Stoneridge (SRI) 10-Q 2006 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

 
For the quarter ended April 1, 2006  
Commission file number: 001-13337

STONERIDGE, INC.

(Exact name of registrant as specified in its charter)

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

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

(330) 856-2443

Registrant’s telephone number, including area code

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

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

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

     The number of Common Shares, without par value, outstanding as of April 28, 2006 was 23,225,266.

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

PART I—FINANCIAL INFORMATION			Page No.
Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of April 1, 2006 (Unaudited) and December 31, 2005		2
		Condensed Consolidated Statements of Operations (Unaudited) For the Thirteen Weeks Ended April 1, 2006 and April 2, 2005		3
		Condensed Consolidated Statements of Cash Flows (Unaudited) For the Thirteen Weeks Ended April 1, 2006 and April 2, 2005		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			25
Item 4.	Controls and Procedures			26
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings			27
Item 1A.	Risk Factors			27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3.	Defaults Upon Senior Securities			27
Item 4.	Submission of Matters to a Vote of Security Holders			27
Item 5.	Other Information			27
Item 6.	Exhibits			27
Signatures				28
Index to Exhibits				29
EX-10.3 Employment Agreement
EX-31.1 Certification 302 - CEO
EX-31.2 Certification 302 - CFO
EX-32.1 Certification 906 - CEO
EX-32.2 Certification 906 - CFO

1

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

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

	April 1,			December 31,
	2006			2005
	(Unaudited)			(Audited)
ASSETS
Current Assets:
Cash and cash equivalents	$	41,774		$	40,784
Accounts receivable, less allowances for doubtful accounts of $5,135 and $4,562, respectively		121,434			100,362
Inventories, net		55,139			53,791
Prepaid expenses and other		14,842			14,490
Deferred income taxes		9,352			9,253
Total current assets		242,541			218,680
Long-Term Assets:
Property, Plant and Equipment, net		113,170			113,478
Other Assets:
Goodwill		65,176			65,176
Investments and other, net		29,372			26,491
Deferred income taxes		38,600			39,213
Total long-term assets		246,318			244,358
Total Assets	$	488,859		$	463,038
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	—		$	44
Accounts payable		68,788			55,344
Accrued expenses and other		53,016			46,603
Total current liabilities		121,804			101,991
Long-Term Liabilities:
Long-term debt, net of current portion		200,000			200,000
Deferred income taxes		1,477			923
Other liabilities		6,216			6,133
Total long-term liabilities		207,693			207,056
Shareholders’ Equity:
Preferred Shares, without par value, 5,000 authorized, none issued		—			—
Common Shares, without par value, authorized 60,000 shares, issued 23,401 and 23,232 shares and outstanding 23,228 and 23,178, respectively, with no stated value		—			—
Additional paid-in capital		148,074			147,440
Common Shares held in treasury, 173 and 54 shares, respectively, at cost		(133	)		(65	)
Retained earnings		10,955			7,188
Accumulated other comprehensive income (loss)		466			(572	)
Total shareholders’ equity		159,362			153,991
Total Liabilities and Shareholders’ Equity	$	488,859		$	463,038

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

2

STONERIDGE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

	Thirteen Weeks Ended
	April 1,			April 2,
	2006			2005
Net Sales	$	179,634		$	180,827
Costs and Expenses:
Cost of goods sold		138,942			135,592
Selling, general and administrative		31,240			30,372
Provision for doubtful accounts		355			16
Gain on sale of property, plant and equipment		(1,489	)		—
Restructuring charges		224			2,126
Operating Income		10,362			12,721
Interest expense, net		5,919			5,989
Equity in earnings of investees		(1,416	)		(732	)
Other loss (income), net		7			(197	)
Income Before Income Taxes		5,852			7,661
Provision for income taxes		2,085			3,292
Net Income	$	3,767		$	4,369
Basic net income per share	$	0.17		$	0.19
Basic weighted average shares outstanding		22,766			22,683
Diluted net income per share	$	0.16		$	0.19
Diluted weighted average shares outstanding		22,884			22,891

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

3

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

	Thirteen Weeks Ended
	April 1,			April 2,
	2006			2005
OPERATING ACTIVITIES:
Net income	$	3,767		$	4,369
Adjustments to reconcile net income to net cash provided (used) by operating activities —
Depreciation		6,246			6,805
Amortization		403			380
Deferred income taxes		1,143			2,701
Earnings of equity method investees, less dividends received		(1,416	)		(752	)
Gain on sale of property, plant and equipment		(1,489	)		—
Share-based compensation expense		634			327
Changes in operating assets and liabilities —
Accounts receivable, net		(20,674	)		(19,900	)
Inventories, net		(1,093	)		(3,222	)
Prepaid expenses and other		(276	)		(3,331	)
Other assets		204			(617	)
Accounts payable		13,140			5,846
Accrued expenses and other		5,632			2,059
Net cash provided (used) by operating activities		6,221			(5,335	)
INVESTING ACTIVITIES:
Capital expenditures		(6,563	)		(4,054	)
Proceeds from sale of property, plant and equipment		2,266			—
Business acquisitions and other		(1,034	)		—
Net cash used by investing activities		(5,331	)		(4,054	)
FINANCING ACTIVITIES:
Repayments of long-term debt		(44	)		(37	)
Share-based compensation activity		(69	)		42
Other financing costs		(150	)		—
Net cash (used) provided by financing activities		(263	)		5
Effect of exchange rate changes on cash and cash equivalents		363			(631	)
Net change in cash and cash equivalents		990			(10,015	)
Cash and cash equivalents at beginning of period		40,784			52,332
Cash and cash equivalents at end of period	$	41,774		$	42,317

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

4

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

(1) Basis of Presentation

     The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the Commission’s rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2005.

     The results of operations for the thirteen weeks ended April 1, 2006 are not necessarily indicative of the results to be expected for the full year.

     Beginning in 2005, the Company changed from a calendar year end to a 52-53 week fiscal year end. The Company’s fiscal quarters are now comprised of thirteen-week periods and once every seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The first thirteen-week period of 2006 and 2005 ended on April 1 and April 2, respectively.

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

(2) 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 to total shareholders’ equity.

(3) Inventories

     Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 71% and 72% of the Company’s inventories at April 1, 2006 and December 31, 2005, 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:

	April 1,			December 31,
	2006			2005
Raw materials	$	38,077		$	34,026
Work in progress		8,115			8,644
Finished goods		10,355			12,400
Total inventories		56,547			55,070
Less: LIFO reserve		(1,408	)		(1,279	)
Inventories, net	$	55,139		$	53,791

(4) 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 April 1, 2006, per quoted market sources, was $172.0 million and the carrying value was $200.0 million.

5

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

     Derivative Instruments and Hedging Activities

     The Company uses derivative financial instruments, including foreign currency forward and option contracts, to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currencies hedged by the Company include the Swedish krona, British pound and the Mexican peso. The foreign currency forward contracts are marked to market, with gains and losses recognized in the Company’s Condensed Consolidated Statement of Operations as a component of other income. The option contracts are marked to market, with gains and losses recognized in the Company’s Condensed Consolidated Statement of Operations as a component of operating income. The Company’s foreign currency forward and option contracts substantially offset gains and losses on the underlying foreign denominated transactions. The Company does not enter into financial instruments for speculative or profit motivated purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest.

     The Company’s foreign currency forward contracts have a notional value of approximately $24,500 and reduce exposure related to the Company’s Swedish krona and British pound denominated receivables. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $(43). The Company’s foreign currency option contracts have a notional value of $70 and reduce the risk associated with the Company’s other known foreign currency exposures related the Mexican peso. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $34.

(5) Share-Based Compensation

     At April 1, 2006, the Company had three share-based compensation plans; (1) Long-Term Incentive Plan (the “Incentive Plan”), (2) Directors’ Share Option Plan (the “Director Option Plan”) and (3) the Directors’ Restricted Shares Plan. One plan is for employees and two plans are for non-employee directors. Prior to the second quarter of 2005, the Company accounted for its plans under the fair value recognition provisions of Statement of Financial Accounting Standard (“SFAS”) 123, “Accounting for Stock-Based Compensation,” adopted prospectively for all employee and director awards granted, modified or settled after January 1, 2003, under the provisions of SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS 123.” Because the Company adopted the fair value method on a prospective basis, the cost related to share-based compensation recognized during the fiscal year ended December 31, 2005 is less than that which would have been recognized if the fair value method had been applied to all awards granted since the original effective date of SFAS 123.

     Effective at the beginning of the second quarter of 2005, the Company adopted SFAS 123(R), “Share-Based Payment,” using the modified-prospective-transition method. Because the Company had previously adopted the fair value recognition provisions required by SFAS 123, and all unvested awards at the time of adoption were being recognized under a fair value approach, the adoption of SFAS 123(R) did not 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 thirteen weeks ended April 1, 2006.

     Total compensation expense recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $634 and $327 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $222 and $123 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

     There were no options granted during the thirteen weeks ended April 1, 2006 or April 2, 2005. As of April 1, 2006, the aggregate intrinsic value of both outstanding and exercisable options was zero.

     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 shares granted during the thirteen weeks ended April 1, 2006 was $6.84. There were no time-based restricted Common Share awards granted during the thirteen weeks ended April 2, 2005.

     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,

6

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

which measures the Company’s performance against a peer group’s performance in terms of total return to shareholders, was calculated 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.

     A summary of the status of the Company’s non-vested restricted Common Shares as of April 1, 2006, and the changes during the thirteen weeks ended, is presented below:

	Time-Based Awards					Performance-Based 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, 2005		207,251		$	11.47		237,000		$	8.24
Granted		169,000			6.84		—			—
Vested		(73,534	)		9.19		—			—
Forfeited		(5,735	)		11.48		(100,800	)		8.24
Non-vested at April 1, 2006		296,982		$	9.40		136,200		$	8.24

     As of April 1, 2006, total unrecognized compensation cost related to non-vested time-based restricted Common Share awards granted was $534. That cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested based on service conditions during the thirteen weeks ended April 1, 2006 was $470. No time-based restricted Common Share awards vested during the thirteen weeks ended April 2, 2005.

     As of April 1, 2006, total unrecognized compensation cost related to non-vested performance-based restricted Common Share awards granted was $274. That cost is expected to be recognized over a weighted-average period of 2.0 years. No performance-based restricted Common Share awards have vested as of April 1, 2006.

(6) Comprehensive Income

     SFAS 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 comprehensive income, net of tax were as follows:

	Thirteen Weeks Ended
	April 1,			April 2,
	2006			2005
Net income	$	3,767		$	4,369
Other comprehensive income (loss):
Currency translation adjustments		1,223			(2,071	)
Minimum pension liability adjustments		(37	)		67
Unrealized (loss) gain on marketable securities		(147	)		10
Total other comprehensive income (loss)		1,039			(1,994	)
Comprehensive income	$	4,806		$	2,375

7

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

(7) Long-Term Debt

     On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes. 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 in May 2007 at 105.75. 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.

     On March 7, 2006, the Company amended it's existing credit agreement, which, among other things, provided the Company substantially all of its borrowing capacity on the $100.0 million credit facility. The credit agreement contains various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated EBITDA and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment, among other things, utilizes a borrowing base composed of accounts receivable and inventory. The borrowing base limitation expires June 30, 2007. In addition, the Company is prohibited from repurchasing, repaying or redeeming subordinated notes until certain covenant levels are met. As of April 1, 2006, $96.1 million of the $100.0 million credit facility was available to the company. The revolving facility expires on April 30, 2008 and requires a commitment fee of 0.375% to 0.500% on the unused balance. The revolving facility permits the Company to borrow up to half its borrowings in specified foreign currencies. Interest is payable quarterly at either (i) the prime rate plus a margin of 0.25% to 1.25% or (ii) LIBOR plus a margin of 1.75% to 2.75%, depending upon the Company's ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined. Interest on the swing line facility is payable monthly at the quoted overnight borrowing rate plus a margin of 1.75% to 2.75%, depending upon the Company's ratio of consolidated total debt to consolidated EBIDTA, as defined.

     Long-term debt consists of the following:

	April 1,		December 31,
	2006		2005
111/2% Senior notes, due 2012	$	200,000	$	200,000
Other		—		44
Total debt		200,000		200,044
Less: Current portion		—		(44	)
Total long-term debt less current portion	$	200,000	$	200,000

(8) Net Income Per Share

     Net income per share amounts for all periods are presented in accordance with SFAS 128, “Earnings Per Share,” 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:

	Thirteen Weeks Ended
	April 1,		April 2,
	2006		2005
Basic weighted average shares outstanding		22,766		22,683
Effect of dilutive securities		118		208
Diluted weighted-average shares outstanding		22,884		22,891

8

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

     Options to purchase 682 and 279 Common Shares at an average price of $12.13 and $16.10 per share were outstanding at April 1, 2006 and April 2, 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.

(9) Restructuring

     In January 2005, the Company announced restructuring initiatives related to the rationalization of certain manufacturing facilities in Europe and North America. This rationalization is part of the Company’s cost reduction initiatives. In connection with these initiatives, the Company recorded restructuring charges of $224 for the thirteen weeks ended April 1, 2006.

     The restructuring charges related to the Vehicle Management & Power Distribution reportable segment and included the following:

				Asset-
	Severance			Related
	Costs			Charges			Total
Total expected restructuring charges	$	763		$	127		$	890
Balance at December 31, 2004	$	—		$	—		$	—
First quarter charge to expense		88			127			215
Second quarter charge to expense		9			—			9
Third quarter charge to expense		356			—			356
Fourth quarter charge to expense		70			—			70
Cash payments		(111	)		—			(111	)
Non-cash utilization		—			(127	)		(127	)
Balance at December 31, 2005	$	412		$	—		$	412
First quarter charge to expense		176			—			176
Cash payments		(46	)		—			(46	)
Non-cash utilization		—			—			—
Balance at April 1, 2006	$	542		$	—		$	542
Remaining expected restructuring charge	$	64		$	—		$	64

9

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

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

				Asset-			Facility			Other
	Severance			Related			Closure			Exit
	Costs			Charges			Costs			Costs			Total
Total expected restructuring charges	$	3,509		$	983		$	1,219		$	651		$	6,352
Balance at March 31, 2004	$	—		$	—		$	—		$	—		$	—
Second quarter charge to expense		—			205			—			—			205
Third quarter charge to expense		—			202			—			118			320
Fourth quarter charge to expense		1,068			207			—			287			1,562
Cash payments		(590	)		—			—			(405	)		(995	)
Non-cash utilization		—			(614	)		—			—			(614	)
Balance at December 31, 2004	$	478		$	—		$	—		$	—		$	478
First quarter charge to expense		1,698			206			—			7			1,911
Second quarter charge to expense		586			163			746			174			1,669
Third quarter charge to expense		214			—			218			35			467
Fourth quarter charge to expense		(57	)		—			140			(18	)		65
Cash payments		(2,722	)		—			(140	)		(198	)		(3,060	)
Non-cash utilization		—			(369	)		—			—			(369	)
Balance at December 31, 2005	$	197		$	—		$	964		$	—		$	1,161
First quarter charge to expense		—			—			—			48			48
Cash payments		(197	)		—			(177	)		(40	)		(414	)
Non-cash utilization		—			—			—			—			—
Balance at April 1, 2006	$	—		$	—		$	787		$	8		$	795
Remaining expected restructuring charge	$	—		$	—		$	115		$	—		$	115

     All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges primarily relate to accelerated depreciation and the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Facility closure costs primarily relate to asset relocation and lease termination costs. Other exit costs include miscellaneous expenditures associated with exiting business activities. The Company expects that these restructuring efforts will be substantially completed during the second quarter of 2006.

(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.

     Customer Bankruptcy

     On March 3, 2006, the Company was notified that one if its customers, Dana Corporation, had filed for Chapter 11 bankruptcy protection. As a result, the Company recorded a charge of approximately $343 for the thirteen weeks ended April 1, 2006. These charges established a reserve for estimated losses expected to result from the bankruptcies and were recorded in the Company’s Condensed Consolidated Statement of Operations as a component of provision of doubtful accounts expense.

10

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

(11) Employee Benefit Plans

     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. The Components of net periodic pension and postretirement benefit cost are as follows:

	Pension Benefit Plan						Postretirement Benefit Plan
	Thirteen Weeks Ended						Thirteen Weeks Ended
	April 1,			April 2,			April 1,		April 2,
	2006			2005			2006		2005
Service cost	$	28		$	19		$	4	$	23
Interest cost		254			257			4		22
Expected return on plan assets		(273	)		(267	)		—		—
Amortization of actuarial loss		65			76			—		—
Net periodic benefit cost	$	74		$	85		$	8	$	45

     The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute $273 to its pension plan in 2006. As of April 1, 2006, contributions of $57 have been made to the pension plan.

(12) Income Taxes

     The Company recognized a provision for income taxes of $2,085, or 35.6% of pre-tax income, and $3,292, or 43.0% of pre-tax income, for federal, state and foreign income taxes for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The decrease in the effective tax rate for the thirteen weeks ended April 1, 2006 compared to the thirteen weeks ended April 2, 2005 was primarily attributable to the improved performance of the United Kingdom operations and the corresponding decrease in the amount of valuation allowance pertaining to the Company’s deferred tax assets.

(13) Accounting Pronouncements

     In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. Management has determined that the implementation of SFAS 155 will not have an effect on the Company’s financial statements.

     In March 2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement 140”. SFAS 156 will become effective for fiscal years beginning after September 15, 2006. SFAS 156 requires an entity to recognize a servicing asset or servicing liability at fair value, if possible, each time it undertakes an obligation to service a financial asset by entering into a servicing contract under certain conditions. Management has determined that the implementation of SFAS 156 will not have an effect on the Company’s financial statements.

(14) Segment Reporting

     SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the chief executive officer.

     The Company has two reportable segments: Vehicle Management & Power Distribution and Control Devices. These reportable segments were determined based on the differences in the nature of the products offered. The Vehicle Management & Power Distribution reportable segment produces electronic instrument clusters, electronic control units, driver information

11

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

systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment produces electronic and electromechanical switches and control actuation devices and sensors.

     The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s December 31, 2005 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

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

	Thirteen Weeks Ended
	April 1,			April 2,
Net Sales	2006			2005
Vehicle Management & Power Distribution	$	100,364		$	99,023
Intersegment sales		4,469			4,819
Vehicle Management & Power Distribution net sales		104,833			103,842
Control Devices		79,270			81,804
Intersegment sales		918			856
Control Devices net sales		80,188			82,660
Eliminations		(5,387	)		(5,675	)
Total consolidated net sales	$	179,634		$	180,827
Income Before Income Taxes
Vehicle Management & Power Distribution	$	6,197		$	9,000
Control Devices		4,409			2,384
Other corporate activities		932			2,136
Corporate interest expense		(5,686	)		(5,859	)
Total consolidated income before income taxes	$	5,852		$	7,661
Depreciation and Amortization
Vehicle Management & Power Distribution	$	1,790		$	2,155
Control Devices		4,430			4,419
Corporate activities		91			98
Total consolidated depreciation and amortization(A)	$	6,311		$	6,672
Interest Expense (Income)
Vehicle Management & Power Distribution	$	(106	)	$	39
Control Devices		339			92
Corporate activities		5,686			5,858
Total consolidated interest expense	$	5,919		$	5,989
Capital Expenditures
Vehicle Management & Power Distribution	$	2,200		$	1,644
Control Devices		4,317			2,317
Corporate activities		46			93
Total consolidated capital expenditures	$	6,563		$	4,054

12

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

	April 1,			December 31,
Total Assets	2006			2005
Vehicle Management & Power Distribution	$	179,176		$	158,203
Control Devices		232,373			222,747
Corporate(B)		247,681			248,739
Eliminations		(170,371	)		(166,651	)
Total consolidated assets	$	488,859		$	463,038

(A)	These amounts represent depreciation and amortization on fixed and certain intangible assets.
(B)	Assets located at Corporate consist primarily of cash, deferred taxes and equity investments.

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

	Thirteen Weeks Ended
	April 1,		April 2,
Net Sales	2006		2005
North America	$	141,024	$	140,294
Europe and other		38,610		40,533
Total consolidated net sales	$	179,634	$	180,827

	April 1,		December 31,
Non-Current Assets	2006		2005
North America	$	218,260	$	216,563
Europe and other		28,058		27,795
Total non-current assets	$	246,318	$	244,358

(15) Investments

     PST Indústria Eletrônica da Amazônia Ltda.

     The Company has a 50% interest in PST Indústria Eletrônica da Amazônia Ltda. (“PST”), a Brazilian electronic components business that specializes in electronic vehicle security devices. The investment is accounted for under the equity method of accounting. The Company’s investment in PST was $19,716 and $17,818 at April 1, 2006 and December 31, 2005, respectively. The Company has a note receivable with PST of $1,148 as of April 1, 2006 and December 31, 2005, respectively. PST operates on a calendar year.

     Condensed financial information for PST is as follows:

	First Quarter ended
	March 31,
	2006		2005
Revenues	$	20,999	$	14,262
Cost of sales	$	10,674	$	8,084
Total pretax income	$	4,196	$	1,638
The Company’s share of pretax income	$	2,098	$	819

     Equity in earnings of PST included in the Condensed Consolidated Statements of Operations was $1,360 and $719 for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively.

13

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

     Minda Instruments Ltd.

     The Company has a 30% interest in Minda Instruments Ltd. (“Minda”), a company based in India that manufactures electronic instrumentation equipment for the automotive and truck markets. In February 2006, the Company increased its investment in Minda from 20% to 30% by purchasing an additional 10% of Minda’s equity for $980. The investment is accounted for under the equity method of accounting. The Company’s investment in Minda was $1,859 and $828 at April 1, 2006 and December 31, 2005, respectively. Equity in earnings of Minda included in the Condensed Consolidated Statements of Operations were $56 and $13, for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively.

(16) Warranty Reserves

     The Company’s warranty reserve is 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 date.

     The following is a reconciliation of the changes in the Company’s warranty reserve:

	Thirteen Weeks Ended			Fiscal Year Ended
	April 1,			December 31,
	2006			2005
Warranty reserves at beginning of period	$	4,981		$	5,425
Payments made		(720	)		(2,548	)
Costs recognized for warranties issued during the period		561			1,483
Changes in estimates for preexisting warranties		195			621
Warranty reserves at end of period	$	5,017		$	4,981

(17) Guarantor Financial Information

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

     Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, at April 1, 2006 and April 2, 2005 and for each of the thirteen weeks ended April 1, 2006 and April 2, 2005.

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

14

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

	April 1, 2006
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	4,464		$	53		$	37,257	$	—		$	41,774
Accounts receivable, net		54,716			37,964			28,825		(71	)		121,434
Inventories, net		26,597			12,551			15,991		—			55,139
Prepaid expenses and other		(268,914	)		254,164			29,592		—			14,842
Deferred income taxes		(3,971	)		12,876			447		—			9,352
Total current assets		(187,108	)		317,608			112,112		(71	)		242,541
Long-Term Assets:
Property, Plant and Equipment, net		60,890			33,626			18,654		—			113,170
Other Assets:
Goodwill		44,585			20,591			—		—			65,176
Investments and other, net		40,871			494			180		(12,173	)		29,372
Deferred income taxes		43,871			(5,738	)		467		—			38,600
Investment in subsidiaries		406,763			—			—		(406,763	)		—
Total long-term assets		596,980			48,973			19,301		(418,936	)		246,318
Total Assets	$	409,872		$	366,581		$	131,413	$	(419,007	)	$	488,859
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	24,876		$	22,029		$	21,883	$	—		$	68,788
Accrued expenses and other		25,634			10,935			16,518		(71	)		53,016
Total current liabilities		50,510			32,964			38,401		(71	)		121,804
Long-Term Liabilities:
Long-term debt		200,000			—			12,173		(12,173	)		200,000
Deferred income taxes		—			—			1,477		—			1,477
Other liabilities		—			2,050			4,166		—			6,216
Total long-term liabilities		200,000			2,050			17,816		(12,173	)		207,693
Shareholders’ Equity		159,362			331,567			75,196		(406,763	)		159,362
Total Liabilities and Shareholders’ Equity	$	409,872		$	366,581		$	131,413	$	(419,007	)	$	488,859

15

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

     Supplemental condensed consolidating financial statements (continued):

					��
	December 31, 2005
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	7,754		$	47		$	32,983	$	—		$	40,784
Accounts receivable, net		46,505			30,883			23,043		(69	)		100,362
Inventories, net		25,662			12,804			15,325		—			53,791
Prepaid expenses and other		(274,706	)		258,203			30,993		—			14,490
Deferred income taxes		4,713			4,116			424		—			9,253
Total current assets		(190,072	)		306,053			102,768		(69	)		218,680
Long-Term Assets:
Property, Plant and Equipment, net		61,620			33,683			18,175		—			113,478
Other Assets:
Goodwill		44,585			20,591			—		—			65,176
Investments and other, net		38,004			460			46		(12,019	)		26,491
Deferred income taxes		41,547			(3,781	)		1,447		—			39,213
Investment in subsidiaries		399,536			—			—		(399,536	)		—
Total long-term assets		585,292			50,953			19,668		(411,555	)		244,358
Total Assets	$	395,220		$	357,006		$	122,436	$	(411,624	)	$	463,038
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	—		$	—		$	44	$	—		$	44
Accounts payable		20,350			17,358			17,636		—			55,344
Accrued expenses and other		20,879			10,351			15,442		(69	)		46,603
Total current liabilities		41,229			27,709			33,122		(69	)		101,991
Long-Term Liabilities:
Long-term debt, net of current portion		200,000			—			12,019		(12,019	)		200,000
Deferred income taxes		—			—			923		—			923
Other liabilities		—			2,043			4,090		—			6,133
Total long-term liabilities		200,000			2,043			17,032		(12,019	)		207,056
Shareholders’ Equity		153,991			327,254			72,282		(399,536	)		153,991
Total Liabilities and Shareholders’ Equity	$	395,220		$	357,006		$	122,436	$	(411,624	)	$	463,038

16

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

     Supplemental condensed consolidating financial statements (continued):

	Thirteen Weeks Ended April 1, 2006
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net Sales	$	90,327		$	58,860		$	52,600		$	(22,153	)	$	179,634
Costs and Expenses:
Cost of goods sold		77,798			43,364			39,253			(21,473	)		138,942
Selling, general and administrative		16,536			6,741			8,998			(680	)		31,595
Gain on sale of property, plant and equipment		—			(1,489	)		—			—			(1,489	)
Restructuring charges		176			47			1			—			224
Operating Income (Loss)		(4,183	)		10,197			4,348			—			10,362
Interest expense		5,879			—			40			—			5,919
Other income		(1,147	)		—			(262	)		—			(1,409	)
Equity earnings from subsidiaries		(13,245	)		—			—			13,245			—
Income (Loss) Before Income Taxes		4,330			10,197			4,570			(13,245	)		5,852
Provision for income taxes		563			19			1,503			—			2,085
Net Income (Loss)	$	3,767		$	10,178		$	3,067		$	(13,245	)	$	3,767

	Thirteen Weeks Ended April 2, 2005
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net Sales	$	89,268		$	59,652		$	51,012		$	(19,105	)	$	180,827
Costs and Expenses:
Cost of goods sold		74,593			42,265			37,382			(18,648	)		135,592
Selling, general and administrative		12,437			7,903			10,505			(457	)		30,388
Restructuring charges		—			300			1,826			—			2,126
Operating Income		2,238			9,184			1,299			—			12,721
Interest expense (income), net		6,022			—			(33	)		—			5,989
Other expense (income), net		(2,505	)		1,658			(82	)		—			(926	)
Equity earnings from subsidiaries		(8,418	)		—			—			8,418			—
Income Before Income Taxes		7,139			7,526			1,414			(8,418	)		7,661
Provision (benefit) for income taxes		2,770			(509	)		1,031			—			3,292
Net Income	$	4,369		$	8,035		$	383		$	(8,418	)	$	4,369

17

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

     Supplemental condensed consolidating financial statements (continued):

	Thirteen Weeks Ended April 1, 2006
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net cash provided (used) by operating activities	$	(5,398	)	$	4,773		$	6,691		$	155		$	6,221
INVESTING ACTIVITIES:
Capital expenditures		(2,891	)		(1,977	)		(1,695	)		—			(6,563	)
Proceeds from sale of fixed assets		2,266			—			—			—			2,266
Business acquisitions and other		(1,720	)		(63	)		—			749			(1,034	)
Net cash used by investing activities		(2,345	)		(2,040	)		(1,695	)		749			(5,331	)
FINANCING ACTIVITIES:
Repayments of long-term debt		348			—			(237	)		(155	)		(44	)
Share-based compensation activity		4,255			(2,728	)		(847	)		(749	)		(69	)
Other financing costs		(150	)		—			—			—			(150	)
Net cash provided (used) by financing activities		4,453			(2,728	)		(1,084	)		(904	)		(263	)
Effect of exchange rate changes on cash and cash equivalents		—			—			363			—			363
Net change in cash and cash equivalents		(3,290	)		5			4,275			—			990
Cash and cash equivalents at beginning of period		7,754			48			32,982			—			40,784
Cash and cash equivalents at end of period.	$	4,464		$	53		$	37,257		$	—		$	41,774

	Thirteen Weeks Ended April 2, 2005
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Net cash provided (used) by operating activities	$	(2,562	)	$	560		$	(7,517	)	$	4,184		$	(5,335	)
INVESTING ACTIVITIES:
Capital expenditures		(1,923	)		(541	)		(1,590	)		—			(4,054	)
Other		4			(17	)		—			13			—
Net cash used by investing activities		(1,919	)		(558	)		(1,590	)		13			(4,054	)
FINANCING ACTIVITIES:
Repayments of long-term debt		—			—			4,147			(4,184	)		(37	)
Share-based compensation activity		42			—			—			—			42
Other financing costs		—			—			13			(13	)		—
Net cash provided by financing activities		42			—			4,160			(4,197	)		5
Effect of exchange rate changes on cash and cash equivalents		—			—			(631	)		—			(631	)
Net change in cash and cash equivalents		(4,439	)		2			(5,578	)		—			(10,015	)
Cash and cash equivalents at beginning of period		20,363			17			31,952			—			52,332
Cash and cash equivalents at end of period	$	15,924		$	19		$	26,374		$	—		$	42,317

18

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

(18) Subsequent Event

     On April 24, 2006, the shareholders of Stoneridge, Inc. approved the Company’s Amended and Restated Long-Term Incentive Plan (the “2006 Plan”), which had been unanimously approved on February 18, 2006 by the Board of Directors upon the recommendation of the Board’s Compensation Committee. The 2006 Plan will replace the Company’s current equity incentive plan when the current plan expires in June 2007.

19

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

     Overview

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

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

     Our net income for the period ending April 1, 2006 was $3.8 million, or $0.16 per diluted share, compared with net income of $4.4 million, or $0.19 per diluted share, for the period ending April 2, 2005.

     Our first quarter 2006 operating results were unfavorably affected by a number of challenging industry-wide issues, including intense competition, product price reductions, higher commodity costs, and customer bankruptcies. We continuously work to address these challenges by implementing a broad range of initiatives aimed to improve operating performance. During the first quarter of 2006, we implemented focused teams to implement best practices in our underperforming operations and we have realigned our purchasing organization to reduce our direct material procurement costs. These challenges were favorably offset by a number of items in the first quarter, including a $1.9 million pretax reduction in our restructuring expense and $1.5 million pretax gain on the sale of a fixed asset. Our PST joint venture in Brazil continued to perform well during the quarter, resulting in equity earnings of $1.4 million compared with $0.7 million in the previous year.

     Significant factors inherent to our markets that could affect our results for 2006 include our ability to successfully execute our planned productivity and cost reduction initiatives and the financial stability of our customers and suppliers. We are undertaking these initiatives to mitigate commodity price increases and customer demanded price reductions. Our results for 2006 also depend on conditions in the automotive and commercial vehicle industries, which are generally dependent on domestic and global economies.

     Results of Operations

     We are primarily organized by markets served and products produced. Under this organization structure, our operations have been aggregated into two reportable segments: Vehicle Management & Power Distribution and Control Devices. 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 of operations from our operations that design and manufacture electronic and electromechanical switches, control actuation devices and sensors.

     Beginning in 2005, we changed from a calendar year-end to a 52-53 week fiscal year-end. Our fiscal quarters are now comprised of thirteen-week periods and once every seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The first thirteen-week period of 2006 and 2005 ended on April 1 and April 2, respectively.

     Thirteen Weeks Ended April 1, 2006 Compared to Thirteen Weeks Ended April 2, 2005

     Net Sales.Net sales for our reportable segments, excluding inter-segment sales, for the thirteen weeks ended April 1, 2006 and April 2, 2005 are summarized in the following table:

	Thirteen Weeks Ended
	April 1,		April 2,		$ Increase /			% Increase /
	2006		2005		(Decrease)			(Decrease)
Vehicle Management & Power Distribution	$	100,364	$	99,023	$	1,341			1.4	%
Control Devices		79,270		81,804		(2,534	)		(3.1	)%
Total net sales	$	179,634	$	180,827	$	(1,193	)		(0.7	)%

20

     The increase in net sales for our Vehicle Management & Power Distribution reportable segment was primarily due to increased sales to our commercial vehicle customers as North American demand was strong in the quarter. This increase was offset by an unfavorable $3.4 million impact from foreign currency exchange in the quarter and ongoing product price reductions.

     The decrease in net sales for our Control Devices reportable segment was primarily attributable an unfavorable North American light vehicle production mix and product price reductions. In addition, unfavorable foreign currency exchange translation reduced our sales by $0.6 million during the quarter.

     Net sales by geographic location for the thirteen weeks ended April 1, 2006 and April 2, 2005 are summarized in the following table:

	Thirteen Weeks Ended
	April 1,		April 2,		$ Increase /			% Increase /
	2006		2005		(Decrease)			(Decrease)
North America	$	141,024	$	140,294	$	730			0.5	%
Europe and other		38,610		40,533		(1,923	)		(4.7	)%
Total net sales	$	179,634	$	180,827	$	(1,193	)		(0.7	)%

     North American sales accounted for 79% of total net sales in the first thirteen weeks of 2006 compared with 78% for the same period in 2005. 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 in the quarter. The increase was partially offset by an unfavorable North American light vehicle production mix and product price reductions. Net sales outside North America accounted for 21% of total net sales for the thirteen weeks ended April 1, 2006 compared to 22% for the same period in 2005. Our sales outside of North America declined primarily due to unfavorable foreign currency exchange rates. The unfavorable effect of these exchange rates totaled $4.0 million in the quarter.

     Cost of Goods Sold.Cost of goods sold for the thirteen weeks ended April 1, 2006 increased by $3.3 million, or 2.5%, to $138.9 million from $135.6 million for the same period in 2005. As a percentage of sales, cost of goods sold increased to 77.3% from 75.0%. This increase as a percentage of sales was predominately due to unfavorable material price variances resulting from raw material price increases, continued operating inefficiencies at some of our facilities in Mexico and product price reductions. Going forward, we expect that pricing and raw material price challenges will continue to affect our gross margin through 2006. Our management team is working to offset these pressures through our focused operational improvement efforts, purchasing programs and, in some cases, commodity hedging programs.

     Selling, General and Administrative Expenses.Selling, general and administrative (“SG&A”) expenses for the thirteen weeks ended April 1, 2006 increased by $0.8 million, or 2.6%, to $31.2 million from $30.4 million for the first thirteen weeks of 2005. Offsetting the net increase in SG&A expense for the period was a decrease of $0.7 million in product development expenses. Product development expenses were $10.3 million for the thirteen weeks ended April 1, 2006 and $11.0 million for the thirteen weeks ended April 2, 2005, respectively. Included in product development expenses in the thirteen weeks ended April 1, 2005, was expenditures incurred to obtain certification for a key product in Europe, which was certified in 2005. Offsetting the decrease in product development expenses was an increase in SG&A expenses. The increase in non-product development SG&A expenses in 2006 compared with 2005 is primarily attributable to the non-recurrence of a favorable legal settlement in 2005. As a percentage of sales, SG&A expenses increased to 17.4% for the first thirteen weeks of 2006 from 16.8% for the same period in 2005.

     Provision for Doubtful Accounts.The provision for doubtful accounts increased $0.3 million compared to the same time period in 2005 primarily due to the Chapter 11 bankruptcy filing of Dana Corporation on March 3, 2006.

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     Restructuring Charges.In January 2005, we announced that we would undertake restructuring efforts related to the rationalization of certain manufacturing facilities in the high cost regions of Europe and North America. This rationalization is a result of our cost reduction initiatives. Restructuring charges recorded by reportable segment during the thirteen weeks ended April 1, 2006 and April 2, 2005 were as follows:

	Thirteen Weeks Ended April 1, 2006
	Vehicle Management				Total Consolidated
	& Power				Restructuring
	Distribution		Control Devices		Charges
Severance costs	$	176	$	—	$	176
Other exit costs		—		48		48
Total restructuring charges.	$	176	$	48	$	224

	Thirteen Weeks Ended April 2, 2005
	Vehicle Management				Total Consolidated
	& Power				Restructuring
	Distribution		Control Devices		Charges
Severance costs	$	88	$	1,698	$	1,786
Asset-related charges		127		206		333
Other exit costs		—		7		7
Total restructuring charges.	$	215	$	1,911	$	2,126

     All restructuring charges, except for the asset-related charges, result in cash outflows. Asset-related charges relate primarily to accelerated depreciation and the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Severance costs relate to a reduction in workforce. Facility closure costs primarily relate to asset relocation and lease termination costs. Other costs include miscellaneous expenditures associated with exiting business activities.

     Gain on Sale of Property, Plant and Equipment.Gain on sale of property, plant and equipment was $1.5 million for the thirteen weeks ended April 1, 2006 and is the result of the sale of land and a building adjacent to our Sarasota, Florida location.

     Equity in Earnings of Investees.Equity in earnings of investees was $1.4 million and $0.7 million for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The increase of $0.7 million 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.

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

	Thirteen Weeks Ended
	April 1,			April 2,			$ Increase /			% Increase /
	2006			2005			(Decrease)			(Decrease)
Vehicle Management & Power Distribution	$	6,197		$	9,000		$	(2,803	)		(31.1	)%
Control Devices		4,409			2,384			2,025			84.9	%
Other corporate activities		932			2,136			(1,204	)		(56.4	)%
Corporate interest expense		(5,686	)		(5,859	)		(173	)		(3.0	)%
Income before income taxes	$	5,852		$	7,661		$	(1,809	)		(23.6	)%

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     The decrease in income before income taxes at the Vehicle Management & Power Distribution reportable segment was primarily the result of unfavorable raw material variances, ongoing operating inefficiencies at our Mexican operations and product price reductions. These factors were partially offset by increased volume in the quarter.

     The increase in income before income taxes at the Control Devices reportable segment was primarily the result of improved operating efficiencies at our United Kingdom operation and a reduction in restructuring expenses in the quarter. These factors were partially offset by ongoing product price reductions and increased raw material costs.

     Income before income taxes for the thirteen weeks ended April 1, 2006 for North America decreased by $5.1 million to $2.7 million from $7.8 million for the same period in 2005. The decrease in our profitability in North America was primarily attributable to unfavorable raw material variances, ongoing operating inefficiencies at our Mexican operations and product price reductions. Income before income taxes for 2005 outside North America increased by $3.3 million to $3.2 million from $(0.1) million in 2005. 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 the 2005 period.

     Provision for Income Taxes.We recognized a provision for income taxes of $2.1 million, or 35.6% of pre-tax income, and $3.3 million, or 43.0% of the pre-tax income, for federal, state and foreign income taxes for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The decrease in the effective tax rate for the thirteen weeks ended April 1, 2006 compared to the thirteen weeks ended April 2, 2005 was primarily attributable to the improved performance of the United Kingdom operations and the corresponding decrease in the amount of valuation allowance pertaining to the Company’s deferred tax assets.

     Liquidity and Capital Resources

     Net cash provided by operating activities was $6.2 million and $(5.3) million for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The increase in net cash provided by operating activities of $11.5 million was primarily due to improvements in working capital management in the areas of accounts payable and accrued expenses. The cash provided from accounts payable resulted from better matching of our accounts receivable and accounts payable in the quarter compared with the prior year.

     Net cash used by investing activities was $5.3 million and $4.1 million for the thirteen weeks ended April 1, 2006 and April 2, 2005, respectively. The increase in net cash used by investing activities of $1.2 million was attributable to an increase in capital expenditures during the quarter. This increase in capital expenditures is predominantly related to the launch of new products in the areas of customer-actuated switches, power distribution systems and sensor products. In addition, in February 2006, we invested approximately $1.0 million for an additional 10% stake in our Minda Instruments Limited joint venture. We now maintain a 30% interest in the venture. The increase in capital spending and investment spending was offset by $2.3 million in proceeds from a property sale.

     Net cash used by financing activities for the thirteen weeks ended April 1, 2006 was $(0.3) million, and primarily related to fees for the completion of our credit agreement amendment during the quarter.

     As discussed in Note 4 to our consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $24,500 to reduce exposure related to our Swedish krona- and British pound-denominated receivables. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $(43). The Company’s foreign currency option contracts have a notional value of $70 and reduce the risk associated with the Company’s other known foreign currency exposures related to the Mexican peso. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $34.

     Our credit facilities contain various covenants that require, among other things, the maintenance of certain specified ratios of consolidated total debt to consolidated EBITDA, interest coverage and fixed charge coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. We were in compliance with all covenants at April 1, 2006. On March 7, 2006, we amended our credit agreement dated May 1, 2002. The amendment modifies certain financial covenant requirements, changes certain reporting requirements, sets borrowing levels based on certain asset levels and prohibits us from repurchasing, repaying or redeeming any of our outstanding subordinated notes unless certain covenant levels are met.

     Future capital expenditures are expected to be consistent with recent levels and future organic growth is expected to be funded through cash flows from operations. Management will continue to focus on reducing its weighted average cost of capital

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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 7 to our financial statements, the Company is a party to a $100.0 million revolving credit facility. On March 7, 2006, the Company amended the credit agreement, which, among other things, gave the Company substantially all of its borrowing capacity on the $100.0 million credit facility. As of April 1, 2006, $96.1 of the $100.0 million was available.

     Inflation and International Presence

     Given the current economic climate and recent increases in certain commodity prices, we believe that a continuation of such price increases would significantly affect our profitability. Furthermore, by operating internationally, we are affected by the economic conditions of certain countries. Based on the current economic conditions in these countries, we believe we are not significantly exposed to adverse economic conditions.

     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 or supplier;
	•	the costs and timing of facility closures, business realignment, or similar actions;
	•	a significant change in automotive, medium- and heavy-duty, agricultural or off-highway vehicle production;
	•	our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;
	•	a significant change in general economic conditions in any of the various countries in which we operate;
	•	labor disruptions at our facilities or at any of our significant customers or suppliers;
	•	the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis;
	•	the amount of debt and the restrictive covenants contained in our credit facility;
	•	customer acceptance of new products;
��
	•	capital availability or costs, including changes in interest rates or market perceptions;
	•	the successful integration of any acquired businesses;
	•	the occurrence or non-occurrence of circumstances beyond our control; and
	•	those items described in Part I, Item IA (“Risk Factors”) of the Company’s 2005 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     Interest Rate Risk

     From time to time, we are exposed to certain market risks, primarily resulting from the effects of changes in interest rates. At April 1, 2006, however, all of our debt was fixed rate debt. At this time, we do not intend to use financial instruments to manage this risk.

     Commodity Price Risk

     Given the current economic climate and the recent increases in certain commodity costs, we 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. On February 2, 2006, the Company entered into a fixed price contract to purchase zinc. The initial notional value of the contract was $849, while the estimated fair market value of the contract as of April 1, 2006, was $855. 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. 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.

     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 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 known foreign currency exposures. As discussed in Note 4 to our condensed consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $24,500 to reduce exposure related to our Swedish krona- and British pound-denominated intercompany loans. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $(43). Our foreign currency option contracts have a notional value of $70 and reduce the risk associated with our other known foreign currency exposures related to the Mexican peso. The estimated fair value of these contracts at April 1, 2006, per quoted market sources, was approximately $34. 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. Furthermore, a hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted exchange rates would not significantly affect our results of operations, financial position or cash flows.

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Item 4. Controls and Procedures.

     Evaluation of Disclosure Controls and Procedures

     As of April 1, 2006, an evaluation was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of April 1, 2006.

     Changes in Internal Control Over Financial Reporting

     There were no changes in the Company’s internal control over financial reporting during the thirteen weeks ended April 1, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

     The Company is involved in certain legal actions and claims arising in the ordinary course of business. The Company, however, does not believe that any of the litigation in which it is currently engaged, either individually or in the aggregate, will have a material adverse effect on its business, condensed consolidated financial position or results of operations. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company’s products and there can be no assurance that the Company will not experience any material product liability losses in the future. In addition, if any of the Company’s products prove to be defective, the Company may be required to participate in the government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims.

Item 1A. Risk Factors.

     There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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

     None.

Item 3. Defaults Upon Senior Securities.

     None.

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

     No matters were submitted to a vote of security holders during the thirteen weeks ended April 1, 2006.

Item 5. Other Information.

     None.

Item 6. Exhibits.

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

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SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STONERIDGE, INC.
Date: May 5, 2006	/s/ John C. Corey
	John C. Corey
	President, Chief Executive Officer and Director (Principal Executive Officer)
Date: May 5, 2006	/s/ George E. Strickler
	George E. Strickler
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

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INDEX TO EXHIBITS

Exhibit
Number	Exhibit
10.1	Form of Change in Control Agreement (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005).
10.2	Severance and Consulting Agreement for Gerald V. Pisani, dated February 28, 2006, (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 3, 2006).
10.3	Employment agreement between the Company and John C. Corey, filed herewith.
10.4	Amendment No. 5 dated March 7, 2006 to Credit Agreement dated as of May 1, 2002 by and among the Company as Borrower, the Lending Institutions Named Therein, as Lenders, National City Bank, as Administrative Agent, a Joint Lead Arranger and Collateral Agent, Deutsche Bank Securities Inc., as a Joint Lead Arranger, Comerica Bank and PNC Bank, National Association, as the Co-Documentation Agents (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March 10, 2006).
31.1	Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2	Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

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