STONERIDGE INC [SRI] Filings

10-Q 1 sri-20220331x10q.htm 10-Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended March 31, 2022

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.)

39675 MacKenzie Drive, Suite 400, Novi, Michigan		48377
(Address of principal executive offices)		(Zip Code)


	(248) 489-9300
	Registrant’s telephone number, including area code

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

Common Shares, without par value SRI New York Stock Exchange

Title of each class Trading symbol(s) Name of each exchange on which registered

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐
Smaller reporting company ☐	Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of Common Shares, without par value, outstanding as of April 29, 2022 was 27,315,157.

Table of Contents

STONERIDGE, INC. AND SUBSIDIARIES


INDEX		Page
PART I–FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021	4
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2022 and 2021	5
	Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three Months Ended March 31, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2022 and 2021	7
	Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II–OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38

Signatures		39

Table of Contents

Forward-Looking Statements

Portions of this report on Form 10-Q contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and may include statements regarding the intent, belief or current expectations of the Company, with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) operational expectations. Forward-looking statements may be identified by the words “will,” “may,” “should,” “designed to,” “believes,” “plans,” “projects,” “intends,” “expects,” “estimates,” “anticipates,” “continue,” and similar words and expressions. The forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:

●

the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis, including the impact of potential tariffs and trade considerations on their operations and output;

●

global economic trends, competition and geopolitical risks, including impacts from the ongoing conflict between Russia and Ukraine and the related sanctions and other measures, or an escalation of sanctions, tariffs or other trade tensions between the U.S. and China or other countries;

●

our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions;

●

the impact of COVID-19, or other future pandemics, on the global economy, and on our customers, suppliers, employees, business and cash flows;

●

the reduced purchases, loss or bankruptcy of a major customer or supplier;

●

the costs and timing of business realignment, facility closures or similar actions;

●

a significant change in automotive, commercial, off-highway or agricultural vehicle production;

●

competitive market conditions and resulting effects on sales and pricing;

●

our ability to manage foreign currency fluctuations;

●

customer acceptance of new products;

●

our ability to successfully launch/produce products for awarded business;

●

adverse changes in laws, government regulations or market conditions, including tariffs, affecting our products or our customers’ products;

●

our ability to protect our intellectual property and successfully defend against assertions made against us;

●

liabilities arising from warranty claims, product recall or field actions, product liability and legal proceedings to which we are or may become a party, or the impact of product recall or field actions on our customers;

●

labor disruptions at our facilities or at any of our significant customers or suppliers;

●

business disruptions due to natural disasters or other disasters outside our control;

●

fluctuations in the cost and availability of key materials (including semiconductors, printed circuit boards, resin, aluminum, steel and copper) and components and our ability to offset cost increases;

●

the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our revolving Credit Facility;

●

capital availability or costs, including changes in interest rates or market perceptions;

●

the failure to achieve the successful integration of any acquired company or business;

●

risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber-attack and other similar disruptions; and

●

the items described in Part I, Item IA (“Risk Factors”) in the Company’s 2021 Form 10-K.

The forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STONERIDGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,		December 31,
(in thousands)	2022		2021
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	41,388	$	85,547
Accounts receivable, less reserves of $1,258 and $1,443, respectively		155,994		150,388
Inventories, net		148,352		138,115
Prepaid expenses and other current assets		50,569		36,774
Total current assets		396,303		410,824
Long-term assets:
Property, plant and equipment, net		109,105		107,901
Intangible assets, net		49,321		49,863
Goodwill		35,412		36,387
Operating lease right-of-use asset		17,128		18,343
Investments and other long-term assets, net		43,579		42,081
Total long-term assets		254,545		254,575
Total assets	$	650,848	$	665,399

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt	$	5,183	$	5,248
Accounts payable		102,643		97,679
Accrued expenses and other current liabilities		71,214		70,139
Total current liabilities		179,040		173,066
Long-term liabilities:
Revolving credit facility		147,745		163,957
Deferred income taxes		10,636		10,706
Operating lease long-term liability		13,785		14,912
Other long-term liabilities		5,718		6,808
Total long-term liabilities		177,884		196,383
Shareholders' equity:
Preferred Shares, without par value, 5,000 shares authorized, none issued		-		-
Common Shares, without par value, 60,000 shares authorized, 28,966 and 28,966 shares issued and 27,316 and 27,191 shares outstanding at March 31, 2022 and December 31, 2021, respectively, with no stated value		-		-
Additional paid-in capital		228,837		232,490
Common Shares held in treasury, 1,650 and 1,775 shares at March 31, 2022 and December 31, 2021, respectively, at cost		(51,171)		(55,264)
Retained earnings		208,073		215,748
Accumulated other comprehensive loss		(91,815)		(97,024)
Total shareholders' equity		293,924		295,950
Total liabilities and shareholders' equity	$	650,848	$	665,399

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

Table of Contents

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended
	March 31,
(in thousands, except per share data)	2022		2021

Net sales	$	221,058	$	193,795
Costs and expenses:
Cost of goods sold		179,615		147,709
Selling, general and administrative		27,399		29,376
Design and development		17,028		14,651
Operating (loss) income		(2,984)		2,059
Interest expense, net		1,786		1,766
Equity in loss (earnings) of investee		81		(614)
Other expense, net		1,331		358
(Loss) income before income taxes		(6,182)		549
Provision for income taxes		1,493		419
Net (loss) income	$	(7,675)	$	130

(Loss) earnings per share:
Basic	$	(0.28)	$	0.00
Diluted	$	(0.28)	$	0.00

Weighted-average shares outstanding:
Basic		27,199		27,017
Diluted		27,199		27,486

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

Table of Contents

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


Three months ended March 31, (in thousands)		2022	2021

Net (loss) income	$	(7,675)	$	130

Other comprehensive income (loss), net of tax:
Foreign currency translation ⁽¹⁾		4,161		(10,778)
Unrealized gain (loss) on derivatives ⁽²⁾		1,048		(129)
Other comprehensive income (loss), net of tax		5,209		(10,907)

Comprehensive loss	$	(2,466)	$	(10,777)

(1)	Net of tax expense of $144 for the three months ended March 31, 2022.

(2)	Net of tax expense (benefit) of $279 and $(35) for the three months ended March 31, 2022 and 2021, respectively.

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

Table of Contents

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


Three months ended March 31, (in thousands)	2022		2021

OPERATING ACTIVITIES:
Net (loss) income	$	(7,675)	$	130
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation		6,877		7,068
Amortization, including accretion and write-off of deferred financing costs		2,357		1,513
Deferred income taxes		(605)		(1,609)
Loss (earnings) of equity method investee		81		(614)
Gain on sale of fixed assets		(94)		(37)
Share-based compensation expense		1,098		1,162
Excess tax deficiency (benefit) related to share-based compensation expense		265		(319)
Gain on disposal of business and joint venture, net		-		(739)
Change in fair value of earn-out contingent consideration		-		72
Changes in operating assets and liabilities:
Accounts receivable, net		(6,129)		(15,953)
Inventories, net		(9,812)		(7,282)
Prepaid expenses and other assets		(12,842)		(4,744)
Accounts payable		6,581		6,725
Accrued expenses and other liabilities		87		(2,439)
Net cash used for operating activities		(19,811)		(17,066)

INVESTING ACTIVITIES:
Capital expenditures, including intangibles		(7,368)		(7,718)
Proceeds from sale of fixed assets		132		155
Proceeds from disposal of business, net		-		1,050
Investment in venture capital fund, net		-		(399)
Net cash used for investing activities		(7,236)		(6,912)

FINANCING ACTIVITIES:
Revolving credit facility borrowings		-		20,500
Revolving credit facility payments		(16,000)		(3,000)
Proceeds from issuance of debt		9,834		11,434
Repayments of debt		(10,311)		(13,763)
Repurchase of Common Shares to satisfy employee tax withholding		(669)		(2,347)
Net cash (used for) provided by financing activities		(17,146)		12,824

Effect of exchange rate changes on cash and cash equivalents		34		(2,257)
Net change in cash and cash equivalents		(44,159)		(13,411)
Cash and cash equivalents at beginning of period		85,547		73,919

Cash and cash equivalents at end of period	$	41,388	$	60,508

Supplemental disclosure of cash flow information:
Cash paid for interest, net	$	1,435	$	1,652
Cash paid for income taxes, net	$	1,491	$	3,742

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

Table of Contents

STONERIDGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Number of								Accumulated
	Common	Number of	Additional		Common				other		Total
	Shares	treasury	paid-in		Shares held		Retained		comprehensive		shareholders'
(in thousands)	outstanding	shares	capital		in treasury		earnings		loss		equity

BALANCE DECEMBER 31, 2020	27,006	1,960	$	234,409	$	(60,482)	$	212,342	$	(89,635)	$	296,634
Net income	—	—		—		—		130		—		130
Unrealized loss on derivatives, net	—	—		—		—		—		(129)		(129)
Currency translation adjustments	—	—		—		—		—		(10,778)		(10,778)
Issuance of Common Shares	224	(224)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(68)	68		—		4,392		—		—		4,392
Share-based compensation, net	—	—		(5,577)		—		—		—		(5,577)
BALANCE MARCH 31, 2021	27,162	1,804	$	228,832	$	(56,090)	$	212,472	$	(100,542)	$	284,672


BALANCE DECEMBER 31, 2021	27,191	1,775	$	232,490	$	(55,264)	$	215,748	$	(97,024)	$	295,950
Net loss	—	—		—		—		(7,675)		—		(7,675)
Unrealized gain on derivatives, net	—	—		—		—		—		1,048		1,048
Currency translation adjustments	—	—		—		—		—		4,161		4,161
Issuance of Common Shares	161	(161)		—		—		—		—		—
Repurchased Common Shares for treasury, net	(36)	36		—		4,093		—		—		4,093
Share-based compensation, net	—	—		(3,653)		—		—		—		(3,653)
BALANCE MARCH 31, 2022	27,316	1,650	$	228,837	$	(51,171)	$	208,073	$	(91,815)	$	293,924

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

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)

(1) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Stoneridge, Inc. (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC’s rules and regulations. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s 2021 Form 10-K.

The Company’s investment in Minda Stoneridge Instruments Ltd. (“MSIL”) for the three months ended March 31, 2021 was determined to be an unconsolidated entity, and was therefore accounted for under the equity method of accounting based on the Company’s 49% ownership in MSIL. The Company sold its equity interest in MSIL on December 30, 2021.

Reclassifications

Certain prior period amounts have been reclassified to conform to their 2022 presentation in the condensed consolidated financial statements.

(2) Recently Issued Accounting Standards

Accounting Standards Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance in ASU 2020-04 provides temporary optional expedient and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”) (also known as the “reference rate reform”). The guidance allows companies to elect not to apply certain modification accounting requirements to contracts affected by the reference rate reform, if certain criteria are met. The guidance will also allow companies to elect various optional expedients which would allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. As of March 31, 2022, the Company has not yet had contracts modified due to rate reform.

(3) Revenue

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. The expected costs associated with our base warranties continue to be recognized as expense when the products are sold. Customer returns only occur if products do not meet the specifications of the contract and are not connected to any repurchase obligations of the Company.

The Company does not have any financing components or significant payment terms as payment occurs shortly after the point of sale. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction that are collected by the Company from a customer are excluded from revenue. Amounts billed to customers related to shipping and handling costs are included in net sales in the condensed consolidated statements of operations. Shipping and handling costs associated with outbound freight after control over a product is transferred to the customer are accounted for as a fulfillment cost and are included in cost of sales.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)

Revenue by Reportable Segment

Control Devices. Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as actuators, sensors, switches and connectors. We sell these products principally to the automotive market in the North American and Asia Pacific regions. To a lesser extent, we also sell these products to the commercial vehicle and agricultural markets in the North American and Asia Pacific regions. Our customers included in these markets primarily consist of original equipment manufacturers (“OEM”) and companies supplying components directly to the OEMs (“Tier 1 supplier”).

Electronics. Our Electronics segment designs and manufactures driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units. These products are sold principally to the commercial vehicle market primarily through our OEM and aftermarket channels in the European, North American and Asia Pacific regions. The camera-based vision systems and related products are sold principally to the commercial vehicle and off-highway vehicle markets in the European and North American regions.

Stoneridge Brazil. Our Stoneridge Brazil segment (“SRB”) primarily serves the South American region and specializes in the design, manufacture and sale of vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions. Stoneridge Brazil sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, directly to OEMs and through mass merchandisers. In addition, monitoring services and tracking devices are sold directly to corporate customers and individual consumers.

The following tables disaggregate our revenue by reportable segment and geographical location⁽¹⁾for the three months ended March, 2022 and 2021:


	Control Devices				Electronics				Stoneridge Brazil				Consolidated
Three months ended March 31,	2022		2021		2022		2021		2022		2021		2022		2021
Net Sales:
North America	$	71,490	$	76,129	$	32,338	$	20,405	$	-	$	-	$	103,828	$	96,534
South America		-		-		-		-		12,045		11,407		12,045		11,407
Europe		-		6,790		91,785		61,005		-		-		91,785		67,795
Asia Pacific		12,570		16,699		830		1,360		-		-		13,400		18,059
Total net sales	$	84,060	$	99,618	$	124,953	$	82,770	$	12,045	$	11,407	$	221,058	$	193,795

(1)	Company sales based on geographic location are where the sale originates not where the customer is located.

Performance Obligations

For OEM and Tier 1 supplier customers, the Company typically enters into contracts to provide serial production parts that consist of a set of documents including, but not limited to, an award letter, master purchase agreement and master terms and conditions. For each production product, the Company enters into separate purchase orders that contain the product specifications and an agreed-upon price. The performance obligation does not exist until a customer release is received for a specific number of parts. The majority of the parts sold to OEM and Tier 1 supplier customers are customized to the specific customer, with the exception of camera-based vision systems (“CMS”) that are common across all customers (CMS for OEMs are customized but sales are not yet material). The transaction price is equal to the contracted price per part and there is no expectation of material variable consideration in the transaction price. For most customer contracts, the Company does not have an enforceable right to payment at any time prior to when the parts are shipped or delivered to the customer; therefore, the Company recognizes revenue at the point in time it satisfies a performance obligation by transferring control of a part to the customer. Certain customer contracts contain an enforceable right to payment if the customer terminates the contract for convenience and therefore are recognized over time using the cost to complete input method.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)

Our aftermarket products are focused on meeting the demand for repair and replacement parts, compliance parts and accessories and are sold primarily to aftermarket distributors and mass retailers in our South American, European and North American markets. Aftermarket products have one type of performance obligation which is the delivery of aftermarket parts and spare parts. For aftermarket customers, the Company typically has standard terms and conditions for all customers. In addition, aftermarket products have alternative use as they can be sold to multiple customers. Revenue for aftermarket part production contracts is recognized at a point in time when the control of the parts transfer to the customer which is based on the shipping terms. Aftermarket contracts may include variable consideration related to discounts and rebates which is included in the transaction price upon recognizing the product revenue.

A small portion of the Company’s sales are comprised of monitoring services that include both monitoring devices and fees to individual, corporate, fleet and cargo customers in our Stoneridge Brazil segment. These monitoring service contracts are generally not capable of being distinct and are accounted for as a single performance obligation. We recognize revenue for our monitoring products and services contracts over the life of the contract. There is no variable consideration associated with these contracts. The Company has the right to consideration from a customer in the amount that corresponds directly with the value to the customer of the Company’s performance to date. Therefore, the Company recognizes revenue over time using the practical expedient ASC 606-10-55-18 in the amount the Company has a “right to invoice” rather than selecting an output or input method.

Contract Balances

The Company had no material contract assets, contract liabilities or capitalized contract acquisition costs as of March 31, 2022 and December 31, 2021.

(4) Inventories

Inventories are valued at the lower of cost (using either the first-in, first-out (“FIFO”) or average cost methods) or net realizable value. The Company evaluates and adjusts as necessary its excess and obsolescence reserve 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:


	March 31,		December 31,
	2022		2021
Raw materials	$	117,945	$	107,034
Work-in-progress		11,189		9,755
Finished goods		19,218		21,326
Total inventories, net	$	148,352	$	138,115

Inventory valued using the FIFO method was $134,853 and $127,939 at March 31, 2022 and December 31, 2021, respectively. Inventory valued using the average cost method was $13,499 and $10,176 at March 31, 2022 and December 31, 2021, respectively.

(5) Financial Instruments and Fair Value Measurements

Financial Instruments

A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair value of debt approximates the carrying value of debt, due to the variable interest rate on the Credit Facility and the maturity of the remaining outstanding debt.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)

Derivative Instruments and Hedging Activities

On March 31, 2022, the Company had open Mexican peso-denominated foreign currency forward contracts and net investment hedges of our euro-denominated subsidiary. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2022 and 2021. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings.

Foreign Currency Exchange Rate Risk

The Company conducts business internationally and, therefore, is exposed to foreign currency exchange rate risk. The Company uses derivative financial instruments as cash flow hedges and net investment hedges to manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures.

Net Investment Hedges

During 2021 the Company entered into two cross-currency swaps, designated as net investment hedges, with notional values of $25,000 each and maturities in August 2026 and August 2028. These swaps hedge a portion of the net investment in a certain euro-denominated subsidiary.

The Company has elected to assess hedge effectiveness under the spot method. Accordingly, periodic changes in the fair value of the derivative instruments attributable to factors other than spot exchange rate variability are excluded from the measurement of hedge ineffectiveness and reported directly in earnings each reporting period. The change in fair value of these derivative instruments is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the condensed consolidated balance sheets. When the related currency translation adjustment is required to be reclassified, usually upon the sale or liquidation of the investment, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in other expense, net in the condensed consolidated statements of operations. Upon settlement, cash flows attributable to derivatives designated as net investment hedges will be classified as investing activities in the consolidated statements of cash flows.

Cash Flow Hedges

The Company entered into foreign currency forward contracts to hedge the Mexican peso currency in 2022 and 2021. These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated other comprehensive loss, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive loss will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the currency.

In certain instances, the foreign currency forward contracts may not qualify for hedge accounting or are not designated as hedges and, therefore, are marked-to-market with gains and losses recognized in the Company’s condensed consolidated statements of operations as a component of other expense, net. At March 31, 2022, all of the Company’s foreign currency forward contracts were designated as cash flow hedges.

The Company’s foreign currency forward contracts offset a portion of the gains and losses on the underlying foreign currency denominated transactions as follows:

Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedges

The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at March 31, 2022 of $17,091 which expire ratably on a monthly basis from April 2022 to December 2022. The notional amount at December 31, 2021 related to Mexican peso-denominated foreign currency forward contracts was $23,923.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)

The Company evaluated the effectiveness of the Mexican peso and U.S. dollar-denominated forward contracts held as of March 31, 2022 and concluded that the hedges were effective.

Interest Rate Risk

Interest Rate Risk – Cash Flow Hedge

On February 18, 2020, the Company entered into a floating-to-fixed interest rate swap agreement (the “Interest Rate Swap”) with a notional amount of $50,000 to hedge its exposure to interest payment fluctuations on a portion of its Credit Facility borrowings. The Interest Rate Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's Credit Facility that has a current balance of $147,745 at March 31, 2022. Accordingly, the change in fair value of the Interest Rate Swap is recognized in accumulated other comprehensive loss. The Interest Rate Swap agreement requires monthly settlements on the same days that the Credit Facility interest payments are due and has a maturity date of March 10, 2023, which is prior to the Credit Facility maturity date of June 4, 2024. Under the Interest Rate Swap terms, the Company pays a fixed interest rate and receives a floating interest rate based on the one-month LIBOR, with a floor. The critical terms of the Interest Rate Swap are aligned with the terms of the Credit Facility, resulting in no hedge ineffectiveness. The difference between amounts to be received and paid under the Interest Rate Swap is recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Interest Rate Swap settlements increased interest expense by $153 and $158 for the three months ended March 31, 2022 and 2021, respectively.

The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:


					Prepaid expenses				Accrued expenses and
	Notional amounts ^(A)				and other current assets				other current liabilities
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2022		2021		2022		2021		2022		2021
Derivatives designated as hedging instruments:
Cash flow hedges:
Forward currency contracts	$	17,091	$	23,923	$	1,394	$	730	$	-	$	-
Interest rate swap	$	50,000	$	50,000	$	160	$	-	$	-	$	503
Net investment hedges:
Cross-currency swaps	$	50,000	$	50,000	$	2,011	$	1,450	$	-	$	-

(A)	Notional amounts represent the gross contract of the derivatives outstanding in U.S. dollars.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)

Gross amounts recorded for the cash flow and net investment hedges in other comprehensive income (loss) and in net (loss) income for the three months ended March 31 were as follows:


					Gain (loss) reclassified from
	Gain (loss) recorded in other				other comprehensive loss
	comprehensive loss				into net (loss) income ^(A)
	2022		2021		2022		2021
Derivatives designated as cash flow hedges:
Forward currency contracts	$	915	$	(154)	$	251	$	207
Interest rate swap	$	510	$	39	$	(153)	$	(158)
Derivatives designated as net investment hedges:
Cross-currency swaps	$	687	$	-	$	-	$	-

(A)

Gains reclassified from other comprehensive loss into net (loss) income recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $51 and $80 for the three months ended March 31, 2022 and 2021, respectively. Gains reclassified from other comprehensive loss into net (loss) income recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $199 and $127 for the three months ended March 31, 2022 and 2021, respectively. Losses reclassified from other comprehensive loss into net (loss) income recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $153 and $158 for the three months ended March 31, 2022 and 2021, respectively.

For the three months ended March 31, 2022, the total net gains on the foreign currency contract cash flow hedges of $1,394 are expected to be included in COGS, SG&A and D&D within the next 12 months. Of the total net gains on the Interest Rate Swap cash flow hedge, $160 of gains are expected to be included in interest expense, net within the next 12 months.

Cash flows from derivatives used to manage foreign currency exchange and interest rate risks are classified as operating activities within the condensed consolidated statements of cash flows.

Fair Value Measurements

Certain assets and liabilities held by the Company are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency and cross-currency contracts, inputs include forward foreign currency exchange rates. For the interest rate swap, inputs include LIBOR. Fair values estimated using Level 3 inputs consist of significant unobservable inputs.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of inputs used.

Table of Contents

STONERIDGE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data, unless otherwise stated)

(Unaudited)


								March 31,		December 31,
			2022						2021
			Fair values estimated using
		Fair	Level 1		Level 2		Level 3			Fair
	value		inputs		inputs		inputs		value
Financial assets carried at fair value:
Forward currency contract	$	1,394	$	-	$	1,394	$	-	$	730
Cross-currency swaps		2,011		-		2,011		-		1,450
Interest rate swap		160		-		160		-		-
Total financial assets carried at fair value	$	3,565	$	-	$	3,565	$	-	$	2,180

Financial liabilities carried at fair value: