UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended June 30, 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.

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

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

(330) 856-2443

     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 filer o      Accelerated filer þ      Non-accelerated filer 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

     The number of Common Shares, without par value, outstanding as of July 27, 2007 was 24,213,162.

 

 

STONERIDGE, INC. AND SUBSIDIARIES

INDEX

		Page No.
PART I–FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006 (Audited)			2
Condensed Consolidated Statements of Operations (Unaudited) For the 3 and 6 Months Ended June 30, 2007 and 13 and 26 Weeks Ended July 1, 2006			3
Condensed Consolidated Statements of Cash Flows (Unaudited) For the 6 Months Ended June 30, 2007 and 26 Weeks Ended July 1, 2006			4
Notes to Condensed Consolidated Financial Statements (Unaudited)			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			31
PART II–OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			33
Item 6. Exhibits			33
Signatures			34
Index to Exhibits			35
EX-3.1
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

STONERIDGE, INC. AND SUBSIDIARIES

		June 30,				December 31,
		2007				2006
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash and cash equivalents		$	66,066			$	65,882
Accounts receivable, less allowances for doubtful accounts and other reserves of $5,747 and $5,243, respectively			113,818				106,985
Inventories, net			57,261				58,521
Prepaid expenses and other			21,037				13,448
Deferred income taxes			8,820				9,196
Total current assets			267,002				254,032
Long-Term Assets:
Property, plant and equipment, net			106,016				114,586
Other Assets:
Goodwill			65,176				65,176
Investments and other, net			36,138				30,875
Deferred income taxes			36,133				37,138
Total long-term assets			243,463				247,775
Total Assets		$	510,465			$	501,807
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	66,499			$	72,493
Accrued expenses and other			46,597				45,624
Total current liabilities			113,096				118,117
Long-Term Liabilities:
Long-term debt			200,000				200,000
Deferred income taxes			1,921				1,923
Other liabilities			3,695				3,145
Total long-term liabilities			205,616				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 24,582 and 23,990 shares and outstanding 24,224 and 23,804 shares, respectively, with no stated value			—				—
Additional paid-in capital			152,754				150,078
Common Shares held in treasury, 358 and 186 shares, respectively, at cost			(369	)			(151	)
Retained earnings			29,266				21,701
Accumulated other comprehensive income			10,102				6,994
Total shareholders’ equity			191,753				178,622
Total Liabilities and Shareholders’ Equity		$	510,465			$	501,807

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

STONERIDGE, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net Sales		$	183,802			$	185,499			$	368,830			$	365,133
Costs and Expenses:
Cost of goods sold			144,920				141,504				287,101				280,447
Selling, general and administrative			33,629				31,151				66,802				62,971
(Gain) Loss on sale of property, plant and equipment, net			(1,653	)			20				(1,688	)			(1,469	)
Operating Income			6,906				12,824				16,615				23,184
Interest expense, net			5,619				5,833				11,103				11,752
Equity in earnings of investees			(2,298	)			(1,550	)			(4,418	)			(2,966	)
Other loss, net			224				1,745				512				1,750
Income Before Income Taxes			3,361				6,796				9,418				12,648
Provision for income taxes			666				1,906				1,853				3,993
Net Income		$	2,695			$	4,890			$	7,565			$	8,655
Basic net income per share		$	0.12			$	0.21			$	0.33			$	0.38
Basic weighted average shares outstanding			23,114				22,861				23,052				22,824
Diluted net income per share		$	0.11			$	0.21			$	0.32			$	0.38
Diluted weighted average shares outstanding			23,702				22,902				23,603				22,884

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

STONERIDGE, INC. AND SUBSIDIARIES

		Six Months Ended
		June 30,				July 1,
		2007				2006
OPERATING ACTIVITIES:
Net income		$	7,565			$	8,655
Adjustments to reconcile net income to net cash provided by (used for) operating activities -
Depreciation			14,513				12,608
Amortization			799				821
Deferred income taxes			(325	)			2,269
Equity in earnings of investees			(4,418	)			(2,980	)
Gain on sale of property, plant and equipment			(1,688	)			(1,469	)
Share-based compensation expense			1,252				926
Changes in operating assets and liabilities -
Accounts receivable, net			(6,506	)			(24,274	)
Inventories, net			1,538				(2,372	)
Prepaid expenses and other			(3,910	)			(219	)
Other assets			(6	)			985
Accounts payable			(6,112	)			15,489
Accrued expenses and other			1,317				1,776
Net cash provided by operating activities			4,019				12,215
INVESTING ACTIVITIES:
Capital expenditures			(10,814	)			(13,150	)
Proceeds from sale of property, plant and equipment			4,951				2,266
Business acquisitions and other			—				(673	)
Net cash used for investing activities			(5,863	)			(11,557	)
FINANCING ACTIVITIES:
Repayments of long-term debt			—				(44	)
Share-based compensation activity, net			1,796				13
Other financing costs			—				(150	)
Net cash provided by (used for) financing activities			1,796				(181	)
Effect of exchange rate changes on cash and cash equivalents			232				1,730
Net change in cash and cash equivalents			184				2,207
Cash and cash equivalents at beginning of period			65,882				40,784
Cash and cash equivalents at end of period		$	66,066			$	42,991

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

STONERIDGE, INC.

(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, 2006.

     The results of operations for the six months ended June 30, 2007 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. Until October 30, 2006, the Company’s fiscal quarters were comprised of 13-week periods. On October 30, 2006, the Company changed back to a calendar (December 31) fiscal year-end; therefore, the 2006 fiscal year ended on December 31, 2006. Our fiscal quarters are now comprised of 3-month periods. Throughout this document, “three months” and “six months” will be used to reference the 3- and 6-month periods of 2007 and the comparable 13- and 26-week periods of 2006.

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

(2) Inventories

     Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 69% and 67% of the Company’s inventories at June 30, 2007 and December 31, 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:

		June 30,				December 31,
		2007				2006
Raw materials		$	36,586			$	39,832
Work-in-progress			8,778				8,196
Finished goods			13,591				12,614
Total inventories			58,955				60,642
Less: LIFO reserve			(1,694	)			(2,121	)
Inventories, net		$	57,261			$	58,521

(3) Fair Value of Financial Instruments

     Financial Instruments

     A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The estimated fair value of the Company’s senior notes (fixed rate debt) at June 30, 2007 and July 1, 2006, per quoted market sources, was $209.0 million and $192.0 million, respectively. On both dates, the carrying value was $200.0 million.

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

     Derivative Instruments and Hedging Activities

     The Company makes use of derivative instruments in foreign exchange and commodity price hedging programs. Derivatives currently in use are foreign currency forward and commodity swap contracts. These contracts are used 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.

     As a result of the Company’s international business presence it is exposed to foreign currency exchange risk. The Company uses derivative financial instruments, including foreign currency forward contracts, to mitigate its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currencies hedged by the Company include the Swedish krona, 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 condensed consolidated statement of operations as a component of other income. 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 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 transaction will be measured on an ongoing basis using the hypothetical operative method.

     The Company’s foreign currency forward contracts had a notional value of $33,268 and $16,003 at June 30, 2007 and July 1, 2006, respectively. The purpose of these investments is to reduce exposure related to the Company’s Mexican peso-, Swedish krona- and British pound-denominated exposures. The estimated fair value of these contracts at June 30, 2007 and July 1, 2006, per quoted market sources, was approximately $676 and $(235), respectively. In 2006, the Company used foreign currency options contracts to reduce the risk of exposures to the Mexican peso. As of July 1, 2006, the Company’s foreign currency option contracts had a notional value of $167 and an estimated fair value of $43. The Company’s foreign currency options contracts expired as of December 31, 2006.

     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. In December 2006, we entered into a fixed price swap for 480 metric tonnes of copper. In January 2007, we entered into an additional fixed price swap for 420 metric tonnes of copper. 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 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; however, as of December 31, 2006 they were not deemed effective and had no impact on other comprehensive income. The effectiveness of the transactions has been and will be measured on an ongoing basis using the hypothetical operative method. As of June 30, 2007, the fair value of the fixed price commodity swap contracts was approximately $752.

(4) Share-Based Compensation

     Total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $665 and $292 for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, total compensation expense recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $1,252 and $926, respectively.

     The total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $233 and $102 for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, total income tax benefit recognized in the condensed consolidated statements of operations for share-based compensation arrangements was $438 and $324, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

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

(5) Comprehensive Income (Loss)

     Statement of Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive Income, establishes standards for the reporting and disclosure of comprehensive income.

     The components of comprehensive income, net of tax are as follows:

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net income		$	2,695			$	4,890			$	7,565			$	8,655
Other comprehensive income:
Currency translation adjustments			1,533				2,325				1,982				3,359
Pension liability adjustments			(28	)			(197	)			(36	)			(234	)
Unrealized gain (loss) on marketable securities			10				(19	)			61				22
Unrecognized gain on derivatives			629				—				1,101				—
Total other comprehensive income			2,144				2,109				3,108				3,147
Comprehensive income		$	4,839			$	6,999			$	10,673			$	11,802

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

		June 30,				December 31,
		2007				2006
Foreign currency translation adjustments		$	10,507			$	8,525
Pension liability adjustments			(1,503	)			(1,467	)
Unrealized loss on marketable securities			(3	)			(64	)
Unrecognized gain on derivatives			1,101				—
Accumulated other comprehensive income		$	10,102			$	6,994

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

(6) Long-Term Debt

     Senior Notes

     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 at 105.75 until April 2008. The 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 Agreement

     On March 7, 2006, the Company amended the existing credit agreement, which provided the Company with 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 earnings before interest, taxes, depreciation and amortization (“EBITDA”) and interest coverage. Restrictions also include limits on capital expenditures, operating leases and dividends. The amendment utilizes a borrowing base composed of accounts receivable and inventory. The borrowing base limitation expired June 30, 2007. In addition, the Company is prohibited from repurchasing, repaying or redeeming subordinated notes until certain covenant levels are met. As of June 30, 2007, $96.4 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 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 EBITDA, as defined.

(7) Net Income Per Share

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

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

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Basic weighted-average shares outstanding			23,113,827				22,861,311				23,051,721				22,824,135
Effect of dilutive securities			588,522				40,932				551,096				59,968
Diluted weighted-average shares outstanding			23,702,349				22,902,243				23,602,817				22,884,103

     For the three months ended June 30, 2007 and July 1, 2006, options to purchase 234,000 and 680,850 Common Shares at an average price of $16.71 and $12.14, respectively, were not included in the computation of diluted net income per share because their respective exercise prices were greater than the average market price of Common Shares and, therefore, their effect would have been anti-dilutive. Options not included in the computation of diluted net income per share to purchase 260,000 and 680,850 Common Shares at an average price of $16.20 and $12.14, respectively, were outstanding during the six months ended June 30, 2007 and July 1, 2006, respectively.

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

     As of June 30, 2007, 508,275 performance-based restricted shares were outstanding. These shares were not included in the computation of diluted net income per share because not all vesting conditions were met. Approximately one quarter of these shares was associated with a plan that used highly optimistic earnings per share targets. At this time, we believe that meeting such thresholds is highly unlikely. The remainder may or may not become dilutive based on the Company’s ability to exceed future earnings thresholds or attain certain targets of total return to its shareholders measured against a peer group’s performance.

(8) 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 $31 and $(150) for the three months ended June 30, 2007 and July 1, 2006, respectively. Restructuring charges for the six months ended June 30, 2007 and July 1, 2006 was $72 and $74, respectively. Restructuring expenses are included in the Company’s condensed consolidated statement of operations as a part of selling, general and administrative expense.

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

						Asset-
		Severance				Related
		Costs				Charges				Total
Total expected restructuring charges		$	964			$	127			$	1,091
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
Second quarter charge to expense			(370	)			—				(370	)
Third quarter charge to expense			127				—				127
Fourth quarter charge to expense			436				—				436
Cash payments			(343	)			—				(343	)
Balance at December 31, 2006		$	438			$	—			$	438
First quarter charge to expense			41				—				41
Second quarter charge to expense			31				—				31
Cash payments			(493	)			—				(493	)
Balance at June 30, 2007		$	17			$	—			$	17
Remaining expected restructuring charge		$	—			$	—			$	—

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

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

						Asset-				Facility
		Severance				Related				Closure				Other Exit
		Costs				Charges				Costs				Costs				Total
Total expected restructuring charges		$	3,665			$	983			$	1,137			$	653			$	6,438
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
Second quarter charge to expense			204				—				14				2				220
Third quarter charge to expense			(48	)			—				1				—				(47	)
Fourth quarter charge to expense			—				—				18				—				18
Cash payments			(353	)			—				(569	)			(50	)			(972	)
Balance at December 31, 2006		$	—			$	—			$	428			$	—			$	428
First quarter charge to expense			—				—				—				—				—
Second quarter charge to expense			—				—				—				—				—
Cash payments			—				—				(324	)			—				(324	)
Balance at June 30, 2007		$	—			$	—			$	104			$	—			$	104
Remaining expected restructuring charge		$	—			$	—			$	—			$	—			$	—

     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. As of June 30, 2007, these restructuring initiatives have been substantially completed.

(9)Commitments and Contingencies

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

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

     Product Warranty and Recall

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

     The following provides a reconciliation of changes in product warranty and recall liability for the six months ended June 30, 2007 and July 1, 2006:

		2007				2006
Product warranty and recall at beginning of period		$	5,825			$	6,220
Accruals for products shipped during period			1,228				2,019
Changes in estimates of existing liabilities			847				96
Settlements made during the period (in cash or in kind)			(2,069	)			(2,291	)
Product warranty and recall at end of period		$	5,831			$	6,044

(10) Employee Benefit Plans

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

		Defined Benefit Plan
		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Service cost		$	43			$	36			$	85			$	64
Interest cost			514				331				1,021				585
Expected return on plan assets			(574	)			(355	)			(1,140	)			(628	)
Amortization of actuarial loss			111				84				221				149
Net periodic benefit cost		$	94			$	96			$	187			$	170

		Postretirement Benefit Plan
		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Service cost		$	4			$	4			$	7			$	8
Interest cost			6				4				12				8
Amortization of actuarial gain			(2	)			—				(3	)			—
Net periodic benefit cost		$	8			$	8			$	16			$	16

     The Company previously disclosed in its financial statements for the year ended December 31, 2006 that it expected to contribute $353 to its pension plan in 2007. Of this amount, contributions of $128 have been made to the pension plan as of June 30, 2007.

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

(11) Income Taxes

     The Company recognized a provision for income taxes of $666, or 19.8% of pre-tax income, and $1,906, or 28.1% of pre-tax income, for federal, state and foreign income taxes for the three months ended June 30, 2007 and July 1, 2006, respectively. The Company recognized a provision for income taxes of $1,853, or 19.7% of pre-tax income, and $3,993, or 31.6% of pre-tax income, for federal, state and foreign income taxes for the six months ended June 30, 2007 and July 1, 2006, respectively. The decrease in the effective tax rate for both the three and six months ended June 30, 2007 and July 1, 2006, respectively, was primarily attributable to the benefit of the federal research and development tax credit which had not been extended at July 1, 2006, a reduction in accrued income taxes, and a more favorable mix of domestic and lower taxed foreign earnings.

     In June 2006, the Financial Accounting Standards Board issued FASB 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 the beginning of the 2007 calendar year. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

     As of January 1, 2007, the Company provided a liability of $4,731, excluding interest and penalties, for unrecognized tax benefits related to various federal, state and foreign income tax matters. The liability for uncertain tax positions is classified as a non-current income tax liability unless it is expected to be paid within one year. The liability for unrecognized tax positions increased by $96 for the second quarter ended June 30, 2007 and decreased by $91 for the six months ended June 30, 2007 resulting in a balance at June 30, 2007 of $4,640. 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 $150-$700 within the next 12 months.

     If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, approximately $4,438 would reduce 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 six months ended June 30, 2007 and 2006, the Company recognized approximately $(43) and $26 of gross interest and penalties, respectively. The Company has accrued approximately $779 and $821 for the payment of interest and penalties at June 30, 2007 and December 31, 2006, respectively.

     The Company conducts business globally and, as a result, the Company or a subsidiary of the Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each important jurisdiction:

Jurisdiction		Open Tax Years
Federal			2003-2006
France			2003-2006
Mexico			2001-2006
Spain			2002-2006
Sweden			2001-2006
United Kingdom			2002-2006

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

(12) Accounting Pronouncements

     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. The Company is currently evaluating the impact that SFAS 157 will have on the Company’s financial statements in 2008.

     In September 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1, Accounting for Planned Major Maintenance Activities (“FSP No. AUG AIR-1”). This position prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. The Company adopted the provisions of this FSP as of January 1, 2007, as required. The adoption did not have a material impact on our condensed consolidated statements of operations or financial condition.

     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 fiscal years beginning after November 15, 2007 with earlier application permitted, subject to certain conditions. The Company is currently evaluating the impact of adopting SFAS 159 on its consolidated financial statements and whether to adopt its provisions prior to the required effective date.

     In May 2007, the FASB issued FASB Staff Position FIN 48-1, 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 our consolidated financial position or results of operations.

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

(13) Segment Reporting

     SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the president and chief executive officer.

     The Company has two reportable segments: Electronics and Control Devices. These reportable segments were determined based on the differences in the nature of the products offered. The Electronics reportable segment, formerly known as the Vehicle Management & Power Distribution reportable segment, produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution. The Control Devices reportable segment produces electronic and electromechanical switches and control actuation devices and sensors.

     The accounting policies of the Company’s reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies” of the Company’s December 31, 2006 Form 10-K. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.

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

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net Sales
Electronics		$	98,248			$	105,543			$	199,049			$	205,907
Inter-segment sales			5,359				4,534				10,490				9,003
Electronics net sales			103,607				110,077				209,539				214,910
Control Devices			85,554				79,956				169,781				159,226
Inter-segment sales			590				1,193				1,391				2,111
Control Devices net sales			86,144				81,149				171,172				161,337
Eliminations			(5,949	)			(5,727	)			(11,881	)			(11,114	)
Total consolidated net sales		$	183,802			$	185,499			$	368,830			$	365,133
Income Before Income Taxes
Electronics		$	1,884			$	8,847			$	8,990			$	15,044
Control Devices			5,510				4,497				8,038				8,906
Other corporate activities			1,572				(735	)			3,521				197
Corporate interest expense			(5,605	)			(5,813	)			(11,131	)			(11,499	)
Total consolidated income before income taxes		$	3,361			$	6,796			$	9,418			$	12,648
Depreciation and Amortization
Electronics		$	2,427			$	1,977			$	4,757			$	3,767
Control Devices			4,885				4,359				9,690				8,789
Corporate activities			88				97				173				188
Total consolidated depreciation and amortization(A)		$	7,400			$	6,433			$	14,620			$	12,744

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

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Interest Expense (Income)
Electronics		$	(137	)		$	(131	)		$	(225	)		$	(237	)
Control Devices			151				151				197				490
Corporate activities			5,605				5,813				11,131				11,499
Total consolidated interest expense, net		$	5,619			$	5,833			$	11,103			$	11,752
Capital Expenditures
Electronics		$	1,446			$	2,834			$	4,173			$	5,034
Control Devices			2,817				3,750				6,231				8,067
Corporate activities			(256	)			3				410				49
Total consolidated capital expenditures		$	4,007			$	6,587			$	10,814			$	13,150

		June 30,				December 31,
		2007				2006
Total Assets
Electronics		$	172,237			$	184,327
Control Devices			220,653				216,523
Corporate(B)			275,775				265,986
Eliminations			(158,200	)			(165,029	)
Total consolidated assets		$	510,465			$	501,807

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

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net Sales
North America		$	132,449			$	143,391			$	266,510			$	284,415
Europe and other			51,353				42,108				102,320				80,718
Total consolidated net sales		$	183,802			$	185,499			$	368,830			$	365,133

		June 30,				December 31,
		2007				2006
Non-Current Assets
North America		$	216,406			$	215,429
Europe and other			27,057				32,346
Total consolidated non-current assets		$	243,463			$	247,775

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

(14) Investments

     PST Indústria Eletrônica da Amazônia Ltda.

     The Company has a 50% equity 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 $27,275 and $21,616 at June 30, 2007 and December 31, 2006, respectively.

     Condensed financial information for PST is as follows:

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Revenues		$	31,279			$	21,014			$	58,630			$	42,013
Cost of sales		$	14,683			$	10,664			$	27,506			$	21,338
Total pre-tax income		$	5,040			$	3,628			$	10,365			$	7,824
The Company’s share of pre-tax income		$	2,520			$	1,814			$	5,183			$	3,912

     Equity in earnings of PST included in the condensed consolidated statements of operations was $2,141 and $1,466 for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, equity in earnings of PST was $4,156 and $2,826, respectively.

     Minda Instruments Ltd.

     At July 1, 2006, the Company had a 30% equity interest in Minda Instruments Ltd. (“Minda”), a company based in India that manufactures electronic instrumentation equipment for the transportation market. Since then, the Company has increased its ownership interest in Minda to 49%. The investment is accounted for under the equity method of accounting. The Company’s investment in Minda was $4,209 and $3,796 at June 30, 2007 and December 31, 2006, respectively. Equity in earnings of Minda included in the condensed consolidated statements of operations was $157 and $84, for the three months ended June 30, 2007 and July 1, 2006, respectively. For the six months ended June 30, 2007 and July 1, 2006, equity in earnings of Minda was $262 and $140, respectively.

(15) Guarantor Financial Information

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

     Presented below are summarized consolidating financial statements of the Parent (which includes certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a condensed consolidated basis, as of June 30, 2007 and December 31, 2006 and for each of the three and six months ended June 30, 2007 and July 1, 2006.

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

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

		June 30, 2007
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	28,474			$	40			$	37,552			$	—			$	66,066
Accounts receivable, net			47,693				31,933				34,192				—				113,818
Inventories, net			24,382				14,290				18,589				—				57,261
Prepaid expenses and other			(279,803	)			283,871				16,969				—				21,037
Deferred income taxes			2,939				4,634				1,247				—				8,820
Total current assets			(176,315	)			334,768				108,549				—				267,002
Long-Term Assets:
Property, plant and equipment, net			58,783				27,144				20,089				—				106,016
Other Assets:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			35,567				363				208				—				36,138
Deferred income taxes			39,244				(3,069	)			(42	)			—				36,133
Investment in subsidiaries			426,283				—				—				(426,283	)			—
Total long-term assets			604,462				45,029				20,255				(426,283	)			243,463
Total Assets		$	428,147			$	379,797			$	128,804			$	(426,283	)		$	510,465
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	21,277			$	20,880			$	24,342			$	—			$	66,499
Accrued expenses and other			14,635				8,241				23,721				—				46,597
Total current liabilities			35,912				29,121				48,063				—				113,096
Long-Term Liabilities:
Long-term debt			200,000				—				—				—				200,000
Deferred income taxes			—				—				1,921				—				1,921
Other liabilities			482				465				2,748				—				3,695
Total long-term liabilities			200,482				465				4,669				—				205,616
Shareholders’ Equity			191,753				350,211				76,072				(426,283	)			191,753
Total Liabilities and Shareholders’ Equity		$	428,147			$	379,797			$	128,804			$	(426,283	)		$	510,465

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

     Supplemental condensed consolidating financial statements (continued):

		December 31, 2006
										Non-
						Guarantor				Guarantor
		Parent				Subsidiaries				Subsidiaries				Eliminations				Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	28,937			$	12			$	36,933			$	—			$	65,882
Accounts receivable, net			48,187				28,376				30,422				—				106,985
Inventories, net			26,173				12,502				19,846				—				58,521
Prepaid expenses and other			(273,206	)			275,577				11,077				—				13,448
Deferred income taxes			3,724				4,379				1,093				—				9,196
Total current assets			(166,185	)			320,846				99,371				—				254,032
Long-Term Assets:
Property, plant and equipment, net			61,320				31,643				21,623				—				114,586
Other Assets:
Goodwill			44,585				20,591				—				—				65,176
Investments and other, net			30,874				131				170				(300	)			30,875
Deferred income taxes			40,713				(3,341	)			(234	)			—				37,138
Investment in subsidiaries			411,366				—				—				(411,366	)			—
Total long-term assets			588,858				49,024				21,559				(411,666	)			247,775
Total Assets			422,673				369,870				120,930				(411,666	)			501,807
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable			26,690				19,044				26,759				—				72,493
Accrued expenses and other			17,291				7,314				21,019				—				45,624
Total current liabilities			43,981				26,358				47,778				—				118,117
Long-Term Liabilities:
Long-term debt			200,000				—				300				(300	)			200,000
Deferred income taxes			—				—				1,923				—				1,923
Other liabilities			70				450				2,625				—				3,145
Total long-term liabilities			200,070				450				4,848				(300	)			205,068
Shareholders’ Equity			178,622				343,062				68,304				(411,366	)			178,622
Total Liabilities and Shareholders’ Equity		$	422,673			$	369,870			$	120,930			$	(411,666	)		$	501,807