxes reflect the expected tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not to occur.
 
Currency Translation
 
The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive income. Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction, with the resulting adjustments included in the results of operations.
 
Revenue Recognition and Sales Commitments
 
The Company recognizes revenues from the sale of products, net of actual and estimated returns, at the point of passage of title, which is generally at the time of shipment. Actual and estimated returns are based on authorized returns and historical trends of sales returns. The Company often enters into agreements with its customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to renegotiation, which may affect product pricing.
 
Allowance for Doubtful Accounts
 
The Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectibility in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The Company does not have collateral requirements with its customers.


40


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
Product Warranty and Recall Reserves
 
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 fiscal years ended December 31, 2007 and 2006:
 
                 
    2007     2006  
 
Product warranty and recall at beginning of period
  $ 5,825     $ 6,220  
Accruals for products shipped during period
    2,689       3,695  
Aggregate changes in pre-existing liabilities due to claims developments
    1,756       31  
Settlements made during the period (in cash or in kind)
    (4,964 )     (4,121 )
                 
Product warranty and recall at end of period
  $ 5,306     $ 5,825  
                 
 
Product Development Expenses
 
Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. These costs amounted to $44,203, $40,840 and $39,193 in fiscal years 2007, 2006 and 2005, respectively or 6.1%, 5.8% and 5.8% of net sales for these periods.
 
Share-Based Compensation
 
At December 31, 2007, the Company had three types of share-based compensation plans: (1) Long-Term Incentive Plan (the “Incentive Plan”), (2) Directors’ Share Option Plan and (3) the Directors’ Restricted Shares Plan. One plan is for employees and two plans are for non-employee directors. The Incentive Plan is made up of the Long-Term Incentive Plan that was approved by the Company’s shareholders on September 30, 1997 and expired on June 30, 2007 and the Amended and Restated Long-Term Incentive Plan that was approved by the Company’s shareholders on April 24, 2006 and expires on April 24, 2016. Prior to the second quarter of 2005, the Company accounted for its plans under the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”) adopted prospectively for all employee and director awards granted, modified or settled after January 1, 2003, under the provisions of SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS 123.
 
Effective at the beginning of the second quarter of 2005, the Company adopted SFAS No. 123(R), Share-Based Payment, (“SFAS 123(R)”) using the modified-prospective-transition method. Because the Company had previously adopted the fair value recognition provisions required by SFAS 123, and due to the fact that all unvested awards at the time of adoption were being recognized under a fair value approach, the adoption of SFAS 123(R) did not significantly impact the Company’s operating income, income before income taxes, net income, cash flow from operating activities, cash flow from financing activities, or basic and diluted net income per share for the fiscal years ended December 31, 2007, 2006 and 2005.
 
Total compensation expense recognized in the consolidated statements of operations for share-based compensation arrangements was $2,431, $1,953 and $1,695 for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. The total income tax benefit recognized in the consolidated statements of operations for share-based


41


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
compensation arrangements was $851, $355 and $593 for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. There was no share-based compensation expense capitalized as inventory in 2007, 2006 or 2005.
 
Financial Instruments and Derivative Financial Instruments
 
Financial instruments, including derivative financial instruments, held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and foreign currency forward and option contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. Refer to Note 9 of the Company’s consolidated financial statements for fair value disclosures of the Company’s fixed rate debt, foreign currency forward and option contracts, and foreign currency swap contracts.
 
Common Shares Held in Treasury
 
The Company accounts for Common Shares held in treasury under the cost method and includes such shares as a reduction of total shareholders’ equity.
 
Accounting Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
 
Net Income Per Share
 
Net income per share amounts for all periods are presented in accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”), which requires the presentation of basic and diluted 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 were as follows:
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Basic weighted-average shares outstanding
    23,132,814       22,866,015       22,709,113  
Effect of dilutive securities
    415,669       195,870       65,861  
                         
Diluted weighted-average shares outstanding
    23,548,483       23,061,885       22,774,974  
                         
 
Options not included in the computation of diluted net income per share to purchase 89,500, 599,850 and 474,250 Common Shares at an average price of $14.61, $12.17 and $13.93 per share were outstanding at December 31, 2007, 2006 and 2005, respectively. These outstanding options 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.
 
As of December 31, 2007, 490,050 performance-based restricted shares were outstanding. These shares were not included in the computation of diluted net income per share because associated performance targets were not


42


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
achieved as of December 31, 2007. These shares may or may not become dilutive based on the Company’s ability to meet or exceed future performance targets.
 
Comprehensive Income (Loss)
 
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income. Other comprehensive income includes foreign currency translation adjustments and gains and losses from certain foreign currency transactions, the effective portion of gains and losses on certain hedging activities, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities.
 
The components of accumulated other comprehensive income, as reported in the statement of consolidated shareholders’ equity as of December 31, net of tax were as follows:
 
                                         
          Pension and
    Unrealized
          Accumulated
 
    Currency
    Postretirement
    Loss (Gain) on
    Unrealized
    Other
 
    Translation
    Liability
    Marketable
    Gain on
    Comprehensive
 
    Adjustments     Adjustments     Securities     Derivatives     Income (Loss)  
 
Balance, January 1, 2005
  $ 7,143     $ (3,488 )   $ (69 )   $     $ 3,586  
Current year change
    (4,643 )     396       89             (4,158 )
                                         
Balance, December 31, 2005
    2,500       (3,092 )     20             (572 )
Current year change
    6,025       1,625       (84 )           7,566  
                                         
Balance, December 31, 2006
    8,525       (1,467 )     (64 )           6,994  
Current year change
    6,043       983       44       (37 )     7,033  
                                         
Balance, December 31, 2007
  $ 14,568     $ (484 )   $ (20 )   $ (37 )   $ 14,027  
                                         


43


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
The tax effects related to each component of other comprehensive income (loss) were as follows:
 
                         
    Before Tax
    Benefit/
    After-Tax
 
    Amount     (Provision)     Amount  
 
2005
                       
Foreign currency translation adjustments
  $ (4,643 )   $     $ (4,643 )
Pension liability adjustments
    566       (170 )     396  
Unrealized loss on marketable securities
    137       (48 )     89  
                         
Other comprehensive loss
  $ (3,940 )   $ (218 )   $ (4,158 )
                         
2006
                       
Foreign currency translation adjustments
  $ 6,025     $     $ 6,025  
Pension liability adjustments
    1,625             1,625  
Unrealized gain on marketable securities
    (129 )     45       (84 )
                         
Other comprehensive income
  $ 7,521     $ 45     $ 7,566  
                         
2007
                       
Foreign currency translation adjustments
  $ 6,043     $     $ 6,043  
Pension and postretirement liability adjustments
    983             983  
Unrealized loss on marketable securities
    68       (24 )     44  
Unrealized gain on derivatives
    (57 )     20       (37 )
                         
Other comprehensive income
  $ 7,037     $ (4 )   $ 7,033  
                         
 
At December 31, 2007 and 2006, the Company was required to record a valuation allowance of $407 and $787, respectively, which fully offset the deferred tax asset related to the accumulated pension liability adjustments.
 
Impairment of Assets
 
The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No significant impairment charges were recorded in 2007, 2006 or 2005. Impairment would be recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. Measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset.
 
Deferred Finance Costs
 
Deferred finance costs are being amortized over the life of the related financial instrument using the straight-line method. The annual amortization in 2007, 2006 and 2005 was $1,318, $1,379 and $1,260, respectively.
 
Recently Issued Accounting Standards
 
New accounting standards to be implemented:
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The provisions of SFAS 157 will be applied prospectively. Subsequently, the FASB provide for a one-year deferral of the effective date for nonfinancial assets and


44


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
liabilities that are recognized or disclosed at fair value on a nonrecurring basis. The adoption of SFAS 157 did not have a significant impact on the Company’s financial position, results of operations or cash flows.
 
In December 2007, the 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 condition or results of operations.
 
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 condition or results of operations.
 
New accounting standards implemented:
 
In June 2006, the FASB issued interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 as of January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
 
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), which expresses the SEC’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB 108 was effective for the first quarter of 2007. The adoption of SAB 108 did not have an impact on the Company’s consolidated financial statements.
 
In May 2007, the FASB issued FASB Staff Position (“FSP”), Definition of Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on determining whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.


45


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). Unrealized gains and losses on items for which the Fair Value Option has been elected are reported in earnings. The Fair Value Option is applied instrument by instrument (with certain exceptions), is irrevocable (unless a new election date occurs) and is applied only to an entire instrument. The effect of the first remeasurement to fair value is reported as a cumulative-effect adjustment to the opening balance of retained earnings. SFAS 159 is effective for the first quarter of 2008. The Company did not elect to use the Fair Value Option for any financial assets and financial liabilities that were not currently recorded at fair value.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to their 2007 presentation in the consolidated financial statements.
 
3.   Investments
 
PST Eletrônica S.A.
 
The Company has a 50% 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 $29,663 and $21,616 at December 31, 2007 and 2006, respectively. During 2006, the Company received a payment of past due interest of $2.4 million from PST related to a note receivable that was paid in 2004.
 
Condensed financial information for PST is as follows:
 
                 
    December 31,  
    2007     2006  
 
Cash and cash equivalents
  $ 7,124     $ 4,785  
Accounts receivable, net
    12,306       11,609  
Inventories, net
    20,114       10,602  
Property, plant and equipment, net
    16,865       9,868  
Other assets
    5,331       3,191  
                 
Total Assets
  $ 61,740     $ 40,055  
                 
Current liabilities
  $ 25,569     $ 15,854  
Long-term liabilities
    3,957       2,791  
Equity of:
               
Stoneridge
    16,107       10,705  
Others
    16,107       10,705  
                 
Total Liabilities and Equity
  $ 61,740     $ 40,055  
                 
 
The difference between the Company’s carrying amount of its investment in PST and the Company’s underlying equity in the net assets of PST is primarily due to a net goodwill balance of $11,296 at December 31, 2007.
 


46


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Net sales
  $ 133,039     $ 94,097     $ 70,819  
Cost of goods sold
  $ 61,575     $ 47,451     $ 38,700  
Total pretax income
  $ 25,152     $ 17,939     $ 10,956  
The Company’s share of pretax income
  $ 12,576     $ 8,970     $ 5,478  
 
Equity in earnings of PST included in the consolidated statements of operations were $10,351, $6,771 and $3,976 for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. During 2007 and 2006, PST declared dividends payable to its joint venture partners, which included the Company. The Company received dividend payments from PST of $5,594 and $3,707 in 2007 and 2006, respectively, which decreased the Company’s investment in PST.
 
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 $4,547 and $3,796 at December 31, 2007 and 2006, respectively. Equity in earnings of Minda included in the consolidated statements of operations were $542, $354 and $76, for the fiscal years ended December 31, 2007, 2006 and 2005, respectively. The Company increased its ownership in Minda from 20% to 49% in 2006.
 
4.   Long-Term Debt
 
Senior Notes
 
The Company had $200.0 million of senior notes outstanding at December 31, 2007 and 2006, respectively. The $200.0 million 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 105.750 until April 30, 2008. On May 1, 2008, the senior notes will be redeemable at 103.833. 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. On July 1, 2002, the Company completed an exchange offer of the senior notes for substantially identical notes registered under the Securities Act of 1933.
 
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 December 31, 2007, 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 December 31, 2007, the Company had borrowing capacity of $73.5 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. The Company was in compliance with all covenants at December 31, 2007.

47


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
5.   Income Taxes
 
The provision for income taxes on income included in the accompanying consolidated financial statements represents federal, state and foreign income taxes. The components of income before income taxes and the provision for income taxes consist of the following:
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Income (loss) before income taxes:
                       
Domestic
  $ 9,186     $ 6,581     $ 4,441  
Foreign
    14,038       13,058       (5 )
                         
Total income before income taxes
  $ 23,224     $ 19,639     $ 4,436  
                         
Provision (benefit) for income taxes:
                       
Current:
                       
Federal
  $ (55 )   $ (807 )   $ 291  
State and foreign
    2,785       3,176       2,397  
                         
Total current provision
    2,730       2,369       2,688  
                         
Deferred:
                       
Federal
    3,450       2,175       (1,368 )
State and foreign
    373       582       2,183  
                         
Total deferred provision
    3,823       2,757       815  
                         
Total provision for income taxes
  $ 6,553     $ 5,126     $ 3,503  
                         
 
A reconciliation of the Company’s effective income tax rate to the statutory federal tax rate is as follows:
 
                         
    For the Fiscal Years Ended
 
    December 31,  
    2007     2006     2005  
 
Statutory U.S. federal income tax rate
    35.0 %     35.0 %     35.0 %
State income taxes, net of federal tax benefit
    (1.0 )     0.8       (7.0 )
Tax credits
    (4.0 )     (5.6 )     (24.6 )
Tax benefit for export sales
          (1.4 )     (9.5 )
Foreign rate differential
    (10.9 )     (8.9 )     (23.0 )
Increase of income tax accruals
    (2.4 )     (4.5 )     (10.3 )
Foreign deemed dividends, net of foreign tax credits
    1.8       4.5       17.9  
Reduction (increase) of deferred taxes
    1.3             (22.6 )
Foreign valuation allowances
    7.4       4.1       120.3  
Other
    1.0       2.1       2.8  
                         
Effective income tax rate
    28.2 %     26.1 %     79.0 %
                         
 
The effective tax rate for 2007 increased slightly due primarily to the increase in higher taxed domestic earnings and the increase over the prior year of the valuation allowance recorded against the deferred tax assets in the United Kingdom. These increases were partially offset by a deferred tax benefit related to a change in state tax law.


48


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
Unremitted earnings of foreign subsidiaries were $22,451, $16,703 and $11,200 as of December 31, 2007, 2006 and 2005, respectively. Because these earnings have been indefinitely reinvested in foreign operations, no provision has been made for U.S. income taxes. It is impracticable to determine the amount of unrecognized deferred taxes with respect to these earnings; however, foreign tax credits may be available to reduce U.S. income taxes in the event of a distribution.
 
Significant components of the Company’s deferred tax assets and (liabilities) as of December 31, 2007 and 2006 are as follows:
 
                 
    2007     2006  
 
Deferred tax assets:
               
Inventories
  $ 2,028     $ 2,002  
Employee benefits
    1,942       2,353  
Insurance
    1,029       1,314  
Depreciation and amortization
    28,244       36,326  
Net operating loss carryforwards
    17,430       19,025  
General business credit carryforwards
    6,670       8,273  
Reserves not currently deductible
    8,814       6,896  
                 
Gross deferred tax assets
    66,157       76,189  
Less: Valuation allowance
    (16,020 )     (17,380 )
                 
Deferred tax assets less valuation allowance
    50,137       58,809  
                 
Deferred tax liabilities:
               
Depreciation and amortization
    (5,404 )     (10,454 )
Other
    (8,541 )     (3,944 )
                 
Gross deferred tax liabilities
    (13,945 )     (14,398 )
                 
Net deferred tax asset
  $ 36,192     $ 44,411  
                 
 
The valuation allowance represents the amount of tax benefit related to foreign net operating losses and other deferred tax assets as well as state deferred tax assets, which management believes are not likely to be realized.
 
The Company has deferred tax assets for net operating loss carryforwards of $6,346 net of a valuation allowance of $11,084. The net operating losses relate to U.S. federal, state and foreign tax jurisdictions. The U.S. net operating losses expire beginning in 2023 through 2026, the state net operating losses expire at various times and the foreign net operating losses have indefinite expiration dates. The Company has a deferred tax asset for general business credit carryforwards of $5,370 net of a valuation allowance of $1,300. The U.S. federal general business credit carryforwards expire beginning in 2021 through 2027 and the state tax credits expire at various times.
 
The Company recognized a provision for income taxes of $6,553, or 28.2% of pre-tax income, and $5,126, or 26.1% of pre-tax income, for federal, state and foreign income taxes for the fiscal years ended December 31, 2007 and 2006, respectively. The increase in the effective tax rate was primarily attributable to the increase in higher taxed domestic earnings and the increase over the prior year of the valuation allowance recorded against the deferred tax assets in the United Kingdom. These increases were partially offset by a deferred tax benefit related to a change in state tax law.


49


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
FIN 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109
 
In June 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 as of the January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.
 
The following is a reconciliation of the Company’s total gross unrecognized tax benefits, from adoption, to December 31, 2007:
 
         
    2007  
 
Balance at January 1, 2007
  $ 4,731  
Tax positions related to the current year:
       
Additions
    357  
Reductions
     
Tax positions related to the prior years:
       
Additions
    272  
Reductions
    (655 )
Settlements
     
Expiration of statutes of limitation
    (87 )
         
Balance at December 31, 2007
  $ 4,618  
         
 
The liability for uncertain tax benefits is classified as a non-current liability unless it is expected to be paid within one year. At December 31, 2007 the Company has classified $1,437 as a current liability and $3,181 as a reduction to non-current deferred income tax assets. 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 $800 within the next 12 months. Management is currently unaware of issues under review that could result in a significant change or a material deviation in this estimate.
 
If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, approximately $4,410 would affect the Company’s effective tax rate.
 
Consistent with historical financial reporting, the Company has elected to classify interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the fiscal years ended December 31, 2007 and 2006, the Company recognized approximately $(149) and $(347) of gross interest and penalties, respectively. The Company has accrued approximately $672 and $821 for the payment of interest and penalties at December 31, 2007 and December 31, 2006, respectively.
 
The Company conducts business globally and, as a result, 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


50


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
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 IRS 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.
 
6.   Operating Lease Commitments
 
The Company leases equipment, vehicles and buildings from third parties under operating lease agreements.
 
The estate of the late D.M. Draime, former Chairman of the Board of Directors, is a 50% owner of Hunters Square, Inc. (“HSI”), an Ohio corporation, which owns Hunters Square, an office complex and shopping mall located in Warren, Ohio. The Company leases office space in Hunters Square. The Company pays all maintenance, tax and insurance costs related to the operation of the office. Lease payments made by the Company to HSI were $342, $342 and $342 in 2007, 2006 and 2005, respectively. The lease terminates in December 2009. The Company believes the terms of the lease are no less favorable to it than would be the terms of a third-party lease.
 
For the years ended December 31, 2007, 2006 and 2005, lease expense totaled $7,114, $6,691 and $6,495, including related party lease expense of $342 for each respective year.
 
Future minimum operating lease commitments at December 31, 2007 are as follows:
 
                 
    Third
    Related
 
    Party     Party  
 
2008
  $ 5,289     $ 342  
2009
    4,148       342  
2010
    2,338        
2011
    1,626        
2012
    1,605        
Thereafter
    6,082        
                 
Total
  $ 21,088     $ 684  
                 
 
7.   Share-Based Compensation Plans
 
In October 1997, the Company adopted a Long-Term Incentive Plan (“Incentive Plan”). The Company reserved 2,500,000 Common Shares for issuance to officers and other key employees under the Incentive Plan. Under the Incentive Plan, as of December 31, 2007, the Company granted cumulative options to purchase 1,594,500 Common Shares to management with exercise prices equal to the fair market value of the Company’s Common Shares on the date of grant. The options issued cliff-vest from one to five years after the date of grant and have a contractual life of 10 years. In addition, the Company has also issued 1,553,125 restricted Common Shares


51


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
under the Incentive Plan, of which 814,250 are time-based with either graded or cliff vesting using the straight-line method while the remaining 738,875 restricted Common Shares are performance-based. Restricted Common Shares awarded under the Incentive Plan entitle the shareholder to all the rights of Common Share ownership except that the shares may not be sold, transferred, pledged, exchanged, or otherwise disposed of during the vesting period. The Incentive Plan expired on June 30, 2007.
 
In April 2006, the Company’s shareholders approved the Amended and Restated Long-Term Incentive Plan (the “2006 Plan”). Common Shares reserved and available for awards under the 2006 Plan is 1,500,000 pursuant to which the maximum number of Common Shares which may be issued subject to Incentive Stock Options is 500,000. Under the 2006 Plan, as of December 31, 2007, the Company has not granted any Common Shares awards.
 
In 2005, pursuant to the Incentive Plan, the Company granted time-based restricted Common Share awards and performance-based restricted Common Share awards. The time-based restricted Common Share awards vest over a one to four year period in equal increments on the first, second, third and fourth grant-date anniversaries. Approximately one-half of the performance-based restricted Common Share awards vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from date of grant and upon achieving certain net income per share targets established by the Company. The remaining one-half of the performance-based restricted Common Share awards also vest and are no longer subject to forfeiture upon the recipient remaining an employee for three years from date of grant and upon the Company attaining certain targets of performance measured against a peer group’s performance in terms of total return to shareholders. The actual number of restricted Common Shares to ultimately vest will depend on the Company’s level of achievement of the targeted performance measures and the employees’ attainment of the defined service requirements.
 
In 2006, pursuant to the Incentive Plan, the Company granted time-based restricted shares and performance-based restricted shares. Certain time-based restricted Common Share awards cliff-vest three years after the grant date. Other time-based restricted Common Share awards are subject to graded vesting using the straight-line method over a three or four year period. The performance-based restricted Common Share awards vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from date of grant and upon achieving certain net income per share targets established by the Company.
 
In 2007, pursuant to the Incentive Plan, the Company granted time-based restricted shares and performance-based restricted shares. The time-based restricted Common Share awards cliff-vest three years after the grant date. The performance-based restricted Common Share awards vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from date of grant and upon achieving certain net income per share targets established by the Company.
 
In April 2005, the Company adopted the Directors’ Restricted Shares Plan (“Director Share Plan”). The Company reserved 300,000 Common Shares for issuance under the Director Share Plan. Under the Director Share Plan, the Company has cumulatively issued 130,700 restricted Common Shares. Shares issued under the Director Share Plan during 2006 will cliff-vested after a period of 13 months. Shares issued under the Director Share Plan during 2007 will cliff vest one year after the grant date.


52


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
Options
 
A summary of option activity under the plans noted above as of December 31, 2007, and changes during the fiscal years ended are presented below:
 
                         
                Weighted-
 
          Weighted-
    Average
 
          Average
    Remaining
 
    Share
    Exercise
    Contractual
 
    Options     Price     Term  
 
Outstanding at December 31, 2006
    623,000     $ 11.89          
Expired
    (170,750 )     16.98          
Exercised
    (163,500 )     8.92          
                         
Outstanding and Exercisable at December 31, 2007
    288,750       10.57       4.48  
                         
 
There were no options granted during the fiscal years ended December 31, 2007, 2006 and 2005 and all outstanding options have vested.
 
The intrinsic value of options outstanding and exercisable is the difference between the fair market value of the Company’s Common Shares on the applicable date (“Measurement Value”) and the exercise price of those options that had an exercise price that was less than the Measurement Value. The intrinsic value of options exercised is the difference between the fair market value of the Company’s Common Shares on the date of exercise and the exercise price. The total intrinsic value of options exercised during the fiscal years ended December 31, 2007, 2006 and 2005 was $482, $176 and $42, respectively.
 
As of December 31, 2007 and 2006, the aggregate intrinsic value of both outstanding and exercisable options was $62 and $115, respectively. The total fair value of options that vested during the fiscal years ended December 31, 2005 was $1,465. Prior to 2006, all outstanding option grants had vested, and therefore, the number of exercisable and outstanding options is equal.
 
Restricted Shares
 
The fair value of the non-vested time-based restricted Common Share awards was calculated using the market value of the shares on the date of issuance. The weighted-average grant-date fair value of time-based restricted Common Shares granted during the fiscal years ended December 31, 2007, 2006 and 2005 was $12.00, $7.79 and $10.23, respectively.
 
The fair value of the non-vested performance-based restricted Common Share awards with a performance condition, requiring the Company to obtain certain net income per share targets, was calculated using the market value of the shares on the date of issuance. The fair value of the non-vested performance-based restricted Common Share awards with a market condition, which measures the Company’s performance against a peer group’s performance in terms of total return to shareholders, was estimated at the date of issuance using valuation techniques incorporating the Company’s historical total return to shareholders in comparison to its peers to determine the expected outcomes related to these awards.


53


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
A summary of the status of the Company’s non-vested restricted Common Shares as of December 31, 2007 and the changes during the fiscal year then ended, are presented below:
 
                                 
          Performance-Based
 
    Time-Based Awards     Awards  
          Weighted-
          Weighted-
 
          Average
          Average
 
          Grant-Date
          Grant-Date
 
Non-vested Restricted Common Shares
  Shares     Fair Value     Shares     Fair Value  
 
Non-vested at December 31, 2006
    468,392     $ 8.47       396,825     $ 8.34  
Granted
    234,700       12.00       212,850       12.03  
Vested
    (138,402 )     9.12              
Forfeited
    (60,866 )     9.91       (119,625 )     9.01  
                                 
Non-vested at December 31, 2007
    503,824       9.76       490,050       9.78  
                                 
 
As of December 31, 2007, total unrecognized compensation cost related to non-vested time-based restricted Common Share awards granted was $2,377. That cost is expected to be recognized over a weighted-average period of 1.47 years. For the fiscal years ended December 31, 2007, 2006 and 2005, the total fair value of time-based restricted Common Share awards vested was $1,541, $1,064 and $460, respectively.
 
As of December 31, 2007, total unrecognized compensation cost related to non-vested performance-based restricted Common Share awards granted was $810. That cost is expected to be recognized over a weighted-average period of 1.58 years. As noted above, the Company has issued and outstanding performance-based restricted Commons Share awards that use different performance targets. The awards that use net income per share as the performance target will not be expensed until it is probable that the Company will meet the underlying performance condition. However, the awards that measure performance against a peer group are expensed even if the market condition is not met. No performance-based restricted Common Share awards have vested as of December 31, 2007.
 
Cash received from option exercises under all share-based payment arrangements for the fiscal years ended December 31, 2007, 2006 and 2005 was $1,409, $301 and $66, respectively. The actual tax benefit realized for the tax deductions from the vesting of restricted Common Shares and option exercises of the share-based payment arrangements totaled $360, $176 and $220 for the fiscal years ended December 31, 2007, 2006 and 2005, respectively.
 
8.   Employee Benefit Plans
 
The Company has certain defined contribution profit sharing and 401(k) plans covering substantially all of its employees in the US and United Kingdom. Company contributions are generally discretionary; however, a portion of these contributions is based upon a percentage of employee compensation, as defined in the plans. The Company’s policy is to fund all benefit costs accrued. For the fiscal years ended December 31, 2007, 2006 and 2005, expenses related to these plans amounted to $3,800, $3,556 and $3,828, respectively.
 
The Company has a single defined benefit pension plan that covers certain employees in the United Kingdom and a single postretirement benefit plan that covers certain employees in the U.S. As of December 31, 2003, employees covered under the United Kingdom defined benefit pension plan no longer accrue benefits related to future service and wage increases. In September 2006, the Board of Directors approved a proposal to discontinue life insurance benefits for all active and retired employees under the Company’s U.S. postretirement benefit plan effective September 30, 2006. The discontinuance of these benefits was accounted for as a plan settlement, resulting in a one-time non-cash gain of approximately $1,242. The remaining healthcare portion of the postretirement benefit plan is contributory, with the Company and plan participants sharing the cost of the plan.


54


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
The following table sets forth the benefit obligation, fair value of plan assets, and the funded status of the Company’s plans; amounts recognized in the Company’s financial statements; and the principal weighted average assumptions used:
 
                                 
    Pension
    Postretirement
 
    Benefit Plan     Benefit Plan  
    2007     2006     2007     2006  
 
Change in projected benefit obligation:
                               
Projected benefit obligation at beginning of year
  $ 22,681     $ 19,988     $ 508     $ 1,702  
Service cost
    140       92             40  
Interest cost
    1,180       994       25       67  
Actuarial gain
    (1,281 )     (515 )     (33 )     (239 )
Benefits paid
    (820 )     (663 )     (53 )     (80 )
Settlement
                      (982 )
Translation adjustments
    401       2,785              
                                 
Projected benefit obligation at end of year
  $ 22,301     $ 22,681     $ 447     $ 508  
                                 
Change in plan assets:
                               
Fair value of plan assets at beginning of year
  $ 20,056     $ 15,898     $     $  
Actual return on plan assets
    1,100       2,209              
Employer contributions
    260       276       53       387  
Benefits paid
    (820 )     (663 )     (53 )     (80 )
Settlement
                      (307 )
Translation adjustments
    350       2,336              
                                 
Fair value of plan assets at end of year
  $ 20,946     $ 20,056     $     $  
                                 
Accumulated benefit obligation at end of year
  $ 22,301     $ 22,681     $ 447     $ 508  
Funded status at end of year
    (1,355 )     (2,625 )     (447 )     (508 )
Amounts recognized in the consolidated balance
                               
sheet consist of:
                               
Accrued liabilities
    (1,355 )     (2,625 )     (447 )     (508 )
 
At December 31, 2007 and 2006, long-term liabilities of $1,748 and $3,075 related to the defined benefit plan and postretirement benefit plan were recognized in the accompanying consolidated balance sheets as components of other liabilities. In addition, a current liability related to the other postretirement benefit plan of $54 and $58 was recognized as a component of accrued expenses and other on the consolidated balance sheets at December 31, 2007 and 2006, respectively.
 


55


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
                                 
    Pension
    Postretirement
 
    Benefit Plan     Benefit Plan  
    2007     2006     2007     2006  
 
Weighted average assumptions used to determine benefit obligation at December 31:
                               
Discount rate
    5.80 %     5.15 %     5.88 %     5.80 %
Rate of increase to compensation levels
    N/A       N/A       N/A       N/A  
Rate of increase to pensions in payment
    3.30 %     3.00 %     N/A       N/A  
Rate of future price inflation
    3.20 %     2.90 %     N/A       N/A  
Initial health care cost trend rate
    N/A       N/A       10.00 %     11.00 %
Ultimate health care cost trend rate
    N/A       N/A       6.00 %     6.00 %
Year that the ultimate trend rate is reached
    N/A       N/A       2015       2011  
Measurement date
    12/31/07       12/31/06       12/31/07       12/31/06  
Weighted average assumptions used to
                               
determine net periodic benefit cost for the
                               
years ended December 31:
                               
Discount rate
    5.15 %     4.75 %     5.80 %     5.50 %
Expected long-term return on plan assets
    7.00 %     6.40 %     N/A       N/A  
Rate of increase to compensation levels
    N/A       N/A       N/A       2.50 %
Rate of increase to pensions in payment
    3.00 %     3.00 %     N/A       N/A  
Rate of future price inflation
    2.90 %     2.75 %     N/A       N/A  
Initial health care cost trend rate
    N/A       N/A       10.00 %     11.00 %
Ultimate health care cost trend rate
    N/A       N/A       6.00 %     6.00 %
Year that the ultimate trend rate is reached
    N/A       N/A       2015       2011  
Measurement date
    12/31/07       12/31/06       12/31/06       12/31/05  
 
In the fiscal year ended December 31, 2006, the Company adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). Prior to the adoption of SFAS 158, the Company’s accumulated benefit obligations and projected benefit obligations were equal, therefore upon adoption, there was no significant impact on the Company’s consolidated statement of financial position as of December 31, 2007. In addition, the provisions of SFAS 158 require the Company to disclose costs recognized in other comprehensive income for the period pursuant and the amortization amounts to be recognized in the next fiscal year, which are shown in the following tables:
 
                 
    Pension
    Postretirement
 
    Benefit Plan
    Benefit Plan
 
    2007     2007  
 
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
               
Net actuarial (gain) loss
  $ (1,120 )   $ 28  
Amortization of actuarial loss
    (80 )      
                 
Total recognized in other comprehensive income
  $ (1,200 )   $ 28  
                 
Total recognized in net periodic pension cost and other comprehensive income
  $ (1,220 )   $ 53  

56


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
No net amortization on actuarial gains or losses will be recognized in the next fiscal year.
 
The Company’s expected long-term return on plan assets assumption is based on a periodic review and modeling of the plan’s asset allocation and liability structure over a long-term horizon. Expectations of returns for each asset class are the most important of the assumptions used in the review and modeling and are based on comprehensive reviews of historical data and economic / financial market theory. The expected long-term rate of return on assets was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy, and (b) projections of inflation over the long-term period during which benefits are payable to plan participants.
 
Components of net periodic pension and postretirement (benefit) cost are as follows:
 
                                                 
    Pension Benefit Plan     Postretirement Benefit Plan  
    For the Fiscal Years
    For the Fiscal Years
 
    Ended December 31,     Ended December 31,  
    2007     2006     2005     2007     2006     2005  
 
Service cost
  $ 140     $ 92     $ 73     $     $ 40     $ 114  
Interest cost
    1,180       994       981       25       67       112  
Settlement gain
                            (1,242 )      
Expected return on plan assets
    (1,420 )     (1,086 )     (999 )                  
Amortization of actuarial loss (gain)
    80       258       291             (17 )      
                                                 
Net periodic (benefit) cost
  $ (20 )   $ 258     $ 346     $ 25     $ (1,152 )   $ 226  
                                                 
 
A 1.0% change in assumed healthcare cost trend rates would not significantly impact the Company’s amounts reported for postretirement health benefits.
 
The Company’s defined benefit pension plan fair value weighted-average asset allocations at December 31 by asset category are as follows:
 
                 
    2007     2006  
 
Asset Category:
               
Equity securities
    74 %     81 %
Debt securities
    25       18  
Other
    1       1  
                 
Total
    100 %     100 %
                 
 
The Company’s target asset allocation, with a permitted range of ± 7.50%, as of December 31, 2007, by asset category, is as follows:
 
         
Asset Category:
       
Equity securities
    75 %
Debt securities
    25 %
 
The Company’s investment policy for the defined benefit pension plan includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges (shown above) by major asset categories. The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies. The Company and a designated third-party fiduciary


57


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
periodically review the investment policy. The policy is established and administered in a manner so as to comply at all times with applicable government regulations.
 
The Company expects to contribute $259 to its defined benefit pension plan in 2008. The following pension and postretirement benefit payments are expected to be paid:
 
                 
    Pension
    Postretirement
 
    Benefit Plan     Benefit Plan  
 
2008
  $ 757     $ 54  
2009
    817       54  
2010
    857       53  
2011
    897       51  
2012
    937       49  
2013 to 2017
    5,281       198  
 
9.   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 December 31, 2007 and 2006, per quoted market sources, was $199.2 million and $206.0 million, respectively. On both dates, the carrying value was $200.0 million.
 
Derivative Instruments and Hedging Activities
 
We make use of derivative instruments in foreign exchange and commodity price hedging programs. Derivatives currently in use are foreign currency forward and option contracts and commodity swaps. These contracts are used strictly for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest.
 
The Company conducts business internationally and therefore 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 foreign currency exposures. The principal currencies hedged by the Company include the British pound and Mexican peso. In certain instances, the foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s consolidated statement of operations as a component of other (income) loss, net. The Company’s foreign currency forward and option contracts substantially offset gains and losses on the underlying foreign currency denominated transactions. In addition, the Company’s contracts intended to reduce exposure to the Mexican peso were executed to hedge forecasted transactions, and therefore the contracts are accounted for as cash flow hedges. The effective portion of the unrealized gain or loss is deferred and reported in the Company’s consolidated balance sheets as a component of accumulated other comprehensive income. The Company’s expectation is that the cash flow hedges will be highly effective in the future. The effectiveness of the transactions will be measured on an ongoing basis using the hypothetical operative method.
 
The Company’s foreign currency forward contracts have a notional value of $8,551 and $16,147 at December 31, 2007 and 2006, respectively. The purpose of these investments is to reduce exposure related to the Company’s British pound- denominated receivables. The estimated fair value of these contracts at December 31, 2007 and 2006, per quoted market sources, was approximately $(28) and $(502), respectively. In 2007, the Company used foreign


58


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
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 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 another fixed price swap contract for 1.0 million pounds of copper, which will last through 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 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. As of December 31, 2007, the fair value of the fixed price commodity swap contract, per quoted market sources, was approximately $57.
 
10.   Commitments and Contingencies
 
In the ordinary course of business, the Company is involved in various legal proceedings, workers’ compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, cash flows or the financial position of the Company.
 
11.   Related Party Transactions
 
Relationship with Counsel.  Avery Cohen, a director and Secretary of the Company, is a partner in Baker & Hostetler LLP, a law firm, which has served as general outside counsel for the Company since 1993. The Company paid $1,193, $1,081 and $1,193 in legal fees to Baker & Hostetler, LLP for the fiscal years ended December 31, 2007, 2006 and 2005, respectively.
 
Hunters Square. See Note 6 to the Company’s consolidated financial statements for information on the Company’s related party transactions involving operating leases.
 
Industrial Development Associates LP (“IDA”).  The Company owned a 30% interest in Industrial Development Associates Limited Partnership, a Maryland limited partnership (“IDA”). In addition, Earl L. Linehan, a member of Stoneridge’s Board of Directors owns an interest in IDA and the estate of D.M. Draime (D.M. Draime was Chairman of the Board of Directors until his death in July 2006) owned an interest in IDA. IDA is a real estate development company of certain commercial properties in Mebane, North Carolina. Stoneridge previously leased a facility from IDA.
 
On December 29, 2006, the Company entered into a Partnership Interest Purchase Agreement (the “Purchase Agreement”) with Heritage Real Estate Fund V, LLC, a Maryland limited liability company (“Heritage”). Pursuant to the Purchase Agreement, on December 29, 2006, Stoneridge sold its 30% general partnership interest in IDA to Heritage for $1,035 in cash and recognized a gain of $1,627 that is included in the consolidated statement of operations as a component of other (income) loss, net. The transaction price was determined by the average of two independent appraisals.
 
Mr. Linehan is a member of Heritage owning a 14.2% membership interest in Heritage. The managing member of Heritage is Heritage Properties, Inc. Mr. Linehan is member of the Board of Directors of Heritage Properties, Inc. Mr. Linehan also owns approximately 26.35% of MI Holding Company, a Maryland corporation, which is a 5.0% general partner of IDA. On December 29, 2006, the estate of D.M. Draime also entered into a Partnership Interest Purchase Agreement with Heritage to sell the estate’s 10% limited partnership interest to Heritage for $345. The son of D.M. Draime, Jeffrey P. Draime, is a member of Stoneridge’s Board of Directors.


59


Table of Contents

 
STONERIDGE, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except share and per share data, unless otherwise indicated)
 
12.   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. In connection with these initiatives, the Company recorded restructuring charges of $74, $608 and $5,098 in the Company’s consolidated statement of operations for the fiscal years ended December 31, 2007, 2006 and 2005.
 
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, England locations. These rationalizations are part of the Company’s cost reduction initiatives. In connection with these initiatives, the Company recorded restructuring charges of $1,027 in the Company’s consolidated statement of operations for the fiscal year ended December 31, 2007. Restructuring expenses that were general and administrative in nature were included in the Company’s consolidated statement of operations as part of restructuring charges, while the remaining restructuring related charges 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:
 
                                 
          Contract
    Other
       
    Severance
    Termination
    Associated
       
    Costs     Costs     Costs     Total  
 
Total expected restructuring charges
  $ 3,454     $ 978     $ 5,582     $ 10,014  
                                 
Fourth quarter 2007 charge to expense
  $ 468     $     $ 103     $ 571  
Cash payments
                (103 )     (103 )
                                 
Balance at December 31, 2007
  $ 468     $     $     $ 468  
                                 
Remaining expected restructuring charge
  $ 2,986     $ 978     $ 5,479     $ 9,443  
                                 
 
The charges related to the restructuring initiatives announced on October 29, 2007 that belong to the Control Devices reportable segment included the following:
                                 
                Other
       
    Severance