| STONERIDGE INC ITEM 1A RISK FACTORS 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 |
| The loss of any significant portion of our sales to these customers or any other significant 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 |
| 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 |
| 6 _________________________________________________________________ [62]Table of Contents Our business is cyclical and seasonal in nature and further downturns in the automotive, medium- and heavy-duty truck, agricultural and off-road vehicle industries could reduce the sales and profitability of our business |
| The demand for our products is largely dependent on the domestic and foreign production of automobiles, medium-and heavy-duty trucks, agricultural 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 automotive, medium- and heavy-duty truck, agricultural 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 automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle production could adversely impact our results of operations and financial condition |
| In 2005, approximately 43prca of our net sales were made to the automotive market and approximately 57prca were derived from the medium- and heavy-duty truck, agricultural and off-highway vehicle markets |
| 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 plant shutdowns in July for vacations and new model changeovers |
| The fourth quarter is also impacted by plant shutdowns for the holidays |
| Consolidation among vehicle parts customers and suppliers could make it more difficult for us to compete favorably |
| Since the early 1980’s the OEM supply industry has undergone a significant consolidation as OEMs 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 OEMs |
| The trend toward consolidation among automotive 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 |
| 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 hacking 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 |
| Our business is very competitive and increased competition could reduce our sales |
| Markets for our products are highly competitive and the company can offer no assurance that we can maintain our product pricing levels with our customers |
| We compete based on quality, service, price, timely delivery and technological innovation |
| Many of our competitors are more diversified and have greater financial and other resources than we do |
| We cannot assure you that our business will not be adversely 7 _________________________________________________________________ [63]Table of Contents affected by competition or that we will be able to maintain our profitability if the competitive environment changes |
| 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 affect 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, 2005, we had approximately 6cmam000 employees, approximately 1cmam400 of whom were salaried and the balance of whom were paid on an hourly basis |
| Certain employees located in Chihuahua, Mexico, Orebro and Stockholm, Sweden and Dundee, Scotland, are represented by unions |
| We cannot assure you that more of 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 |
| 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 8 _________________________________________________________________ [64]Table of Contents may be required to participate in government-imposed or 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 affect on our results of operations and financial condition |
| We are subject to risks related to our international operations |
| Approximately 21prca of our net sales in 2005 were derived from sales of our European and other international operations, and European and other international non-current assets accounted for approximately 11prca of our non-current assets as of December 31, 2005 |
| 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 US export laws |
| Additionally, to the extent any portion of our net sales and expenses are denominated in currencies other than US dollars, changes in exchange rates could have a material adverse affect on our results of operations and financial condition |
| 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, 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 |