Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We are a global designer and manufacturer of highly engineered electrical and electronic systems, components and modules primarily for the automotive, commercial, off-highway and agricultural vehicle markets.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.
Global Market Conditions
The coronavirus pandemic (“COVID-19”) and the ongoing supply chain disruptions, including the semiconductor shortages, have had a negative impact on the global economy since 2020. These conditions have disrupted, and likely will continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway and agricultural vehicles by end-consumers.
The adverse impacts of the COVID-19 pandemic led to a significant vehicle production slowdown in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules. This surge in demand led to a worldwide semiconductor supply shortage at the end of 2020, and other supply chain related constraints that have continued through 2022. We have experienced longer lead-times, higher costs, delays in procuring other component parts and raw materials and significant production volume reductions and volatility because of these shortages and continued impact of COVID-19. These supply chain disruptions became incrementally more challenging in the second half of 2021 resulting in higher related costs. Although the supply chain conditions have improved in 2022, we continued to experience production and supply chain volatility in several of our primary end-markets. In addition, rising COVID-19 infections in China and continued production volatility with our North American passenger car customers led to production reductions in 2022. Despite the continued challenges in 2022, we successfully negotiated appropriate, but significant price increases with our customers to offset material and labor cost headwinds. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise, due to this or any other issue. As these costs are expected to remain elevated in 2023, we will continue to work with our customers and implement supply chain and material cost reduction strategies to drive margin performance. The Company recognized $58.4 million and $17.6 million in 2022 and 2021, respectively, of cost recoveries related to spot buys of materials purchased for our customers.
North American automotive vehicle volumes are expected to increase in 2022 due to a combination of higher demand and low inventory levels. Whereas North American and European commercial vehicle volumes are expected to slightly decline in 2022. Vehicle production volumes could continue to be negatively impacted by the ongoing supply chain disruptions, including semiconductor shortages. The magnitude of the adverse impact on our financial condition, results of operations and cash flows will depend on the evolution of the semiconductor supply shortage, vehicle production schedules and supply chain impacts.
Segments
We are organized by products produced and markets served. Under this structure, our operations have been reported using the following segments:
Control Devices. This segment includes results of operations that manufacture actuators, sensors, switches and connectors.
Electronics. This segment includes results of operations from the production of driver information systems, vision and safety systems, connectivity and compliance products and electronic control units.
Stoneridge Brazil (“SRB”). This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices, driver information systems and telematics solutions.
Overview
The global macroeconomic environment in 2022 continued to provide a challenging backdrop for the global transportation industry and our served markets. The Company was able to navigate this volatile operating environment while at the same time continuing to execute on our long-term strategy of product development that aligns with industry megatrends, by focusing on product platforms that will drive future growth. The Company continues to work with our customers to preserve gross margin through price increases aligned with current market conditions and is executing on initiatives to reduce supply chain related costs. During 2022, the Company was able to mitigate a significant amount of the material headwinds we experienced, recognizing $32.1 million of negotiated price increases.
The Company had net loss of $14.1 million, or $(0.52) per diluted share, for the year ended December 31, 2022.
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Net income in 2022 decreased by $17.5 million, or $(0.64) per diluted share, from $3.4 million, or $0.12 per diluted share, for the year ended December 31, 2021 primarily due to the 2021 pre-tax gain on sale of the Canton Facility of $30.7 million, or $0.93 per diluted share, offset by lower restructuring and business realignment costs of $3.8 million as well as the impact of higher net sales and gross margin in our Electronics segment.
In 2022, our net sales increased by $129.5 million, or 16.8%, while our operating income decreased $12.5 million.
Our Control Devices segment net sales decreased by 3.7% primarily due to decreases in our China commercial, North American commercial and China automotive vehicle markets. Our European automotive and commercial vehicle markets decreased due to our exit of the PM sensor business. Segment gross margin decreased due to costs associated with supply chain disruptions offset by lower restructuring and business realignment costs of $1.5 million and favorable leverage of fixed costs from higher sales levels. Segment operating income decreased due to the 2021 gain on sale of the Canton Facility of $30.7 million, lower restructuring and realignment costs of $2.6 million and the 2021 gain on disposal of the PM sensor business of $1.1 million.
Our Electronics segment net sales increased by 41.1% primarily due to higher sales volumes in our European commercial, North American commercial, European off-highway and North American off-highway vehicle markets as well as favorable customer pricing for recoveries of semiconductor spot buy purchases and negotiated price increases offset by unfavorable foreign exchange fluctuations . Segment gross margin as a percent of sales decreased primarily due to increased material costs associated with supply chain disruptions including spot purchases of electronic components, adverse foreign exchange fluctuations and inflation offset by increased contribution from higher sales levels and negotiated price increases. Segment operating income increased primarily due to higher sales and margin, lower SG&A spending and lower D&D cost from higher customer reimbursements.
Our Stoneridge Brazil segment net sales decreased by 8.0% due to lower sales in most Stoneridge Brazil product lines offset by favorable foreign currency translation and slightly higher sales of tracking devices and monitoring services. Segment gross margin decreased due to lower sales levels compared with the prior year. Operating income increased primarily due to lower SG&A expense due to the unfavorable adjustment to the fair value of the Stoneridge Brazil earn-out consideration of $2.1 million in 2021 and lower selling costs offset by lower gross margin and net unfavorable adjustments for Brazilian indirect tax credits of $0.9 million.
In 2022, SG&A expenses decreased compared to 2021 due to favorable non-recurring 2022 commercial and legal settlements, lower wages, incentive compensation, legal fees and selling costs. In addition, compared to 2021, SG&A was favorably impacted by an unfavorable adjustment to the fair value of the Stoneridge Brazil earn-out consideration in 2021, lower business realignment and restructuring costs and Sarasota environmental remediation costs incurred in 2021. Offsetting these favorable items were the 2021 gain on disposal of the MSIL joint venture, the 2021 gain on disposal of the PM Sensor business and unfavorable net adjustments for Brazilian indirect tax credits.
D &D costs decreased slightly in 2022 as higher customer reimbursements in our Electronics segment for ongoing development activities were offset by increased spend for awarded business program launches and development of advanced technologies and systems in our Electronics, Control Devices and Stoneridge Brazil segments.
At December 31, 2022 and 2021, we had cash and cash equivalents of $54.8 million and $85.5 million, respectively. At December 31, 2022 and 2021 , we had $167.8 million and $164.0 million , respectively, in borrowings outstanding on the 2019 Credit Facility. The 2022 decrease in cash and cash equivalents was due to capital expenditures for new product launches and to support higher working capital levels, mostly inventory as a result of supply chain disruptions, new product launches and expectations for increased production and new product launches.
Outlook
The Company believes that focusing on products that address industry megatrends will have a positive effect on both our top-line growth and underlying margins. For example, the Company is aligned with platforms likely to perform well against overall market dynamics including our content on electrified vehicle platforms.
Beginning in the first quarter of 2020, COVID-19 caused worldwide adverse economic conditions and uncertainty in our served markets. Since the first quarter of 2021, we have been experiencing supply chain related disruptions, due to a worldwide semiconductor shortage, as well as other material availability constraints, which continue and have resulted in longer lead-times, higher costs and delays in procuring other component parts and raw materials. Although material cost challenges are moderating, the Company expects to experience ongoing impacts from supply chain disruptions, material cost inflation and COVID-19, which will continue to put pressure on margins. In order to recover these higher costs, we have negotiated and expect to continue to negotiate price increases and cost recoveries with our customers and implement supply chain strategies to help mitigate future costs. During the second half of 2022, we began to see the impacts of improving material availability on net sales, which favorably impacted gross margin.
Based on IHS Market production forecast, the North American automotive market is expected to increase to 15.1 million units in 2023 from 14.3 million units in 2022 as this market continues to recover from supply chain disruptions and economic
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headwinds. The Company expects sales volumes in our Control Devices segment to increase from 2022 based on year end production forecasts and market conditions as well as the ramp-up of actuation program launches. We will continue to focus on growing our core product portfolio aligned with powertrain electrification. We will continue to invest in our actuation business as we anticipate greater opportunities as powertrains become increasingly electrified. However, on-going global supply chain disruptions, including the global semiconductor supply shortage, material cost inflation and COVID-19 could adversely impact our sales volumes and gross margin for the remainder of 2023.
For 2023, we expect an increase in our Electronics’ segment sales compared to 2022 primarily due to strong demand for our products in our off-highway and commercial vehicle end markets and the ramp-up of new product launches even though production volumes in our European and North American commercial markets are expected decrease approximately 2.0% to 3.5%. In addition, we expect increased sales from the continued roll out of our MirrorEye camera-based vision system in the retrofit markets and additional launches of our MirrorEye systems for OEM applications. MirrorEye OEM system take-rates continue to exceed prior expectations and customer production forecasts suggest these take-rates could continue to rise significantly as material becomes more readily available and customer truck production continues to shift to new models. Customer recoveries related to spot buys of materials purchased for our customers increased net sales by $58.4 million during 2022. Spot buy material purchasing activity, which is recognized as revenue and material costs, was mostly passed through to the customer and was driven by electronic component shortages. The Company expects spot buy activity to continue in 2023 but cannot predict the duration or magnitude of continued spot buy activity due to volatile supply chains and component availability. We expect to continue to offset a significant majority of spot buy related costs going forward and expect continued reduction in overall spot buy costs in 2023. In addition, we expect customer negotiated price increases to favorably impact sales in 2023.
In 2021 and continuing throughout 2022, our gross D&D spend increased to support near term launches of awarded business in both our Electronics and Control Devices segments. In 2023, we expect that our D&D spending will stabilize as we continue to align our global engineering capabilities in order to develop advanced technologies and systems within our portfolio of products and we expect to sustain current levels of customer reimbursement to support specific programs and products.
Our 2022 Stoneridge Brazil segment revenues decreased compared to the prior year due to lower sales of most of our product lines offset by favorable foreign currency translation and slightly higher sales of tracking devices and monitoring service fees. In October 2022, the International Monetary Fund forecasted the Brazil gross domestic product to grow 2.8% in 2022 and 1.0% in 2023. We expect our served market channels to remain stable based on current market conditions. Stoneridge Brazil will focus on continuing to grow our OEM capabilities in-region to better support our global customers. This will drive steady future growth and provide a platform to continue to rotate our local portfolio to more closely align with our global business. Our financial performance in our Stoneridge Brazil segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.
Beginning in 2021, global transportation vehicle production was impacted by supply chain disruptions, including semiconductor shortages, primarily affecting our commercial vehicle and automotive end-markets. Based on the current market conditions, we expect continued but moderating impacts on production in 2023. We expect incremental costs related to supply chain disruptions and production schedule volatility to continue to adversely affect our gross margin in 2023.
We continued to effectively offset a significant portion of incremental material and supply chain related costs through pricing and supply chain actions resulting in cost pass-throughs and the recovery of both current and historical costs in 2022. While incremental material costs have started to moderate, we expect material cost inflation to persist into 2023. We will continue to evaluate macroeconomic conditions and expect ongoing discussions with our customers regarding price increases and other cost recovery actions to help continue to improve our margin performance.
As a result of these supply chain disruptions and production schedule volatility, our working capital balances, specifically inventory, have increased significantly compared to historical levels. In addition, inventory has also increased from product launches in our Electronics and Control Devices segments. We continue to engage in initiatives to reduce working capital including reducing on-hand inventory by refining our procurement process and managing the on-time collection of our accounts receivable balances.
Our future effective tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles and our jurisdictional mix of earnings. We monitor these factors and adjust our effective tax rate accordingly.
Other Matters
A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and Stoneridge Brazil segments are denominated in U.S. dollars, and therefore movements in foreign currency exchange rates can also have a significant effect on our results of operations. The U.S. Dollar strengthened against the euro, Swedish krona
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and Argentine peso in 2022 and the euro, Swedish krona, Brazilian real, Argentine peso and Mexican peso in 2021, unfavorably impacting our reported results.
On November 2, 2021, the Company entered into a Share Purchase Agreement (the “SPA”) with Minda Corporation Limited (“Minda”), as the buyer, and MSIL. Pursuant to the SPA, the Company agreed to sell to Minda the Company’s minority interest in MSIL for approximately $21.5 million equivalent Indian Rupee which was payable in U.S. dollars at closing. On December 30, 2021, pursuant to the SPA, the Company closed the sale of MSIL to Minda for $21.6 million. The Company recognized net proceeds of $21.0 million and a gain, net of direct selling costs, of $1.8 million.
On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA, the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). The Buyers did not acquire any of the Company’s locations or employees. The purchase price for the sale of the PM sensor business was $4.0 million (subject to a post-closing inventory adjustment, which was a payment to SMP of $1.1 million) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3.2 million and $0.8 million, respectively. The sale of the Gen 2 assets occurred during November 2021 as the Company’s supply commitments to certain customers were completed in September 2021. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company provided and was compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter sensor product line (“PM Sensor Exit”). The costs for the PM Sensor Exit included employee severance and termination costs and other related costs including supplier settlements. Non-cash charges included impairment and accelerated depreciation of fixed assets associated with PM sensor production. We recognized $0.0 million and $2.4 million of expense as a result of this initiative during the years ended December 31, 2022 and 2021, respectively. The only remaining costs relate to potential commercial settlements and legal fees that we continue to negotiate. The estimated additional cost related to these settlements and fees is up to $4.2 million.
In January 2019, we committed to a restructuring plan that resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized expense as a result of these actions during the years ended December 31, 2022 and 2021 of $0.0 million and less than $0.1 million, respectively. We do not expect to incur additional costs related to the Canton Restructuring. During the third quarter of 2020, we leased the Canton Facility to a third party. On June 17, 2021, we sold the Canton Facility for net proceeds of $35.2 million and a net gain of $30.7 million.
On April 1, 2019, the Company entered into an Asset Purchase Agreement by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40.0 million (subject to a post-closing inventory adjustment which was a payment to SMP of $1.6 million) and the assumption of certain liabilities, the Company and SCD sold to SMP product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company provided and was compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis. The products related to the Non-core Products were manufactured in Juarez, Mexico and Canton, Massachusetts, and included ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components. On April 1, 2019, the Company’s Control Devices segment recognized net sales and costs of goods sold of $4.2 million and $2.8 million, respectively, for the one-time sale of finished goods inventory and a gain on disposal of $33.9 million for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs. On June 17, 2020, the Company and SMP terminated the transition services agreement and the contract manufacturing agreement.
In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location, which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. For the years ended December 31, 2022 and 2021, we recognized expense of $0.0 million and $0.3 million, respectively, as a result of these actions for related costs. The Company does not expect to incur additional restructuring costs related to the Electronics segment.
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On October 26, 2018, the Company announced a Board of Directors approved share repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program of $50.0 million for the repurchase of our Common Shares over an 18 month period. The repurchases could be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases could also have been made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases was at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization did not obligate the Company to acquire any particular amount of its Common Shares, and could have been suspended or discontinued at any time. For the quarter ended March 31, 2020, under this repurchase program, the Company repurchased 242,634 Common Shares for $5.0 million, which became treasury shares, in accordance with this repurchase program authorization. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19. This repurchase program authorization expired during the third quarter of 2021 and no additional shares were repurchased.
We regularly evaluate the performance of our businesses and their cost structures, including personnel, and make necessary changes thereto in order to optimize our results. We also evaluate the required skill sets of our personnel and periodically make strategic changes. As a consequence of these actions, we incur severance related costs which we refer to as business realignment charges. Business realignment costs of $0.3 million and $1.4 million were incurred during the years ended December 31, 2022 and 2021, respectively.
Because of the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which to date has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.
Year Ended December 31, 2022 Compared To Year Ended December 31, 2021
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease)
Net sales $ 899,923 100.0 % $ 770,462 100.0 % $ 129,461
Costs and expenses:
Cost of goods sold 724,997 80.6 603,604 78.3 121,393
Selling, general and administrative 106,695 11.9 116,000 15.1 (9,305)
Gain on sale of Canton Facility, net — — (30,718) (4.0) 30,718
Design and development 65,296 7.3 66,165 8.6 (869)
Operating income 2,935 0.3 15,411 2.0 (12,476)
Interest expense, net 7,097 0.8 5,189 0.7 1,908
Equity in loss (earnings) of investee 823 0.1 (3,658) (0.5) 4,481
Other expense, net 5,711 0.6 1,444 0.3 4,267
(Loss) income before income taxes (10,696) (1.2) 12,436 1.5 (23,132)
Provision for income taxes 3,360 0.4 9,030 1.2 (5,670)
Net (loss) income $ (14,056) (1.6) % $ 3,406 0.3 % $ (17,462)
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Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase / (decrease) Percent
increase / (decrease)
Control Devices $ 342,596 38.1 % $ 355,775 46.1 % $ (13,179) (3.7) %
Electronics 505,097 56.1 357,910 46.5 147,187 41.1 %
Stoneridge Brazil 52,230 5.8 56,777 7.4 (4,547) (8.0) %
Total net sales $ 899,923 100.0 % $ 770,462 100.0 % $ 129,461 16.8 %
Our Control Devices segment net sales decreased $13.2 million due to lower sales volumes in our served markets and unfavorable foreign currency translation of $20.0 million and $2.3 million, respectively, which were offset by negotiated price increases of $9.1 million. Sales volumes decreased in our China commercial, North American commercial and China automotive markets of $5.8 million, $3.4 million and $2.3 million, respectively. European automotive and commercial vehicle markets decreased by $10.3 million and $2.4 million, respectively, due to our exit of the PM sensor business. Net sales for 2022 were favorably impacted by an increase in our North American automotive markets of $2.9 million compared to the prior year.
Our Electronics segment net sales increased $147.2 million due to higher sales volumes in our European commercial, North American commercial, European off-highway vehicle and North American off-highway markets of $55.1 million, $33.8 million, $18.2 million and $6.0 million, respectively. In addition, 2022 net sales were favorably impacted by both customer pricing for recoveries of electronic component spot buy purchases and for negotiated price increases of $40.8 million and $23.0 million, respectively. These increases were offset by unfavorable euro and Swedish krona foreign currency translation compared to the prior year of $28.8 million.
Our Stoneridge Brazil segment net sales decreased $4.5 million due to lower sales in most Stoneridge Brazil product lines of $7.8 million offset by favorable foreign currency translation of $2.6 million and higher sales of tracking devices and monitoring services fees of $0.7 million.
Net sales by geographic location are summarized in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase / (decrease) Percent
increase / (decrease)
North America $ 444,928 49.4 % $ 386,944 50.2 % $ 57,984 15.0 %
South America 52,230 5.8 56,777 7.4 (4,547) (8.0) %
Europe and Other 402,765 44.8 326,741 42.4 76,024 23.3 %
Total net sales $ 899,923 100.0 % $ 770,462 100.0 % $ 129,461 16.8 %
The increase in North American net sales was mostly attributable to increases in sales volume in our Electronics segment commercial vehicle and off-highway markets of $33.8 million and $6.0 million, respectively and in our Control Devices segment automotive market of $2.9 million offset by sales volume decreases in our Control Devices segment commercial vehicle market of $3.4 million. In addition, North American net sales were favorably impacted by negotiated price increases of $16.1 million and customer recoveries of semiconductor spot buy purchases of $0.7 million.
The decrease in net sales in South America was primarily due to lower sales in most Stoneridge Brazil product lines of $7.8 million offset by favorable foreign currency translation of $2.6 million and higher sales of tracking devices and monitoring service fees of $0.7 million.
The increase in net sales in Europe and Other was due to customer recoveries of semiconductor spot buy purchases and negotiated price increases of $40.1 million and $15.9 million, respectively and increases in our Electronics segment European commercial vehicle and European off-highway markets of $52.9 million and $18.2 million, respectively. This increase for Europe and Other was offset by decreases in our Control Devices European automotive and commercial vehicle markets of $10.4 million and $2.4 million, respectively, and China commercial vehicle and automotive markets of $5.8 million and $2.3 million, respectively. In addition, Europe and Other net sales decreased $31.1 million due to unfavorable foreign currency translation.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to 2021 and our gross margin decreased to 19.4% in 2022 compared to 21.7% in 2021. Our material cost as a percentage of net sales increased by 4.8% to 61.8% in 2022 compared to 57.0% in 2021 primarily caused by costs associated with supply chain disruptions including spot purchases of electronic components and inflation. In 2022, cost of goods sold increased by $58.4 million, or 6.5% of net sales, due to semiconductor spot buy purchases that was offset by customer recoveries. The impact of these spot buy
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purchases reduced gross margin percent by 1.4%. Overhead as a percentage of net sales decreased by 1.9% to 14.2% for 2022 compared to 16.1% for 2021 primarily due to leverage of fixed costs from higher sales levels .
Our Control Devices segment gross margin decreased due to higher material costs associated with supply chain disruptions and inflation offset by negotiated price increases and lower restructuring and realignment costs of $1.5 million.
Our Electronics segment gross margin increased primarily due to increased contribution from higher sales levels and favorable negotiated pricing offset by higher material costs associated with supply chain disruptions including spot purchases of electronic components, adverse foreign exchange fluctuations and inflation.
Our Stoneridge Brazil segment gross margin as a percentage of sales was consistent with the prior year as adverse leverage of fixed costs from lower product sales was offset by favorable sales mix from a greater percentage of monitoring service fees.
Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $9.3 million compared to 2021 due to favorable non-recurring 2022 commercial and legal settlements, lower wages, incentive compensation, legal fees and selling costs. In addition, compared to 2021, SG&A was favorably impacted by an unfavorable adjustment to the fair value of the Stoneridge Brazil earn-out consideration in 2021, lower business realignment and restructuring costs and Sarasota environmental remediation costs incurred in 2021. Offsetting these favorable items were the 2021 gain on disposal of the MSIL joint venture, the 2021 gain on disposal of the PM Sensor business and unfavorable net adjustments for Brazilian indirect tax credits.
Design and Development (“D&D”). D&D costs decreased by $0.9 million due to higher customer reimbursements for ongoing development activities in our Electronics segment of $8.3 million that were offset by increased spend for awarded business program launches and development of advanced technologies and systems in our Electronics, Control Devices and Stoneridge Brazil segments.
Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease) Percent
increase /
(decrease)
Control Devices $ 23,917 $ 54,933 $ (31,016) (56.5) %
Electronics 5,128 (12,502) 17,630 141.0 %
Stoneridge Brazil 3,150 995 2,155 216.6 %
Unallocated corporate (29,260) (28,015) (1,245) (4.4) %
Operating income (loss) $ 2,935 $ 15,411 $ (12,476) (81.0) %
Our Control Devices segment operating income decreased due to the gain on sale of the Canton Facility of $30.7 million in 2021 and the gain on disposal of the PM sensor business of $1.1 million in 2021.
Our Electronics segment operating income increased from higher contribution from increased sales levels and lower SG&A and D&D costs from higher customer reimbursements.
Our Stoneridge Brazil segment operating income increased primarily due to lower SG&A expenses from the unfavorable adjustment to the fair value of the Stoneridge Brazil earn-out consideration in 2021 and lower selling costs offset by lower gross margin and unfavorable net adjustments for Brazilian indirect tax credits.
Our unallocated corporate operating loss increased due to the 2021 gain on disposal of the MSIL joint venture offset by lower business realignment.
Operating income (loss) by geographic location is summarized in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease) Percent
increase /
(decrease)
North America $ (2,066) $ 13,072 $ (15,138) (115.8) %
South America 3,150 995 2,155 216.6 %
Europe and Other 1,851 1,344 507 37.7 %
Operating income (loss) $ 2,935 $ 15,411 $ (12,476) (81.0) %
Our North American operating income decreased due to the 2021 gains on the sale of the Canton Facility, the disposal of the MSIL joint venture and the PM Sensor business. and higher material costs from supply chain disruptions. Offsetting
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these gains were increased contribution from higher sales levels and 2022 non-recurring commercial and legal settlements. The increase in operating income in South America was primarily due to an unfavorable change in fair value of earn-out consideration adjustments of $2.1 million in 2021 and lower selling costs offset by lower contribution from lower sales levels and an unfavorable net adjustments for Brazilian indirect tax credits. Our operating results in Europe and Other increased slightly primarily due to higher contribution from increased sales levels and the favorable impact of negotiated pricing offset by higher costs from supply chain disruptions including spot purchases of electronic components net of recoveries and adverse foreign exchange fluctuations and inflation.
Interest Expense, net. Interest expense, net increased by $1.9 million compared to 2021 due to higher Credit Facility interest rates and $0.4 million related to the write-off of deferred financing fees as a result of Amendment No. 3 to the Credit Facility.
Equity in Loss (Earnings) of Investee. Equity loss (earnings) for Autotech were $0.8 million and $(1.9) million for the years ended December 31, 2022 and 2021 . The decrease in Autotech earnings was due to unfavorable 2022 fair value adjustments to fund investments. Equity earnings for MSIL were $1.8 million for the year ended December 31, 2021. As discussed in Note 2 to the consolidated financial statements, the Company sold its equity interest in MSIL on December 30, 2021.
Other Expense, net . We record certain foreign currency transaction losses (gains) as a component of other income, net on the consolidated statement of operations. Other expense, net of $5.7 million, increased by $4.3 million in 2022 compared to other expense, net of $1.4 million for 2021 primarily due to foreign currency transaction losses in our Electronics, Control Devices and Stoneridge Brazil segments from the strengthening of the U.S. dollar.
Provision for Income Taxes. In 2022, income tax expense of $3.4 million was attributable to the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions and U.S. taxes on foreign earnings offset by tax credits and incentives. The effective tax rate of (31.4)% varies from the statutory tax rate primarily due to tax credits and incentives offset by the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as U.S. tax on foreign earnings.
In 2021, income tax expense of $9.0 million was attributable to the gain on the sale of the Canton facility, the gain on the sale of the Company’s minority interest in MSIL, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 72.6% was greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions, the tax impact of the sale of the Company’s minority interest in MSIL, partially offset by tax incentives.
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Year Ended December 31, 2021 Compared To Year Ended December 31, 2020
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Year ended December 31, 2021 2020 Dollar
increase /
(decrease)
Net sales $ 770,462 100.0 % $ 648,006 100.0 % $ 122,456
Costs and expenses:
Cost of goods sold 603,604 78.3 493,810 76.2 109,794
Selling, general and administrative 116,000 15.1 112,474 17.4 3,526
Gain on sale of Canton Facility, net (30,718) (4.0) — — (30,718)
Design and development 66,165 8.6 49,386 7.6 16,779
Operating income (loss) 15,411 2.0 (7,664) (1.2) 23,075
Interest expense, net 5,189 0.7 6,124 0.9 (935)
Equity in earnings of investee (3,658) (0.5) (1,536) (0.2) (2,122)
Other expense (income), net 1,444 0.3 (1,528) (0.2) 2,972
Income (loss) before income taxes 12,436 1.5 (10,724) (1.7) 23,160
Provision (benefit) for income taxes 9,030 1.2 (2,774) (0.4) 11,804
Net income (loss) $ 3,406 0.3 % $ (7,950) (1.3) % $ 11,356
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Year ended December 31, 2021 2020 Dollar
increase / (decrease) Percent
increase /(decrease)
Control Devices $ 355,775 46.1 % $ 342,576 52.9 % $ 13,199 3.9 %
Electronics 357,910 46.5 257,767 39.7 100,143 38.9 %
Stoneridge Brazil 56,777 7.4 47,663 7.4 9,114 19.1 %
Total net sales $ 770,462 100.0 % $ 648,006 100.0 % $ 122,456 18.9 %
Our Control Devices segment net sales increased $13.2 million due to recovery from 2020 COVID-19 impacts in our North American automotive and agricultural vehicle markets of $23.4 million and $2.7 million, respectively, and an increase in our China automotive and commercial vehicle markets of $3.8 million and $0.4 million, respectively, as well as a favorable foreign currency translation of $3.2 million. These increases were partially offset by a decrease in volumes in our European automotive market of $16.7 million due to the exit of PM sensor production and a decrease in volumes in our North American commercial vehicle market of $4.3 million.
Our Electronics segment net sales increased $100.1 million due to recovery from 2020 COVID-19 impacts in our North American and European commercial vehicle and European and North American off-highway vehicle markets of $28.7 million, $28.4 million, $14.4 million and $5.3 million, respectively, as well as favorable euro and Swedish krona foreign currency translation of $5.0 million compared to the prior year period. In the fourth quarter, net sales increased by $17.6 million due to customer pricing for recoveries of electronic component spot buy purchases.
Our Stoneridge Brazil segment net sales increased $9.1 million due to higher volumes for all of our product lines and for our Argentina market channel offset by unfavorable foreign currency translation of $3.0 million.
Net sales by geographic location are summarized in the following table (in thousands):
Year ended December 31, 2021 2020 Dollar
increase Percent increase
North America $ 386,944 50.2 % $ 330,528 51.0 % $ 56,416 17.1 %
South America 56,777 7.4 47,663 7.4 9,114 19.1 %
Europe and Other 326,741 42.4 269,815 41.6 56,926 21.1 %
Total net sales $ 770,462 100.0 % $ 648,006 100.0 % $ 122,456 18.9 %
The increase in North American net sales was attributable to sales volume increases in our North American commercial vehicle, automotive and off-highway markets of $24.5 million, $22.5 million and $6.2 million, respectively and customer pricing for recoveries of semiconductor spot buy purchases of $2.4 million. The increase in net sales in South America was
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due to higher volumes for all of our Stoneridge Brazil product lines and for our Argentina market channel offset by unfavorable Brazilian real foreign currency translation of $3.0 million. The increase in net sales in Europe and Other was primarily due to increases in our European commercial vehicle and off-highway markets of $28.4 million and $14.4 million, respectively, and increases in our China automotive and agricultural vehicle markets of $3.8 million and $2.2 million, respectively. Europe and Other net sales also increased due to customer pricing for recoveries of semiconductor spot buy purchases of $15.2 million and favorable foreign currency translation of $8.2 million. These increases were partially offset by a decrease in volumes in our European automotive market of $16.7 million due to the exit of PM sensor production.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to 2020 and our gross margin decreased to 21.7% in 2021 compared to 23.8% in 2020. Our material cost as a percentage of net sales increased by 4.2% to 57.0% in 2021 compared to 52.8% in 2020 primarily caused by costs associated with supply chain disruptions including spot purchases of electronic components. In 2021, cost of goods sold increased by $17.6 million, or 2.3% of net sales, due to semiconductor spot buy purchases which was offset by customer recoveries. Overhead as a percentage of net sales decreased by 2.0% to 16.1% for 2021 compared to 18.0% for 2020 primarily due to leverage of fixed costs from higher sales levels offset by higher incremental freight costs .
Our Control Devices segment gross margin decreased due to costs associated with supply chain disruptions offset by lower restructuring and realignment costs of $1.7 million and favorable leverage of fixed costs from higher sales levels.
Our Electronics segment gross margin decreased primarily due to higher costs associated with supply chain disruptions including spot purchases of electronic components offsetting favorable leverage of fixed costs from higher sales levels.
Our Stoneridge Brazil segment gross margin decreased due to adverse sales mix from higher product sales compared to monitoring fees and higher costs associated with supply chain disruptions offset by favorable leverage of fixed costs.
Selling, General and Administrative. SG&A expenses increased by $3.5 million compared to 2020 due to a $5.3 million increase in net adjustments to the fair value of the Stoneridge Brazil earn-out consideration and higher professional service costs which were offset by lower incentive compensation costs and the 2021 gain on disposal of the PM sensor business of $1.1 million and the MSIL joint venture of $1.8 million.
Design and Development. D&D costs increased by $16.8 million mostly due to increased spend in our Electronics segment of $14.4 million comprised of higher consulting and prototype costs as well as lower customer reimbursements offset by higher capitalized software development costs for ongoing development activities for awarded business programs and development of advanced technologies and systems.
Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Year ended December 31, 2021 2020 Dollar
increase /
(decrease) Percent
increase /
(decrease)
Control Devices $ 54,933 $ 22,072 $ 32,861 148.9 %
Electronics (12,502) (3,672) (8,830) (240.5) %
Stoneridge Brazil 995 3,766 (2,771) (73.6) %
Unallocated corporate (28,015) (29,830) 1,815 6.1 %
Operating income (loss) $ 15,411 $ (7,664) $ 23,075 301.1 %
Our Control Devices segment operating income increased due to the gain on sale of the Canton Facility of $30.7 million, the gain on disposal of the PM sensor business of $1.1 million and a decrease in restructuring expense of $4.0 million offset by higher costs from supply chain disruptions and higher Sarasota environmental remediation costs.
Our Electronics segment operating loss increased primarily due to higher costs from supply chain disruptions including spot purchases of electronic components net of recoveries and higher D&D costs offset by higher sales.
Our Stoneridge Brazil segment operating income decreased primarily due to a $5.3 million increase in net adjustments to the fair value of the Stoneridge Brazil earn-out consideration and the impairment of Brazilian indirect tax credits of $0.7 million offset by higher sales.
Our unallocated corporate operating loss was lower due to lower incentive compensation benefits as a result of Company performance and the gain on the disposal of the MSIL joint venture offset by higher business realignment costs of $0.8 million and higher professional service costs.
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Operating income (loss) by geographic location is summarized in the following table (in thousands):
Year ended December 31, 2021 2020 Dollar
increase / (decrease) Percent
increase / (decrease)
North America $ 13,072 $ (22,179) $ 35,251 158.9 %
South America 995 3,766 (2,771) (73.6) %
Europe and Other 1,344 10,749 (9,405) (87.5) %
Operating income (loss) $ 15,411 $ (7,664) $ 23,075 301.1 %
Our North American operating income increased due to the gain on sales of the Canton Facility, the PM sensor business and the MSIL joint venture, higher sales in our automotive and commercial vehicle markets and lower restructuring costs offsetting higher costs from supply chain disruptions. The decrease in operating income in South America was primarily due to an unfavorable change in fair value of earn-out consideration adjustments of $5.3 million offsetting higher sales. Our operating results in Europe and Other decreased primarily due to higher costs from supply chain disruptions including spot purchases of electronic components net of recoveries and higher D&D costs offset by higher sales in our commercial vehicle and off-highway markets as well as a favorable foreign currency translation impact.
Interest Expense, net. Interest expense, net decreased by $0.9 million compared to 2020 due to higher interest income of $1.2 million at Stoneridge Brazil from monetary correction on indirect tax credits. Offsetting this increase was higher interest expense from Credit Facility borrowings.
Equity in Earnings of Investee. Equity earnings for MSIL were $1.8 million and $1.5 million for the years ended December 31, 2021 and 2020, respectively. As discussed in Note 2 to the consolidated financial statements, the Company sold its equity interest in MSIL on December 30, 2021. Equity earnings for Autotech were $1.9 million and $0.1 million for the years ended December 31, 2021 and 2020 . The increase in Autotech earnings was due to favorable 2021 fair value adjustments to fund investments.
Other Expense (Income), net . We record certain foreign currency transaction losses (gains) as a component of other income, net on the consolidated statement of operations. Other expense (income), net of $1.4 million, increased by $2.9 million in 2021 compared to other income, net of $1.5 million for 2020 primarily due to 2021 foreign currency losses in our Electronics segment and 2020 foreign currency transaction gains in our Stoneridge Brazil and Electronics segments.
Provision (Benefit) for Income Taxes. In 2021, income tax expense of $9.0 million was attributable to the gain on the sale of the Canton facility, the gain on the sale of the Company’s minority interest in MSIL, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 72.6% is greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions, the tax impact of the sale of the Company’s minority interest in MSIL, partially offset by tax incentives.
In 2020, income tax benefit of $(2.8) million was attributable to the mix of earnings and losses among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 25.9% is slightly greater than the statutory tax rate primarily due to non-deductible expenses and tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions offset by the impact of certain incentives.
Liquidity and Capital Resources
Summary of Cash Flows for the years ended December 31, 2022 and 2021 (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease)
Net cash provided by (used for):
Operating activities $ 6,806 $ (36,248) $ 43,054
Investing activities (28,581) 28,041 (56,622)
Financing activities (7,297) 22,876 (30,173)
Effect of exchange rate changes on cash and cash equivalents (1,677) (3,041) 1,364
Net change in cash and cash equivalents $ (30,749) $ 11,628 $ (42,377)
Cash provided by operating activities increased compared to 2021 primarily due to a reduction in cash used to fund working capital levels primarily for inventory due to supply chain disruptions and new product launches. Our receivable terms and collections rates have remained consistent between periods presented.
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Net cash used for investing activities increased compared to the prior year due to 2021 proceeds from the sale of the Canton Facility, from the disposal of the MSIL joint venture and from the disposal of the PM sensor business as well as higher capital expenditures and capitalized software costs which were offset by 2022 proceeds from the settlement of the net investment hedges and lower investments in the Autotech Fund II.
Net cash used for financing activities increased compared to the prior year primarily due to lower Credit Facility net borrowings and the 2022 cash payment of Stoneridge Brazil earn-out consideration.
Summary of Cash Flows for the years ended December 31, 2021 and 2020 (in thousands):
Years ended December 31, 2021 2020 Dollar
increase /
(decrease)
Net cash provided by (used for):
Operating activities $ (36,248) $ 28,641 $ (64,889)
Investing activities 28,041 (33,885) 61,926
Financing activities 22,876 6,513 16,363
Effect of exchange rate changes on cash and cash equivalents (3,041) 3,247 (6,288)
Net change in cash and cash equivalents $ 11,628 $ 4,516 $ 7,112
Cash used for operating activities increased compared to 2020 primarily due to an increase in cash used to fund working capital levels primarily for inventory, which was impacted by supply chain disruptions and production volatilities, offset by higher net income, net of the reconciling adjustment for the gain on the sale of the Canton Facility. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash provided by investing activities increased compared to 2020 due to proceeds from the sale of the Canton Facility, from the disposal of the MSIL joint venture and from the disposal of the PM sensor business as well as lower capital expenditures and capitalized software costs which were offset by higher investments in the Autotech Fund II.
Net cash used for financing activities increased compared to the prior year primarily due to higher Credit Facility net borrowings.
Summary of Future Cash Flows
The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2022 (in thousands):
Total Less than
1 year 2-3 years 4-5 years After
5 years
Credit Facility $ 167,802 $ — $ 167,802 $ — $ —
Debt 1,450 1,450 — — —
Interest payments (A)
15,852 10,577 5,275 — —
Operating leases 16,547 4,357 7,152 3,059 1,979
Total contractual obligations (B)
$ 201,651 $ 16,384 $ 180,229 $ 3,059 $ 1,979
(A) Includes estimated payments under the Company’s Credit Facility and other debt obligations using the most current interest rate and principal balance information available at December 31, 2022, extended through the end of the term.
(B) In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten year life of the fund. The Company has contributed $8.1 million to the Autotech Fund II since December 2018.
Management will continue to focus on efficiently managing its weighted-average cost of capital and believes that cash flows from operations and the availability of funds from our Credit Facility provides sufficient liquidity to meet our future growth and operating needs.
As outlined in Note 5 to our consolidated financial statements, the Credit Facility permits borrowing up to a maximum level of $300.0 million, as amended on February 28, 2022, by Amendment No. 3 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 3”) . This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type
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including covenants that place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The Credit Facility had an outstanding balance of $167.8 million at December 31, 2022.
Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts on the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provided for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivered a compliance certificate for the quarter ending June 30, 2021). The Covenant Relief Period ended on August 14, 2021. During the Covenant Relief Period:
• the maximum net leverage ratio was suspended;
• the calculation of the minimum interest coverage ratio excluded second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021;
• the minimum interest coverage ratio of 3.50 was reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively;
• the Company’s liquidity could not be less than $150,000;
• the Company’s aggregate amount of cash and cash equivalents could not exceed $130,000;
• there were certain restrictions on Restricted Payments (as defined); and
• a Permitted Acquisition (as defined) could not be consummated unless otherwise approved in writing by the required lenders.
Amendment No. 1 increased the leverage based LIBOR pricing grid through the maturity date and also provided for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remained subject to a LIBOR floor of 0 basis points.
On December 17, 2021, the Company entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 2”). Amendment No. 2 implemented non-LIBOR interest reference rates for borrowings in euros and British pounds.
Due to the ongoing impacts of the COVID-19 pandemic and supply chain disruptions on the Company’s end-markets and the resulting financial impacts on the Company, on February 28, 2022, the Company entered into Amendment No. 3. Amendment No. 3 reduced the total revolving credit commitments from $400.0 million to $300.0 million and the maximum permitted amount of swing loans from $40.0 million to $30.0 million . Amendment No. 3 provides for certain financial covenant relief and additional covenant restrictions during the “Specified Period” (the period from February 28, 2022 until the date that the Company delivers a compliance certificate for the quarter ending March 31, 2023 in form and substance satisfactory to the administrative agent). During the Specified Period:
• the maximum net leverage ratio was changed to 4.00 to 1.00 for the year ended December 31, 2021, suspended for the quarters ending March 31, 2022 through September 30, 2022 and cannot exceed 4.75 to 1.00 for the quarter ended December 31, 2022 or 3.50 to 1.00 for the quarter ended March 31, 2023;
• the minimum interest coverage ratio of 3.50 was reduced to 2.50 for the quarter ended March 31, 2022, 2.25 for the quarter ended June 30, 2022 and 3.00 for the quarters ended September 30, 2022 and December 31, 2022;
• an additional condition to drawing on the Credit Facility has been added that restricts borrowings if the Company’s total of 100% of domestic and 65% of foreign cash and cash equivalents exceeds $70.0 million;
• there are certain additional restrictions on Restricted Payments (as defined); and
• a Permitted Acquisition (as defined) may not be consummated unless the net leverage ratio is below 3.50 to 1.00 during the Specified Period.
Amendment No. 3 changed the leverage based LIBOR pricing grid through the maturity date and also retained a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remained subject to a LIBOR floor of 0 basis points.
Amendment No. 3 also incorporates hardwired mechanics to permit a future replacement of LIBOR as the interest reference rate without lender consent.
Due to continued supply chain disruptions and macroeconomic challenges on the Company’s end-markets and the resulting financial impacts on the Company, on March 1, 2023, the Company entered into Amendment No. 4. Amendment No. 4 provides for certain financial covenant relief and additional covenant restrictions during the “Amendment No. 4 Specified Period” (the period from March 1, 2023 until the date that the Company delivers a compliance certificate for the quarter ending September 30, 2023 in form and substance satisfactory to the administrative agent). During the Amendment No. 4 Specified Period:
• the maximum net leverage ratio was changed to 4.75 to 1.00 for the quarter ended March 31, 2023 and 4.25 to 1.00 for the quarter ended June 30, 2023;
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• the minimum interest coverage ratio of 3.50 was reduced to 3.00 for the quarters ended March 31, 2023 and June 30, 2023;
• drawing on the Credit Facility continues to be restricted if the Company's total of 100% of domestic and 65% of foreign cash and cash equivalents exceeds $70.0 million;
• there continue to be certain additional restrictions on Restricted Payments (as defined); and
• consistent with Amendment No. 3, a Permitted Acquisition (as defined) may not be consummated unless the net leverage ratio is below 3.50 to 1.00 during the Amendment No. 4 Specified Period.
As a result of the amendments, the Company was in compliance with all covenants at December 31, 2022. The Company has not experienced a violation that would limit the Company’s ability to borrow under the Credit Facility, as amended and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the Credit Facility may be limited as a result of lower than expected financial performance due to the adverse impact of supply chain disruptions and COVID-19 on the Company’s markets and general global demand. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations and to remain in compliance with all covenants.
Stoneridge Brazil maintained short-term loans used for working capital purposes during 2021 and 2020. There were no borrowings outstanding on these notes at December 31, 2022.
The Company’s wholly-owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20.0 million Swedish krona, or $1.9 million and $2.2 million, at December 31, 2022 and 2021, respectively. At December 31, 2022, there were no borrowings outstanding on this overdraft credit line. At December 31, 2021, there was 19.0 million Swedish krona, or $2.1 million outstanding on this overdraft credit line. During the year ended December 31, 2022, the subsidiary borrowed 380.7 million Swedish krona, or $36.6 million, and repaid 399.6 million Swedish krona, or $38.4 million.
The Company’s wholly-owned subsidiary located in Suzhou, China, has lines of credit which allow up to a maximum borrowing level of 20.0 million Chinese yuan, or $2.9 million at December 31, 2022 and 50.0 million Chinese yuan, or $7.9 million at December 31, 2021. At December 31, 2022 and 2021 there was $1.5 million and $3.1 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which facilitates the extension of trade payable payment terms by 180 days. The bank acceptance draft line of credit allows up to a maximum borrowing level of 60.0 million Chinese yuan, or $8.7 million, at December 31, 2022 and 15.0 million Chinese yuan, or $2.4 million at December 31, 2021. There was $2.0 million and $2.2 million utilized on the Suzhou bank acceptance draft line of credit at December 31, 2022 and 2021, respectively.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter sensor product line. The costs for the PM Sensor Exit include employee severance and termination costs and other related costs including supplier settlements. Non-cash charges included impairment and accelerated depreciation of fixed assets associated with PM sensor production. We recognized $0.0 million and $2.4 million of expense as a result of this initiative during 2022 and 2021, respectively. The only remaining costs relate to potential commercial settlements and legal fees which we continue to negotiate. The estimated additional costs related to these settlements and fees is up to $4.2 million .
In January 2019, the Company committed to a restructuring plan that resulted in the closure of its Canton Facility as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations. The costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized expense as a result of these actions during the years ended December 31, 2022 and 2021 of $0.0 million and less than $0.1 million, respectively. During the third quarter of 2020, we leased the Canton facility to a third party. On June 17, 2021, we sold the Canton Facility for net proceeds of $35.2 million and a net gain of $30.7 million.
On October 26, 2018, the Company announced a Board of Directors approved share repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program for $50.0 million of our Common Shares over an 18 month period. The repurchases could be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases could also have been made under rule 10b-18, which permits Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of repurchases of Common Shares was at the discretion of management, dependent on market conditions, other priorities of cash investment,
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applicable securities laws and other factors. This Common Share repurchase program authorization did not obligate the Company to acquire any particular amount of its Common Shares, and it could have been suspended or discontinued at any time. For the quarter ended March 31, 2020, the Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program authorization. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19. This repurchase program authorization expired during the third quarter of 2021 and no additional shares were repurchased.
In January 2020, Stoneridge Brazil paid dividends to former noncontrolling interest holders of Brazilian real (“R$”) 24.2 million ($6.0 million). The dividends payable balance included R$3.7 million ($1.0 million) in monetary correction for the year ended December 31, 2019 based on the Brazilian National Extended Consumer Price inflation index.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. As of December 31 2022, the Company’s cumulative investment in the Autotech Fund II was $8.1 million. The Company contributed $1.0 million and $3.2 million, net to the Autotech Fund II during the years ended December 31, 2022 and 2021, respectively.
Our future results could also be adversely affected by unfavorable changes in foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden, Estonia, the Netherlands, United Kingdom and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 10 to the consolidated financial statements for additional details. Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of our raw material purchases.
At December 31, 2022, we had a cash and cash equivalents balance of approximately $54.8 million, of which 91.4% was held in foreign locations. The Company has approximately $132.2 million of undrawn commitments under the Credit Facility as of December 31, 2022, which results in total undrawn commitments and cash balances of more than $185.4 million. However, despite the March 1, 2023 amendment, it is possible that future borrowing flexibility under our Credit Facility may be limited as a result of our financial performance.
Commitments and Contingencies
See Note 11 to the consolidated financial statements for disclosures of the Company’s commitments and contingencies.
Seasonality
Our Control Devices and Electronics segments are moderately seasonal, impacted by mid-year and year-end shutdowns and the ramp-up of new model production at key customers. In addition, the demand for our Stoneridge Brazil segment consumer products is generally higher in the second half of the year.
Inflation and International Presence
By operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Furthermore, given the current economic climate and recent fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 10 to the consolidated financial statements for additional details on the Company’s commodity price and foreign currency exchange rate risks.
Critical Accounting Policies and 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 and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions used in our consolidated financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Our critical accounting policies, those most important to the financial presentation and those that are the most complex, subjective or require significant judgment, are as follows. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies.”
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Revenue Recognition and Sales Commitments. We recognize revenue 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. Revenue for OEM and Tier 1 supplier customers and aftermarket products are recognized at the point in time it satisfies a performance obligation by transferring control of a part to the customer. A small portion of our sales are comprised of monitoring services of which the revenue is recognized over the life of the contract. See Note 3 to the consolidated financial statements for additional information on our revenue recognition policies, including recognizing revenue based on satisfying performance obligations.
Warranties. Our warranty liability is established based on our best estimate of the amounts necessary to settle existing and future 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. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to hold the company responsible for their product warranties. Although we believe that our warranty liability is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
Contingencies. We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters.
We have accrued for estimated losses when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating that amount of probable loss. The liabilities may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Income Taxes. Deferred income taxes are provided for temporary differences between the amount of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred tax assets include, among other items, net operating loss carryforwards and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Our U.S. state and foreign net operating losses expire at various times or have indefinite expiration dates. Our U.S. federal general business credits, if unused, begin to expire in 2026, and the state and foreign tax credits expire at various times.
Accounting standards require that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment, and in making this evaluation, the Company considers available positive and negative evidence, including the potential to carryback net operating losses and credits, the future release of certain taxable temporary differences, actual and forecasted results, and tax planning strategies that are both prudent and feasible. Certain deferred tax assets are dependent on future taxable income to be realized. Risk factors include U.S. and foreign economic conditions that affect the automotive and commercial vehicle markets of which the Company has significant operations.
The Company has recognized deferred taxes related to foreign withholding taxes and the expected foreign currency impact upon repatriation from foreign subsidiaries not considered indefinitely reinvested.
The Company has made an accounting policy election to reflect the impact of global intangible low-taxed income (“GILTI”) taxes, if any, as a current period tax expense when incurred.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other
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taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard prospectively as of January 1, 2020 using the modified retrospective basis. The impact of the adoption was a reduction to deferred tax liabilities and an increase to retained earnings of $13.8 million on the consolidated balance sheet as of December 31, 2020. The adoption of this standard did not have an impact on the Company’s consolidated results of operations and cash flows.
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2021
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 December 31, 2022, the Company has not yet had contracts modified due to rate reform.