UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

STONERIDGE, INC.

(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. Yes þ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of Common Shares, without par value, outstanding as of May 2, 2005 was 23,182,141.

STONERIDGE, INC. AND SUBSIDIARIES
INDEX

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STONERIDGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

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 for per share data)

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)

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 for per share data, unless otherwise indicated)

1.	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 2004 Annual Report on Form 10-K.
	The results of operations for the three months ended April 2, 2005 are not necessarily indicative of the results to be expected for the full year.
2.	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 seven years, starting in 2008, the fourth quarter will be 14 weeks in length. The first quarter of 2005 and 2004 ended on April 2 and March 31, respectively.
3.	On March 24, 2005, the Company entered into a stock purchase agreement with GE Capital Equity Holdings, Inc., 3i Group plc, 3i Europartners II LP, Roberto Poli and Alberto Bombonato to acquire Vimercati, S.p.A. (“Vimercati”), an Italian full service switch products supplier for the automotive industry. The closing of the purchase of Vimercati is conditioned on (i) customary closing conditions, including the Company’s due diligence into Vimercati’s customer relationships, and (ii) the pre-emptive right of a shareholder of Vimercati. In April 2005, this shareholder gave notice of his intent to exercise his pre-emptive right. Accordingly, if this shareholder is successful in acquiring the remaining outstanding shares of Vimercati, the Company’s agreement to acquire Vimercati will be terminated. If the shareholder fails in his bid to acquire Vimercati, the Company may still complete the acquisition, subject to customary closing conditions. The purchase price to acquire Vimercati is 24.9 million euros subject to post-closing adjustments, which are based upon Vimercati’s financial position at closing. This acquisition, if completed, would be funded through available cash. For the fiscal year ended December 31, 2004, Vimercati reported net sales of approximately 32 million euros. At this time, because of the exercise of the pre-emptive right, the Company does not expect to close the acquisition of Vimercati.
4.	Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method for approximately 72% and 67% of the Company’s inventories at April 2, 2005 and December 31, 2004, 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:

5.

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

5

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

	maturity of these instruments. The estimated fair value of the Company’s fixed rate debt at April 2, 2005, per quoted market sources, was $219.8 million and the carrying value was $200.0 million.
	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 short-term, foreign currency denominated intercompany transactions and other known foreign currency exposures. The principal currencies hedged by the Company include the Swedish krona, British pound, Mexican peso and euro. 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 $18.0 million and reduce exposure related to the Company’s krona and pound denominated receivables. The estimated fair value of these contracts at April 2, 2005, per quoted market sources, was approximately $(0.2) million. The Company’s foreign currency option contracts have a notional value of $0.3 million and reduce exposure to the Company’s other known foreign currency exposures. The estimated fair value of these contracts at April 2, 2005, per quoted market sources, was approximately $(0.1) million.
6.	Under Statement of Financial Accounting Standard (SFAS) 142, “Goodwill and Other Intangible Assets,” goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. The Company performs its annual impairment test of goodwill as of October 1. In the fourth quarter of 2004, the Company determined that the carrying value of one of the Company’s reporting units, which is included in the Control Devices reportable segment, exceeded its fair value by $183.5 million. The corresponding write-down of goodwill to its fair value was reported as a component of operating loss in the Company’s consolidated statement of operations for the fourth quarter of 2004.
	There was no change in the carrying value of goodwill by reportable segment during the first quarter of 2005.
7.	The Company has two share-based compensation plans. One plan is for employees and one plan is for the Company’s outside directors. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” prospectively to 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.” Option awards under the Company’s plans cliff-vest over periods ranging from one to five years, and compensation expense is recognized on a straight-line basis. Restricted share awards vest over a period of one to three years and compensation expense is also recognized on a straight-line basis. Because the Company adopted the fair value recognition provisions of SFAS 123 on a prospective basis, the cost related to employee and director share-based compensation recognized during the first quarter of 2005 and 2004 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. The following table illustrates the effect on net income and net income per share if the fair value method had been applied to all outstanding and unvested awards in each period.

6

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

8.

Other comprehensive (loss) income includes foreign currency translation adjustments and gains and losses from certain foreign currency transactions, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities. All portions of other comprehensive (loss) income are recorded net of related taxes. Comprehensive income for the three months ended April 2, 2005 and March 31, 2004 consisted of the following:

9.

On May 1, 2002, the Company issued $200.0 million aggregate principal amount of senior notes. The $200.0 million 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.

In conjunction with the issuance of the senior notes, the Company also entered into a $200.0 million credit agreement with a bank group. The credit agreement had the following components: a $100.0 million revolving facility (of which $96.1 million was available at April 2, 2005, after consideration of outstanding letters of credit), which includes a $10.0 million swing line facility, and a $100.0 million term facility. 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

7

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

	debt to consolidated EBITDA. The Company repaid the entire outstanding balance of the term facility during 2003.
	Long-term debt consisted of the following:

10.

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:

	Options to purchase 279 and 415 common shares at an average price of $16.10 and $16.97 per share were outstanding during the first quarter of 2005 and 2004, respectively, and were not included in the computation of diluted earnings per share. These options were not included because their respective exercise prices were greater than the average market price of the Company’s common shares and, therefore, their effect would have been anti-dilutive.
11.	The Company has announced restructuring initiatives related to the rationalization of certain manufacturing facilities in the high cost regions of Europe and North America. This rationalization is a result of the Company’s cost reduction initiatives. In connection with this plan, the Company recorded restructuring charges of $2,126 in the Company’s condensed consolidated statement of operations, for the quarter ended April 2, 2005. These restructuring charges are related to the Control Devices reportable segment and included the following:

8

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

	All restructuring charges, except for the asset impairments, will result in cash outflows. Severance costs relate to a reduction in workforce. Asset impairment charges relate primarily to the write-down of property, plant and equipment, resulting from the closure or streamlining of certain facilities. Facility closure costs primarily relate to asset relocation and lease termination costs and other exit costs include miscellaneous expenditures associated with exiting business activities. At this time, the Company expects that these restructuring efforts will be substantially completed during the second quarter of 2006.
12.	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.
	As previously disclosed, a judgment was entered against the Company in the District Court (365th Judicial District) in Maverick County, Texas on January 15, 2004. The plaintiffs alleged in their complaint that a Company fuel valve installed as a replacement part on a truck caused a fire after an accident resulting in a death. The plaintiffs are the parents of the decedent. The final judgment entered against the Company was approximately $36.5 million. The Company denied its fuel valve contributed to the fire and believed that there were valid grounds to reverse the judgment on appeal. An appellate hearing of this judgment was held during the first quarter of 2005. The Company has recently been advised that its legal counsel and the plaintiff’s counsel have entered into a written agreement dated April 11, 2005 to settle this litigation. The court of appeals has been advised to abate its decision while the parties finalize the necessary documentation. When the documentation is complete, the parties will request that the court of appeals remand to the trial court. The trial court will be presented with a proposed order agreed to by both parties to enter a final judgment. The settlement amount is covered by the Company’s insurance.
13.	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. 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, 2004 that it expected to contribute $183 to its defined benefit pension plan in 2005. As of April 2, 2005, the Company did not make any contributions to its defined benefit pension plan.

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STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

14.	The Company recognized a provision for income taxes of $3.3 million, or 43.0% of pre-tax income, and $4.6 million, or 33.1% of pre-tax income, for federal, state and foreign income taxes for the three months ended April 2, 2005 and March 31, 2004, respectively. The increase in the effective tax rate for the first quarter of 2005 compared to the first quarter of 2004 was attributable to the affect of foreign losses related to certain operations in the U.K. for which it is estimated that the tax benefit may not be realized. As a result, a valuation allowance was recorded in the first quarter of 2005.
15.	In December 2004, the FASB issued SFAS 123R, “Share-Based Payment,” which requires all companies to measure compensation cost for all share-based payments (including employee share options) at fair value. This Statement was to become effective for interim periods beginning after June 15, 2005; however, effective April 21, 2005, the SEC issued a final ruling that amended Rule 4-01(a) of Regulation S-X to delay the date for compliance with SFAS 123R to the first interim or annual reporting period of the Company’s first fiscal year beginning on or after June 15, 2005. The Company adopted the fair-value provisions of SFAS 123 in 2003, as discussed in Note 7 to the Company’s condensed consolidated financial statements; therefore, the adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
16.	In November 2004, the FASB issued SFAS 151, “Inventory Costs,” as an amendment to ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). This Statement requires that these items be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. This Statement becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS 151 to have a material impact on the Company’s consolidated financial statements.
17.	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 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, control actuation devices and sensors, and driver information systems.
	As a result of changes in executive leadership during 2004, the Company realigned senior management responsibilities under four operating segments effective for the fourth quarter of 2004. These four operating segments are aggregated for reporting purposes into the Company’s Vehicle Management & Power Distribution and Control Devices reportable segments. The Company’s chief executive officer also changed the profit measure used to evaluate the business to “Income Before Income Taxes.” Because the Company changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change, and because the profit measure used to evaluate the business changed, the corresponding information for prior periods has been restated to conform to the current year reportable segment presentation.
	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, 2004 Form 10-K. The

10

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

	Company’s chief executive officer evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes. Intersegment 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:

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STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

18.	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 did not guarantee the senior notes and the credit facility (Non-Guarantor Subsidiaries).
	Presented below are summarized condensed consolidating financial statements of the Parent (which include certain of the Company’s operating units), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis, as of April 2, 2005 and December 31, 2004, and for the three months ended April 2, 2005 and March 31, 2004.
	These summarized condensed consolidating financial statements are prepared on 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.

12

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

13

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Supplemental condensed consolidating financial statements (continued):

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STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Supplemental condensed consolidating financial statements (continued):

15

STONERIDGE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

Supplemental condensed consolidating financial statements (continued):