UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2008

OR

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

For the transition period from ________to ________

Commission file number: 001-13337

STONERIDGE, INC.
(Exact name of registrant as specified in its charter)

Ohio
 
34-1598949
(State or other jurisdiction of
 
(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
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Shares, without par value
 
New York Stock Exchange
     
Securities registered pursuant to section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No

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


 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
     
(Do not check if a smaller reporting company)
 

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

As of June 30, 2008, the aggregate market value of the registrant’s Common Shares, without par value, held by non-affiliates of the registrant was approximately $247.1 million.  The closing price of the Common Shares on June 30, 2008 as reported on the New York Stock Exchange was $17.06 per share.  As of June 30, 2008, the number of Common Shares outstanding was 24,660,471.

The number of Common Shares, without par value, outstanding as of February 20, 2009 was 24,664,529.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 2009, into Part III, Items 10, 11, 12, 13 and 14.

 
1

 
STONERIDGE, INC. AND SUBSIDIARIES
 
INDEX
     
Page No.
PART I
Item 1.
Business
 
3
Item 1A.
Risk Factors
 
9
Item 1B.
Unresolved Staff Comments
 
12
Item 2.
Properties
 
13
Item 3.
Legal Proceedings
 
14
Item 4.
Submission of Matters to a Vote of Security Holders
 
14
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
15
Item 6.
Selected Financial Data
 
16
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
17
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
33
Item 8.
Financial Statements and Supplementary Data
 
34
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
72
Item 9A.
Controls and Procedures
 
72
Item 9B.
Other Information
 
74
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
 
74
Item 11.
Executive Compensation
 
74
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
74
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
75
Item 14.
Principal Accounting Fees and Services
 
75
PART IV
Item 15.
Exhibits, Financial Statement Schedules
 
75
       
 
Signatures
 
76

2

 
PART I

Item 1.  Business.

Overview

Founded in 1965, Stoneridge, Inc. (the “Company”) is an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the medium- and heavy-duty truck, agricultural, automotive and off-highway vehicle markets.  Our custom-engineered products are predominantly sold on a sole-source basis and consist of application-specific control devices, sensors, vehicle management electronics and power and signal distribution systems.  These products comprise the elements of every vehicle’s electrical system, and individually interface with a vehicle’s mechanical and electrical systems to (i) activate equipment and accessories, (ii) display and monitor vehicle performance and (iii) control and distribute electrical power and signals.  Our products improve the performance, safety, convenience and environmental monitoring capabilities of our customers’ vehicles.  As such, the growth in many of the product areas in which we compete is driven by the increasing consumer desire for safety, security and convenience.  This is coupled with the need for original equipment manufacturers (“OEM”) to meet safety requirements in addition to the general trend of increased electrical and electronic content per vehicle.  Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and to excel in the transition from mechanical-based components and systems to electrical and electronic components, modules and systems.

Products

We conduct our business in two reportable segments: Electronics and Control Devices. Under the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company’s operating segments are aggregated based on sharing similar economic characteristics.  Other aggregation factors include the nature of the products offered and management and oversight responsibilities.   The core products of the Electronics reportable segment include vehicle electrical power and distribution systems and electronic instrumentation and information display products. The core products of the Control Devices reportable segment include electronic and electrical switch products, control actuation devices and sensors.  We design and manufacture the following vehicle parts:

Electronics. The Electronics reportable segment produces electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution.  These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled and driver messages related to vehicle performance.  In addition, power distribution systems regulate, coordinate and direct the operation of the entire electrical system within a vehicle compartment.  These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.

Control Devices. The Control Devices reportable segment produces products that monitor, measure or activate a specific function within the vehicle.  Product lines included within the Control Devices segment are sensors, switches, actuators, as well as other electronic products.  Sensor products are employed in most major vehicle systems, including the emissions, safety, powertrain, braking, climate control, steering and suspension systems.  Switches transmit a signal that activates specific functions.  Hidden switches are not typically seen by vehicle passengers, but are used to activate or deactivate selected functions.  Customer activated switches are used by a vehicle's operator or passengers to manually activate headlights, rear defrosters and other accessories.  In addition, the Control Devices segment designs and manufactures electromechanical actuator products that enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions.  We sell these products principally to the automotive market.

 
3

 

The following table presents net sales by reportable segment, as a percentage of total net sales:

   
For the Years Ended
 
   
December 31,
 
   
2008
 
2007
 
2006
 
                   
Electronics
    69 %     61 %     62 %
Control Devices
    31       39       38  
Total
    100 %     100 %     100 %

For further information related to our reportable segments and financial information about geographic areas, see Note 13, “Segment Reporting,” to the consolidated financial statements included in this report.

Production Materials

The principal production materials used in the manufacturing process for both reportable segments include: copper wire, zinc, cable, resins, plastics, printed circuit boards, and certain electrical components such as microprocessors, memory devices, resistors, capacitors, fuses, relays and connectors.  We purchase such materials pursuant to both annual contract and spot purchasing methods.  Such materials are readily available from multiple sources, but we generally establish collaborative relationships with a qualified supplier for each of our key production materials in order to lower costs and enhance service and quality.  Any change in the supply of, or price for, these raw materials could materially affect our results of operations and financial condition.

Patents and Intellectual Property

Both of our reportable segments maintain and have pending various U.S. and foreign patents and other rights to intellectual property relating to our business, which we believe are appropriate to protect the Company's interests in existing products, new inventions, manufacturing processes and product developments. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or ability to compete. We are not currently engaged in any material infringement litigation, nor are there any material infringement claims pending by or against the Company.

Industry Cyclicality and Seasonality

The markets for products in both of our reportable segments have historically been cyclical. Because these products are used principally in the production of vehicles for the medium- and heavy-duty truck, agricultural, automotive and off-highway vehicle markets, sales, and therefore results of operations, are significantly dependent on the general state of the economy and other factors, like the impact of environmental regulations on our customers, which affect these markets. A decline in medium- and heavy-duty truck, agricultural, automotive and off-highway vehicle production of our principal customers could adversely impact the Company.  Approximately 70%, 60% and 62% of our net sales in 2008, 2007 and 2006, respectively, were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets.  Approximately 30%, 40% and 38% of our net sales in 2008, 2007 and 2006, respectively, were made to the automotive market.

We typically experience decreased sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is similarly impacted by plant shutdowns for the holidays.

Customers

We are dependent on a small number of principal customers for a significant percentage of our sales. The loss of any significant portion of our sales to these customers or the loss of a significant customer would have a material adverse impact on the financial condition and results of operations of the Company.  We supply numerous different parts to each of our principal customers.  Contracts with several of our customers provide for supplying their requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of our major customers could have a material adverse impact on the Company. We may also enter into contracts to supply parts, the introduction of which may then be delayed or not used at all.  We also compete to supply products for successor models and are therefore subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on the financial condition and results of operations of the Company.  In addition, we sell products to other customers that are ultimately sold to our principal customers.

 
4

 

The following table presents the Company’s principal customers, as a percentage of net sales:

   
For the Ended
 
   
December 31,
 
   
2008
   
2007
   
2006
 
                   
Navistar International
    26 %     20 %     25 %
Deere & Company
    10       7       6  
Ford Motor Company
    6       8       6  
Chrysler LLC
    6       5       5  
MAN AG
    4       6       6  
General Motors
    4       6       5  
Other
    44       48       47  
Total
    100 %     100 %     100 %

Backlog

Our products are produced from readily available materials and have a relatively short manufacturing cycle; therefore our products are not on backlog status. Each of our production facilities maintains its own inventories and production schedules.  Production capacity is adequate to handle current requirements and can be expanded to handle increased growth if needed.

Competition

Markets for our products in both reportable segments are highly competitive. The principal methods of competition are technological innovation, price, quality, service and timely delivery.  We compete for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM customer will usually continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns.

Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location.  We compete based on strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price.  We compete against the following primary competitors:

Electronics.  Our primary competitors include Continental AG/Siemens VDO, Delphi and Leoni.

Control Devices.  Our primary competitors include Methode, Denso, Delphi, Bosch, Continental AG/Siemens VDO, Hella, TRW and BEI Duncan.

Product Development

Our research and development efforts are largely product design and development oriented and consist primarily of applying known technologies to customer generated problems and situations.  We work closely with our customers to creatively solve problems using innovative approaches.  The majority of our development expenses are related to customer-sponsored programs where we are involved in designing custom-engineered solutions for specific applications or for next generation technology.  To further our vehicles platform penetration, we have also developed collaborative relationships with the design and engineering departments of key customers.  These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.

 
5

 

Development work at the Company is largely performed on a decentralized basis.  We have engineering and product development departments located at a majority of our manufacturing facilities.  To ensure knowledge sharing among decentralized development efforts, we have instituted a number of mechanisms and practices whereby innovation and best practices are shared.  The decentralized product development operations are complimented by larger technology groups in Canton, Massachusetts, Lexington, Ohio and Stockholm, Sweden.

We use efficient and quality oriented work processes to address our customers’ high standards.  Our product development technical resources include a full complement of computer-aided design and engineering (“CAD/CAE”) software systems, including (i) virtual three-dimensional modeling, (ii) functional simulation and analysis capabilities and (iii) data links for rapid prototyping.  These CAD/CAE systems enable the Company to expedite product design and the manufacturing process to shorten the development time and ultimately time to market.

We have further strengthened our electrical engineering competencies through investment in equipment such as (i) automotive electro-magnetic compliance test chambers, (ii) programmable automotive and commercial vehicle transient generators, (iii) circuit simulators and (iv) other environmental test equipment.  Additional investment in product machining equipment has allowed us to fabricate new product samples in a fraction of the time required historically.  Our product development and validation efforts are supported by full service, on-site test labs at most manufacturing facilities, thus enabling cross-functional engineering teams to optimize the product, process and system performance before tooling initiation.

We have invested, and will continue to invest in technology to develop new products for our customers.  Research and development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses, as incurred.  Such costs amounted to approximately $45.6 million, $44.2 million and $40.8 million for 2008, 2007 and 2006, respectively, or 6.1%, 6.1% and 5.8% of net sales for these periods.

We will continue shifting our investment spending toward the design and development of new products rather than focusing on sustaining existing product programs for specific customers.  This shift is essential to the future growth of the Company.  However, the typical product development process takes three to five years to show tangible results.  As part of our effort to shift our investment spending, we reviewed our current product portfolio and adjusted our spending to either accelerate or eliminate our investment in these products, based on our position in the market and the potential of the market and product.

Environmental and Other Regulations

Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.

Employees

As of December 31, 2008, we had approximately 6,400 employees, approximately 1,600 of whom were salaried and the balance of whom were paid on an hourly basis.  Except for certain employees located in Mexico, Sweden, and the United Kingdom, our employees are not represented by a union. Our unionized workers are not covered by collective bargaining agreements.  We believe that relations with our employees are good.

Joint Ventures

We form joint ventures in order to achieve several strategic objectives including gaining access to new markets, exchanging technology and intellectual capital, broadening our customer base and expanding our product offerings.  Specifically we have formed joint ventures in Brazil, PST Eletrônica S.A. (“PST”), and India, Minda Stoneridge Instruments Ltd. (“Minda”), and continue to explore similar business opportunities in other global markets.  We have a 50% interest in PST and a 49% interest in Minda.  We entered into our PST joint venture in October 1997 and our Minda joint venture in August 2004.  Each of these investments is accounted for using the equity method of accounting.

 
6

 

Our joint ventures have contributed positively to our financial results in 2008, 2007 and 2006.  Equity earnings by joint venture for the years ended December 31, 2008, 2007 and 2006 are summarized in the following table (in thousands):

   
For the Years Ended
 
   
December 31,
 
   
2008
   
2007
   
2006
 
                   
PST
  $ 12,788     $ 10,351     $ 6,771  
Minda
    702       542       354  
Total equity earnings of investees
  $ 13,490     $ 10,893     $ 7,125  

In Brazil, our PST joint venture, which is an electronic system provider focused on security and convenience applications primarily for the vehicle and motorcycle industry, generated net sales of $174.3 million, $133.0 million and $94.1 million in 2008, 2007 and 2006, respectively.  We also received dividend payments of $4.2 million, $5.6 million and $3.7 million from PST in 2008, 2007 and 2006, respectively.

Executive Officers of the Company

Each executive officer of the Company is appointed by the Board of Directors, serves at its pleasure and holds office until a successor is appointed, or until the earlier of death, resignation or removal.  The Board of Directors generally appoints executive officers annually.  The executive officers of the Company are as follows:

Name
 
Age
 
Position
John C. Corey
 
61
 
President, Chief Executive Officer and Director
George E. Strickler
 
61
 
Executive Vice President, Chief Financial Officer and Treasurer
Thomas A. Beaver
 
55
 
Vice President of Global Sales and Systems Engineering
Mark J. Tervalon
 
42
 
Vice President of the Company and President of the Stoneridge Electronics Division

John C. Corey, President, Chief Executive Officer and Director. Mr. Corey has served as President and Chief Executive Officer since being appointed by the Board of Directors in January 2006.  Mr. Corey has served as a Director on the Board of Directors since January 2004.  Prior to his employment with the Company, Mr. Corey served from October 2000, as President and Chief Executive Officer and Director of Safety Components International, a supplier of airbags and components, with worldwide operations.

George E. Strickler, Executive Vice President, Chief Financial Officer and Treasurer. Mr. Strickler has served as Executive Vice President and Chief Financial Officer since joining the Company in January of 2006.  Mr. Strickler was appointed Treasurer of the Company in February 2007.  Prior to his employment with the Company, Mr. Strickler served as Executive Vice President and Chief Financial Officer for Republic Engineered Products, Inc. (“Republic”), from February 2004 to January of 2006.  Before joining Republic, Mr. Strickler was BorgWarner Inc.’s Executive Vice President and Chief Financial Officer from February 2001 to November 2003.

Thomas A. Beaver, Vice President of Global Sales and Systems Engineering. Mr. Beaver has served as Vice President of Global Sales and Systems Engineering of the Company since January of 2005.  Prior to this time, Mr. Beaver served as Vice President of Stoneridge Sales and Marketing from January 2000 to January 2005.

Mark J. Tervalon, Vice President of the Company and President of the Stoneridge Electronics Division.  Mr. Tervalon has served as President of the Stoneridge Electronics Division and Vice President of the Company since August of 2006.  Prior to that, Mr. Tervalon served as Vice President and General Manager of the Electronic Products Division from May 2002 to December 2003 when he became Vice President and General Manager of the Stoneridge Electronics Group.
 
7

 
Available Information

We make available, free of charge through our website (www.stoneridge.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC.  Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, Whistleblower Policy and Procedures and the charters of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees are posted on our website as well.  Copies of these documents will be available to any shareholder upon request.  Requests should be directed in writing to Investor Relations at 9400 East Market Street, Warren, Ohio 44484.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.

 
8

 

Item 1A.  Risk Factors.

Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could cause our actual business results to differ materially from any forward-looking statements contained in this Report. In addition, future results could be materially affected by general industry and market conditions, changes in laws or accounting rules, general U.S. and non-U.S. economic and political conditions, including a global economic slow-down, fluctuation of interest rates or currency exchange rates, terrorism, political unrest or international conflicts, political instability or major health concerns, natural disasters, commodity prices or other disruptions of expected economic and business conditions. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section to follow, "Forward-Looking Statements," on page 32 should be considered in addition to the following statements.

Current worldwide economic conditions and credit tightening may adversely affect our business, operating results and financial condition.

General worldwide economic conditions have experienced a downturn due to the effects of the sub-prime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns.  We are not immune to changes in economic conditions.  We  believe the current worldwide economic crisis has resulted and may continue to result in a further decline in current and forecasted production volumes for light and commercial vehicles, which will likely result in decreased demand for our products.  The worldwide economic crisis also may have other adverse implications on our business.  For example, the ability of our customers to borrow money from their existing lenders or to obtain credit from other sources to purchase our products may be impaired.  Although we maintain an allowance for doubtful accounts for estimating losses resulting from the inability of our customers to make required payments and such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same loss rates that we have in the past, especially given the current turmoil in the worldwide economy.  A significant change in the liquidity or financial condition of our customers could cause unfavorable trends in our receivable collections and additional allowances may be required, which could adversely affect our operating results.  In addition, the worldwide economic crisis may adversely impact the ability of suppliers to provide us with materials and components, which could adversely affect our business and operating results.

The North American and European automotive industries are in distress and further deterioration could adversely impact our business.

Global automotive market sales represented 30%, 40% and 38% of our total net sales in 2008, 2007 and 2006, respectively.  A number of companies in the global automotive industry are facing severe financial difficulties. In North America, General Motors, Ford, and Chrysler have experienced a market decline. They have announced significant restructuring actions in an effort to improve profitability and some have received Federal financing assistance. The North American automotive manufacturers are also burdened with substantial structural costs, such as pension and healthcare costs, that have impacted their profitability and labor relations and may ultimately result in severe financial difficulty, including bankruptcy. Automakers across Europe and Japan are also experiencing difficulties from a weakened economy and tightening credit markets. Automotive industry conditions have adversely affected our supply base. Lower production levels for some of our key suppliers, increases in certain raw material, commodity and energy costs and the global credit market crisis has resulted in severe financial distress among many companies within the automotive supply base. The continuation of financial distress within the automotive industry and the supply base and/or the bankruptcy of one or more of the automakers may lead to supplier bankruptcies, commercial disputes, supply chain interruptions, supplier requests for company sponsored capital support, or a collapse of the supply chain.

Our business is cyclical and seasonal in nature and downturns in the medium- and heavy-duty truck, agricultural, automotive and off-road vehicle markets could reduce the sales and profitability of our business.
 
The demand for our products is largely dependent on the domestic and foreign production of medium- and heavy-duty trucks, agricultural, automobiles and off-road vehicles.  The markets for our products have historically been cyclical, because new vehicle demand is dependent on, among other things, consumer spending and is tied closely to the overall strength of the economy. Because our products are used principally in the production of vehicles for the medium- and heavy-duty truck, agricultural, automotive and off-road vehicle markets, our sales, and therefore our results of operations, are significantly dependent on the general state of the economy and other factors which affect these markets.  A decline in medium- and heavy-duty truck, agricultural, automotive and off-highway vehicle production could adversely impact our results of operations and financial condition. In 2008, approximately 70% were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets and approximately 30% of our net sales were made to the automotive market.  Seasonality experienced by the automotive industry also impacts our operations.  We typically experience decreased sales during the third quarter of each year due to the impact of scheduled OEM customer plant shutdowns in July for vacations and new model changeovers.  The fourth quarter is also impacted by plant shutdowns for the holidays.

 
9

 

We may not realize sales represented by awarded business.

We base our growth projections, in part, on commitments made by our customers.  There commitments generally renew yearly during a program life cycle.  If actual production orders from our customers do not approximate such commitments, it could adversely affect our business.

The prices that we can charge some of our customers are predetermined and we bear the risk of costs in excess of our estimates.
 
Our supply agreements with some of our customers require us to provide our products at predetermined prices.  In some cases, these prices decline over the course of the contract and may require us to meet certain productivity and cost reduction targets.  In addition, our customers may require us to share productivity savings in excess of our cost reduction targets.  The costs that we incur in fulfilling these contracts may vary substantially from our initial estimates.  Unanticipated cost increases or the inability to meet certain cost reduction targets may occur as a result of several factors, including increases in the costs of labor, components or materials.  In some cases, we are permitted to pass on to our customers the cost increases associated with specific materials. Cost overruns that we cannot pass on to our customers could adversely affect our business, results of operations and financial condition.

We are dependent on the availability and price of raw materials.
 
We require substantial amounts of raw materials and substantially all raw materials we require are purchased from outside sources.  The availability and prices of raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. Any change in the supply of, or price for, these raw materials could materially affect our results of operations and financial condition.

The loss or insolvency of any of our major customers would adversely affect our future results.
 
We are dependent on a small number of principal customers for a significant percentage of our net sales.  In 2008, our top three principal customers were Navistar International, Deere & Company and Ford Motor Company, which comprised 26%, 10% and 6% of our net sales respectively.  In 2008, our top ten customers accounted for 68% of our net sales.  The loss of any significant portion of our sales to these customers or any other customers would have a material adverse impact on our results of operations and financial condition.  The contracts we have entered into with many of our customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years.  These contracts are subject to renegotiation, which may affect product pricing and generally may be terminated by our customers at any time.  Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of our major customers could have a material adverse impact on our results of operations and financial condition by reducing cash flows and our ability to spread costs over a larger revenue base. We also compete to supply products for successor models and are subject to the risk that the customer will not select us to produce products on any such model, which could have a material adverse impact on our results of operations and financial condition.  In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy.  
 
Consolidation among vehicle parts customers and suppliers could make it more difficult for us to compete favorably.
 
The vehicle part supply industry has undergone a significant consolidation as OEM customers have sought to lower costs, improve quality and increasingly purchase complete systems and modules rather than separate components. As a result of the cost focus of these major customers, we have been, and expect to continue to be, required to reduce prices. Because of these competitive pressures, we cannot assure you that we will be able to increase or maintain gross margins on product sales to our customers.  The trend toward consolidation among vehicle parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale.  If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future with these larger, consolidated companies, our results of operations and financial condition could be adversely affected.

 
10

 

Our physical properties and information systems are subject to damage as a result of disasters, outages or similar events.
 
Our offices and facilities, including those used for design and development, material procurement, manufacturing, logistics and sales are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events.  If any of these facilities or offices were to experience a significant loss as a result of any of the above events, it could disrupt our operations, delay production, shipments and revenue, and result in large expenses to repair or replace these facilities or offices.

In addition, network and information system shutdowns caused by unforeseen events such as power outages, disasters, hardware or software defects; computer viruses and computer security breaks pose increasing risks.  Such an event could also result in the disruption of our operations, delay production, shipments and revenue, and result in large expenditures necessary to repair or replace such network and information systems.
       
We must implement and sustain a competitive technological advantage in producing our products to compete effectively.
 
Our products are subject to changing technology, which could place us at a competitive disadvantage relative to alternative products introduced by competitors.  Our success will depend on our ability to continue to meet customers’ changing specifications with respect to quality, service, price, timely delivery and technological innovation by implementing and sustaining competitive technological advances.  Our business may, therefore, require significant ongoing and recurring additional capital expenditures and investment in research and development and manufacturing and management information systems.  We cannot assure you that we will be able to achieve the technological advances or introduce new products that may be necessary to remain competitive.  Our inability to continuously improve existing products and to develop new products and to achieve technological advances could have a material adverse effect on our results of operations and financial condition.
 
We may experience increased costs associated with labor unions that could adversely affect our financial performance and results of operations.
 
As of December 31, 2008, we had approximately 6,400 employees, approximately 1,600 of whom were salaried and the balance of whom were paid on an hourly basis. Certain employees located in Mexico, Sweden, and the United Kingdom are represented by a union but not collective bargaining agreements.  We cannot assure you that our employees will not be covered by collective bargaining agreements in the future or that any of our facilities will not experience a work stoppage or other labor disruption.  Any prolonged labor disruption involving our employees, employees of our customers, a large percentage of which are covered by collective bargaining agreements, or employees of our suppliers could have a material adverse impact on our results of operations and financial condition by disrupting our ability to manufacture our products or the demand for our products.
 
Compliance with environmental and other governmental regulations could be costly and require us to make significant expenditures.
 
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things:
 
 
·
the discharge of pollutants into the air and water;
 
·
the generation, handling, storage, transportation, treatment, and disposal of waste and other materials;
 
·
the cleanup of contaminated properties; and
 
·
the health and safety of our employees.
 
We believe that our business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.  The operation of our manufacturing facilities entails risks and we cannot assure you that we will not incur material costs or liabilities in connection with these operations.  In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future.

 
11

 

We may incur material product liability costs.
 
We are subject to the risk of exposure to product liability claims in the event that the failure of any of our products results in personal injury or death and we cannot assure you that we will not experience material product liability losses in the future.  In addition, if any of our products prove to be defective, we may be required to participate in government-imposed or customer OEM-instituted recalls involving such products.  We maintain insurance against such product liability claims, but we cannot assure you that such coverage will be adequate for liabilities ultimately incurred or that it will continue to be available on terms acceptable to us.  A successful claim brought against us that exceeds available insurance coverage or a requirement to participate in any product recall could have a material adverse effect on our results of operations and financial condition.
 
We are subject to risks related to our international operations.
 
Approximately 25.9% of our net sales in 2008 were derived from sales outside of North America. Non-current assets outside of North America accounted for approximately 13.6% of our non-current assets as of December 31, 2008.  International sales and operations are subject to significant risks, including, among others:
 
 
·
political and economic instability;
 
·
restrictive trade policies;
 
·
economic conditions in local markets;
 
·
currency exchange controls;
 
·
labor unrest;
 
·
difficulty in obtaining distribution support and potentially adverse tax consequences; and
 
·
the imposition of product tariffs and the burden of complying with a wide variety of international and U.S. export laws.
 
Additionally, to the extent any portion of our net sales and expenses are denominated in currencies other than the U.S. dollar, changes in exchange rates could have a material adverse effect on our results of operations and financial condition.  

We face risks through our equity investments in companies that we do not control.

Our net earnings include significant equity earnings from unconsolidated subsidiaries.  For the year ended December 31, 2008, we recognized $13.5 million of equity earnings and received $4.2 million in cash dividends from our unconsolidated subsidiaries.  Our equity investments may not always perform at the levels we have seen in recent years.

Our annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors.

The overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax.  However, tax expense and benefits are not recognized on a global basis but rather on a jurisdictional or legal entity basis.  Losses in certain jurisdictions provide no current financial statement tax benefit.  As a result, changes in the mix of earnings between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.

Item 1B.  Unresolved Staff Comments.
 
None.

 
12

 

Item 2.  Properties.

The Company and our joint ventures currently own or lease 16 manufacturing facilities, which together contain approximately 1.4 million square feet of manufacturing space.  Of these manufacturing facilities, nine are used by our Electronics reportable segment, four are used by our Control Devices reportable segment and three are owned by our joint venture companies.  The following table provides information regarding our facilities:

   
Owned/
     
Square
Location
 
Leased
 
Use
 
Footage
             
Electronics
           
Portland, Indiana
 
Owned
 
Manufacturing
 
182,000
Juarez, Mexico
 
Owned
 
Manufacturing/Division Office
 
178,000
Chihuahua, Mexico
 
Owned
 
Manufacturing
 
135,569
El Paso, Texas
 
Leased
 
Warehouse
 
93,000
Tallinn, Estonia
 
Leased
 
Manufacturing
 
85,911
Orebro, Sweden
 
Leased
 
Manufacturing
 
77,472
Mitcheldean, England
 
Leased
 
Manufacturing (Vacant)
 
74,790
Monclova, Mexico
 
Leased
 
Manufacturing
 
68,436
Chihuahua, Mexico
 
Leased
 
Manufacturing
 
49,805
Cheltenham, England
 
Leased
 
Manufacturing (Vacant)
 
39,983
Stockholm, Sweden
 
Leased
 
Engineering Office/Division Office
 
37,714
Dundee, Scotland
 
Leased
 
Manufacturing/Sales Office/Engineering Office
 
32,753
Warren, Ohio
 
Leased
 
Engineering Office/Division Office
 
24,570
Chihuahua, Mexico
 
Leased
 
Manufacturing
 
10,000
Bayonne, France
 
Leased
 
Sales Office/Warehouse
 
8,267
Portland, Indiana
 
Leased
 
Warehouse
 
8,250
Madrid, Spain
 
Leased
 
Sales Office/Warehouse
 
1,560
Rome, Italy
 
Leased
 
Sales Office
 
1,216
             
Control Devices
           
Lexington, Ohio
 
Owned
 
Manufacturing/Division Office
 
209,492
Canton, Massachusetts
 
Owned
 
Manufacturing/Division Office
 
132,560
Sarasota, Florida
 
Owned
 
Manufacturing (Vacant)
 
115,000
Suzhou, China
 
Leased
 
Manufacturing/Warehouse
 
25,737
Lexington, Ohio
 
Owned
 
Manufacturing
 
10,120
Sarasota, Florida
 
Owned
 
Warehouse (Vacant)
 
7,500
Lexington, Ohio
 
Leased
 
Warehouse
 
5,000
Lexington, Ohio
 
Leased
 
Warehouse
 
4,000
             
Corporate
           
Novi, Michigan
 
Leased
 
Sales Office/Engineering Office
 
9,400
Warren, Ohio
 
Owned
 
Headquarters
 
7,500
Stuttgart, Germany
 
Leased
 
Sales Office/Engineering Office
 
1,000
Shanghai, China
 
Leased
 
Sales Office
 
270
Seoul, South Korea
 
Leased
 
Sales Office
 
154
             
Joint Ventures
           
Pune, India
 
Owned
 
Manufacturing/Engineering Office/Sales Office
 
76,000
Manaus, Brazil
 
Owned
 
Manufacturing
 
73,550
São Paulo, Brazil
 
Owned
 
Manufacturing/Engineering Office/Sales Office
 
45,343
Buenos Aires, Argentina
 
Leased
 
Sales Office
 
3,551

 
13

 

Item 3.  Legal Proceedings.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of 2008.

 
14

 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “SRI.”  As of February 20, 2009, we had 24,664,529 Common Shares without par value, issued and outstanding, which were owned by approximately 300 registered holders, including Common Shares held in the names of brokers and banks (so-called “street name” holdings) who are record holders with approximately 2,000 beneficial owners.

The Company has not historically paid or declared dividends, which are restricted under both the senior notes and the asset-based credit facility, on our Common Shares.  We may only pay cash dividends in the future if immediately prior to and immediately after the payment is made, no event of default shall have occurred and outstanding indebtedness under our asset-based credit facility is not greater than or equal to $20.0 million before and after the payment of the dividend.  We currently intend to retain earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness.  Accordingly, we do not expect to pay cash dividends in the foreseeable future.

High and low sales prices (as reported on the NYSE composite tape) for our Common Shares for each quarter ended during 2008 and 2007 are as follows:

 
Quarter Ended
 
High
   
Low
 
2008
March 31
  $ 14.15     $ 6.97  
 
June 30
  $ 17.98     $ 13.04  
 
September 30
  $ 19.06     $ 11.25  
 
December 31
  $ 10.32     $ 2.42  
2007
March 31
  $ 12.17     $ 8.25  
 
June 30
  $ 13.53     $ 10.29  
 
September 30
  $ 13.76     $ 9.15  
 
December 31
  $ 10.98     $ 8.00  

The Company did not repurchase any Common Shares in 2008 or 2007.

Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in our Common Shares with the cumulative total return of hypothetical investments in the Hemscott Group–Industry Group 333 (Automotive Parts) Index and the NYSE Market Index based on the respective market price of each investment at December 31, 2003, 2004, 2005, 2006, 2007 and 2008 assuming in each case an initial investment of $100 on December 31, 2003, and reinvestment of dividends.
 

   
2003
   
2004
   
2005
   
2006
   
2007
   
2008
 
                                     
Stoneridge, Inc
    100.00       100.53       43.99       54.42       53.42       30.30  
Hemscott Group–Industry Group 333 Index
    100.00       102.92       91.50       103.09       110.76       48.02  
NYSE Market Index
    100.00       112.92       122.25       143.23       150.88       94.76  

For information on “Related Stockholder Matters” required by Item 201(d) of Regulation S-K, refer to Item 12 of this report.

 
15

 

Item 6.  Selected Financial Data.

The following table sets forth selected historical financial data and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.  The selected historical data was derived from our consolidated financial statements.

   
For the Years Ended December 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
 
 
(in thousands, except per share data)
 
Statement of Operations Data:                               
Net sales:
                             
Electronics
  $ 533,328     $ 458,672     $ 456,932     $ 401,663     $ 403,322  
Control Devices
    236,038       289,979       271,943       291,434       299,408  
Eliminations
    (16,668 )     (21,531 )     (20,176 )     (21,513 )     (20,935 )
Consolidated
  $ 752,698     $ 727,120     $ 708,699     $ 671,584     $ 681,795  
                                         
Gross profit
  $ 166,287     $ 167,723     $ 158,906     $ 148,588     $ 174,987  
                                         
Operating income (loss) (A)
  $ (43,271 )   $ 34,799     $ 35,063     $ 23,303     $ (125,570 )
                                         
Equity in earnings of investees
  $ 13,490     $ 10,893     $ 7,125     $ 4,052     $ 1,698  
                                         
Income (loss) before income taxes (A)
                                       
Electronics
  $ 38,713     $ 20,692     $ 20,882     $ (216 )   $ 27,562  
Control Devices
    (78,858 )     15,825       13,987       19,429       (147,960 )
Other corporate activities
    10,078       8,676       6,392       8,217       (4,477 )
Corporate interest
    (20,708 )     (21,969 )     (21,622 )     (22,994 )     (24,281 )
Consolidated
  $ (50,775 )   $ 23,224     $ 19,639     $ 4,436     $ (149,156 )
                                         
Net income (loss) (A)
  $ (97,527 )   $ 16,671     $ 14,513     $ 933     $ (92,503 )
                                         
Basic net income (loss) per share (A)
  $ (4.17 )   $ 0.72     $ 0.63     $ 0.04     $ (4.09 )
                                         
Diluted net income (loss) per share (A)
  $ (4.17 )   $ 0.71     $ 0.63     $ 0.04     $ (4.09 )
                                         
Other Data:
                                       
Product development expenses
  $ 45,508     $ 44,203     $ 40,840     $ 39,193     $ 36,145  
Capital expenditures
  $ 24,573     $ 18,141     $ 25,895     $ 28,934     $ 23,917  
Depreciation and amortization (B)
  $ 26,399     $ 28,503     $ 26,180     $ 26,157     $ 24,802  
                                         
Balance Sheet Data (at period end):
                                       
Working capital
  $ 160,387     $ 184,788     $ 135,915     $ 116,689     $ 123,317  
Total assets
  $ 382,437     $ 527,769     $ 501,807     $ 463,038     $ 473,001  
Long-term debt, less current portion
  $ 183,000     $ 200,000     $ 200,000     $ 200,000     $ 200,052  
Shareholders' equity
  $ 91,758     $ 206,189     $ 178,622     $ 153,991     $ 155,605  

(A)
Our 2008 and 2004 operating loss, loss before income taxes, net loss, and related basic and diluted loss per share amounts include non-cash, pre-tax goodwill impairment losses of $65,175 and $183,450, respectively.

(B)
These amounts represent depreciation and amortization on fixed and certain finite-lived intangible assets.

 
16

 

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

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

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

For the year ended December 31, 2008, net sales were $752.7 million, an increase of $25.6 million compared with $727.1 million for the year ended December 31, 2007.

Our net loss for the year ended December 31, 2008 was $97.5 million, or $(4.17) per diluted share, compared with net income of $16.7 million, or $0.71 per diluted share, for 2007. Earnings per share for 2008 include $(5.15) per share for restructuring expenses, an after-tax non-cash goodwill impairment charge and a non-cash deferred tax asset valuation allowance.

Our increase in net sales was predominantly attributable to net new business sales.  This increase was partially offset by volume reductions and contractual price reductions at our major customers in the automotive vehicle market for the year ended December 31, 2008.

Our 2008 net loss was due to a non-cash goodwill impairment charge of $65.2 million and a non-cash deferred tax asset valuation of $62.0 million.

We achieved income from continuing operations excluding restructuring, the effect of the goodwill impairment charge and the deferred tax asset valuation allowance (“other non-recurring items”) in 2008 of $22.8 million, or $0.98 per share, compared with $17.6 million, or $0.75 per share, in 2007.  We aggressively pursued restructuring efforts starting in late 2007 and during 2008 to adjust the cost structure and eliminate overhead centers to enhance profitability in robust economic times and protect profitability when market adversity occurs.  We recorded after-tax restructuring expenses of $12.3 million, or $0.53 per share in 2008.  In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) and SFAS 109, Accounting for Income Taxes, the 2008 results also include an after-tax non-cash goodwill impairment charge in our Control Device reporting segment of $46.1 million, or $1.97 per share, and a non-cash valuation allowance against deferred tax assets of $62.0 million or $2.65 per share.  The impact of the non-cash impairment charge and deferred tax asset valuation allowance was driven by adverse equity market conditions that caused a decrease in current market multiples and our stock price as of December 31, 2008.
  
Affecting our profitability were restructuring initiatives that began in the fourth quarter of 2007 to improve the Company’s manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida and Mitcheldean, United Kingdom locations.  Related 2008 expenses, primarily comprised of one-time termination benefits and line-transfer expenses of approximately $15.4 million.  Restructuring expenses that were general and administrative in nature were included in the Company’s consolidated statements of operations as restructuring charges, while the remaining restructuring related expenses were included in cost of goods sold.

In 2008, our PST Eletrônica S.A. (“PST”) joint venture in Brazil, which is an electronic system provider focused on security and convenience applications primarily for the vehicle and motorcycle industry, continued to perform well, resulting in equity earnings of $12.8 million compared to $10.4 million in the previous year.  We also received dividend payments from PST of $4.2 million and $5.6 million in 2008 and 2007, respectively. We currently hold a 50% equity interest in PST.  The results of PST in 2009 will be impacted by fluctuations in foreign exchange rates.

 
17

 

To supplement the Company’s consolidated financial statements presented on a basis in accordance with generally accepted accounting principles (GAAP) in the United States, the Company's management also uses and discloses certain non-GAAP financial measures. These non-GAAP financial measures are not in accordance with, nor are they alternatives for, GAAP-based financial measures. The Company includes these non-GAAP financial measures because it believes they provide useful information with which to evaluate the performance of the Company. The non-GAAP measures included in this Annual Report on Form 10-K have been reconciled to the comparable GAAP measures within the accompanying table, as required under Securities and Exchange Commission rules regarding the use of non-GAAP financial measures. They should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP.

A reconciliation of GAAP net loss and earnings per share (“EPS”) to adjusted net income before restructuring related expenses and other non-recurring costs and EPS is presented below (in thousands except per share data):

   
For the Year Ended
 
   
December 31,
 
   
2008
   
2007
 
   
Dollars
   
EPS
   
Dollars
   
EPS
 
Adjusted net income per share before restructuring related expenses and other non-recurring items
                       
Net income (loss)
  $ (97,527 )   $ (4.17 )   $ 16,671     $ 0.71  
Total restructuring related expenses, net of tax benefits
    12,286       0.53       915       0.04  
Goodwill impairment, net of tax benefits
    46,052       1.97       -       -  
Deferred tax asset valuation allowance
    62,006       2.65       -       -  
                                 
Adjusted net income before restructuring related expenses and other non-recurring items
  $ 22,817     $ 0.98     $ 17,586     $ 0.75  
                                 
Diluted weighted average shares outstanding 1
    23,367               23,548          

1 - Basic and Diluted weighted average shares outstanding are the same for 2008 periods as a net loss caused the dilutive shares to have an anti-dilutive effect.

Recent Trends and Market Conditions

The automotive and commercial vehicle industries experienced significantly unfavorable developments during 2008 (primarily the second half of 2008), particularly in North America and Europe. These trends include:

General Economic Factors:

Disruptions in financial markets and restrictions on liquidity are adversely impacting the availability and cost of incremental credit for many companies. These disruptions are also adversely affecting the global economy, further negatively impacting consumer spending patterns in the automotive and commercial vehicle industries. Our customers and suppliers are attempting to respond to rapidly changing consumer preferences, restricted liquidity and increased cost of capital any of which could negatively impact their business and could result in further restructuring or even reorganization or liquidation under bankruptcy laws. Any such negative event could, in turn, negatively affect our business either through loss of sales to our customers or through our inability to meet our commitments (or inability to meet them without excess expense), due to the loss of supplies from any of our suppliers so affected.

Production Levels and Product Mix:

In the U.S. and Europe, overall negative economic conditions, including the deterioration of global financial markets, reduced credit availability and lower consumer confidence have significantly impacted the automotive and commercial vehicle industries. As such, automotive and commercial vehicle production and sales have deteriorated substantially and are not expected to recover significantly in the near term. Therefore, considering the drastic changes to consumer demand for vehicles, and corresponding decrease in production and demand for our products, as well as are common share price, we tested our goodwill for impairment and recognized a pre-tax non-cash $65.2 million goodwill impairment charge in 2008.

 
18

 
 
In recent years, and continuing into 2008, General Motors, Ford and Chrysler (“Detroit Three”) have seen a steady decline in their market share for vehicle sales in North America. Declining market share, inherent legacy issues with the Detroit Three and the impact of declining consumer confidence have led to recent, unprecedented production cuts and permanent capacity reductions. During 2008, the Detroit Three North American production levels declined approximately 21% compared to 2007. These declines will have a continuing negative impact on our sales, liquidity and results of operations.
 
In addition, in order to address market share declines, reduced production levels, negative industry trends (such as change in mix of vehicles), general macroeconomic conditions and other structural issues specific to their companies (such as significant overcapacity and pension and healthcare costs), the Detroit Three and certain of our other customers continue to implement or may implement various forms of restructuring initiatives (including, in certain cases, reorganization under bankruptcy laws). These restructuring actions have had and may continue to have a significant impact throughout our industry, including our supply base.

Outlook

In the fourth quarter of 2008 the North American automotive and the global commercial vehicle markets experienced the beginning of a significant decline that is unprecedented in its breadth, depth and speed.  It is currently accelerating into the first part of 2009.  The uncertainty of the activity of the global economy makes it difficult to predict how demand for automotive and commercial vehicle products will develop in 2009.

Significant factors inherent to our markets that could affect our results for 2009 include general economic conditions and the financial stability of our customers and suppliers as well as our ability to successfully execute our planned restructuring, productivity and cost reduction initiatives.  We are undertaking these initiatives to mitigate significant sales volume reductions in our served markets and customer-demanded price reductions.  Our management team is focused on improving operational efficiency while adapting to the needs of our customers.

We continue our transition to low-cost manufacturing locations.  Initially, this initiative will result in restructuring costs stemming from facility closures and production relocations.  However, the longer-term effects of such an initiative will enable us to reduce our operating costs and increase global sourcing capacity to our customers.

We will continue to monitor business conditions and will take the necessary steps to address the current economic environment.

Results of Operations

We are primarily organized by markets served and products produced.  Under this organizational structure, our operations have been aggregated into two reportable segments: Electronics and Control Devices.  The Electronics reportable segment includes results of operations that design and manufacture electronic instrument clusters, electronic control units, driver information systems and electrical distribution systems, primarily wiring harnesses and connectors for electrical power and signal distribution.  The Control Devices reportable segment includes results from our operations that design and manufacture electronic and electromechanical switches, control actuation devices and sensors.

Year Ended December 31, 2008 Compared To Year Ended December 31, 2007

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the years ended December 31, 2008 and 2007 are summarized in the following table (in thousands):

   
For the Years Ended December 31,
   
$ Increase /
   
% Increase /
 
   
2008
   
2007
   
(Decrease)
   
(Decrease)
 
                                     
Electronics
  $ 520,936       69.2 %   $ 441,717       60.7 %   $ 79,219       17.9 %
Control Devices
    231,762       30.8       285,403       39.3       (53,641 )     (18.8 )%
Total net sales
  $ 752,698       100.0 %   $ 727,120       100.0 %   $ 25,578       3.5 %

 
19

 

The increase in net sales for our Electronics segment was primarily due to new business sales and increased sales volume in 2008.  Contractual price reductions and foreign currency exchange rates negatively affected net sales by approximately $2.0 million in 2008.

The decrease in net sales for our Control Devices segment was primarily attributable to production volume reductions at our major customers in the North American automotive market.  Additionally, the loss of sensor product revenue at our Sarasota, Florida, facility had a negative impact on net sales.

Net sales by geographic location for the years ended December 31, 2008 and 2007 are summarized in the following table (in thousands):
 
   
For the Years Ended December 31,
   
$ Increase /
   
% Increase /
 
   
2008
   
2007
   
(Decrease)
   
(Decrease)
 
                                     
North America
  $ 557,990       74.1 %   $ 522,730       71.9 %   $ 35,260       6.7 %
Europe and other
    194,708       25.9       204,390       28.1       (9,682 )     (4.7 )%
Total net sales
  $ 752,698       100.0 %   $ 727,120       100.0 %   $ 25,578       3.5 %

The increase in North American sales was primarily attributable to net new business sales of electronics products.  The increase was partially offset by lower sales volume in our North American automotive market.  Our decrease in sales outside North America was primarily due to reduced volume in light vehicle products and reduced European commercial vehicle sales volume.

Consolidated statements of operations as a percentage of net sales for the years ended December 31, 2008 and 2007 are presented in the following table (in thousands):

   
For the Years Ended December 31,
   
$ Increase /
 
   
2008
   
2007
   
(Decrease)
 
                               
Net Sales
  $ 752,698       100.0 %   $ 727,120       100.0 %   $ 25,578  
                                         
Costs and Expenses:
                                       
Cost of goods sold
    586,411       77.9       559,397       76.9       27,014  
Selling, general and administrative
    136,563       18.1       133,708       18.4       2,855  
Gain on sale of property, plant & equipment, net
    (571 )     (0.1 )     (1,710 )     (0.2 )     1,139  
Goodwill impairment charge
    65,175       8.7       -       -       65,175  
Restructuring charges
    8,391       1.1       926       0.1       7,465  
                                         
Operating Income (Loss)
    (43,271 )     (5.7 )     34,799       4.8       (78,070 )
                                         
Interest expense, net
    20,575       2.7       21,759       3.0       (1,184 )
Equity in earnings of investees
    (13,490 )     (1.8 )     (10,893 )     (1.5 )     (2,597 )
Loss on early extinguishment of debt
    770       0.1       -       -       770  
Other (income) expense, net
    (351 )     -       709       0.1       (1,060 )
                                         
Income (Loss) Before Income Taxes
    (50,775 )     (6.7 )     23,224       3.2       (73,999 )
                                         
Provision for income taxes
    46,752       6.2       6,553       0.9       40,199  
                                         
Net Income (Loss)
  $ (97,527 )     (12.9 )%   $ 16,671       2.3 %   $ (114,198 )

Cost of Goods Sold. The increase in cost of goods sold as a percentage of sales was primarily due to $7.0 million of restructuring expenses included in cost of goods sold for the year ended December 31, 2008.  The negative impact of restructuring expenses were partially offset by a more favorable product mix and new business sales.

Selling, General and Administrative Expenses.  Product development expenses included in SG&A were $45.6 million and $44.2 million for the years ended December 31, 2008 and 2007, respectively.  The increase was primarily related to development spending in the areas of instrumentation and wiring. The Company intends to reallocate its resources to focus on the design and development of new products rather than primarily focusing on sustaining existing product programs. The increase in SG&A expenses, excluding product development was due primarily to increased compensation related items.  

 
20

 

Gain on Sale of Property, Plant and Equipment, net.  The gain for 2008 was primarily a result of selling manufacturing lines which was part of the line transfer initiative at our Mitcheldean, United Kingdom facility.  The gain for the year ended December 31, 2007 was primarily attributable to the sale of non-strategic assets including two idle facilities and the Company airplane.

Goodwill Impairment Charge.  A goodwill impairment charge of $65.2 million was recorded during the year ended December 31, 2008.  During the fourth quarter, as a result of the deterioration of the global economy and its effects on the automotive and commercial vehicle markets, we were required to perform an additional goodwill impairment test subsequent to our annual October 1, 2008 test.  The result of the December 31, 2008 impairment test was that our goodwill was determined to be significantly impaired and was written off.  The goodwill related to two reporting units in the Control Devices segment.

Restructuring Charges. The increase in restructuring charges that were general and administrative in nature, were primarily the result of the ratable recognition of one-time termination benefits that were due to employees and the cancellation of certain contracts upon the closure of our Sarasota, Florida, and Mitcheldean, United Kingdom, locations.  Additionally, in 2008, we announced additional restructuring initiatives at our Canton, Massachusetts, Orebro, Sweden and Tallinn, Estonia locations.  The majority of this charge resulted in the recognition of one-time termination benefits that were due to affected employees.  No fixed-asset impairment charges were incurred because the assets were transferred to our other locations for continued production.  Restructuring expenses that were general and administrative in nature were included in the Company’s consolidated statements of operations as restructuring charges, while the remaining restructuring related expenses were included in cost of goods sold.  These initiatives were substantially completed in 2008.

Restructuring charges recorded by reportable segment during the year ended December 31, 2008 were as follows (in thousands):

   
Electronics
   
Control Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 2,564     $ 2,521     $ 5,085  
Contract termination costs
    1,305       -       1,305  
Other costs
    23       1,978       2,001  
Total restructuring charges
  $ 3,892     $ 4,499     $ 8,391  

Severance costs relate to a reduction in workforce.  Contract termination costs represent expenditures associated with long-term lease obligations that were cancelled as part of the restructuring initiatives.  Other exit costs include miscellaneous expenditures associated with exiting business activities, such as the transferring of production equipment.

Restructuring charges recorded by reportable segment during the year ended December 31, 2007 were as follows (in thousands):

   
Electronics
   
Control Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 542     $ 357     $ 899  
Other costs
    -       27       27  
Total restructuring charges
  $ 542     $ 384     $ 926  

 
21

 

Restructuring related expenses, general and administrative in nature, for the year ended December 31, 2007 were primarily severance costs as a result of the ratable recognition of one-time termination benefits that were due to employees upon the closure of our Sarasota, Florida and Mitcheldean, United Kingdom locations that were announced in 2007.

Equity in Earnings of Investees. The increase was predominately attributable to the increase in equity earnings recognized from our PST joint venture.  The increase primarily reflects higher volume for PST’s security product lines and favorable exchange rates throughout most of 2008.

Income (Loss) Before Income Taxes.  Income (loss) before income taxes is summarized in the following table by reportable segment (in thousands):

   
For the Years Ended
December 31,
   
$ Increase /
   
% Increase /
 
   
2008
   
2007
   
(Decrease)
   
(Decrease)
 
                         
Electronics
  $ 38,713     $ 20,692     $ 18,021       87.1 %
Control Devices
    (78,858 )     15,825       (94,683 )     (598.3 )%
Other corporate activities
    10,078       8,676       1,402       16.2 %
Corporate interest expense
    (20,708 )     (21,969 )     1,261       5.7 %
Income (loss) before income taxes
  $ (50,775 )   $ 23,224     $ (73,999 )     (318.6 )%

The increase in income before income taxes in the Electronics segment was related to higher net sales, which  increased by $79.2 million in  2008.  This was partially offset by increased restructuring related expenses of $3.4 million in 2008 when compared to 2007.

The decrease in income before income taxes in the Control Devices reportable segment was primarily due to the goodwill impairment charge of $65.2 million recognized in 2008.  Additionally, net sales reduced by $53.6 million and the segment recognized an additional $4.1 million of restructuring related expenses in 2008.

The increase in income before income taxes from other corporate activities was primarily due to an increase in equity earnings from our PST joint venture of $2.4 million in 2008.

Income (loss) before income taxes by geographic location for the years ended December 31, 2008 and 2007 are summarized in the following table (in thousands):

   
For the Years Ended December 31,
             
   
2008
   
2007
   
$ Decrease
   
% Decrease
 
                                     
North America
  $ (47,795 )     94.1 %   $ 12,405       53.4 %   $ (60,200 )     (485.3 )%
Europe and other
    (2,980 )     5.9       10,819       46.6       (13,799 )     (127.5 )%
Income (loss) before income taxes
  $ (50,775 )     100.0 %   $ 23,224       100.0 %   $ (73,999 )     (318.6 )%

Our North American 2008 profitability was adversely affected by the $65.2 million goodwill impairment charge, which was offset by new business sales of electronic products.  Other factors impacting the 2008 results were increased restructuring related expenses of $8.9 million and lower North American automotive production.  The decrease in profitability outside North America was primarily due to increased restructuring related expenses of $6.5 million and design and development expenses.  The decrease was partially offset by increased European commercial vehicle production during the first half of 2008.

Provision for Income Taxes. We recognized a provision for income taxes of $46.8 million, or 92.1% of pre-tax loss, and $6.6 million, or 28.2% of pre-tax income, for federal, state and foreign income taxes for the years ended December 31, 2008 and 2007, respectively. The increase in the effective tax rate for 2008 was primarily attributable to the recording of a valuation allowance against our domestic deferred tax assets. Due to the impairment of goodwill the Company was in a cumulative loss position for the period 2006-2008. Pursuant to the accounting guidance the Company was required to record a valuation allowance. Additionally, the effective tax rate was unfavorably affected by the costs incurred to restructure our United Kingdom operations. Since we do not believe that the related tax benefit of those losses will be realized, a valuation allowance was recorded against the foreign deferred tax assets associated with those foreign losses. Finally, offsetting the impact of the current year valuation allowances, the effective tax rate was favorably impacted by a combination of audit settlements, successful litigation and the expiration of certain statutes of limitation.

 
22

 

Year Ended December 31, 2007 Compared To Year Ended December 31, 2006

Net Sales. Net sales for our reportable segments, excluding inter-segment sales, for the years ended December 31, 2007 and 2006 are summarized in the following table (in thousands):

   
For the Years Ended December 31,
   
$ Increase /
   
% Increase /
 
   
2007
   
2006
   
(Decrease)
   
(Decrease)
 
                                     
Electronics
  $ 441,717       60.7 %   $ 442,427       62.4 %   $ (710 )     (0.2 )%
Control Devices
    285,403       39.3       266,272       37.6       19,131       7.2 %
Total net sales
  $ 727,120       100.0 %   $ 708,699       100.0 %   $ 18,421       2.6 %

The decrease in net sales for our Electronics segment was primarily due to a substantial decline in medium- and heavy-duty truck production in North America.  Medium- and heavy-duty truck production in 2007 was unfavorably impacted by the new 2007 diesel emissions regulations that were implemented on January 1, 2007 in the U.S.  Offsetting the unfavorable impact of the new diesel emissions standards were new program revenues in North America and Europe, increased production volume in our European commercial vehicle operations and favorable foreign currency exchange.  Favorable foreign currency exchange rates contributed $18.6 million to net sales for the year ended December 31, 2007.

The increase in net sales for our Control Devices segment was primarily attributable to new product launches in our temperature and speed sensor businesses.  The increase was partially offset by production volume reductions at our major automotive customers.

Net sales by geographic location for the years ended December 31, 2007 and 2006 are summarized in the following table (in thousands):

   
For the Years Ended December 31,
   
$ Increase /
   
% Increase /
 
   
2007
   
2006
   
(Decrease)
   
(Decrease)
 
                                     
North America
  $ 522,730       71.9 %   $ 541,479       76.4 %   $ (18,749 )     (3.5 )%
Europe and other
    204,390       28.1       167,220       23.6       37,170       22.2 %
Total net sales
  $ 727,120       100.0 %   $ 708,699       100.0 %   $ 18,421       2.6 %

The decrease in North American sales was primarily attributable to lower sales to our commercial vehicle customers as a result of lower demand because of the new 2007 U.S. diesel emission regulations and lower production volume from our North American light vehicle customers.  The decrease was partially offset by sales related to new program launches of sensor products and new electronic products supplied for the production of military vehicles.  Our increase in sales outside of North America for the year was primarily due to increased production volume, new product revenues and favorable foreign currency exchange rates.  The favorable effect of foreign currency exchange rates affected net sales outside North America by $18.6 million for the year ended December 31, 2007.

 
23

 

Consolidated statements of operations as a percentage of net sales for the years ended December 31, 2007 and 2006 are presented in the following table (in thousands):

   
For the Years Ended December 31,
   
$ Increase /
 
   
2007
   
2006
   
(Decrease)
 
                                         
Net Sales
  $ 727,120       100.0 %   $ 708,699       100.0 %   $ 18,421  
                                         
Costs and Expenses:
                                       
Cost of goods sold
    559,397       76.9       549,793       77.6       9,604  
Selling, general and administrative
    133,708       18.4       124,538       17.6       9,170  
Gain on sale of property, plant and equipment, net
    (1,710 )     (0.2 )     (1,303 )     (0.2 )     (407 )
Restructuring charges
    926       0.1       608       0.1       318  
                                         
Operating Income
    34,799       4.8       35,063       4.9       (264 )
Interest expense, net
    21,759       3.0       21,744       3.1       15  
Equity in earnings of investees
    (10,893 )     (1.5 )     (7,125 )     (1.0 )     (3,768 )
Other expense, net
    709       0.1       805       0.1       (96 )
                                         
Income Before Income Taxes
    23,224       3.2       19,639       2.7       3,585  
                                         
Provision for income taxes
    6,553       0.9       5,126       0.7       1,427  
                                         
Net Income
  $ 16,671       2.3 %   $ 14,513       2.0 %   $ 2,158  

Cost of Goods Sold.  The decrease in cost of goods sold as a percentage of sales was due to increased sales volume from new business awards, ongoing procurement initiatives and favorable product mix.  The decrease was partially offset by unfavorable material costs, operational inefficiencies related to new product launches and higher depreciation expense.

Selling, General and Administrative Expenses. Product development expenses included in SG&A were $44.2 million and $40.8 million for the years ended December 31, 2007 and 2006, respectively.  The increase related to development spending in the areas of tachographs and instrumentation.

The increase in SG&A expenses, excluding product development expenses, in 2007 compared with 2006 was primarily attributable to the increase in our selling and marketing activity to support new products in Europe, the increase in systems implementation expenses related to a new information system in Europe, and a $1.2 million one-time gain in the third quarter of 2006 related to the settlement of the life insurance benefits portion of a postretirement plan.

Restructuring Charges.  The increase in restructuring charges was primarily the result of one-time termination benefits related to the restructuring initiatives announced in 2007 to improve manufacturing efficiency and cost position by ceasing manufacturing operations at our Sarasota, Florida and Mitcheldean, United Kingdom locations.  No fixed-asset impairment charges were incurred because assets are primarily being transferred to our other locations for continued production.

Restructuring charges recorded by reportable segment during the year ended December 31, 2007 were as follows (in thousands):

   
Electronics
   
Control Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 542     $ 357     $ 899  
Other costs
    -       27       27  
Total restructuring charges
  $ 542     $ 384     $ 926  

 
24

 

Also included in severance costs for the Electronics reporting segment in 2007 was $0.1 million of expense related to the rationalization of certain manufacturing facilities in Europe and North America announced in 2005.  These restructuring initiatives were completed in 2007.

Restructuring charges recorded by reportable segment during the year ended December 31, 2006 were as follows (in thousands):

   
Electronics
   
Control Devices
   
Total
Consolidated
Restructuring
Charges
 
                   
Severance costs
  $ 369     $ 156     $ 525  
Other costs
    -       83       83  
Total restructuring charges
  $ 369     $ 239     $ 608  

Severance costs related to a reduction in workforce.  Other associated costs include miscellaneous expenditures associated with exiting business activities.

Gain on Sale of Property, Plant and Equipment, net. The increase was primarily attributable to a gain on the sale of two closed facilities during 2007 exceeding the gain on the sale of land during the first quarter of 2006.

Equity in Earnings of Investees.  The increase in equity earnings from investees was predominately attributable to the increase in equity earnings recognized from our PST joint venture in Brazil.  The increase primarily reflects higher volume for PST’s security product lines.

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

   
For the Years Ended
December 31,
   
$ Increase /
 
   
2007
   
2006
   
(Decrease)
 
                   
Electronics
  $ 20,692     $ 20,882     $ (190 )
Control Devices
    15,825       13,987       1,838  
Other corporate activities
    8,676       6,392       2,284  
Corporate interest expense
    (21,969 )     (21,622 )     (347 )
Income before income taxes
  $ 23,224     $ 19,639     $ 3,585  

The decrease in income before income taxes in the Electronics segment was related to reduced volume and increased SG&A expenses.  The increased SG&A expenses were predominantly due to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.

The increase in income before income taxes in the Control Devices reportable segment was primarily due to increased sales volume and new product launches.  These factors were offset by operating inefficiencies related to a new product launch.

The increase in income before income taxes from other corporate activities was primarily due to a reduction in foreign exchange losses recorded in the previous year and an increase in equity earnings from our PST joint venture of $3.6 million.

 
25

 

Income before income taxes by geographic location for the years ended December 31, 2007 and 2006 is summarized in the following table (in thousands):

   
For the Years Ended December 31,
             
   
2007
   
2006
   
$ Increase
   
% Increase
 
                                     
North America
  $ 12,405       53.4 %   $ 10,847       55.2 %   $ 1,558       14.4 %
Europe and other
    10,819       46.6       8,792       44.8       2,027       23.1 %
Income before income taxes
  $ 23,224       100.0 %   $ 19,639       100.0 %   $ 3,585       18.3 %

The increase in our profitability in North America was primarily attributable to increased revenue from new sensor product launches and new electronic products supplied for the production of military vehicles.  The increase was primarily offset by unfavorable variances related to a new product launch, lower North American automotive and commercial vehicle production and contractual price reductions with our customers.  The increase in our profitability outside North America was primarily due to increased European commercial vehicle production and revenue from new program launches.  The increase was offset by higher SG&A related to increased development spending in the areas of tachographs and instrumentation and higher selling and marketing costs associated with new product introductions.

Provision for Income Taxes. We recognized a provision for income taxes of $6.6 million, or 28.2% of pre-tax income, and $5.1 million, or 26.1% of pre-tax income, for federal, state and foreign income taxes for the years ended December 31, 2007 and 2006, respectively. The increase in the effective tax rate was primarily attributable to the increase in higher taxed domestic earnings and the increase over the prior year of the valuation allowance recorded against deferred tax assets in the United Kingdom. These increases were partially offset by a deferred tax benefit related to a change in state tax law.

Liquidity and Capital Resources

Summary of Cash Flows (in thousands):

   
For the Years
       
   
Ended December 31,
   
$ Increase /
 
   
2008
   
2007
   
(Decrease)
 
Cash provided by (used for):
                 
Operating activities
  $ 42,456     $ 33,525     $ 8,931  
Investing activities
    (23,901 )     (5,826 )     (18,075 )
Financing activities
    (16,231 )     900       (17,131 )
Effect of exchange rate changes on cash and cash equivalents
    (5,556 )     1,443       (6,999 )
Net change in cash and cash equivalents
  $ (3,232 )   $ 30,042     $ (33,274 )

The increase in net cash provided by operating activities was primarily due to lower accounts receivable balances in the current year.

The increase in net cash used for investing activities reflects an increase in cash used for capital projects.  The increase was due in part to the expansion of our Lexington facility during 2008.  In addition, 2007 net cash used for investing activities includes the proceeds from the sale of non-strategic assets, including two idle facilities and the Company airplane.

The increase in net cash used by financing activities was primarily due to cash used to purchase and retire $17.0 million in par value of the Company’s senior notes during 2008.

As discussed in Note 9 to our consolidated financial statements, we have entered into foreign currency forward contracts with a notional value of $8.8 million and $8.6 million at December 31, 2008 and 2007, respectively.  The purpose of these investments is to reduce exposure related to our British pound-denominated receivables and Mexican peso-denominated payables.  At December 31, 2007, the Company also used forward currency contracts to reduce the exposure related to the Company’s Mexican peso- and Swedish krona-denominated receivables. The estimated fair value of the British pound contract at December 31, 2008 and 2007, per quoted market sources, was approximately $2.1 million and $(0.03) million, respectively.  The estimated fair market value of the Mexican peso-denominated contracts at December 31, 2008, per quoted market sources, was approximately $(2.9) million.  For the year ended December 31, 2008, we recognized a $2.2 million gain related to foreign currency contracts in the consolidated statement of operations as a component of other expense (income), net.  As discussed in Note 9, we entered into a fixed price swap contract in December 2007 for 1.0 million pounds of copper, which lasted through December 2008.  In September 2008, we entered into a fixed price swap contract for 1.4 million pounds of copper, which will last from January 2009 to December 2009.  The purpose of these contracts is to reduce our price risk as it relates to copper prices.  As of December 31, 2008 and 2007, the fair value of the fixed price commodity swap contract, per quoted market sources, was approximately $(2.1) million and $0.1 million, respectively.

 
26

 

The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2008 (in thousands):

Contractual Obligations:
 
Total
   
Less than 1
year
   
2-3 years
   
4-5 years
   
After 5 years
 
Long-term debt
  $ 183,000     $ -     $ -     $ 183,000     $ -  
Operating leases
    20,703       5,122       6,521       4,144       4,916  
Employee benefit plans
    8,695       731       1,549       1,666       4,749  
Total contractual obligations
  $ 212,398     $ 5,853     $ 8,070     $ 188,810     $ 9,665  

Our 2009 capital expenditures are expected to be slightly lower than our 2008 expenditures, due to lower expected demand in the markets that we serve.  Management will continue to focus on reducing its weighted average cost of capital and believes that cash flows from operations and the availability of funds from our asset-based credit facility will provide sufficient liquidity to meet our future growth and operating needs.

We will continue to monitor business conditions and will take the necessary steps to ensure our position in the current economic environment.

As outlined in Note 4 to our consolidated financial statements, our asset-based credit facility, permits borrowing up to a maximum level of $100.0 million.  This facility provides us with lower borrowing rates and allows us the flexibility to refinance our outstanding debt.  At December 31, 2008, there were no borrowings on this asset-based credit facility.  The available borrowing capacity on this credit facility is based on eligible current assets, as d