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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2011
Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of Stoneridge, Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). Intercompany transactions and balances have been eliminated in consolidation. The Company accounts for investments in joint ventures in which it owns between 20% and 50% of equity, or otherwise acquires significant management influence, using the equity method (see Note 3). Accounting Estimates The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. Cash and Cash Equivalents The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value, due to the highly liquid nature and short-term duration of the underlying securities. Accounts Receivable and Concentration of Credit Risk Revenues are principally generated from the commercial, automotive, agricultural and off-highway vehicle markets. The Company’s largest customers were Navistar International Corporation and Deere & Company, primarily related to the Electronics reportable segment. These customers accounted for approximately 24%, 24% and 27% and 15%, 14% and 12% of net sales for the years ended December 31, 2011, 2010 and 2009, respectively. Change in Accounting Principle Effective January 1, 2011, the Company elected to change the method of valuing inventories for certain U.S. businesses to the first-in, first-out (“FIFO”) method, while in prior years, these inventories were valued using the last-in, first-out (“LIFO”) method. As a result of this change in accounting principle, all inventories are valued using the FIFO method. The Company believes the change is preferable as it conforms the Company’s inventory costing methods for all inventories to a single method and improves comparability with industry peers. The FIFO method also better reflects current acquisition cost of those inventories on the consolidated balance sheets. The Company has applied this change in method of inventory costing retrospectively to all prior periods presented herein in accordance with accounting principles relating to accounting changes. The effect of retrospectively applying the change on the Company’s inventory costing method decreased accumulated deficit by $2,663 as of December 31, 2008. There were no tax effects for the adjustments for any periods presented below due to the fact that the Company has a full valuation allowance recorded against its U.S. deferred tax assets. Presented below are the effects of the change in accounting principle for inventory costs on the consolidated financial statements for 2010 and 2009.
Consolidated Statements of Operations: |  |  |  |  |  |
For the years ended December 31 |  | 2010 |  |  | 2009 |
|  |  |  |  | Impact of |  |  |  |  |  |  |  |  | Impact of |  |  |  |
|  | Originally |  |  | change |  |  | As |  |  | Originally |  |  | change |  |  | As |
|  | reported |  |  | to FIFO |  |  | adjusted |  |  | reported |  |  | to FIFO |  |  | adjusted |
Cost of goods sold |  | $ | 490,391 |  |  | $ | (721 | ) |  | $ | 489,670 |  |  | $ | 387,167 |  |  | $ | 253 |  |  | $ | 387,420 |
Operating income (loss) |  | $ | 22,803 |  |  | $ | 721 |  |  | $ | 23,524 |  |  | $ | (18,243 | ) |  | $ | (253 | ) |  | $ | (18,496 | )
Income (loss) before income taxes |  | $ | 11,303 |  |  | $ | 721 |  |  | $ | 12,024 |  |  | $ | (33,326 | ) |  | $ | (253 | ) |  | $ | (33,579 | )
Net income (loss) |  | $ | 10,625 |  |  | $ | 721 |  |  | $ | 11,346 |  |  | $ | (32,323 | ) |  | $ | (253 | ) |  | $ | (32,576 | )
Net income (loss) attributable to Stoneridge, Inc. and subsidiaries |  | $ | 10,809 |  |  | $ | 721 |  |  | $ | 11,530 |  |  | $ | (32,405 | ) |  | $ | (253 | ) |  | $ | (32,658 | )
Basic net income (loss) per share |  | $ | 0.45 |  |  | $ | 0.03 |  |  | $ | 0.48 |  |  | $ | (1.37 | ) |  | $ | (0.01 | ) |  | $ | (1.38 | )
Diluted net income (loss) per share |  | $ | 0.44 |  |  | $ | 0.03 |  |  | $ | 0.47 |  |  | $ | (1.37 | ) |  | $ | (0.01 | ) |  | $ | (1.38 | )
Consolidated Balance Sheets: |  |  |  |  |  |
|  | December 31, 2010 |
|  |  |  |  | Impact of |  |  |  |
|  | Originally |  |  | change |  |  | As |
|  | reported |  |  | to FIFO |  |  | adjusted |
Inventories, net |  | $ | 51,828 |  |  | $ | 3,131 |  |  | $ | 54,959 |
Total current assets |  | $ | 246,845 |  |  | $ | 3,131 |  |  | $ | 249,976 |
Total assets |  | $ | 383,605 |  |  | $ | 3,131 |  |  | $ | 386,736 |
Accumulated deficit |  | $ | (80,751 | ) |  | $ | 3,131 |  |  | $ | (77,620 | )
Total Stoneridge, Inc. and subsidiaries shareholders' equity |  | $ | 83,780 |  |  | $ | 3,131 |  |  | $ | 86,911 |
Total shareholders' equity |  | $ | 88,088 |  |  | $ | 3,131 |  |  | $ | 91,219 |
Total liabilities and shareholders' equity |  | $ | 383,605 |  |  | $ | 3,131 |  |  | $ | 386,736 |
Consolidated Statements of Cash Flows: |  |  |  |  |  |  |  |  |  |
For the years ended December 31 |  | 2010 |  |  | 2009 |
|  |  |  |  | Impact of |  |  |  |  |  |  |  |  | Impact of |  |  |  |
|  | Originally |  |  | change |  |  | As |  |  | Originally |  |  | change |  |  | As |
|  | reported |  |  | to FIFO |  |  | adjusted |  |  | reported |  |  | to FIFO |  |  | adjusted |
Net income (loss) |  | $ | 10,625 |  |  | $ | 721 |  |  | $ | 11,346 |  |  | $ | (32,323 | ) |  | $ | (253 | ) |  | $ | (32,576 | )
Change in inventories, net |  | $ | (11,586 | ) |  | $ | (721 | ) |  | $ | (12,307 | ) |  | $ | 17,255 |  |  | $ | 253 |  |  | $ | 17,508 |
Inventories Inventories are valued at the lower of cost or market. As discussed above, effective January 1, 2011, the Company elected to change its costing method to the FIFO method for all inventories. The Company adopted this change in accounting principle by retrospectively adjusting all prior periods presented. The Company adjusts its excess and obsolescence reserve at least on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. Inventory cost includes material, labor and overhead. Inventories consist of the following:
As of December 31 |  | 2011 |  |  | 2010 |
|  |  |  |  | As adjusted |
Raw materials |  | $ | 72,308 |  |  | $ | 35,793 |
Work-in-progress |  |  | 14,723 |  |  |  | 9,454 |
Finished goods |  |  | 33,615 |  |  |  | 9,712 |
Total inventories, net |  | $ | 120,645 |  |  | $ | 54,959 |
Pre-production costs related to long-term supply arrangements Engineering, researching and development and other design and development costs for products sold on long-term supply arrangements are expensed as incurred unless the Company has a contractual guarantee for reimbursement from the customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company either has title to the assets or has the noncancelable right to use the assets during the term of the supply arrangement are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets, typically three to five years. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee to lump sum reimbursement from the customer are capitalized in prepaid expenses and other current assets. The amounts recorded related to these pre-production costs as of December 31, 2011 and 2010 were $10,381 and $7,307, respectively, and were recorded as a component of prepaid expenses and other current assets on the consolidated balance sheets. Property, Plant and Equipment Property, plant and equipment are recorded at cost and consist of the following:
As of December 31 |  | 2011 |  |  | 2010 |
Land and land improvements |  | $ | 5,235 |  |  | $ | 3,150 |
Buildings and improvements |  |  | 45,249 |  |  |  | 35,180 |
Machinery and equipment |  |  | 177,413 |  |  |  | 139,266 |
Office furniture and fixtures |  |  | 8,818 |  |  |  | 7,118 |
Tooling |  |  | 69,719 |  |  |  | 65,684 |
Information technology |  |  | 30,904 |  |  |  | 24,695 |
Vehicles |  |  | 1,624 |  |  |  | 414 |
Leasehold improvements |  |  | 3,416 |  |  |  | 3,103 |
Construction in progress |  |  | 19,089 |  |  |  | 18,645 |
Total property, plant, and equipment |  |  | 361,467 |  |  |  | 297,255 |
Less: accumulated depreciation |  |  | (236,665 | ) |  |  | (220,679 | )
Property, plant and equipment, net |  | $ | 124,802 |  |  | $ | 76,576 |
As a result of the restructuring plan approved on October 29, 2007 (see Note 11), the manufacturing facility located in Sarasota, Florida, was closed in 2008. This facility was included within the Control Devices segment. Beginning in 2009, the Company classified the Sarasota, Florida, facility as an asset held for sale and included the net book value of the facility of $3,757 within the December 31, 2010 consolidated balance sheets as a component of prepaid expenses and other current assets. During the year ended December 31, 2011, the Company sold the facility and recognized a gain of $95 as a component of selling, general and administrative. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2011, 2010 and 2009 was $18,847, $19,070 and $19,875, respectively. Depreciable lives within each property classification are as follows:
Buildings and improvements | 10–40 years |
Machinery and equipment | 3–10 years |
Office furniture and fixtures | 3–10 years |
Tooling | 2–5 years |
Information technology | 3–5 years |
Vehicles | 3–5 years |
Leasehold improvements | shorter of lease term or 3–10 years |
Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of the property, plant and equipment are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is recorded in the consolidated statements of operations as a component of selling, general and administrative. Impairment of Long-Lived or Finite-Lived Assets The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment would be recognized when events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. Measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset. During the year ended December 31, 2011, the Company incurred an impairment charge of $807 in its Electronics reportable segment related to certain capitalized software costs that were determined to no longer represent a future realizable benefit. This charge is recorded in the consolidated statements of operations as a component of selling, general and administrative. No significant impairment charges were recorded in 2010 or 2009 for long-lived or finite lived assets. Acquisitions PST Eletrônica Ltda. On December 31, 2011, the Company acquired a controlling interest in PST Eletronica Ltda. (“PST”), increasing its interest from 50% to 74%. The PST joint venture was accounted for under the equity method of accounting prior to the acquisition of the additional interest. On the date of acquisition, PST became a consolidated subsidiary of the Company. PST’s results of operations are included in the Company’s statement of operations as equity earnings of investees for the years ended December 31, 2011, 2010 and 2009. PST’s financial position is included in the consolidated balance sheet at December 31, 2011. PST has been identified by the Company as representing a new reportable segment. PST specializes in the design, manufacture and sale of electronic vehicle alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices. PST sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers. PST’s sales are primarily to customers in South America. The acquisition date fair value of the total consideration transferred consisted of the following:
Cash |  | $ | 29,669 |
Common Shares (1,940,413 shares) |  |  | 15,310 |
Fair value of consideration transferred |  |  | 44,979 |
Fair value of the Company's previously held equity interest |  |  | 104,118 |
Fair value of noncontrolling interest |  |  | 48,727 |
Total fair value of PST |  | $ | 197,824 |
Of the $44,979 consideration transferred for the additional 24% interest, $29,976 ($19,779 of cash and $10,197 of Company Common Shares) was transferred on January 5, 2012, in accordance with the terms of the purchase agreement. This amount is a liability owed to the sellers of the business and is included as a component of accrued expenses and other current liabilities on the consolidated balance sheet as of December 31, 2011. The fair value of the Common Shares transferred was based on the closing market price of the Company’s Common Shares on the acquisition date, less a discount. The discount was due to a lack of short-term marketability, as the Common Shares transferred were issued through a private placement. As a result of obtaining a controlling interest in PST, the Company’s previously held equity interest in PST of 50% was remeasured to an acquisition date fair value of $104,118. The Company recognized a one-time non-cash pre-tax gain of $65,372 as a result of the remeasurment. The gain is included on the consolidated statement of operations as a gain on previously held equity interest. The acquisition date fair value of the remaining 26% noncontrolling interest in PST was measured at $48,727. The noncontrolling interest is recorded as a component of total shareholder’s equity on the consolidated balance sheet at December 31, 2011. The fair value of the Company’s previously held equity interest and the noncontrolling interest were estimated using a combination of the income approach and a market approach. As PST is a private company, the fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement as defined in the fair value measurement accounting standard. The fair value estimates are based on (a) a discount rate range of 16.3% to 19.3%, (b) a terminal growth rate of 7.2% (c) a financial multiple of 5.3 to 8.0, based on companies in the same industry as PST and (d) an adjustment due to lack of control that market participants would consider when estimating the fair value of the noncontrolling interest in PST. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The purchase price allocation is preliminary pending completion of the valuation of acquired intangible assets, inventory, property, plant and equipment and deferred income taxes.
At December 31, 2011 |  |  |
Cash |  | $ | 2,137 |
Accounts receivable |  |  | 48,993 |
Inventory |  |  | 56,204 |
Prepaids and other current assets |  |  | 9,547 |
Property, plant and equipment |  |  | 42,389 |
Identifiable intangible assets |  |  | 102,090 |
Other long-term assets |  |  | 1,479 |
Total identifiable assets acquired |  |  | 262,839 |
Accounts payable |  |  | 9,825 |
Other current liabilities |  |  | 25,801 |
Debt |  |  | 54,068 |
Deferred tax liabilities |  |  | 39,392 |
Total liabilities assumed |  |  | 129,086 |
Net identifiable assets acquired |  |  | 133,753 |
Goodwill |  |  | 64,071 |
Net assets acquired |  | $ | 197,824 |
Goodwill is calculated as the excess of the fair value of consideration transferred over the fair market value of the identifiable assets and liabilities and represents the future economic benefits arising from other assets acquired that could not be separately recognized. The goodwill is reported in the Company’s PST segment and is not deductible for income tax purposes. Of the $102,090 of acquired identifiable intangible assets, $51,818 was provisionally assigned to customer lists with a 15-year useful life; $31,400 was provisionally assigned to trademarks with a 20 year useful life; and $18,872 was provisionally assigned to technology with a 17 year weighted-average useful life. The fair value of the identifiable intangible assets was determined using an income approach. The Company recognized $849 of acquisition related costs that were expensed in 2011. These costs are included in the consolidated statement of operations as a component of selling, general and administrative. The following unaudited pro forma information reflects the Company’s consolidated results of operations as if the acquisition had taken place on January 1, 2010. The unaudited pro forma information is not necessarily indicative of the results of operations that the Company would have reported had the transaction actually occurred at the beginning of these periods, nor is it necessarily indicative of future results.
Years ended December 31 |  | 2011 |  |  | 2010 |
Net sales |  | $ | 999,553 |  |  | $ | 818,172 |
Net income attributable to Stoneridge, Inc. and subsidiaries |  | $ | 10,608 |  |  | $ | 55,730 |
The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are directly related to the business combination and factually supportable. These adjustments include, but are not limited to, the recognition of the gain on the Company’s previously held equity interest in PST in 2010 results and its removal from 2011 results, depreciation and amortization related to fair value adjustments to property, plant, and equipment and intangible assets and fair value adjustments related to inventory. Bolton Conductive Systems, LLC On October 13, 2009, the Company acquired a 51% membership interest in Bolton Conductive Systems, LLC (“BCS”) for a purchase price of $5,967, net of cash acquired. BCS designs and manufactures a wide variety of electrical solutions for the military, automotive, marine and specialty vehicle markets and is based in Walled Lake, Michigan. The Company acquired a majority interest in BCS in order to expand its presence in the military channel. The Company may be required to make an additional payment to the prior owners of BCS for its 51% membership interest based on BCS achieving financial performance targets as defined by the purchase agreement. The maximum amount of additional payments to the prior owners of BCS is $3,200 in 2013 and is contingent upon BCS achieving profitability targets based on earnings before interest, income taxes, depreciation and amortization in 2012. The Company recorded $0 and $435; the fair value of the estimated future additional payments to the prior owners of BCS as of December 31, 2011 and 2010, respectively, on the consolidated balance sheets as a component of other long-term liabilities. The estimated future additional payments to the prior owners of BCS were based upon an analysis of forecasted operating results and the probability of achieving the forecasted targets. During the year ended December 31, 2011, the Company reduced the estimated future payments to $0, as a result of BCS not achieving 2011 performance targets and revised estimates for 2012. This adjustment was recorded as a reduction to selling, general and administrative on the consolidated statement of operations for the year ended December 31, 2011. The purchase agreement provides the Company with the option to purchase the remaining 49% interest in BCS in 2013 at a price determined in accordance with the purchase agreement. If the Company does not exercise this option then the minority owners of BCS have the option in 2014 to purchase the Company’s 51% interest in BCS at a price determined in accordance with the purchase agreement or to jointly market BCS for sale. BCS’s results of operations are included in the Company’s consolidated statements of operations from its date of acquisition. In 2011, the Company recognized a goodwill impairment charge of $4,945 related to BCS (see Goodwill and Other Intangible Assets below). Goodwill and Other Intangible Assets The total purchase price associated with acquisitions is allocated to the acquisition date fair values of assets acquired and liabilities assumed, with the excess purchase price recorded to goodwill. In 2011, the Company recorded a preliminary goodwill amount of $64,071 related to the acquisition of PST (see Acquisitions above). In 2009, the Company recorded goodwill of $9,199 within the Electronics segment related to the BCS acquisition. This goodwill related to these acquisitions is not deductible for income tax purposes. The remainder of the December 31, 2011 and 2010 goodwill balance relates to the 2008 acquisition of Magnum Trade AB, which is included within the Electronics segment. Goodwill as of December 31, 2011 and 2010, and changes in the carrying amount of goodwill by segment were as follows:
|  |  |  |  | Control |  |  |  |  |  |  |
|  | Electronics |  |  | Devices |  |  | PST |  |  | Total |
Balance at January 1, 2010 |  | $ | 9,743 |  |  | $ | - |  |  | $ | - |  |  | $ | 9,743 |
Translations and other adjustments |  |  | (47 | ) |  |  | - |  |  |  | - |  |  |  | (47 | )
Balance at December 31, 2010 |  | $ | 9,696 |  |  | $ | - |  |  | $ | - |  |  | $ | 9,696 |
Acquisition of business |  |  | - |  |  |  | - |  |  |  | 64,071 |  |  |  | 64,071 |
Impairment |  |  | (4,945 | ) |  |  | - |  |  |  | - |  |  |  | (4,945 | )
Translations and other adjustments |  |  | (14 | ) |  |  | - |  |  |  | - |  |  |  | (14 | )
Balance at December 31, 2011 |  | $ | 4,737 |  |  | $ | - |  |  | $ | 64,071 |  |  | $ | 68,808 |
Goodwill is subject to an annual assessment for impairment (or more frequently if impairment indicators arise) by applying a fair value-based test. The Company performs its annual impairment test of goodwill as of the beginning of the fourth quarter. The Company uses a combination of valuation techniques, which include consideration of a market-based approach (guideline company method) and an income approach (discounted cash flow method), in determining the fair value of the Company’s applicable reporting units in the annual impairment test of goodwill. The Company believes that the combination of the valuation models provides a more appropriate valuation of the Company’s reporting units by taking into account different marketplace participant assumptions. Both methods utilize market data in the derivation of a value estimate and are forward-looking in nature. The guideline assessment of future performance and the discounted cash flow method utilize a market-derived rate of return to discount anticipated performance. These methodologies are applied to the reporting units’ historical and projected financial performance. The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumption of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows. During the year ended December 31, 2011, the Company recorded a goodwill impairment charge of $4,945 within the Electronics reportable segment. The goodwill impairment charge reduced the carrying value of BCS goodwill to $4,173 and was the result of a decline in business activity due to a reduction in military and defense related spending by customers since the Company’s acquisition of BCS. The table below shows accumulated goodwill impairment for the year ended December 31, 2011:
|  | 2011 |
Accumulated goodwill impairment loss at January 1, 2011 |  | $ | 248,625 |
Goodwill impairment charge |  |  | 4,945 |
Accumulated goodwill impairment loss at December 31, 2011 |  | $ | 253,570 |
Intangible assets, net at December 31, 2011 consisted of the following:
|  | Acquisition |  |  | Accumulated |  |  |  |
Intangible asset |  | cost |  |  | amortization |  |  | Net |
Customer lists |  | $ | 52,532 |  |  | $ | (194 | ) |  | $ | 52,338 |
Trademarks |  |  | 31,829 |  |  |  | (316 | ) |  |  | 31,513 |
Technology |  |  | 18,872 |  |  |  | - |  |  |  | 18,872 |
Other |  |  | 87 |  |  |  | (79 | ) |  |  | 8 |
Total |  | $ | 103,320 |  |  | $ | (589 | ) |  | $ | 102,731 |
Intangible assets, net at December 31, 2010 was $507, primarily related to the 2009 acquisition of BCS. The Company recognized $238, $215 and $64 of amortization expense in 2011, 2010 and 2009, respectively. Amortization expense is included as a component of selling, general and administrative on the consolidated statements of operations. Amortization expense for intangible assets is estimated to be approximately $6,240 for the years 2012 through 2017. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following:
As of December 31 |  | 2011 |  |  | 2010 |
Compensation related reserves |  | $ | 22,013 |  |  | $ | 20,041 |
Product warranty and recall obligations |  |  | 5,126 |  |  |  | 3,831 |
Financial instruments |  |  | 7,722 |  |  |  | - |
Liability to PST shareholders |  |  | 29,975 |  |  |  | - |
Other (A) |  |  | 26,581 |  |  |  | 18,881 |
Total accrued expenses and other current liabilities |  | $ | 91,417 |  |  | $ | 42,753 |
| (A) | “Other” is comprised of miscellaneous accruals; none of which contributed a significant portion of the total.
Income Taxes The Company accounts for income taxes using the liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not to occur. During the year ended December 31, 2008 the Company determined that it was more likely than not that the Company would not be able to realize its deferred tax assets in the U.S. As a result, the Company recorded a valuation allowance related to its U.S. deferred tax assets of $62,006 in 2008. The Company continued to record a full valuation allowance in 2009, 2010 and 2011. The Company's policy is to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2011, the Company believes it has appropriately accounted for any unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company's effective tax rate in a given financial statement period may be affected. Currency Translation The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive income (loss). Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction, with the resulting adjustments included on the consolidated statements of operations. Revenue Recognition and Sales Commitments The Company recognizes revenues from the sale of products, net of actual and estimated returns, at the point of passage of title, which is generally at the time of shipment. Estimated returns are based on historical authorized returns. The Company often enters into agreements with its customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to renegotiation, which may affect product pricing. Allowance for Doubtful Accounts The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectability in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The Company does not have collateral requirements with its customers. Shipping and Handling Costs Shipping and handling costs are included in cost of goods sold on the consolidated statement of operations. Product Warranty and Recall Reserves Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. The current portion of the product warranty and recall reserve is included as a component of accrued expenses and other current liabilities on the consolidated balance sheets. The following provides a reconciliation of changes in the product warranty and recall reserve:
Years ended December 31 |  | 2011 |  |  | 2010 |
Product warranty and recall at beginning of period |  | $ | 3,831 |  |  | $ | 4,764 |
Accruals for products shipped during period |  |  | 3,142 |  |  |  | 3,338 |
Acquisition |  |  | 1,063 |  |  |  | - |
Aggregate changes in pre-existing liabilities due to claim developments |  |  | (168 | ) |  |  | (181 | )
Settlements made during the period (in cash or in kind) |  |  | (2,567 | ) |  |  | (4,090 | )
Product warranty and recall at end of period (A) |  | $ | 5,301 |  |  | $ | 3,831 |
| (A) | Product warranty and recall includes $175 of a long-term warranty liability at December 31, 2011.
Product Development Expenses Expenses associated with the development of new products and changes to existing products are charged to expense as incurred and are included in the Company’s consolidated statements of operations as a component of selling, general and administrative. These costs amounted to $35,263, $37,563 and $32,993 in years ended December 31, 2011, 2010 and 2009, respectively or 4.6%, 5.9% and 6.9% of net sales for these respective periods. Share-Based Compensation At December 31, 2011, the Company had three types of share-based compensation plans: (1) Long-Term Incentive Plan, as amended, (2) Directors’ Share Option Plan and (3) the Amended Directors’ Restricted Shares Plan. One plan is for employees and two plans are for non-employee directors. The Long-Term Incentive Plan is made up of the Long-Term Incentive Plan that was approved by the Company's shareholders on September 30, 1997, and expired on June 30, 2007, and the Amended and Restated Long-Term Incentive Plan, as amended, that was approved by shareholders on May 17, 2010, and expires on April 24, 2016. Total compensation expense recognized as a component of selling, general and administrative on the consolidated statements of operations for share-based compensation arrangements was $4,423, $2,661 and $1,252 for the years ended December 31, 2011, 2010 and 2009, respectively. Of these amounts, $375 and $184 for the years ended December 31, 2011 and 2010, respectively, were related to the Long-Term Cash Incentive Plan “Phantom Shares” discussed in Note 8. There was no share-based compensation expense capitalized as inventory in 2011, 2010 or 2009. Financial Instruments and Derivative Financial Instruments Financial instruments, including derivative financial instruments, held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt and foreign currency forward contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. See Note 9 for fair value disclosures of the Company’s financial instruments. Common Shares Held in Treasury The Company accounts for Common Shares held in treasury under the cost method and includes such shares as a reduction of total shareholders’ equity. Net Income (Loss) Per Share Basic net income (loss) per share was computed by dividing net income (loss) by the weighted-average number of Common Shares outstanding for each respective period. Diluted net income per share was calculated by dividing net income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented. For all periods in which the Company recognized a net loss, the Company has not recognized the effect from dilutive securities as no anti-dilution is permitted. Actual weighted-average Common Shares outstanding used in calculating basic and diluted net income (loss) per share were as follows:
Years ended December 31 |  | 2011 |  |  | 2010 |  |  | 2009 |
Basic weighted-average shares outstanding |  |  | 24,180,671 |  |  |  | 23,945,754 |  |  |  | 23,625,923 |
Effect of dilutive shares |  |  | 464,258 |  |  |  | 386,847 |  |  |  | - |
Diluted weighted-average shares outstanding |  |  | 24,644,929 |  |  |  | 24,332,601 |  |  |  | 23,625,923 |
Options not included in the computation of diluted net income (loss) per share to purchase 50,000, 106,750 and 169,750 Common Shares at an average price of $15.73, $12.96 and $9.57 per share were outstanding at December 31, 2011, 2010 and 2009, respectively. These outstanding options were not included in the computation of diluted net income (loss) per share because their respective exercise prices were greater than the average closing market price of Company Common Shares. There were 419,100, 445,950 and 395,925 performance-based restricted Common Shares outstanding at December 31, 2011, 2010 and 2009, respectively. These shares were not included in the computation of diluted net income (loss) per share because not all vesting conditions were achieved as of December 31, 2011, 2010 and 2009. These shares may or may not become dilutive based on the Company’s ability to meet or exceed future performance targets. Comprehensive Income (Loss) Other comprehensive income (loss) includes foreign currency translation adjustments, pension liability adjustments, unrealized gains and losses on available-for-sale marketable securities and the effective portion of gains and losses on certain hedging activities. The components of accumulated other comprehensive income (loss), as reported on the consolidated statements of other comprehensive income (loss) and shareholders’ equity, net of tax, were as follows:
|  |  |  |  |  |  |  | Unrealized |  |  |  |  |  | Accumulated |
|  | Currency |  |  | Pension |  |  | gain (loss) on |  |  | Unrealized |  |  | other |
|  | translation |  |  | liability |  |  | marketable |  |  | gain (loss) on |  |  | comprehensive |
|  | adjustments |  |  | adjustments |  |  | securities |  |  | derivatives |  |  | income (loss) |
Balance, January 1, 2009 |  | $ | 6 |  |  | $ | (1,959 | ) |  | $ | (30 | ) |  | $ | (5,014 | ) |  | $ | (6,997 | )
Current year change |  |  | 6,066 |  |  |  | (3,130 | ) |  |  | 6 |  |  |  | 6,724 |  |  |  | 9,666 |
Balance, December 31, 2009 |  |  | 6,072 |  |  |  | (5,089 | ) |  |  | (24 | ) |  |  | 1,710 |  |  |  | 2,669 |
Current year change |  |  | (1,994 | ) |  |  | 5,089 |  |  |  | 8 |  |  |  | (1,710 | ) |  |  | 1,393 |
Balance, December 31, 2010 |  |  | 4,078 |  |  |  | - |  |  |  | (16 | ) |  |  | - |  |  |  | 4,062 |
Current year change |  |  | (5,971 | ) |  |  | - |  |  |  | 16 |  |  |  | (7,722 | ) |  |  | (13,677 | )
Balance, December 31, 2011 |  | $ | (1,893 | ) |  | $ | - |  |  | $ | - |  |  | $ | (7,722 | ) |  | $ | (9,615 | )
The tax effects related to each component of other comprehensive income (loss) were as follows:
|  | Before tax |  |  |  |  |  | After-tax |
|  | amount |  |  | Provision |  |  | amount |
2009 |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  | $ | 6,066 |  |  | $ | - |  |  | $ | 6,066 |
Pension liability adjustments |  |  | (3,130 | ) |  |  | - |  |  |  | (3,130 | )
Unrealized gain on marketable securities |  |  | 9 |  |  |  | (3 | ) |  |  | 6 |
Unrealized gain on derivatives |  |  | 6,724 |  |  |  | - |  |  |  | 6,724 |
Current year change |  | $ | 9,669 |  |  | $ | (3 | ) |  | $ | 9,666 |
2010 |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  | $ | (1,994 | ) |  | $ | - |  |  | $ | (1,994 | )
Pension liability adjustments |  |  | 5,089 |  |  |  | - |  |  |  | 5,089 |
Unrealized gain on marketable securities |  |  | 12 |  |  |  | (4 | ) |  |  | 8 |
Unrealized loss on derivatives |  |  | (1,710 | ) |  |  | - |  |  |  | (1,710 | )
Current year change |  | $ | 1,397 |  |  | $ | (4 | ) |  | $ | 1,393 |
2011 |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  | $ | (5,971 | ) |  | $ | - |  |  | $ | (5,971 | )
Unrealized gain on marketable securities |  |  | 24 |  |  |  | (8 | ) |  |  | 16 |
Unrealized loss on derivatives |  |  | (7,722 | ) |  |  | - |  |  |  | (7,722 | )
Current year change |  | $ | (13,669 | ) |  | $ | (8 | ) |  | $ | (13,677 | )
As of December 31, 2009, the Company recorded a valuation allowance of $1,675, which fully offset the deferred tax asset related to the pension liability adjustments. There was no valuation recorded as of December 31, 2010 as a result of reversing the deferred tax asset in conjunction with placing Stoneridge Pollak Limited (“SPL”) into administration as described in Note 13. Deferred Finance Costs Deferred finance costs are being amortized over the life of the related financial instrument using the straight-line method, which approximates the effective interest method. The 2.5% discount to the initial purchasers of the Company’s senior secured notes is being accreted using the effective interest rate of 10.0% over the life of the senior secured notes. Deferred finance cost amortization and debt discount accretion for the years ended December 31, 2011, 2010 and 2009 was $875, $914 and $989, respectively, and is included as a component of interest expense, net on the consolidated statements of operations. As of December 31, 2011 and 2010, deferred financing costs, net were $1,914 and $1,723, respectively and were included on the consolidated balance sheets as a component of investments and other long-term assets, net. Recently Issued Accounting Standards Not Yet Adopted at December 31, 2011 In May 2011, the FASB issued changes to fair value measurement. This change clarifies the concepts related to highest and best use and valuation premise, blockage factors and other premiums and discounts, the fair value measurement of financial instruments held in a portfolio and of those instruments classified as a component of shareholder’s equity. The guidance includes enhanced disclosure requirements about recurring Level 3 fair value measurements, the use of nonfinancial assets, and the level in the fair value hierarchy of assets and liabilities not recorded at fair value. The provisions are effective prospectively for interim and annual periods beginning on or after December 15, 2011. Early application is prohibited. This requires changes in presentation only and we do not expect it will have a material impact on its consolidated financial statements. In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. These changes become effective for the Company on January 1, 2012. Management is currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income. Other than the change in presentation, management has determined these changes will not have an impact on the consolidated financial statements. In September 2011, the FASB issued changes to the testing of goodwill for impairment. These changes provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, go directly to the two-step quantitative impairment test. These changes become effective for the Company for any goodwill impairment test performed on January 1, 2012 or later, although early adoption is permitted. Management performs a review of the Company’s goodwill in the fourth quarter of each calendar year. We do not expect that adoption of these provisions will have a material impact on the Company’s consolidated financial statements. In December 2011, the FASB issued updated guidance to provide enhanced disclosures such that users of the financial statements will be able to better evaluate the effect or potential effect of netting arrangements on the statement of financial position. The guidance requires improved information about financial instruments and derivative instruments that are either offset according to specific guidance or subject to an enforceable master netting agreement or similar arrangement. The disclosures will provide both net and gross information for these assets and liabilities. Although we do not currently elect to offset assets and liabilities within the scope of the guidance, expanded disclosures will be required starting for the quarter ended March 31, 2013, along with retrospective presentation of prior periods. Reclassifications Certain prior period amounts have been reclassified to conform to their 2011 presentation in the consolidated financial statements.

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