Stoneridge - 10-Q quarterly report FY

 

Commission file number: 001-13337

     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):

     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 24, 2006 was 23,225,949.

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

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

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

     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 13 and 26 weeks ended July 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 13-week periods and once every 7 years, starting in 2008, the fourth quarter will be 14 weeks in length. The second 13-week period of 2006 and 2005 ended on July 1 and July 2, respectively.

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

     The Company accounts for Common Shares held in treasury under the cost method and includes such shares as a reduction to total shareholders’ equity.

     Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method for approximately 68% and 72% of the Company’s inventories at July 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:

     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 July 1, 2006, per quoted market sources, was $192.0 million and the carrying value was $200.0 million.

     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 intercompany transactions denominated in a foreign currency 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 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 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 the 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 $16,003 and reduce exposure related to the Company’s Swedish krona and British pound denominated receivables. The estimated fair value of these contracts at July 1, 2006, per quoted market sources, was approximately $(235). The Company’s foreign currency option contracts have a notional value of $167 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 July 1, 2006, per quoted market sources, was approximately $43.

     At July 1, 2006, the Company had three types of 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. The Incentive Plan is made up of the Long-Term Incentive Plan that was approved by the Company’s shareholders on September 30, 1997 (the “1997 Plan”) and expires on June 30, 2007 and the Amended and Restated Long-Term Incentive Plan (the “2006 Plan”) that was approved by the Company’s shareholders on April 24, 2006 and expires on April 24, 2016. Prior to the second quarter of 2005, the Company accounted for its plans under the fair value recognition provisions of 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 13 and 26 weeks ended July 1, 2006.

     Total compensation expense recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $292 and $415 for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26-week period ended July 1, 2006 and July 2, 2005, total compensation expense recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $926 and $742, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $102 and $156 for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26-week period ended July 1, 2006 and July 2, 2005, total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $324 and $434, respectively. There was no share-based compensation cost capitalized as inventory or fixed assets for either period.

     There were no options granted during the 13 or 26 weeks ended July 1, 2006 or July 2, 2005. As of July 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 was $6.84 for both the 13- and 26-

week periods ended July 1, 2006. The weighted-average grant-date fair value of shares granted during the 13- and 26-week periods ended July 2, 2005 was $10.23.

     The fair value of the non-vested performance-based restricted Common Share awards with a performance condition, requiring the Company to obtain certain net income per share targets, was calculated using the market value of the shares on the date of issuance. The fair value of the non-vested performance-based restricted Common Share awards with a market condition, which measures the Company’s performance against a peer group’s performance in terms of total return to shareholders, was 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 July 1, 2006, and the changes during the 26 weeks ended, is presented below:

     As of July 1, 2006, total unrecognized compensation cost related to non-vested time-based restricted Common Share awards granted was $1,414. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of shares vested based on service conditions during the 13 and 26 weeks ended July 1, 2006 was $451 and $922, respectively. For the 13 and 26 weeks ended July 2, 2005, the total fair value of time-based restricted Common Share awards vested was $110 and $117, respectively.

     As of July 1, 2006, total unrecognized compensation cost related to non-vested performance-based restricted Common Share awards granted was $238. That cost is expected to be recognized over a weighted-average period of 1.8 years. No performance-based restricted Common Share awards have vested as of July 1, 2006.

     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:

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

     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 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.

     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 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 July 1, 2006, $96.7 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.

     Long-term debt consists of the following:

     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:

     Outstanding options not included in the computation of diluted net income per share to purchase 681 and 483 Common Shares at an average price of $12.14 and $13.94 per share were outstanding during the 13-week periods ended July 1, 2006 and July 2, 2005, respectively. Outstanding options not included in the computation of diluted net income per share to purchase 681 and 300 Common Shares at an average price of $12.14 and $16.11 per share were outstanding during the 26-week periods ended July 1, 2006 and July 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.

     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 $(150) and $74 for the 13 and 26 weeks ended July 1, 2006. Restructuring charges on the Condensed Consolidated Statements of Operations for the 13 and 26 weeks ended July 2, 2005 were $2,014 and $4,140, respectively. Accrued severance costs of $370 related to the Vehicle Management and Power Distribution segment were reversed during the 13 weeks ended July 1, 2006, resulting from continued production at a plant that was previously scheduled to close. The reversal of the accrual to income represents a non-cash inflow. Also included in the Condensed Consolidated Statements of Operations was a gain on the sale of property, plant and equipment related to our restructuring initiatives of $336 for the 13 and 26 weeks ended July 2, 2005. This gain is netted within the activity listed in the table on the next page.

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

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

     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 2007.

     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 of its customers, Dana Corporation, had filed for Chapter 11 bankruptcy protection. As a result, the Company established a reserve for estimated losses of approximately $343 that are expected to result from the bankruptcy. The charges were recorded in the Company’s Condensed Consolidated Statement of

Operations as a component of provision for doubtful accounts expense. The charge was recorded during the 13-week period ended April 1, 2006.

     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 date. 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 26 weeks ended July 1, 2006 and July 2, 2005:

     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:

     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 July 1, 2006, contributions of $116 have been made to the pension plan.

     The Company recognized a provision for income taxes of $ 1,906, or 28.1% of pre-tax income, and $ 1,815, or 39.2% of pre-tax income, for federal, state and foreign income taxes for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. The Company recognized a provision for income taxes of $ 3,993, or 31.6% of pre-tax income, and $ 5,107, or 41.6% of pre-tax income, for federal, state and foreign income taxes for the 26 weeks ended July 1, 2006 and July 2, 2005, respectively. The decrease in the effective tax rate for both the 13- and 26-week periods ended July 1, 2006 compared to the 13- and 26-week periods ended July 2, 2005 was primarily attributable to the improved performance of the United Kingdom operations thus reducing the impact on the effective tax rate of the current year valuation allowance provided.

     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.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The company is assessing FIN 48 and has not determined yet the impact that the adoption of FIN 48 will have on its result of operations or financial position.

     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 management in deciding how to allocate resources and in assessing performance.

     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 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:

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

     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 $21,033 and $17,818 at June 30, 2006 and December 31, 2005, respectively. The Company has a note receivable with PST of $1,148 as of June 30, 2006 and December 31, 2005, respectively. PST operates on a calendar year.

     Condensed financial information for PST is as follows:

     Equity in earnings of PST included in the Condensed Consolidated Statements of Operations were $1,466 and $1,046 for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26 weeks ended July 1, 2006 and July 2, 2005, equity in earnings of PST included in the Condensed Consolidated Statements of Operations were $2,826 and $1,765, respectively.

     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 transportation market. 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 $1,890 and $828 at July 1, 2006 and December 31, 2005, respectively. Equity in earnings of Minda included in the Condensed Consolidated Statements of Operations were $84 and $28, for the 13 weeks ended July 1, 2006 and July 2, 2005, respectively. For the 26 weeks ended July 1,

2006 and July 2, 2005, equity in earnings of Minda included in the Condensed Consolidated Statements of Operations were $140 and $41, respectively.

     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, as of July 1, 2006 and December 31, 2005 and for each of the 13 and 26 weeks ended July 1, 2006 and July 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 presentations on the subsequent pages.

     Supplemental condensed consolidating financial statements (continued):