STONERIDGE INC 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Consolidated Financial Statements: Page Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 35 Consolidated Balance Sheets as of December 31, 202 2 and 202 1 37 Consolidated Statements of Operations for the Years Ended December 31, 202 2 , 202 1 and 20 20 38 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 202 2 , 202 1 and 20 20 39 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 2 , 202 1 and 20 20 40 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 202 2 , 202 1 and 20 20 41 Notes to Consolidated Financial Statements 42 Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts 73 34 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Stoneridge, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, cash flows and shareholders’ equity for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2023 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the account or disclosure to which it relates. 35 Table of Contents Product warranty and recall reserves Description of the Matter The Company's reserves for product warranty and recall totaled $13.5 million at December 31, 2022. As described in Note 2 to the consolidated financial statements, the Company's reserve for product warranty and recall is based on several factors, including the historical trends of units sold and claim payment amounts, combined with the Company’s current understanding of existing warranty and recall claims. The warranty liability requires a forecast of the resolution of existing claims as well as expected future claims on products previously sold. Auditing the Company’s reserve for product warranty and recall is complex due to the measurement uncertainty associated with the estimate, management’s judgment in determining the cost and volume estimates used in the computation as well as volume and costing assumptions in determining the expected future claims on products previously sold. How We Addressed the Matter in Our Audit We evaluated the design and tested the operating effectiveness of the Company’s controls over the product warranty and recall process. For example, we tested management review controls over the appropriateness of assumptions management used in the calculation and the completeness of warranty claims. To evaluate the reserve for product warranty and recall, we performed audit procedures that included, among others, testing the completeness and accuracy of the underlying claims data and costs used in the computation of management’s estimate, performing inquiries of the Company’s quality control team, and obtaining legal confirmation letters to evaluate the status and assessment of certain reserves. We assessed the historical accuracy of management’s product warranty and recall reserves and performed sensitivity analyses of significant assumptions to evaluate the impact to the reserve that would result from changes in the assumptions. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2002. Detroit, MI March 2, 2023 36 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (in thousands) 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 54,798 $ 85,547 Accounts receivable, less reserves of $ 962 and $ 1,443 , respectively 158,155 150,388 Inventories, net 152,580 138,115 Prepaid expenses and other current assets 44,018 36,774 Total current assets 409,551 410,824 Long-term assets: Property, plant and equipment, net 104,643 107,901 Intangible assets, net 45,508 49,863 Goodwill 34,225 36,387 Operating lease right-of-use asset 13,762 18,343 Investments and other long-term assets, net 44,416 42,081 Total long-term assets 242,554 254,575 Total assets $ 652,105 $ 665,399 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of debt $ 1,450 $ 5,248 Accounts payable 110,202 97,679 Accrued expenses and other current liabilities 66,040 70,139 Total current liabilities 177,692 173,066 Long-term liabilities: Revolving credit facility 167,802 163,957 Deferred income taxes 8,498 10,706 Operating lease long-term liability 10,594 14,912 Other long-term liabilities 6,577 6,808 Total long-term liabilities 193,471 196,383 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 27,341 and 27,191 shares outstanding at December 31, 2022 and December 31, 2021, respectively, with no stated value — — Additional paid-in capital 232,758 232,490 Common Shares held in treasury, 1,625 and 1,775 shares at December 31, 2022 and December 31, 2021, respectively, at cost ( 50,366 ) ( 55,264 ) Retained earnings 201,692 215,748 Accumulated other comprehensive loss ( 103,142 ) ( 97,024 ) Total shareholders' equity 280,942 295,950 Total liabilities and shareholders' equity $ 652,105 $ 665,399 The accompanying notes are an integral part of these consolidated financial statements. 37 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, (in thousands, except per share data) 2022 2021 2020 Net sales $ 899,923 $ 770,462 $ 648,006 Costs and expenses: Cost of goods sold 724,997 603,604 493,810 Selling, general and administrative 106,695 116,000 112,474 Gain on sale of Canton Facility, net — ( 30,718 ) — Design and development 65,296 66,165 49,386 Operating income (loss) 2,935 15,411 ( 7,664 ) Interest expense, net 7,097 5,189 6,124 Equity in loss (earnings) of investee 823 ( 3,658 ) ( 1,536 ) Other expense (income), net 5,711 1,444 ( 1,528 ) (Loss) income before income taxes ( 10,696 ) 12,436 ( 10,724 ) Provision (benefit) for income taxes 3,360 9,030 ( 2,774 ) Net (loss) income $ ( 14,056 ) $ 3,406 $ ( 7,950 ) (Loss) earnings per share: Basic $ ( 0.52 ) $ 0.13 $ ( 0.29 ) Diluted $ ( 0.52 ) $ 0.12 $ ( 0.29 ) Weighted-average shares outstanding: Basic 27,258 27,114 27,025 Diluted 27,258 27,416 27,025 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year ended December 31, (in thousands) 2022 2021 2020 Net (loss) income $ ( 14,056 ) $ 3,406 $ ( 7,950 ) Other comprehensive (loss) income, net of tax: Foreign currency translation (1) ( 6,171 ) ( 8,408 ) 2,677 Unrealized gain (loss) on derivatives (2) 53 1,019 ( 840 ) Other comprehensive (loss) income, net of tax ( 6,118 ) ( 7,389 ) 1,837 Comprehensive loss $ ( 20,174 ) $ ( 3,983 ) $ ( 6,113 ) _____________________________ (1) Net of tax expense of $ 514 and $ 267 for the years ended December 31, 2022 and 2021, respectively. (2) Net of tax expense (benefit) of $ 14 , $ 271 and $( 223 ) for the years ended December 31, 2022, 2021 and 2020, respectively. The accompanying notes are an integral part of these consolidated financial statements. 39 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands) 2022 2021 2020 OPERATING ACTIVITIES: Net (loss) income $ ( 14,056 ) $ 3,406 $ ( 7,950 ) Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation 26,687 27,823 27,309 Amortization, including accretion and write-off of deferred financing costs 8,055 6,648 5,926 Deferred income taxes ( 5,110 ) ( 511 ) ( 7,953 ) Loss (earnings) of equity method investee 823 ( 3,658 ) ( 1,536 ) (Gain) loss on sale of fixed assets ( 241 ) ( 165 ) 185 Share-based compensation expense 5,942 5,960 5,888 Excess tax deficiency (benefit) related to share-based compensation expense 543 ( 563 ) ( 46 ) Gain on sale of Canton Facility, net — ( 30,718 ) — Gain on disposal of business and joint venture, net — ( 2,942 ) — Property, plant and equipment impairment charge 33 — 2,349 Change in fair value of earn-out contingent consideration — 2,065 ( 3,196 ) Changes in operating assets and liabilities: Accounts receivable, net ( 13,161 ) ( 17,019 ) 4,164 Inventories, net ( 20,127 ) ( 51,270 ) 4,000 Prepaid expenses and other assets ( 5,159 ) ( 5,116 ) 1,342 Accounts payable 18,489 16,515 3,642 Accrued expenses and other liabilities 4,088 13,297 ( 5,483 ) Net cash provided by (used for) operating activities 6,806 ( 36,248 ) 28,641 INVESTING ACTIVITIES: Capital expenditures, including intangibles ( 31,609 ) ( 27,031 ) ( 32,462 ) Proceeds from sale of fixed assets 158 268 127 Proceeds from settlement of net investment hedges 3,820 — — Proceeds from disposal of business, net — 1,837 — Proceeds from disposal of joint venture, net — 20,999 — Proceeds from sale of Canton Facility, net — 35,167 — Investment in venture capital fund, net ( 950 ) ( 3,199 ) ( 1,550 ) Net cash (used for) provided by investing activities ( 28,581 ) 28,041 ( 33,885 ) FINANCING ACTIVITIES: Revolving credit facility borrowings 21,562 91,913 71,500 Revolving credit facility payments ( 18,000 ) ( 64,000 ) ( 61,500 ) Proceeds from issuance of debt 38,940 45,753 41,104 Repayments of debt ( 42,732 ) ( 48,125 ) ( 37,823 ) Earn-out consideration cash payment ( 6,276 ) — — Common Share repurchase program — — ( 4,995 ) Repurchase of Common Shares to satisfy employee tax withholding ( 791 ) ( 2,665 ) ( 1,773 ) Net cash (used for) provided by financing activities ( 7,297 ) 22,876 6,513 Effect of exchange rate changes on cash and cash equivalents ( 1,677 ) ( 3,041 ) 3,247 Net change in cash and cash equivalents ( 30,749 ) 11,628 4,516 Cash and cash equivalents at beginning of period 85,547 73,919 69,403 Cash and cash equivalents at end of period $ 54,798 $ 85,547 $ 73,919 Supplemental disclosure of cash flow information: Cash paid for interest $ 7,293 $ 6,055 $ 5,620 Cash paid for income taxes, net $ 6,178 $ 11,267 $ ( 254 ) Supplemental disclosure of non-cash activities: Adoption of ASU 2019-12 (Note 2) $ — $ — $ 13,750 The accompanying notes are an integral part of these consolidated financial statements. 40 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands) Number of Common Shares outstanding Number of treasury shares Additional paid-in capital Common Shares held in treasury Retained earnings Accumulated other comprehensive loss Total shareholders' equity BALANCE , DECEMBER 31, 2019 27,408 1,558 $ 225,607 $ ( 50,773 ) $ 206,542 $ ( 91,472 ) $ 289,904 Net loss — — — — ( 7,950 ) — ( 7,950 ) Unrealized loss on derivatives, net — — — — — ( 840 ) ( 840 ) Currency translation adjustments — — — — — 2,677 2,677 Issuance of Common Shares 285 ( 285 ) — — — — — Repurchased Common Shares for treasury, net ( 80 ) 80 — 5,286 — — 5,286 Common Share repurchase program ( 607 ) 607 10,000 ( 14,995 ) — — ( 4,995 ) Share-based compensation, net — — ( 1,198 ) — — — ( 1,198 ) Adoption of ASU 2019-12 (Note 2) — — — — 13,750 — 13,750 BALANCE DECEMBER 31, 2020 27,006 1,960 $ 234,409 $ ( 60,482 ) $ 212,342 $ ( 89,635 ) $ 296,634 Net income — — $ — $ — $ 3,406 $ — $ 3,406 Unrealized gain on derivatives, net — — — — — 1,019 1,019 Currency translation adjustments — — — — — ( 8,408 ) ( 8,408 ) Issuance of Common Shares 265 ( 265 ) — — — — — Repurchased Common Shares for treasury, net ( 80 ) 80 — 5,218 — — 5,218 Share-based compensation, net — — ( 1,919 ) — — — ( 1,919 ) BALANCE DECEMBER 31, 2021 27,191 1,775 $ 232,490 $ ( 55,264 ) $ 215,748 $ ( 97,024 ) $ 295,950 Net loss — — $ — $ — $ ( 14,056 ) $ — $ ( 14,056 ) Unrealized gain on derivatives, net — — — — — 53 53 Currency translation adjustments — — — — — ( 6,171 ) ( 6,171 ) Issuance of Common Shares 193 ( 193 ) — — — — — Repurchased Common Shares for treasury, net ( 43 ) 43 — 4,898 — — 4,898 Share-based compensation, net — — 268 — — — 268 BALANCE DECEMBER 31, 2022 27,341 1,625 $ 232,758 $ ( 50,366 ) $ 201,692 $ ( 103,142 ) $ 280,942 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 1. Organization and Nature of Business Stoneridge, Inc. and its subsidiaries are global designers and manufacturers of highly engineered electrical and electronic systems, components and modules for the automotive, commercial, off-highway and agricultural vehicle markets. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of Stoneridge, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany transactions and balances have been eliminated in consolidation. The Company analyzes its ownership interests in accordance with Accounting Standards Codification (“ASC”) “Consolidations (Topic 810)” to determine whether they are a variable interest entity and, if so, whether the Company is the primary beneficiary. Prior to the sale of our investment in Minda Stoneridge Instruments Ltd. (“MSIL”) on December 30, 2021, the Company accounted for its 49 % ownership in MSIL under the equity method of accounting. Accounting Estimates The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. Cash and Cash Equivalents The Company’s cash and cash equivalents include actively traded money market funds with short-term investments in marketable securities, primarily U.S. government securities. Cash and cash equivalents are stated at cost, which approximates fair value, due to the highly liquid nature and short-term duration of the underlying securities with original maturities of 90 days or less. Accounts Receivable and Concentration of Credit Risk Revenues are principally generated from the automotive, commercial, off-highway and agricultural vehicle markets. The Company’s largest customers are PACCAR and Volvo, primarily related to the Electronics reportable segment and accounted for the following percentages of consolidated net sales: 2022 2021 2020 PACCAR 15 % 6 % 4 % Volvo 11 % 9 % 8 % Accounts receivable are recorded at the invoice price, net of an estimate of allowance for doubtful accounts and other reserves. Allowance for Doubtful Accounts The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectability in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The Company does not have collateral requirements with its customers. 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 42 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 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: December 31 2022 2021 Raw materials $ 121,983 $ 107,034 Work-in-progress 7,812 9,755 Finished goods 22,785 21,326 Total inventories, net $ 152,580 $ 138,115 Inventory valued using the FIFO method was $ 139,996 and $ 127,939 at December 31, 2022 and 2021, respectively. Inventory valued using the average cost method was $ 12,584 and $ 10,176 at December 31, 2022 and 2021, respectively. Long Term Supply Commitment In 2022, the Company entered into a long term supply agreement with a supplier for the purchase of certain electronic semiconductor components through December 31, 2026. Pursuant to the agreement, the Company paid a $ 1,000 capacity deposit in 2022 and is obligated to pay an additional $ 1,000 capacity deposit in 2023. The capacity deposit is recognized in prepaid and other current assets on our consolidated balance sheet. This long term supply agreement requires the Company to purchase minimum annual volumes while requiring the supplier to sell these components at a fixed price. The Company purchased $ 1,174 of these components during the year ended December 31, 2022. The Company is required to purchase $ 5,871 , $ 7,828 , $ 10,764 and $ 10,764 of components in each of the years 2023 through 2026, respectively. Pre-production Costs Related to Long-term Supply Arrangements Engineering, research and development and other design and development costs for products sold on long-term supply arrangements are expensed as incurred unless the Company has a contractual guarantee for reimbursement from the customer which are capitalized as pre-production costs. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company either has title to the assets or has the noncancelable right to use the assets during the term of the supply arrangement are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets, typically three to seven years . Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee to a lump sum reimbursement from the customer are capitalized either as a component of prepaid expenses and other current assets or an investment and other long-term assets, net within the consolidated balance sheets. Capitalized pre-production costs were $ 19,539 and $ 16,292 at December 31, 2022 and 2021, respectively, and were recorded as a component of prepaid expenses and other current assets on the consolidated balance sheets. Disposal of Particulate Matter Sensor Business 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”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers did not acquire any of the Company’s locations or employees. The purchase price for the sale of the PM sensor assets was $ 4,000 (subject to a post-closing inventory adjustment which was a payment to SMP of $ 1,133 ) 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 $ 3,214 and $ 786 , respectively. The sale of the Gen 2 assets occurred during November 2021, upon completion of the Company’s supply commitments to certain customers. 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 March 8, 2021 the Company’s Control Devices segment recognized net sales and cost of goods sold ("COGS") of $ 971 and $ 898 , respectively, for the one-time sale of Gen 1 inventory and a gain on disposal of $ 740 for the sale of Gen 1 fixed assets less transaction costs of $ 60 within selling, general and administrative ("SG&A") during the three months ended March 31, 2021. Pursuant to the contract manufacturing agreement, the Company produced and sold PM sensor Gen 1 finished goods inventory to SMP for net sales of $ 8,042 in the year ended December 31, 2021. In addition, the Company received $ 308 and 43 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) $ 783 for services provided pursuant to the transition services agreement which were recognized as a reduction in SG&A for the years ended December 31, 2022 and 2021, respectively. PM sensor Gen 1 net sales, including sales of $ 8,042 to SMP pursuant to the contract manufacturing agreement and the sale of Gen 1 inventory components of $ 2,283 and operating income were $ 12,592 and $ 1,415 , respectively, for the year ended December 31, 2021. PM sensor Gen 1 net sales and operating income were $ 8,814 and $ 1,090 , respectively, for the year ended December 31, 2020. The Company completed the PM sensor Gen 2 product supply commitments and ended production on September 23, 2021. In November 2021, the Company’s Control Devices segment recognized proceeds of $ 786 and a gain on disposal of $ 408 for the sale of the Gen 2 fixed assets within SG&A, for the year ended December 31, 2021. Sale of Canton Facility On May 7, 2021, the Company entered into a Real Estate Purchase and Sale Agreement (the “Agreement”) with Sun Life Assurance Company of Canada, a Canadian corporation (the “Buyer”), to sell the Canton Facility for $ 38,200 (subject to adjustment pursuant to the Agreement). On June 17, 2021, pursuant to the Agreement, as amended after May 7, 2021, the Company closed the sale of the Canton Facility to the Buyer for an adjusted purchase price of $ 37,900 . The Company recognized in the Control Devices segment, net proceeds of $ 35,167 and a gain, net of direct selling costs, of $ 30,718 . Sale of MSIL 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 $ 21,500 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 $ 21,587 . The Company recognized net proceeds of $ 20,999 and a gain, net of transaction costs, of $ 1,794 . Property, Plant and Equipment Property, plant and equipment are recorded at cost and consist of the following: December 31 2022 2021 Land and land improvements $ 3,030 $ 3,064 Buildings and improvements 29,703 28,842 Machinery and equipment 247,237 249,365 Office furniture and fixtures 9,100 8,701 Tooling 42,950 41,391 Information technology 32,584 30,454 Vehicles 783 741 Leasehold improvements 5,199 5,592 Construction in progress 20,676 12,584 Total property, plant, and equipment 391,262 380,734 Less: accumulated depreciation ( 286,619 ) ( 272,833 ) Property, plant and equipment, net $ 104,643 $ 107,901 44 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $ 26,687 , $ 27,823 and $ 27,309 , respectively. Depreciable lives within each property classification are as follows: Buildings and improvements 10 - 40 years Machinery and equipment 3 - 10 years Office furniture and fixtures 3 - 10 years Tooling 2 - 7 years Information technology 3 - 7 years Vehicles 3 - 7 years Leasehold improvements shorter of lease term or 3 - 10 years Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of the property, plant and equipment are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is recorded in the consolidated statements of operations as a component of SG&A expenses. Impairment of Long-Lived or Finite-Lived Assets The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired. On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there were two asset groups comprised of PM sensor fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM sensor fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $ 2,326 was recorded based on the difference between the fair value and the carrying value of the assets. The Company used the income approach to determine the fair value of the PM sensor fixed assets at the Tallinn, Estonia facility. During the year ended December 31, 2020, the impairment loss of $ 2,326 was recorded on the Company’s consolidated statement of operations within SG&A expense. Goodwill and Other Intangible Assets Goodwill The total purchase price associated with acquisitions is allocated to the acquisition date fair values of identifiable assets acquired and liabilities assumed with the excess purchase price assigned to goodwill. Goodwill was $ 34,225 and $ 36,387 at December 31, 2022 and 2021, respectively, all of which relates to the Electronics segment. Goodwill is not amortized, but instead is tested for impairment at least annually, or earlier when events and circumstances indicate that it is more likely than not that such assets have been impaired, by applying a fair value-based test. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is 45 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company utilizes an income statement approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income statement approach provides a reasonable estimate of the fair value of a reporting unit. The market valuation approach is used to further support our analysis. There was no impairment of goodwill for the years ended December 31, 2022, 2021 or 2020. Goodwill and changes in the carrying amount of goodwill for the Electronics segment for the years ended December 31, 2022 and 2021 were as follows: 2022 2021 Balance at January 1 $ 36,387 $ 39,104 Currency translation ( 2,162 ) ( 2,717 ) Balance at December 31 $ 34,225 $ 36,387 The Company’s cumulative goodwill impairment loss since inception was $ 300,083 at December 31, 2022 and 2021, which includes Stoneridge Brazil’s goodwill impairment in 2014 and goodwill impairment recorded by the Company’s Control Devices segment in 2008 and 2004. Other Intangible Assets Other intangible assets, net at December 31, 2022 and 2021 consisted of the following: As of December 31, 2022 Acquisition cost Accumulated amortization Net Customer lists $ 44,394 $ ( 23,355 ) $ 21,039 Tradenames 16,430 ( 7,761 ) 8,669 Technology and patents 12,921 ( 10,100 ) 2,821 Capitalized software development 15,591 ( 2,612 ) 12,979 Total $ 89,336 $ ( 43,828 ) $ 45,508 As of December 31, 2021 Acquisition cost Accumulated amortization Net Customer lists $ 45,000 $ ( 20,240 ) $ 24,760 Tradenames 16,016 ( 6,655 ) 9,361 Technology and patents 12,855 ( 8,922 ) 3,933 Capitalized software development 12,433 ( 624 ) 11,809 Total $ 86,304 $ ( 36,441 ) $ 49,863 Other intangible assets, net at December 31, 2022 for customer lists, tradenames, technology and patents, and capitalized software development include $ 16,521 , $ 3,589 , $ 575 and $ 10,218 , respectively, related to the Electronics segment. Customer lists, tradenames and technology of $ 4,518 , $ 5,080 and $ 2,173 , respectively, related to the Stoneridge Brazil segment at December 31, 2022. Capitalized software development and patents of $ 2,761 and $ 73 , respectively, related to the Control Devices segment at December 31, 2022. 46 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) The Company designs and develops software that will be embedded into certain products and sold to customers. Software development costs are capitalized after the software product development reaches technological feasibility and until the software product becomes available for general release to customers. These intangible assets are amortized using the straight-line method over estimated useful lives generally ranging from three to seven years . The Company recognized $ 7,003 , $ 6,006 and $ 5,420 of amortization expense related to intangible assets in 2022, 2021 and 2020, respectively. Amortization expense is included as a component of COGS, SG&A and design and development ("D&D") on the consolidated statements of operations. Annual amortization expense for intangible assets is estimated to be approximately $ 8,000 for the year 2023 and approximately $ 7,600 for the years 2024 through 2027. The weighted-average remaining amortization period is approximately 7 years. There were no intangible impairment charges for the years ended December 31, 2022, 2021 or 2020. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following: As of December 31 2022 2021 Compensation related liabilities $ 19,015 $ 18,716 Product warranty and recall obligations 9,040 6,752 Other (A) 37,985 44,671 Total accrued expenses and other current liabilities $ 66,040 $ 70,139 _____________________________ (A) “Other” is comprised of miscellaneous accruals, none of which individually contributed a significant portion of the total. Income Taxes The Company accounts for income taxes using the liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not to occur. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Deferred tax assets are recognized to the extent that these assets are more likely than not to be realized (See Note 6). In making such a determination, the Company considers all available positive and negative evidence, including future release of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. Certain deferred tax assets are dependent on future taxable income to be realized. Release of some or all of a valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. The Company’s policy is to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company’s effective tax rate in a given financial statement period may be affected. The Company adjusts this liability in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or more information becomes available. The Company has made an accounting policy election to reflect global intangible low-taxed income (“GILTI”) taxes, if any, as a current period tax expense when incurred. Currency Translation The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive loss in the Company’s consolidated balance sheets. Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction with the resulting adjustments included on the consolidated statements of operations within other expense (income), net. These foreign currency transaction losses (gains), including the impact of hedging activities, were $ 5,534 , $ 2,037 and $( 997 ) for the years ended December 31, 2022, 2021 and 2020, respectively. 47 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Revenue Recognition and Sales Commitments The Company recognizes 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. The Company recognizes monitoring service revenues over time, as the services are provided to customers. 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 Company collects certain taxes and fees on behalf of government agencies and remits such collections on a periodic basis. The taxes are collected from customers but are not included in net sales. Estimated returns are based on historical authorized returns. The Company often enters into agreements with its customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to potential renegotiation from time to time, which may affect product pricing. See Note 3 for additional disclosure. Shipping and Handling Costs Shipping and handling costs are included in COGS on the consolidated statements of operations. Product Warranty and Recall Reserves Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle 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, forecasts of the resolution of existing claims, expected future claims on products sold and commercial discussions with our customers. The key factors in our estimate are the warranty period and the customer source. The Company can provide no assurances that it will not experience material claims or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued. The current portion of the product warranty and recall reserve is included as a component of accrued expenses and other current liabilities on the consolidated balance sheets. Product warranty and recall includes $ 4,437 and $ 3,094 of a long-term liability at December 31, 2022 and 2021, respectively, which is included as a component of other long-term liabilities on the consolidated balance sheets. The following provides a reconciliation of changes in the product warranty and recall reserve: Year ended December 31, 2022 2021 Product warranty and recall at beginning of period $ 9,846 $ 12,691 Accruals for warranties established during period 9,917 7,037 Aggregate changes in pre-existing liabilities due to claim developments 1,502 201 Settlements made during the period ( 7,351 ) ( 9,647 ) Foreign currency translation ( 437 ) ( 436 ) Product warranty and recall at end of period $ 13,477 $ 9,846 Design and Development Costs Expenses associated with the development of new products, and changes to existing products, other than capitalized software development costs, are charged to expense as incurred, and are included in the Company’s consolidated statements of operations as a separate component of costs and expenses. These product development costs amounted to $ 65,296 , $ 66,165 and $ 49,386 for the years ended December 31, 2022, 2021 and 2020, respectively, or 7.3 %, 8.6 % and 7.6 % of net sales for these respective periods. Research and Development Activities The Company enters into research and development contracts with certain customers, which generally provide for reimbursement of costs. The Company incurred and was reimbursed for contracted research and development costs of $ 23,784 , $ 15,849 and $ 19,302 for the years ended December 31, 2022, 2021 and 2020, respectively. 48 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Share-Based Compensation At December 31, 2022, the Company had two types of share-based compensation plans: (1) 2016 Long-Term Incentive Plan for employees and (2) the 2018 Amended and Restated Directors’ Restricted Shares Plan, for non-employee directors. See Note 8 for additional details on share-based compensation plans. Total compensation expense recognized as a component of SG&A expense on the consolidated statements of operations for share-based compensation arrangements was $ 5,942 , $ 5,960 and $ 5,888 for the years ended December 31, 2022, 2021 and 2020, respectively. There was no share-based compensation expense capitalized in inventory during 2022, 2021 or 2020. Share-based compensation expense is calculated using estimated volatility and forfeitures based on historical data, future expectations and the expected term of the share-based compensation awards. Financial Instruments and Derivative Financial Instruments Financial instruments, including derivative financial instruments, held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt, net investment hedge, interest rate swap agreement and foreign currency forward contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. See Note 10 for fair value disclosures of the Company’s financial instruments. Common Shares Held in Treasury The Company accounts for Common Shares held in treasury under the cost method (applied on a FIFO basis) and includes such shares as a reduction of total shareholders’ equity. (Loss) Earnings Per Share Basic (loss) earnings per share was computed by dividing net (loss) income by the weighted-average number of Common Shares outstanding for each respective period. Diluted earnings per share was calculated by dividing net (loss) income by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented. However, for all periods in which the Company recognized a net loss, the Company did not recognize the effect of the potential dilutive securities as their inclusion would be anti-dilutive. Potential dilutive shares of 232,458 and 372,937 for the years ended December 31, 2022 and December 31, 2020, respectively, were excluded from diluted loss per share because the effect would have been anti-dilutive. Actual weighted-average Common Shares outstanding used in calculating basic and diluted net (loss) income per share were as follows: Year ended December 31, 2022 2021 2020 Basic weighted-average Common Shares outstanding 27,258,456 27,114,359 27,024,571 Effect of dilutive shares — 301,175 — Diluted weighted-average Common Shares outstanding 27,258,456 27,415,534 27,024,571 There were 767,593 , 580,116 and 752,784 performance-based right to receive Common Shares outstanding at December 31, 2022, 2021 and 2020. These performance-based restricted and right to receive Common Shares are included in the computation of diluted earnings per share based on the number of Common Shares that would be issuable if the end of the year were the end of the contingency period. Deferred Financing Costs, net Deferred financing costs are amortized over the life of the related financial instrument using the straight-line method, which approximates the effective interest method. Deferred financing cost amortization and debt discount accretion, for the years ended December 31, 2022, 2021 and 2020 was $ 1,051 , $ 643 and $ 506 , respectively, and is included as a component of interest expense, net in the consolidated statements of operations. In 2020, the Company capitalized $ 1,086 of deferred financing costs as a result of entering into Amendment No. 1 to the Credit Facility. In 2022, the Company capitalized $ 484 of deferred financing costs as a result of entering into Amendment No. 3 to the Credit Facility. In connection with Amendment No. 3, the Company wrote off a portion of the previously recorded deferred financing costs of $ 365 in interest expense, net during the year ended December 31, 2022. See Note 5 to the consolidated financial statements for additional details regarding the Credit Facility and related deferred financing costs. The Company has elected to continue to present deferred financing costs within long-term assets in the Company’s consolidated balance sheets. Deferred financing costs, net, were $ 996 and $ 1,563 , as of December 31, 2022 and 2021, respectively. 49 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Equity and Changes in Accumulated Other Comprehensive Loss by Component Common Share Repurchase On October 26, 2018, the Company’s Board of Directors authorized the Company to repurchase up to $ 50,000 of Common Shares. Thereafter, on May 7, 2019, the Company entered into a Master Confirmation (the “Master Confirmation”) and a Supplemental Confirmation, together with the Master Confirmation, the Accelerated Share Repurchase Agreement (“ASR Agreement”), with Citibank N.A. (the “Bank”) to purchase Company Common Shares for a payment of $ 50,000 (the “Prepayment Amount”). Under the terms of the ASR Agreement, on May 7, 2019, the Company paid the Prepayment Amount to the Bank and received on May 8, 2019 an initial delivery of 1,349,528 Company Common Shares, which was approximately 80 % of the total number of Company Common Shares expected to be repurchased under the ASR Agreement based on the closing price of the Company’s Common Shares on May 7, 2019. These Common Shares became treasury shares and were recorded as a $ 40,000 reduction to shareholder’s equity. The remaining $ 10,000 of the Prepayment Amount was recorded as a reduction to shareholders’ equity as an unsettled forward contract indexed to our Common Shares. On February 25, 2020, the Bank notified the Company that it terminated early its commitment pursuant the ASR Agreement and would deliver 364,604 Common Shares on February 27, 2020 based on the volume weighted average price of our Common Shares during the term set forth in the ASR Agreement. The Bank’s notice of early termination and the subsequent delivery of Common Shares represented the final settlement of the Company’s share repurchase program pursuant to the accelerated share repurchase agreement. These Common Shares became treasury shares and were recorded as a $ 10,000 reduction to shareholders’ equity as Common Shares held in treasury with the offset of $ 10,000 to additional paid-in capital. On February 24, 2020, the Company’s Board of Directors authorized a new repurchase program of $ 50,000 for the repurchase of the Company’s outstanding Common Shares over the next 18 months. The repurchases could be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases could also be made under Rule 10b-18 plans, which permit Common Shares to be repurchased through pre-determined criteria. On March 3, 2020, under the new repurchase program the Company entered into a 10b-18 Agreement Letter (the “10b-18 Agreement”), with the Bank to purchase Company Common Shares, under purchasing conditions of Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (“Rule 10b-18”), for up to $ 5,000 . Under the terms of the 10b-18 Agreement, commencing March 3, 2020 and ending March 6, 2020, the Company received delivery of a total of 242,634 Company Common Shares for the amount of $ 4,995 . These Common Shares became treasury shares and were recorded as a $ 4,995 reduction to shareholders’ equity as Common Shares held in treasury. In April 2020, the Company announced that it was temporarily suspending the 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. 50 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive loss for the years ended December 31, 2022 and 2021 were as follows: Foreign currency translation Unrealized gain (loss) on derivatives Total Balance at January 1, 2022 $ ( 97,203 ) $ 179 $ ( 97,024 ) Other comprehensive (loss) income before reclassifications ( 6,171 ) 1,816 ( 4,355 ) Amounts reclassified from accumulated other comprehensive loss — ( 1,763 ) ( 1,763 ) Net other comprehensive (loss) income, net of tax ( 6,171 ) 53 ( 6,118 ) Balance at December 31, 2022 $ ( 103,374 ) $ 232 $ ( 103,142 ) Balance at January 1, 2021 $ ( 88,795 ) $ ( 840 ) $ ( 89,635 ) Other comprehensive (loss) income before reclassifications ( 8,408 ) 859 ( 7,549 ) Amounts reclassified from accumulated other comprehensive loss — 160 160 Net other comprehensive (loss) income, net of tax ( 8,408 ) 1,019 ( 7,389 ) Balance at December 31, 2021 $ ( 97,203 ) $ 179 $ ( 97,024 ) Reclassifications Certain prior period amounts have been reclassified to conform to their 2022 presentation in the consolidated financial statements. 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 taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. 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 $ 13,750 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, 2022 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. 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 51 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 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 are 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 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. 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, vision and safety 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 vision and safety systems 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, driver information systems 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 periods ended December 31, 2022, 2021 and 2020: Control Devices Electronics Stoneridge Brazil Consolidated Year ended December 31, 2022 2021 2020 2022 2021 2020 2022 2021 2020 2022 2021 2020 Net Sales: North America $ 291,808 $ 282,525 $ 261,967 $ 153,120 $ 104,419 $ 68,561 $ — $ — $ — $ 444,928 $ 386,944 $ 330,528 South America — — — — — — 52,230 56,777 47,663 52,230 56,777 47,663 Europe — 12,681 29,679 347,129 248,468 184,579 — — — 347,129 261,149 214,258 Asia Pacific 50,788 60,569 50,930 4,848 5,023 4,627 — — — 55,636 65,592 55,557 Total net sales $ 342,596 $ 355,775 $ 342,576 $ 505,097 $ 357,910 $ 257,767 $ 52,230 $ 56,777 $ 47,663 $ 899,923 $ 770,462 $ 648,006 (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 monitoring systems (“CMS”) sold through our aftermarket channel that are common across all customers. 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. 52 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 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 December 31, 2022 or 2021. 4. Investments Minda Stoneridge Instruments Ltd. The Company had a 49 % equity interest in MSIL, a company based in India that manufactures electronics, instrumentation equipment and sensors primarily for the motorcycle, commercial vehicle and automotive markets. As discussed in Note 2, the Company sold its equity interest in MSIL on December 30, 2021. The investment was accounted for under the equity method of accounting. The Company’s investment in MSIL, recorded as a component of investments and other long-term assets, net on the consolidated balance sheet as of December 31, 2020 was $ 13,547 . Equity in earnings of MSIL included in the consolidated statements of operations were $ 1,776 and $ 1,477 for the years ended December 31, 2021 and 2020, respectively. PST Eletrônica Ltda. The Company had a 74 % controlling interest in Stoneridge Brazil from December 31, 2011 through May 15, 2017. On May 16, 2017, the Company acquired the remaining 26 % noncontrolling interest in Stoneridge Brazil. As part of the acquisition agreement, the Company was required to pay additional earn-out consideration based on Stoneridge Brazil’s financial performance in 2021. The final earn-out consideration of $ 8,272 was paid in the second quarter of 2022. See Note 10 for the fair value and foreign currency adjustments of the earn-out consideration for the current and prior periods. Stoneridge Brazil had dividends payable to former noncontrolling interest holders of Brazilian real (“R$”) 24,154 ($ 6,010 ) as of December 31, 2019. These dividends were paid in January 2020. Other Investments In December 2018, the Company entered into an agreement to make a $ 10,000 investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology which is accounted for under the equity method of accounting. The Company’s $ 10,000 investment in the Autotech Fund II will be contributed over the expected ten year life of the fund. The Company contributed $ 950 to the Autotech Fund II during the year ended December 31, 2022. The Company contributed $ 3,450 to and received $ 251 in distributions from the Autotech Fund II during the year ended December 31, 2021. The Company has a 6.5 % interest in Autotech Fund II. The Company recognized loss (earnings) of $ 823 , $( 1,882 ) and $( 59 ) during the years ended December 31, 2022, 2021 and 2020, respectively. The Autotech Fund II investment recorded in investments and other long-term assets, net in the consolidated balance sheets was $ 8,644 and $ 8,517 as of December 31, 2022 and 2021, respectively. 53 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 5. Debt December 31, 2022 December 31, 2021 Interest rates at December 31, 2022 Maturity Revolving Credit Facility Credit Facility $ 167,802 $ 163,957 6.29 % June 2024 Debt Sweden short-term credit line — 2,099 Suzhou short-term credit line 1,450 3,149 3.70 % June 2023 Total debt 1,450 5,248 Less: current portion ( 1,450 ) ( 5,248 ) Total long-term debt, net $ — $ — Revolving Credit Facility On June 5, 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the “Credit Facility”). The Credit Facility provided for a $ 400,000 senior secured revolving credit facility (which, as described below in the discussion of Amendment No. 3 to the Credit Facility was amended to be a $ 300,000 credit commitment) and it replaced and superseded the Third Amended and Restated Credit Agreement that provided for a $ 300,000 revolving credit facility. The Credit Facility had an accordion feature which allowed the Company to increase the availability by up to $ 150,000 upon the satisfaction of certain conditions and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The Credit Facility has a termination date of June 5, 2024 . Borrowings under the Credit Facility bear interest at either the Base Rate or the LIBOR rate, at the Company’s option, plus the applicable margin as set forth in the Credit Facility. 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 contains customary affirmative covenants and representations. The Credit Facility also contains customary negative covenants, which, among other things, are subject to certain exceptions, including restrictions on (i) indebtedness, (ii) liens, (iii) liquidations, mergers, consolidations and acquisitions, (iv) disposition of assets or subsidiaries, (v) affiliate transactions, (vi) creation or ownership of certain subsidiaries, partnerships and joint ventures, (vii) continuation of or change in business, (viii) restricted payments, (ix) prepayment of subordinated and junior lien indebtedness, (x) restrictions in agreements on dividends, intercompany loans and granting liens on the collateral, (xi) loans and investments, (xii) sale and leaseback transactions, (xiii) changes in organizational documents and fiscal year and (xiv) transactions with respect to bonding subsidiaries. The Credit Facility contains customary events of default, subject to customary thresholds and exceptions, including, among other things, (i) non-payment of principal and non-payment of interest and fees, (ii) a material inaccuracy of a representation or warranty at the time made, (iii) a failure to comply with any covenant, subject to customary grace periods in the case of certain affirmative covenants, (iv) cross default of other debt, final judgments and other adverse orders in excess of $ 30,000 , (v) any loan document shall cease to be a legal, valid and binding agreement, (vi) certain uninsured losses or proceedings against assets with a value in excess of $ 30,000 , (vii) ERISA events, (viii) a change of control, or (ix) bankruptcy or insolvency proceedings. Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts to 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 in form and substance satisfactory to the administrative agent). 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. 54 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Amendment No. 1 changed the leverage based LIBOR pricing grid through the maturity date of the Credit Facility and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points. As of December 31, 2022, Specified Hedge Borrowings were $ 50,000 . The Company capitalized $ 1,086 of deferred financing costs as a result of entering into Amendment No. 1. 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 to the Fourth Amended and Restated Credit Agreement (“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 could not 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 changes the leverage based LIBOR pricing grid through the maturity date and also retains a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain 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. The Company capitalized $ 484 of deferred financing costs as a result of entering into Amendment No. 3. In connection with Amendment No. 3, the Company wrote off a portion of the previously recorded deferred financing costs of $ 365 in interest expense, net during the year ended December 31, 2022. 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 to the Fourth Amended and Restated Credit Agreement (“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; • 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. Borrowings outstanding on the Credit Facility were $ 167,802 and $ 163,957 at December 31, 2022 and 2021, respectively. As a result of the amendments, the Company was in compliance with all credit facility covenants at December 31, 2022 and 2021. 55 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) The Company also had outstanding letters of credit of $ 1,626 and $ 1,698 at December 31, 2022 and 2021, respectively. Debt 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 20,000 Swedish krona, or $ 1,922 and $ 2,213 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 18,973 Swedish krona, or $ 2,099 , outstanding on this overdraft credit line. During the year ended December 31, 2022, the subsidiary borrowed 380,652 Swedish krona, or $ 36,574 , and repaid 399,625 Swedish krona, or $ 38,397 . The Company’s wholly-owned subsidiary located in Suzhou, China (the "Suzhou subsidiary"), has lines of credit (the “Suzhou credit line”) which allow up to a maximum borrowing level of 20,000 Chinese yuan, or $ 2,900 at December 31, 2022 and 50,000 Chinese yuan, or $ 7,871 at December 31, 2021. At December 31, 2022 and 2021 there was $ 1,450 and $ 3,149 , respectively, in borrowings outstanding on the Suzhou credit line with weighted-average interest rates of 3.70 % and 4.15 %, respectively. The Suzhou credit line is included on the consolidated balance sheet 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 60,000 Chinese yuan, or $ 8,699 at December 31, 2022 and 15,000 Chinese yuan, or $ 2,361 , at December 31, 2021. There was $ 1,998 and $ 2,182 utilized on the Suzhou bank acceptance draft line of credit at December 31, 2022 and 2021, respectively. The Suzhou bank acceptance draft line of credit is included on the consolidated balance sheet within accounts payable. At December 31, 2022, the future maturities of the Credit Facility and debt were as follows: Year ended December 31, 2023 $ 1,450 2024 167,802 2025 — 2026 — 2027 — Total $ 169,252 6. Income Taxes The income tax expense (benefit) included in the accompanying consolidated statement of operations represents federal, state and foreign income taxes. The components of (loss) income before income taxes and the provision (benefit) for income taxes consist of the following: Year ended December 31, 2022 2021 2020 (Loss) income before income taxes: Domestic $ ( 11,944 ) $ 11,596 $ ( 25,403 ) Foreign 1,248 840 14,679 Total (loss) income before income taxes $ ( 10,696 ) $ 12,436 $ ( 10,724 ) Provision (benefit) for income taxes: Current: Federal $ 435 $ — $ ( 3 ) State and foreign 8,035 9,542 5,182 Total current expense $ 8,470 $ 9,542 $ 5,179 Deferred: Federal $ ( 3,282 ) $ 714 $ ( 8,512 ) State and foreign ( 1,828 ) ( 1,226 ) 559 Total deferred benefit ( 5,110 ) ( 512 ) ( 7,953 ) Total income tax expense (benefit) $ 3,360 $ 9,030 $ ( 2,774 ) 56 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) A summary of the differences between the statutory federal income tax rate of 21.0% and the consolidated provision for income taxes is shown below. Year ended December 31, 2022 2021 2020 Statutory U.S. federal income tax (benefit) provision $ ( 2,246 ) $ 2,612 $ ( 2,252 ) State income taxes, net of federal tax benefit 495 942 ( 647 ) Tax credits and incentives ( 4,060 ) ( 3,316 ) ( 2,791 ) Foreign tax rate differential 910 730 90 Impact of change in enacted tax law 300 227 1,108 Change in valuation allowance 5,248 5,070 2,174 U.S. tax on foreign earnings 1,376 ( 347 ) ( 519 ) Tax impact of unconsolidated subsidiaries 395 1,828 ( 323 ) Unremitted earnings on foreign subsidiaries ( 898 ) 835 86 Non-deductible expenses 657 740 498 Compensation and benefits 774 358 362 Other 409 ( 649 ) ( 560 ) Provision (benefit) for income taxes $ 3,360 $ 9,030 $ ( 2,774 ) Significant components of the Company’s deferred tax assets and liabilities were as follows: As of December 31, 2022 2021 Deferred tax assets: Inventories $ 1,479 $ 1,692 Employee compensation and benefits 2,078 2,420 Accrued liabilities and reserves 5,862 4,486 Property, plant and equipment 2,794 751 Tax loss carryforwards 16,997 13,479 Tax credit carryforwards 20,802 24,173 Capitalized research and development 4,785 — Lease liability 2,817 3,712 Other 1,213 647 Gross deferred tax assets 58,827 51,360 Less: Valuation allowance ( 18,496 ) ( 14,516 ) Deferred tax assets less valuation allowance 40,331 36,844 Deferred tax liabilities: Property, plant and equipment ( 2,038 ) ( 1,235 ) Intangible assets ( 10,056 ) ( 11,767 ) Right-of-use-assets ( 2,595 ) ( 3,493 ) Other ( 4,991 ) ( 5,021 ) Gross deferred tax liabilities ( 19,680 ) ( 21,516 ) Net deferred tax assets $ 20,651 $ 15,328 57 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) The balance sheet classification of our net deferred tax asset is shown below: Year ended December 31, 2022 2021 Long-term deferred tax assets $ 29,149 $ 26,034 Long-term deferred tax liabilities ( 8,498 ) ( 10,706 ) Net deferred tax assets $ 20,651 $ 15,328 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. At December 31, 2022, the aggregate undistributed earnings of our foreign subsidiaries amounted to $ 36,155 . Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at December 31, 2022, a valuation allowance is recorded against certain deferred tax assets based upon the conclusion that it was more likely than not they would not be realized. Certain deferred tax assets are dependent on future taxable income to be realized. The Company has net operating loss carry forwards of $ 48,430 and $ 73,553 for state and foreign tax jurisdictions, respectively. The state net operating losses expire from 2023-2041 and the foreign net operating losses expire from 2023-2027 or have indefinite lives. The Company has general business and foreign tax credit carry forwards of $ 19,055 , $ 1,083 and $ 664 for U.S. federal, state and foreign jurisdictions, respectively. The U.S. federal general business credits, if unused, begin to expire in 2026, and the state and foreign tax credits expire at various times. The following is a reconciliation of the Company’s total gross unrecognized tax benefits: 2022 2021 2020 Balance as of January 1 $ 2,891 $ 3,449 $ 3,449 Tax positions related to the current year: Additions — — — Tax positions related to the prior years: Reductions — — — Expirations of statutes of limitation ( 346 ) ( 558 ) — Balance as of December 31 $ 2,545 $ 2,891 $ 3,449 The Company has classified its uncertain tax positions as a reduction to non-current deferred income tax assets. If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, the amount that would affect the Company’s effective tax rate is approximately $ 2,545 and $ 2,891 at December 31, 2022 and 2021, respectively. The Company classifies interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2022, 2021 and 2020, the Company recognized no expense related to interest and penalties. On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implemented a 15% minimum tax on financial statement income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on its current analysis of the provisions, the Company does not believe this legislation will have a material impact on our results of operations, but the Company is continuing to evaluate the implications. 58 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each jurisdiction: Jurisdiction Open Tax Years U.S. Federal 2017 - 2022 Argentina 2017 - 2022 Brazil 2015 - 2022 China 2018 - 2022 France 2019 - 2022 Germany 2019 - 2022 Italy 2017 - 2022 Mauritius 2019 - 2022 Mexico 2017 - 2022 Netherlands 2018 - 2022 Sweden 2017 - 2022 United Kingdom 2021 - 2022 7. Leases Lessee The Company has various cancelable and noncancelable leased assets within all segments, which include certain properties, vehicles and equipment of which are all classified as operating leases. Payments for these leases are generally fixed; however, several of our leases are composed of variable lease payments including index-based payments or inflation-based payments based on a Consumer Price Index (“CPI”) or other escalators. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Under Leases (Topic 842), the Company determines an arrangement is a lease when we have the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Other than the leases that we have already identified, we are not aware of any material leases that have not yet commenced. For leases that have a calculated lease term of 12 months or less and do not include an option to purchase the underlying asset which we are reasonably certain to exercise, the Company has made the policy election to not apply the recognition requirements in Leases (Topic 842). For these short-term leases, the Company recognizes the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For the leases identified, right of use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, the Company used the calculated incremental borrowing rate based on the information available at the implementation date, and going forward at the commencement date, in determining the present value of lease payments. The Company will use the implicit rate when readily determinable. The ROU asset includes the carrying amount of the lease liability, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The Company’s lease terms may include options to extend or terminate the lease and such options are included in the lease term when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease expenses are recognized within COGS, SG&A and D&D costs in the consolidated statements of operations. The Company has made the policy election to account for lease and non-lease components as a single lease component for all of its leases. The components of lease expense are as follows: Year ended December 31, 2022 2021 Operating lease cost $ 4,736 $ 5,581 Short-term lease cost 958 843 Variable lease cost 585 553 Total lease cost $ 6,279 $ 6,977 59 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Balance sheet information related to leases is as follows: As of December 31, 2022 2021 Assets: Operating lease right-of-use assets $ 13,762 $ 18,343 Liabilities: Operating lease current liability, included in other current liabilities $ 3,938 $ 4,203 Operating lease long-term liability 10,594 14,912 Total leased liabilities $ 14,532 $ 19,115 Maturities of operating lease liabilities are as follows: As of December 31, 2022 2023 $ 4,357 2024 3,926 2025 3,226 2026 2,039 2027 1,020 Thereafter 1,979 Total future minimum lease payments $ 16,547 Less: imputed interest ( 2,015 ) Total lease liabilities $ 14,532 Weighted-average remaining lease term and discount rate for operating leases is as follows: As of December 31, 2022 2021 Weighted-average remaining lease term (in years) 4.64 5.44 Weighted-average discount rate 5.67 % 5.56 % Other information: Year ended December 31, 2022 2021 Operating cash flows: Cash paid related to operating lease obligations $ 4,649 $ 5,092 Non-cash activity: Right-of-use assets obtained in exchange for operating lease obligations $ 594 $ 4,596 Lessor The Company, as lessor, entered into a lease with a third-party lessee effective July 1, 2020, of its Canton, Massachusetts facility. In conjunction with the Canton restructuring plan outlined in Note 12, the Company ceased operations at this facility in March 2020. As discussed in Note 2, the Company sold the Canton facility and assigned the lease to the buyer on June 17, 2021. The Company recognized lease income on a straight-line basis over the lease term until the time of the sale. The Company recognized, in its Control Devices segment, operating and variable lease income from leases in our consolidated statements of operations of $ 602 and $ 199 , respectively, for the year ended December 31, 2021 and $ 674 and $ 199 , respectively for the year ended December 31, 2020. 8. Share-Based Compensation Plans In May 2016, the Company’s shareholders approved the 2016 Long-Term Incentive Plan (the “2016 Plan”) and reserved 1,800,000 Common Shares (of which the maximum number of Common Shares which may be issued). In May 2020, the Company’s shareholders approved an amendment to the 2016 Plan to increase by 1,100,000 the number of Common Shares authorized for issuance. The amendment to the 2016 Plan brought the total Common Shares available for issuance to 2,900,000 . Under the 2016 Plan, as of December 31, 2022, the Company has granted 2,905,947 share units, of which 60 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 1,194,460 were time-based with cliff vesting using the straight-line method and 1,711,487 were performance-based. As of December 31, 2022, 871,369 of the shares granted have been forfeited. There are 865,422 shares available to be granted under the 2016 Plan at December 31, 2022. In 2022, 2021 and 2020, pursuant to the 2016 Plan, the Company granted time-based share units and performance-based performance shares. The majority of the time-based share units cliff vest three years after the date of grant. The performance-based performance shares vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from the date of grant and, for a portion of the annual awards, upon the Company attaining certain targets of performance measured against a peer group’s three year performance in terms of total shareholder return and, for the remaining portion of the annual awards, upon achieving certain earnings per share targets and return on invested capital targets established by the Company during the performance period of the award. The allocation of performance shares granted between total shareholder return, earnings per share and return on invested capital were as follows for the years ended December 31: 2022 2021 2020 Total shareholder return 45 % 45 % 45 % Earnings per share 36 % 36 % 36 % Return on invested capital 18 % 18 % 18 % In April 2005, the Company adopted the Directors’ Restricted Shares Plan (the “Director Share Plan”) and reserved 500,000 Common Shares for issuance under the Director Share Plan. In May 2013, shareholders approved an amendment to the Director Share Plan to increase the number of shares for issuance by 200,000 to 700,000 . In May 2018, the Company’s shareholders approved the 2018 Amended and Restated Director’s Restricted Shares Plan (the "2018 Director Share Plan") to increase the number of shares for issuance by 150,000 to 850,000 . In May 2022, the Company's shareholders approved Amendment No. 1 to the 2018 Director Share Plan to increase the number of shares for issuance by 100,000 to 950,000 . Under the 2018 Director Share Plan, the Company has cumulatively issued 797,011 restricted Common Shares. As such, there are 152,989 restricted Common Shares available to be issued on December 31, 2022. Shares issued annually under the 2018 Director Share Plan are no longer subject to forfeiture one year after the date of grant. Share Units and Performance Shares The fair value of the non-vested time-based share unit awards was calculated using the market value of the Common Shares on the date of issuance. The weighted-average grant-date fair value of time-based share units granted during the years ended December 31, 2022, 2021 and 2020 was $ 18.71 , $ 35.13 , and $ 17.78 , respectively. The fair value of the non-vested performance-based performance share awards with a performance condition requiring the Company to obtain certain earnings per share and return on invested capital targets were estimated using the market value of the shares on the date of grant. The fair value of non-vested performance-based performance share awards with a market condition requiring the Company to obtain a total shareholder return target relative to a group of peer companies was estimated using a Monte Carlo valuation model taking into consideration the probability of achievement using multiple simulations. The awards that use earnings per share and return on invested capital as the performance target are expensed beginning when it is probable that the Company will meet the underlying performance condition. 61 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) A summary of the status of the Company’s non-vested share units and performance shares as of December 31, 2022 and the changes during the year then ended, are presented below: Time-based awards Performance-based awards Share units Weighted- average grant date fair value Performance shares Weighted- average grant date fair value Non-vested as of January 1, 2022 450,331 $ 26.55 578,985 $ 28.42 Granted 335,044 $ 18.71 361,982 $ 20.64 Vested ( 168,222 ) $ 27.12 ( 2,317 ) $ 22.70 Forfeited or cancelled ( 46,350 ) $ 20.17 ( 171,058 ) $ 31.75 Non-vested as of December 31, 2022 570,803 $ 22.29 767,592 $ 24.03 A summary of the status of the Company’s non-vested share units and performance shares as of December 31, 2021 and the changes during the year then ended, are presented below: Time-based awards Performance-based awards Share units Weighted- average grant date fair value Performance shares Weighted- average grant date fair value Non-vested as of January 1, 2021 502,728 $ 21.89 752,783 $ 24.32 Granted 202,599 $ 35.13 215,936 $ 43.34 Vested ( 159,755 ) $ 22.52 ( 126,242 ) $ 29.61 Forfeited or cancelled ( 95,241 ) $ 26.96 ( 263,492 ) $ 28.35 Non-vested as of December 31, 2021 450,331 $ 26.55 578,985 $ 28.42 As of December 31, 2022 total unrecognized compensation cost related to non-vested time-based share units granted was $ 5,592 . That cost is expected to be recognized over a weighted-average period of 1.15 years. For the years ended December 31, 2022, 2021 and 2020, the total fair value of awards vested was $ 3,334 , $ 9,637 and $ 5,288 , respectively. As of December 31, 2022, there was no unrecognized compensation cost related to non-vested performance shares granted that are probable to vest. As noted above, the Company has issued and outstanding performance-based share units that use different performance targets (total shareholder return, earnings per share and return on invested capital). The excess tax deficiency (benefit) realized from the vesting of share units and performance shares of the share-based payment arrangements was $ 543 , $( 563 ) and $( 46 ) for the years ended December 31, 2022, 2021 and 2020, respectively. 9. Employee Benefit Plans The Company has certain defined contribution profit sharing and 401(k) plans covering substantially all of its employees in the United States and Europe. The Company provides matching contributions to the Company’s 401(k) plan. Company contributions are generally discretionary. For the years ended December 31, 2022, 2021 and 2020, expenses related to these plans amounted to $ 4,883 , $ 5,082 and $ 3,812 , respectively. 10. 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. Derivative Instruments and Hedging Activities On December 31, 2022, the Company had no open foreign currency forward contracts. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2022 and 2021. Management believes that its 62 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments have been 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 that were scheduled to mature in August 2026 and August 2028. These swaps hedged a portion of the net investment in a euro-denominated subsidiary. As a result of favorable market conditions, on May 5, 2022, the Company unwound the two net investment hedges and recognized a net gain of $ 3,716 , which was recorded on the Company’s consolidated statement of operations as a component of other expense, net for the second quarter ended June 30, 2022 . The cash received from the settlement of these swaps of $ 3,820 was classified in investing activities in the consolidated statement of cash flows. In the fourth quarter ended December 31, 2022, the Company determined it had incorrectly recognized the net gain in the consolidated statement of operations and reclassified the net gain of $ 3,716 to other comprehensive (loss) income, net of tax and accumulated other comprehensive loss. This item would have increased the loss for the three-months ended June 30, 2022, six-months ended June 30, 2022 and nine-months ended September 30, 2022 by $ 0.10 per share and recording the item in the three-months ended December 31, 2022 decreased the income per share by $ 0.10 . The Company assessed the materiality of this matter from a qualitative and quantitative perspective and concluded that the impact of the error is not material to the current or previous quarterly results. The Company elected to assess hedge effectiveness of the net investment hedges under the spot method. Accordingly, periodic changes in the fair value of the derivative instruments attributable to factors other than spot exchange rate variability were excluded from the measurement of hedge ineffectiveness and reported directly in earnings each reporting period. The change in fair value of these derivative instruments was recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the consolidated balance sheets. The Company had no outstanding net investment hedges as of December 31, 2022. 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 consolidated statements of operations as a component of other expense, net. During 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: U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedges The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, and expired ratably on a monthly basis during 2020. There were no such contracts at December 31, 2022 or 2021. Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedges The Company held Mexican peso-denominated foreign currency forward contracts which expired ratably on a monthly basis from January 2022 to December 2022. The notional amounts at December 31, 2022 and 2021 related to Mexican peso-denominated foreign currency forward contracts were $ 0 and $ 23,923 , respectively. 63 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of December 31, 2021 and the year then ended, and concluded that the hedges were highly 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 “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 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 $ 167,802 at December 31, 2022. Accordingly, the change in fair value of the Swap is recognized in accumulated other comprehensive loss. The 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 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 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 Swap is recognized as a component of interest expense, net on the consolidated statements of operations. The swap settlements (reduced) increased interest expense, net by $( 156 ), $ 651 and $ 433 for the years ended December 31, 2022, 2021 and 2020, respectively. The notional amounts and fair values of derivative instruments in the consolidated balance sheets were as follows: Notional amounts (A) Prepaid expenses and other current assets Accrued expenses and other current liabilities As of December 31, 2022 2021 2022 2021 2022 2021 Derivatives designated as hedging instruments: Cash flow hedges: Forward currency contracts $ — $ 23,923 $ — $ 730 $ — $ — Interest rate swap $ 50,000 $ 50,000 $ 294 $ — $ — $ 503 Net investment hedges: Cross-currency swaps $ — $ 50,000 $ — $ 1,450 $ — $ — _____________________________ (A) Notional amounts represent the gross contract of the derivatives outstanding in U.S. dollars. Gross amounts recorded for the cash flow hedges in other comprehensive (loss) income and in net (loss) income for the years ended December 31 were as follows: Gain (loss) recorded in other comprehensive (loss) income Gain (loss) reclassified from other comprehensive (loss) income into net (loss) income (A) 2022 2021 2020 2022 2021 2020 Derivatives designated as cash flow hedges: Forward currency contracts $ 1,346 $ 923 $ ( 1,244 ) $ 2,076 $ 448 $ ( 1,499 ) Interest rate swap $ 953 $ 164 $ ( 1,751 ) $ 156 $ ( 651 ) $ ( 433 ) Derivatives designated as net investment hedges: Cross-currency swaps $ 2,446 $ 1,270 — $ — $ — $ — _____________________________ (A) Gains (losses) reclassified from comprehensive loss into net (loss) income recognized in COGS in the Company’s consolidated statements of operations for the years ended December 31, 2022, 2021 and 2020 were $ 1,572 , $ 341 and $( 1,146 ), respectively. Gains (losses) reclassified from other comprehensive loss into net (loss) income recognized in D&D in the Company’s consolidated statements of operations were $ 0 , $ 0 and $( 29 ) for the years ended December 31, 2022, 2021 and 2020, respectively. Gains (losses) reclassified from other comprehensive loss into net (loss) income recognized in SG&A in the Company’s consolidated statements of operations were $ 504 , $ 107 and $( 324 ) for the years ended December 31, 2022, 2021 and 2020, respectively. Gains (losses) 64 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) reclassified from other comprehensive loss into net (loss) income recognized in interest expense, net in the Company’s consolidated statements of operations were $ 156 , $( 651 ) and $( 433 ) for the years ended December 31, 2022, 2021 and 2020, respectively. For the year ended December 31, 2022, the total net gains on the interest rate swap cash flow hedge of $ 294 are expected to be included in interest expense, net within the next 12 months. Cash flows from derivatives used to manage foreign exchange and interest rate risks are classified as operating activities within the consolidated statements of cash flows. The Company has measured the ineffectiveness of the forward currency contracts and any amounts recognized in the consolidated financial statements were immaterial for the years ended December 31, 2022, 2021 and 2020. 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. December 31, 2022 2021 Fair values estimated using Fair value Level 1 inputs Level 2 inputs Level 3 inputs Fair value Financial assets carried at fair value: Forward currency contract $ — $ — $ — $ — $ 730 Cross-currency swaps — — — — 1,450 Interest rate swap 294 — 294 — — Total financial assets carried at fair value $ 294 $ — $ 294 $ — $ 2,180 Financial liabilities carried at fair value: Interest rate swap $ — $ — $ — $ — $ 503 Earn-out consideration — — — — 7,351 Total financial liabilities carried at fair value $ — $ — $ — $ — $ 7,854 The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities related to earn-out consideration that are measured at fair value on a recurring basis. Stoneridge Brazil 2022 2021 Balance at January 1 $ 7,351 $ 5,813 Change in fair value — 2,065 Foreign currency adjustments 921 ( 527 ) Earn-out consideration cash payment ( 8,272 ) — Balance at December 31 $ — $ 7,351 The Company was required to pay the Stoneridge Brazil earn-out consideration based on Stoneridge Brazil’s financial performance in 2021. The fair value of the Stoneridge Brazil earn-out consideration was based on 2021 earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Stoneridge Brazil earn-out consideration obligation was recorded within accrued expenses and other current liabilities in the consolidated balance sheet as of December 31, 2021. The earn-out consideration obligation of $ 8,272 was paid in April 2022 and recorded in the consolidated statement of cash flows within operating and financing activities in the amounts of $ 1,996 and $ 6,276 , respectively, for the year ended December 31, 2022. 65 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) The 2021 change in fair value of the earn-out consideration for Stoneridge Brazil was due to updated financial performance projections during 2021 and foreign currency translation fluctuations through settlement. The change in fair value of the Stoneridge Brazil earn-out consideration was recorded in SG&A expense and the foreign currency impact was included in other expense, net in the consolidated statements of operations. There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the year ended December 31, 2022. No non-recurring fair value adjustments were required for nonfinancial assets for the years ended December 31, 2022 and 2021. Impairment of Long-Lived Assets or Finite-Lived Assets The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired. On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there were two asset groups comprised of PM sensor fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM sensor fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $ 2,326 was recorded based on the difference between the fair value and the carrying value of the assets. The Company used the income approach to determine the fair value of the PM sensor fixed assets at the Tallinn, Estonia facility. During the year ended December 31, 2020, the impairment loss of $ 2,326 was recorded on the Company’s consolidated statement of operations within SG&A expense. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." 11. Commitments and Contingencies From time to time we are subject to various legal actions and claims incidental to our business, including those arising out of breach of contracts, product warranties, product liability, patent infringement, regulatory matters and employment-related matters. The Company establishes accruals for matters which it believes that losses are probable and can be reasonably estimated. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its consolidated results of operations or financial position. As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at this site. The Company engaged an environmental engineering consultant to assess the level of contamination and to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. A remedial action plan was approved by the Florida Department of Environmental Protection and ground water remediation began in the fourth quarter of 2015. During the years ended December 31, 2022, 2021 and 2020, the Company recognized expense of $ 0 , $ 407 and $ 225 , respectively, related to ground water remediation. At December 31, 2022 and 2021, the Company had accruals of $ 246 and $ 391 respectively, related to future remediation costs. At December 31, 2022 and 2021, $ 132 and $ 216 , respectively, were recorded as a component of accrued expenses and other current liabilities on the consolidated balance sheets while the remaining amounts as of December 31, 2022 and 2021 were recorded as a component of other long-term liabilities. Costs associated with the recorded liability will be incurred to complete the groundwater remediation and monitoring. The recorded 66 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) liability is based on assumptions in the remedial action plan as well as estimates for future remediation activities. Although the Company sold the Sarasota facility and related property in December 2011, the liability to remediate the site contamination remains the responsibility of the Company. Due to the ongoing site remediation, the Company is currently required to maintain a $ 1,489 letter of credit for the benefit of the buyer. The Company’s Stoneridge Brazil subsidiary has civil, labor and other tax contingencies (excluding income tax) for which the likelihood of loss is deemed to be reasonably possible, but not probable, by the Company’s legal advisors in Brazil. As a result, no provision has been recorded with respect to these contingencies, which amounted to R$ 47,820 ($ 9,165 ) and R$ 46,530 ($ 8,338 ) at December 31, 2022 and 2021, respectively. An unfavorable outcome on these contingencies could result in significant cost to the Company and adversely affect its results of operations and cash flows. On August 12, 2020, the Brazilian Administrative Counsel for Economic Defense (“CADE”) issued a ruling against Stoneridge Brazil for abuse of dominance and market foreclosure through its prior use of exclusivity provisions in agreements with its distributors. The CADE tribunal imposed a R$ 7,995 ($ 1,532 ) fine which is included in the reasonably possible contingencies noted above. The Company is challenging this ruling in Brazilian federal court to reverse this decision by the CADE tribunal. 12. Restructuring and Business Realignment On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. The decision to exit the PM sensor product line was made after consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. In conjunction with the strategic exit of the PM sensor product line, the Company entered into an asset purchase agreement related to the sale of the PM sensor product line during the first quarter of 2021. Refer to Note 2 of the consolidated financial statements for additional details regarding this sale. As a result of the PM sensor restructuring actions, the Company recognized expense of $ 0 , $ 2,360 and $ 3,428 for the years ended December 31, 2022, 2021 and 2020, respectively, for non-cash fixed asset charges, including impairment and accelerated depreciation of PM sensor related fixed assets, employee severance and termination costs and other related costs including supplier settlements. For the year ended December 31, 2021 restructuring related costs of $ 1,510 , $ 642 and $ 208 were recognized in COGS, SG&A and D&D, respectively. For the year ended December 31, 2020 restructuring related costs of $ 817 and $ 2,611 were recognized in COGS and SG&A, 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 $ 4,200 . The expenses for the exit of the PM sensor line that relate to the Control Devices reportable segment include the following: Utilization Accrual as of January 1, 2022 2022 Charge to Expense Cash Non-Cash Accrual as of December 31, 2022 Employee termination benefits $ 35 $ — $ ( 35 ) $ — $ — Other related costs — — — — — Total $ 35 $ — $ ( 35 ) $ — $ — Utilization Accrual as of January 1, 2021 2021 Charge to Expense Cash Non-Cash Accrual as of December 31, 2021 Fixed asset impairment and accelerated depreciation $ — $ 188 $ — $ ( 188 ) $ — Employee termination benefits — 139 ( 104 ) — 35 Other related costs — 2,033 ( 2,033 ) — — Total $ — $ 2,360 $ ( 2,137 ) $ ( 188 ) $ 35 67 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) Utilization Accrual as of January 1, 2020 2020 Charge to Expense Cash Non-Cash Accrual as of December 31, 2020 Fixed asset impairment and accelerated depreciation $ — $ 3,326 $ — $ ( 3,326 ) $ — Other related costs — 102 ( 102 ) — — Total $ — $ 3,428 $ ( 102 ) $ ( 3,326 ) $ — On January 10, 2019, the Company committed to a restructuring plan that resulted in the closure of the Canton, Massachusetts facility (“Canton Facility”) on March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). Company management informed employees at the Canton Facility of this restructuring decision on January 11, 2019. The costs for the Canton Restructuring included employee severance and termination costs, contract terminations 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. As a result of the Canton Restructuring actions, the Company recognized expense of $ 0 , $ 13 and $ 2,978 for the years ended December 31, 2022 , 2021 and 2020, respectively, for employee severance and termination costs and other restructuring related costs. For the year ended December 31, 2021 severance and other restructuring related costs of $ 13 were recognized in D&D in the consolidated statement of operations. For the year ended December 31, 2020 severance and other related restructuring costs of $ 1,659 , $ 551 and $ 768 were recognized in COGS, SG&A and D&D, respectively, in the consolidated statement of operations. We do not expect to incur additional costs related to the Canton Restructuring. Refer to Note 7 and Note 2 to the consolidated financial statements for additional details regarding the third-party lease and sale, respectively, of the Canton Facility. The expenses for the Canton Restructuring that relate to the Control Devices reportable segment include the following: Utilization Accrual as of January 1, 2022 2022 Charge to Expense Cash Non-Cash Accrual as of December 31, 2022 Employee termination benefits $ 93 $ — $ ( 93 ) $ — $ — Other related costs — — — — — Total $ 93 $ — $ ( 93 ) $ — $ — Utilization Accrual as of January 1, 2021 2021 Charge to Expense Cash Non-Cash Accrual as of December 31, 2021 Employee termination benefits $ 165 $ — $ ( 72 ) $ — $ 93 Other related costs — 13 ( 13 ) — — Total $ 165 $ 13 $ ( 85 ) $ — $ 93 Utilization Accrual as of January 1, 2020 2020 Charge to Expense Cash Non-Cash Accrual as of December 31, 2020 Employee termination benefits $ 2,636 $ 1,119 $ ( 3,590 ) $ — $ 165 Other related costs — 1,859 ( 1,859 ) — — Total $ 2,636 $ 2,978 $ ( 5,449 ) $ — $ 165 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 a restructuring program to transfer the European production of its controls product line to China. As a result of these actions, the Company recognized expense of $ 0 , $ 290 and $ 2,400 respectively, for the years ended December 31, 2022, 2021 and 2020 for employee severance and termination costs, non-cash fixed asset charges for accelerated depreciation of fixed assets, contract termination costs and other related costs. Electronics segment restructuring costs recognized in COGS, 68 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) SG&A and D&D in the consolidated statement of operations for the year ended December 31, 2021 were $ 37 , $ 210 and $ 43 , respectively. Electronics segment restructuring costs recognized in COGS, SG&A and D&D in the consolidated statement of operations for the year ended December 31, 2020 were $ 147 , $ 1,774 and $ 479 , respectively. We do not expect to incur additional costs related to these Electronics segment restructuring actions. The expenses for the restructuring activities that relate to the Electronics reportable segment include the following: Utilization Accrual as of January 1, 2021 2021 Charge to Expense Cash Non-Cash Accrual as of December 31, 2021 Employee termination benefits $ 227 $ 50 $ ( 277 ) $ — $ — Other related costs — 240 ( 240 ) — — Total $ 227 $ 290 $ ( 517 ) $ — $ — Utilization Accrual as of January 1, 2020 2020 Charge to Expense Cash Non-Cash Accrual as of December 31, 2020 Employee termination benefits $ 52 $ 1,034 $ ( 859 ) $ — $ 227 Contract termination costs — 452 ( 452 ) — — Other related costs — 914 ( 914 ) — — Total $ 52 $ 2,400 $ ( 2,225 ) $ — $ 227 In addition to the specific restructuring activities, the Company regularly evaluates the performance of its businesses and cost structures, including personnel, and makes necessary changes thereto in order to optimize its results. The Company also evaluates the required skill sets of its personnel and periodically makes strategic changes. As a consequence of these actions, the Company incurs severance related costs which are referred to as business realignment charges. Business realignment charges by reportable segment were as follows: Year ended December 31, 2022 2021 2020 Control Devices (A) $ — $ 192 $ 1,752 Electronics (B) — 3 1,690 Stoneridge Brazil (C) 98 59 234 Unallocated Corporate (D) 190 1,138 361 Total business realignment charges $ 288 $ 1,392 $ 4,037 _____________________________ (A) Severance costs for the year ended December 31, 2021 related to SG&A were $ 192 . Severance costs for the year ended December 31, 2020 related to COGS, D&D and SG&A were $ 724 , $ 283 and $ 745 respectively. (B) Severance costs (benefit) for the year ended December 31, 2021 related to COGS, SG&A and D&D were $ 1 , $( 7 ) and $ 9 , respectively. Severance costs for the year ended December 31, 2020 related to COGS, D&D and SG&A were $ 383 , $ 402 and $ 905 respectively. (C) Severance costs for the year ended December 31, 2022 related to SG&A were $ 98 . Severance costs for the year ended December 31, 2021 related to COGS and SG&A were $ 7 and $ 52 , respectively. Severance costs for the year ended December 31, 2020 related to COGS and SG&A were $ 124 and $ 110 , respectively. (D) Severance costs for the years ended December 31, 2022, 2021 and 2020 related to SG&A were $ 190 , $ 1,138 and $ 361 , respectively. Business realignment charges classified by statement of operations line item were as follows: Year ended December 31, 2022 2021 2020 Cost of goods sold $ — $ 8 $ 1,231 Selling, general and administrative 288 1,375 2,121 Design and development — 9 685 Total business realignment charges $ 288 $ 1,392 $ 4,037 69 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) 13. Segment Reporting Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the chief executive officer. The Company has three reportable segments, Control Devices, Electronics and Stoneridge Brazil, which also represent its operating segments. The Control Devices reportable segment produces actuators, sensors, switches and connectors. The Electronics reportable segment produces driver information systems, vision and safety systems, connectivity and compliance products and electronic control units. The Stoneridge Brazil reportable segment designs and manufactures vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices, driver information systems and telematics solutions. The accounting policies of the Company’s reportable segments are the same as those described in Note 2. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and operating income. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation. The financial information presented below is for our three reportable operating segments and includes adjustments for unallocated corporate costs and intercompany eliminations, where applicable. Such costs and eliminations do not meet the requirements for being classified as an operating segment. Corporate costs include various support functions, such as accounting/finance, executive administration, human resources, information technology and legal. 70 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) A summary of financial information by reportable segment is as follows: December 31, 2022 2021 2020 Net Sales: Control Devices $ 342,596 $ 355,775 $ 342,576 Inter-segment sales 2,719 3,502 5,475 Control Devices net sales 345,315 359,276 348,051 Electronics 505,097 357,910 257,767 Inter-segment sales 28,709 26,192 24,027 Electronics net sales 533,806 384,103 281,794 Stoneridge Brazil 52,230 56,777 47,663 Inter-segment sales 32 — — Stoneridge Brazil net sales 52,262 56,777 47,663 Eliminations ( 31,460 ) ( 29,694 ) ( 29,502 ) Total net sales $ 899,923 $ 770,462 $ 648,006 Operating Income (Loss): Control Devices $ 23,917 $ 54,933 $ 22,072 Electronics 5,128 ( 12,502 ) ( 3,672 ) Stoneridge Brazil 3,150 995 3,766 Unallocated Corporate (A) ( 29,260 ) ( 28,015 ) ( 29,830 ) Total operating income (loss) $ 2,935 $ 15,411 $ ( 7,664 ) Depreciation and Amortization: Control Devices $ 13,521 $ 15,351 $ 15,377 Electronics 13,913 12,487 10,501 Stoneridge Brazil 3,939 3,856 4,766 Unallocated Corporate 2,318 2,134 2,086 Total depreciation and amortization (B) $ 33,691 $ 33,828 $ 32,730 Interest Expense (Income), net: Control Devices $ 93 $ 132 $ 173 Electronics 1,009 462 320 Stoneridge Brazil ( 1,282 ) ( 1,353 ) ( 4 ) Unallocated Corporate 7,277 5,948 5,635 Total interest expense, net $ 7,097 $ 5,189 $ 6,124 Capital Expenditures: Control Devices $ 12,620 $ 9,154 $ 11,760 Electronics 10,479 9,735 11,617 Stoneridge Brazil 3,480 2,918 2,839 Unallocated Corporate (C) 653 1,142 1,444 Total capital expenditures $ 27,232 $ 22,949 $ 27,660 71 Table of Contents STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data, unless otherwise indicated) December 31, 2022 2021 Total Assets: Control Devices $ 174,535 $ 181,968 Electronics 369,232 338,080 Stoneridge Brazil 60,861 59,100 Corporate (C) 419,469 438,175 Eliminations ( 371,992 ) ( 351,924 ) Total assets $ 652,105 $ 665,399 The following table presents net sales and long-term assets for the geographic areas in which the Company operates: December 31, 2022 2021 2020 Net Sales: North America $ 444,928 $ 386,944 $ 330,528 South America 52,230 56,777 47,663 Europe and Other 402,765 326,741 269,815 Total net sales $ 899,923 $ 770,462 $ 648,006 December 31, 2022 2021 Long-term Assets: North America $ 92,149 $ 91,039 South America 31,796 30,272 Europe and Other 118,609 133,264 Total long-term assets $ 242,554 $ 254,575 _____________________________ (A) Unallocated Corporate expenses include, among other items, accounting/finance, human resources, information technology and legal costs as well as share-based compensation. (B) These amounts represent depreciation and amortization on property, plant and equipment and certain intangible assets. (C) Assets located at Corporate consist primarily of cash, intercompany receivables, fixed and leased assets for the headquarter building, information technology assets, equity investments and investments in subsidiaries. 14. Subsequent Events Credit Facility Amendment On March 1, 2023, the Company entered into Amendment No. 4 to the Credit Facility. Refer to Note 5 of the consolidated financial statements for details regarding this amendment. 72 Table of Contents SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS The following schedule provides the activity for accounts receivable reserves and valuation allowance for deferred tax assets for the years ended December 31, 2022, 2021 and 2020 (in thousands): Balance at beginning of period Charged to costs and expenses Write-offs Balance at end of period Accounts receivable reserves: Year ended December 31, 2022 $ 1,443 $ 1,255 $ ( 1,736 ) $ 962 Year ended December 31, 2021 $ 817 $ 1,030 $ ( 404 ) $ 1,443 Year ended December 31, 2020 $ 1,289 $ 1,130 $ ( 1,602 ) $ 817 Balance at beginning of period Net additions charged to income (expense) Exchange rate fluctuations and other items Balance at end of period Valuation allowance for deferred tax assets: Year ended December 31, 2022 $ 14,516 $ 4,975 $ ( 995 ) $ 18,496 Year ended December 31, 2021 $ 10,237 $ 4,768 $ ( 489 ) $ 14,516 Year ended December 31, 2020 $ 8,586 $ 2,174 $ ( 523 ) $ 10,237 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. There have been no disagreements between the management of the Company and its Independent Registered Public Accounting Firm on any matter of accounting principles or practices of financial statement disclosures, or auditing scope or procedure.