Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We are a global designer and manufacturer of highly engineered electrical and electronic systems, components and modules primarily for the automotive, commercial, off-highway and agricultural vehicle markets.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein.
Segments
We are organized by products produced and markets served. Under this structure, our operations have been reported using the following segments:
Control Devices. This segment includes results of operations that manufacture actuators, sensors, switches and connectors.
Electronics. This segment includes results of operations from the production of driver information systems, vision and safety systems, connectivity and compliance products and electronic control units.
Stoneridge Brazil. This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices, driver information systems and telematics solutions.
Overview
During 2023, we benefited from increased volumes in both our North American and European commercial vehicle markets, compared to the prior year, due to improvements in end market demand and launches of previously awarded programs including launches for our MirrorEye camera monitor system and our SE5000 Smart 2 tachograph. We continued to benefit from both previously agreed pricing actions, as well as incremental actions taken within the year, with the majority of our customers, which offset a portion of the incremental material, supply chain and other input costs we incurred.
The Company had net loss of $5.2 million, or $(0.19) per diluted share, for the year ended December 31, 2023.
Net loss in 2023 decreased by $8.9 million, or $0.33 per diluted share, from $14.1 million, or $(0.52) per diluted share, for the year ended December 31, 2022 primarily due to additional contribution from higher sales levels, including the benefit of negotiated price increases and favorable foreign exchange fluctuations offset by higher Selling, General and Administrative (“SG&A”) and Design and Development (“D&D”) spending, including higher business realignment costs, and interest expense.
In 2023, our net sales increased by $75.9 million, or 8.4%, while our operating income increased $9.9 million.
Our Control Devices segment net sales decreased by 0.2% primarily due to a decrease in our North American automotive market, which was adversely impacted in the fourth quarter of 2023 by the UAW strike and a slower than expected penetration rate for electric vehicle platforms, as well as a decrease in our agricultural market. These decreases were offset by negotiated price increases and an increase in our China commercial vehicle and automotive markets. Segment gross margin as a percentage of sales decreased due to higher direct material costs from inflation and support costs for a troubled supplier. Segment operating income decreased due to lower gross margin and higher SG&A and D&D spending.
Our Electronics segment net sales increased by 14.1% primarily due to higher sales volumes in our European and North American commercial vehicle markets, including the launches of a next generation tachograph product for OEM and aftermarket applications in Europe and our first OEM MirrorEye program in North America, and the impact of negotiated price increases offset by lower required electronic component spot buy purchases. Segment gross margin as a percent of sales increased primarily due to higher contribution from higher sales levels, negotiated price increases, lower material costs including the favorable effect of foreign currency and lower required electronic component spot buy purchases offset by an increase in labor and overhead costs. Operating income for the segment increased primarily due to higher gross margin partially offset by higher SG&A and D&D spending, including support for new product launches and business realignment expense of $2.9 million focused on centralizing critical functions in order to effectively utilize global resources.
Our Stoneridge Brazil segment net sales increased by 9.5% due to favorable foreign currency translation and higher sales of our OEM products offset by lower sales demand for our other product lines. Segment gross margin increased due to increased contribution margin from higher sales and favorable foreign currency fluctuations. Operating income increased due to higher gross margin offset by an increase in SG&A spending.
In 2023, SG&A expenses increased compared to 2022 due to higher business realignment costs of $3.0 million, higher incentive compensation due to the achievement of performance targets, consulting and professional service fees and travel related costs.
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D &D costs increased in 2023 due to lower customer reimbursements as a result of a shift to platform development and higher costs related to product launch preparations offset by increased capitalized software development costs.
At December 31, 2023 and 2022, we had cash and cash equivalents of $40.8 million and $54.8 million, respectively. At December 31, 2023 and 2022 , we had $189.3 million and $167.8 million , respectively, in borrowings outstanding on the Credit Facility. The 2023 decrease in cash and cash equivalents was due to capital expenditures for new product launches and relatively higher working capital levels to support higher sales and production levels as well as the residual impact of supply chain issues on inventory.
Outlook
The Company believes that focusing on products that address industry megatrends has had and will continue to have a positive effect on both our top-line growth and underlying margins. For example, the Company is aligned with platforms likely to perform well against overall market dynamics including light-trucks, SUVs and crossover vehicles and our continued focus on safety, vehicle intelligence and connectivity based products, such as the recent release of our next generation tachograph in Europe as well as current and future launches of our MirrorEye programs in North America and Europe for both OEM and aftermarket applications.
Global inflation has increased significantly since 2021. Rising costs of materials, labor and other inputs used to manufacture and sell our products, have impacted, and may continue to impact, our results. While incremental material and production costs have started to moderate, we expect continued cost inflation to persist into 2024 which will continue to put pressure on margins. In order to minimize the impact of these incremental costs, we have taken several actions, including negotiating price increases and cost recoveries with our customers. Additionally, we continued to focus on improving manufacturing performance and optimizing our global cost structure to both reduce costs and improve operational efficiency. We expect these actions will benefit our future financial performance.
Based on IHS Market production forecasts, the North American automotive market is expected to increase from 15.6 million units in 2023 to 15.8 million units in 2024 as this market continues to recover from the effects of prior supply chain disruptions, the impact of the UAW strike in the fourth quarter of 2024 and economic headwinds. In our Control Devices segment, we expect lower than previously anticipated growth rates for sales of products used in electric vehicle platforms due to reduced production expectations with some of our key customers. We continue to focus on improved manufacturing execution, supply chain strategy, material cost improvement actions and enterprise-wide cost improvement plans and will continue to react to changes in our end-markets as needed to maintain and improve our margins. During 2023, our Control Devices segment incurred $2.5 million of support costs for a troubled supplier. We expect these costs to moderate in the first half of 2024. We will continue to focus on growing our core product portfolio aligned with industry megatrends by investing in our actuation and system-level sensor products as we anticipate greater opportunities as powertrains become increasingly electrified and efficient.
In 2024, our European and North American commercial vehicle end market volumes are forecasted to decrease 10.5% and 7.6%, respectively. We expect our Electronics’ segment sales to outperform forecasted changes in production volumes due to strong demand for our existing products and the ramp-up of recently launched programs, including our next generation tachograph product in Europe for both OEM and aftermarket applications and our first North American OEM MirrorEye program, as well as expected program launches, including our next OEM MirrorEye program launch in Europe in 2024. Recovery from customers related to spot buys of materials purchased by the Company on behalf of those customers increased net sales by $14.6 million and $58.4 million for 2023 and 2022, respectively. Spot buy material purchasing activity, which is recognized as revenue and material costs, was mostly passed through to customers and was driven by electronic component shortages. The Company expects spot buy activity to continue to decline as supply chains normalize and material availability improves.
In 2024, we expect net D&D spend to increase primarily driven by spend for the development of next generation products as new product launch related spend decreases in the second half of 2024. As a result of reduced launch activities we expect lower customer reimbursements and capitalization of software development costs. We continue to evaluate and optimize our engineering footprint to enhance capabilities and capacity for the most efficient return on our engineering spend.
In January 2024, the International Monetary Fund forecasted the Brazil gross domestic product to grow 1.7 % in 2024. We expect our served market channels to remain relatively stable in 2024 based on current market conditions. Stoneridge Brazil will focus on continuing to grow our OEM capabilities in-region to better support our global customers. This focus will provide opportunities for future growth and provide a platform to continue to rotate our local portfolio to more closely align with our global business.
We remain focused on improving cash generation and the reduction of debt through efficient operating performance and targeted actions to reduce net working capital, particularly our inventory levels, as the impacts from product launches and material availability normalizes.
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We expect higher interest expense in 2024 driven by higher outstanding balances on our Credit Facility.
Our future effective tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles and our jurisdictional mix of earnings. We monitor these factors and the impact on our effective tax rate.
Other Matters
A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and Stoneridge Brazil segments are denominated in U.S. dollars and, therefore, movements in foreign currency exchange rates can also have a significant effect on our results of operations. The U.S. Dollar strengthened against the Chinese yuan and Argentine peso in 2023 and the euro, Swedish krona, Chinese yuan and Argentine peso in 2022, unfavorably impacting our reported results.
On November 2, 2021, the Company entered into a Share Purchase Agreement (the “SPA”) with Minda Corporation Limited (“Minda”), as the buyer, and MSIL. Pursuant to the SPA, the Company agreed to sell to Minda the Company’s minority interest in MSIL for approximately $21.5 million equivalent Indian Rupee which was payable in U.S. dollars at closing. On December 30, 2021, pursuant to the SPA, the Company closed the sale of MSIL to Minda for $21.6 million. The Company recognized net proceeds of $21.0 million and a gain, net of direct selling costs, of $1.8 million.
On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA, the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). The Buyers did not acquire any of the Company’s locations or employees. The purchase price for the sale of the PM sensor business was $4.0 million (subject to a post-closing inventory adjustment, which was a payment to SMP of $1.1 million) plus the assumption of certain liabilities. The purchase price was allocated among PM sensor product lines, Gen 1 and Gen 2 as defined under the APA. The purchase price allocated to Gen 1 fixed assets and inventory and Gen 2 fixed assets was $3.2 million and $0.8 million, respectively. The sale of the Gen 2 assets occurred during November 2021 as the Company’s supply commitments to certain customers were completed in September 2021. The Company and SMP also entered into certain ancillary agreements, including a contract manufacturing agreement, a transitional services agreement, and a supply agreement, pursuant to which the Company provided and was compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis.
On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter sensor product line (“PM Sensor Exit”). The costs for the PM Sensor Exit included employee severance and termination costs and other related costs including supplier settlements. Non-cash charges included impairment and accelerated depreciation of fixed assets associated with PM sensor production. We recognized $2.4 million of expense as a result of this initiative during the year ended December 31, 2021.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten year life of the fund. The Company has contributed $8.4 million to the Autotech Fund II since December 2018.
We regularly evaluate the performance of our businesses and their cost structures, including personnel, and make necessary changes thereto in order to optimize our results. We also evaluate the required skill sets of our personnel and periodically make strategic changes. As a consequence of these actions, we incur severance related costs which we refer to as business realignment charges. Business realignment costs of $4.5 million and $0.3 million were incurred during the years ended December 31, 2023 and 2022, respectively. Realignment expense for the year ended December 31, 2023 was primarily related to the centralization of the product line management, sales and engineering funct ions and executive separation costs.
Because of the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which to date has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.
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Year Ended December 31, 2023 Compared To Year Ended December 31, 2022
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Year ended December 31, 2023 2022 Dollar
increase /
(decrease)
Net sales $ 975,818 100.0 % $ 899,923 100.0 % $ 75,895
Costs and expenses:
Cost of goods sold 774,512 79.4 724,997 80.6 49,515
Selling, general and administrative 117,395 12.0 106,695 11.9 10,700
Design and development 71,075 7.3 65,296 7.3 5,779
Operating income 12,836 1.3 2,935 0.3 9,901
Interest expense, net 13,000 1.3 7,097 0.8 5,903
Equity in loss of investee 522 0.1 823 0.1 (301)
Other expense, net 1,236 0.1 5,711 0.6 (4,475)
Loss before income taxes (1,922) (0.2) (10,696) (1.2) 8,774
Provision for income taxes 3,261 0.3 3,360 0.4 (99)
Net loss $ (5,183) (0.5) % $ (14,056) (1.6) % $ 8,873
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Year ended December 31, 2023 2022 Dollar
increase /
(decrease) Percent
increase /
(decrease)
Control Devices $ 342,065 35.1 % $ 342,596 38.1 % $ (531) (0.2) %
Electronics 576,539 59.0 505,097 56.1 71,442 14.1 %
Stoneridge Brazil 57,214 5.9 52,230 5.8 4,984 9.5 %
Total net sales $ 975,818 100.0 % $ 899,923 100.0 % $ 75,895 8.4 %
Our Control Devices segment net sales decreased $0.5 million due to a decrease in our North American automotive market of $6.3 million, including the adverse impact of the UAW strike in the fourth quarter of 2023 and a slower than expected penetration rate for electric vehicle platforms, as well as a decrease in our agricultural market of $1.1 million. These decreases were offset by increases in our China commercial vehicle and automotive markets of $2.6 million and $2.2 million, respectively. In addition, net sales for the year ended December 31, 2023 were impacted by negotiated price increases of $5.4 million offset by an increase in unfavorable foreign currency translation of $2.5 million.
Our Electronics segment net sales increased $71.4 million due to higher sales volumes in our European and North American commercial vehicle markets of $55.2 million and $52.4 million, respectively, including the launches of a next generation tachograph product in Europe for both OEM and aftermarket applications and our first OEM MirrorEye program in North America, and the impact of negotiated price increases of $7.5 million. These increases were offset by the impact of lower required electronic component spot buy purchases of $40.8 million compared to 2022. In addition, we experienced lower sales volumes in North American off-highway vehicle market of $3.5 million and unfavorable foreign currency translation of $3.2 million, mostly from euro and Swedish krona, compared to the prior year.
Our Stoneridge Brazil segment net sales increased $5.0 million due to higher sales in our OEM product line and favorable foreign currency translation offset by lower sales demand for our other product lines .
Net sales by geographic location are summarized in the following table (in thousands):
Year ended December 31, 2023 2022 Dollar
increase /
(decrease) Percent
increase /
(decrease)
North America $ 495,541 50.8 % $ 444,928 49.4 % $ 50,613 11.4 %
South America 57,214 5.9 52,230 5.8 4,984 9.5 %
Europe and Other 423,063 43.3 402,765 44.8 20,298 5.0 %
Total net sales $ 975,818 100.0 % $ 899,923 100.0 % $ 75,895 8.4 %
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The increase in North American net sales was attributable to increased sales volume in our commercial vehicle market of $51.5 million and by negotiated price increases of $10.7 million. These increases were offset by lower sales volume in our North American automotive, off-highway and agricultural markets.
The increase in net sales in South America was primarily due to higher sales in our OEM product line and favorable foreign currency translation offset by lower sales demand for our other product lines .
The increase in net sales in Europe and Other was due to increases in our European and China commercial vehicle markets of $55.2 million and $4.5 million, respectively, China automotive of $2.2 million and negotiated price increases o f $2.2 million. These increases were offset by lower required customer recoveries of electronic component spot buys of $39.7 million. In addition, we experienced unfavorable foreign currency translation of $5.7 million.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to 2022 and our gross margin increased to 20.6% in 2023 compared to 19.4% in 2022. Our material cost as a percentage of net sales de creased by 2.4% t o 59.4% in 2023 compared to 61.8% in 2022. The decrease in the material cost percentage was partially due to the impact of required electronic component spot buy purchases that were offset by customer recoveries. The impact of these spot buy purchases increased cost of goods sold by $14.6 million, or 1.5% of net sales, and $58.4 million, or 6.5% of sales, during 2023 and 2022, respectively, which reduced gross margin percent by 0.3 % and 1.4% in 2023 and 2022, respectively. Other factors reducing the material cost percentage were favorable foreign currency fluctuations and favorable sales mix in our Electronics segment. Overhead as a percentage of net sales was 15.1% and 14.2% for 2023 and 2022, respectively. The increase in overhead as a percentage of sales was attributable to higher indirect wage inflation and warranty costs which offset favorable fixed cost leverage from higher sales levels.
Our Control Devices segment gross margin decreased primarily due to higher direct material costs associated with inflation and financial support for a troubled supplier as well as unfavorable sales mix.
Our Electronics segment gross margin increased due to the contribution from higher sales levels, including negotiated price increases, and the reduction of the adverse effect of required electronic component spot buy purchases, net of customer recoveries, offset by higher labor and overhead costs including wages and warranty expense.
Our Stoneridge Brazil segment gross margin increased primarily due to increased contribution from higher sales and favorable foreign currency fluctuations.
Selling, General and Administrative. SG&A expenses increased by $10.7 million compared to 2022 due to higher business realignment costs of $3.0 million, higher incentive compensation due to achievement of performance targets, consulting and professional service fees and travel related costs. In addition, our Control Devices segment recognized 2022 favorable legal settlements offset by a 2023 gain on the sale of fixed assets of an idled sensor production line.
Design and Development. D&D costs increased by $5.8 million due to lower customer reimbursements and higher costs related to product launch preparations offset by increases in capitalized software development costs for our Electronics segment. All other segments also incurred slightly higher spending attributable to product launch activities.
Operating Income. Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Year ended December 31, 2023 2022 Dollar
increase /
(decrease) Percent
increase /
(decrease)
Control Devices $ 13,582 $ 23,917 $ (10,335) (43.2) %
Electronics 27,309 5,128 22,181 432.5 %
Stoneridge Brazil 4,454 3,150 1,304 41.4 %
Unallocated corporate (32,509) (29,260) (3,249) (11.1) %
Operating income $ 12,836 $ 2,935 $ 9,901 337.3 %
Our Control Devices segment operating income decreased due to lower gross margin primarily resulting from higher material costs associated with inflation and troubled supplier support costs , unfavorable sales mix and a 2022 favorable legal settlement offset by a 2023 gain on disposal of fixed assets.
Our Electronics segment operating income increased primarily due to higher contribution from higher sales and negotiated pricing and favorable foreign exchange fluctuations offset by higher labor and overhead costs as well as higher SG&A and D&D spending including business realignment costs.
Our Stoneridge Brazil segment operating income increased due to contribution from higher sales levels offset by higher SG&A and D&D spending.
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Our unallocated corporate operating loss increased primarily from higher service related costs, business realignment costs associated with employee separation related costs of $0.9 million and higher incentive compensation due to achievement of performance targets.
Operating income (loss) by geographic location is summarized in the following table (in thousands):
Year ended December 31, 2023 2022 Dollar
increase /
(decrease) Percent
increase /
(decrease)
North America $ (13,566) $ (2,066) $ (11,500) 556.6 %
South America 4,454 3,150 1,304 41.4 %
Europe and Other 21,948 1,851 20,097 1085.7 %
Operating income $ 12,836 $ 2,935 $ 9,901 337.3 %
Our North American operating loss increased due to higher material and labor costs, higher business realignment, higher incentive compensation and a 2022 favorable legal settlement offset by a 2023 gain on disposal of fixed assets. Operating income in South America increased due to higher sales levels offset by higher SG&A and D&D spending. Our operating results in Europe and Other increased primarily due to contribution from higher sales levels offset by higher D&D expense.
Interest Expense, net. Interest expense, net increased by $5.9 million compared to 2022 due to both higher interest rates and outstanding balances for our Credit Facility in addition to the write-off of $0.3 million of deferred financing fees as a result of entering into the Fifth Amended and Restated Credit Agreement.
Equity in Loss of Investee. Equity losses for Autotech Fund II were $0.5 million and $0.8 million for the years ended December 31, 2023 and 2022 . The decrease in Autotech Fund II earnings was due to unfavorable 2023 and 2022 fair value adjustments to fund investments and fund expenses.
Other Expense, net . We record certain foreign currency transaction losses (gains) as a component of other expense, net on the consolidated statement of operations. Other expense, net of $1.2 million, decreased by $4.5 million in 2023 compared to other expense, net of $5.7 million for 2022 primarily due to the impact of favorable foreign currency movements in our Electronics and Control Devices segments from moderated strengthening of the U.S. dollar.
Provision for Income Taxes. In 2023, the provision for income tax expense was $3.3 million, resulting in an effective tax rate of (169.7)%. In 2022, the provision for income tax expense was $3.4 million, resulting in an effective tax rate of (31.4)%. In 2023 and 2022, the provision for income taxes was impacted by jurisdictional earnings mix, U.S. taxes on foreign earnings, various tax credits and incentives and tax losses for which no benefit is recognized due to valuation allowances.
The OECD implemented a 15% global corporate minimum tax to ensure that large multinational enterprises pay a minimum level of tax in the countries they operate. While various countries have implemented the legislation as of January 1, 2024, we do not expect a material change to our income tax provision for the year ended December 31, 2024. As additional jurisdictions implement this legislation, our effective tax rate and cash tax payments could increase in future years.
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Year Ended December 31, 2022 Compared To Year Ended December 31, 2021
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease)
Net sales $ 899,923 100.0 % $ 770,462 100.0 % $ 129,461
Costs and expenses:
Cost of goods sold 724,997 80.6 603,604 78.3 121,393
Selling, general and administrative 106,695 11.9 116,000 15.1 (9,305)
Gain on sale of Canton Facility, net — — (30,718) (4.0) 30,718
Design and development 65,296 7.3 66,165 8.6 (869)
Operating income 2,935 0.3 15,411 2.0 (12,476)
Interest expense, net 7,097 0.8 5,189 0.7 1,908
Equity in loss (earnings) of investee 823 0.1 (3,658) (0.5) 4,481
Other expense, net 5,711 0.6 1,444 0.2 4,267
(Loss) income before income taxes (10,696) (1.2) 12,436 1.6 (23,132)
Provision for income taxes 3,360 0.4 9,030 1.2 (5,670)
Net (loss) income $ (14,056) (1.6) % $ 3,406 0.4 % $ (17,462)
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease) Percent
increase /
(decrease)
Control Devices $ 342,596 38.1 % $ 355,775 46.2 % $ (13,179) (3.7) %
Electronics 505,097 56.1 357,910 46.5 147,187 41.1 %
Stoneridge Brazil 52,230 5.8 56,777 7.4 (4,547) (8.0) %
Total net sales $ 899,923 100.0 % $ 770,462 100.0 % $ 129,461 16.8 %
Our Control Devices segment net sales decreased $13.2 million due to lower sales volumes in our served markets and unfavorable foreign currency translation of $20.0 million and $2.3 million, respectively, which were offset by negotiated price increases of $9.1 million. Sales volumes decreased in our China commercial, North American commercial and China automotive markets of $5.8 million, $3.4 million and $2.3 million, respectively. European automotive and commercial vehicle markets decreased by $10.3 million and $2.4 million, respectively, due to our exit of the PM sensor business. Net sales for 2022 were favorably impacted by an increase in our North American automotive markets of $2.9 million compared to the prior year.
Our Electronics segment net sales increased $147.2 million due to higher sales volumes in our European commercial, North American commercial, European off-highway vehicle and North American off-highway markets of $55.1 million, $33.8 million, $18.2 million and $6.0 million, respectively. In addition, 2022 net sales were favorably impacted by both customer pricing for recoveries of electronic component spot buy purchases and for negotiated price increases of $40.8 million and $23.0 million, respectively. These increases were offset by unfavorable euro and Swedish krona foreign currency translation compared to the prior year of $28.8 million.
Our Stoneridge Brazil segment net sales decreased $4.5 million due to lower sales in most Stoneridge Brazil product lines of $7.8 million offset by favorable foreign currency translation of $2.6 million and higher sales of tracking devices and monitoring services fees of $0.7 million.
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Net sales by geographic location are summarized in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease) Percent
increase /
(decrease)
North America $ 444,928 49.4 % $ 386,944 50.2 % $ 57,984 15.0 %
South America 52,230 5.8 56,777 7.4 (4,547) (8.0) %
Europe and Other 402,765 44.8 326,741 42.4 76,024 23.3 %
Total net sales $ 899,923 100.0 % $ 770,462 100.0 % $ 129,461 16.8 %
The increase in North American net sales was mostly attributable to increases in sales volume in our Electronics segment commercial vehicle and off-highway markets of $33.8 million and $6.0 million, respectively and in our Control Devices segment automotive market of $2.9 million offset by sales volume decreases in our Control Devices segment commercial vehicle market of $3.4 million. In addition, North American net sales were favorably impacted by negotiated price increases of $16.1 million and customer recoveries of semiconductor spot buy purchases of $0.7 million.
The decrease in net sales in South America was primarily due to lower sales in most Stoneridge Brazil product lines of $7.8 million offset by favorable foreign currency translation of $2.6 million and higher sales of tracking devices and monitoring service fees of $0.7 million.
The increase in net sales in Europe and Other was due to customer recoveries of semiconductor spot buy purchases and negotiated price increases of $40.1 million and $15.9 million, respectively and increases in our Electronics segment European commercial vehicle and European off-highway markets of $52.9 million and $18.2 million, respectively. This increase for Europe and Other was offset by decreases in our Control Devices European automotive and commercial vehicle markets of $10.4 million and $2.4 million, respectively, and China commercial vehicle and automotive markets of $5.8 million and $2.3 million, respectively. In addition, Europe and Other net sales decreased $31.1 million due to unfavorable foreign currency translation.
Cost of Goods Sold and Gross Marg in. Cost of goods sold increased compared to 2021 and our gross margin decreased to 19.4% in 2022 compared to 21.7% in 2021. Our material cost as a percentage of net sales increased by 4.8% to 61.8% in 2022 compared to 57.0% in 2021 primarily caused by costs associated with supply chain disruptions including spot purchases of electronic components and inflation. In 2022, cost of goods sold increased by $58.4 million, or 6.5% of net sales, due to semiconductor spot buy purchases that was offset by customer recoveries. The impact of these spot buy
purchases reduced gross margin percent by 1.4%. Overhead as a percentage of net sales decreased by 1.9% to 14.2% for 2022 compared to 16.1% for 2021 primarily due to leverage of fixed costs from higher sales levels.
Our Control Devices segment gross margin decreased due to higher material costs associated with supply chain disruptions and inflation offset by negotiated price increases and lower restructuring and realignment costs of $1.5 million.
Our Electronics segment gross margin increased primarily due to increased contribution from higher sales levels and favorable negotiated pricing offset by higher material costs associated with supply chain disruptions including spot purchases of electronic components, adverse foreign exchange fluctuations and inflation.
Our Stoneridge Brazil segment gross margin as a percentage of sales was consistent with the prior year as adverse leverage of fixed costs from lower product sales was offset by favorable sales mix from a greater percentage of monitoring service fees.
Selling, General and Administrative . SG&A expenses decreased by $9.3 million compared to 2021 due to favorable non-recurring 2022 commercial and legal settlements, lower wages, incentive compensation, legal fees and selling costs. In addition, compared to 2021, SG&A was favorably impacted by an unfavorable adjustment to the fair value of the Stoneridge Brazil earn-out consideration in 2021, lower business realignment and restructuring costs and Sarasota environmental remediation costs incurred in 2021. Offsetting these favorable items were the 2021 gain on disposal of the MSIL joint venture, the 2021 gain on disposal of the PM Sensor business and unfavorable net adjustments for Brazilian indirect tax credits.
Design and Development. D&D costs decreased by $0.9 million due to higher customer reimbursements for ongoing development activities in our Electronics segment of $8.3 million that were offset by increased spend for awarded business program launches and development of advanced technologies and systems in our Electronics, Control Devices and Stoneridge Brazil segments.
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Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease) Percent
increase /
(decrease)
Control Devices $ 23,917 $ 54,933 $ (31,016) (56.5) %
Electronics 5,128 (12,502) 17,630 141.0 %
Stoneridge Brazil 3,150 995 2,155 216.6 %
Unallocated corporate (29,260) (28,015) (1,245) (4.4) %
Operating income (loss) $ 2,935 $ 15,411 $ (12,476) (81.0) %
Our Control Devices segment operating income decreased due to the gain on sale of the Canton Facility of $30.7 million in 2021 and the gain on disposal of the PM sensor business of $1.1 million in 2021.
Our Electronics segment operating income increased from higher contribution from increased sales levels and lower SG&A and D&D costs from higher customer reimbursements.
Our Stoneridge Brazil segment operating income increased primarily due to lower SG&A expenses from the unfavorable adjustment to the fair value of the Stoneridge Brazil earn-out consideration in 2021 and lower selling costs offset by lower gross margin and unfavorable net adjustments for Brazilian indirect tax credits.
Our unallocated corporate operating loss increased due to the 2021 gain on disposal of the MSIL joint venture offset by lower business realignment.
Operating income (loss) by geographic location is summarized in the following table (in thousands):
Year ended December 31, 2022 2021 Dollar
increase /
(decrease) Percent
increase /
(decrease)
North America $ (2,066) $ 13,072 $ (15,138) (115.8) %
South America 3,150 995 2,155 216.6 %
Europe and Other 1,851 1,344 507 37.7 %
Operating income (loss) $ 2,935 $ 15,411 $ (12,476) (81.0) %
Our North American operating income decreased due to the 2021 gains on the sale of the Canton Facility, the disposal of the MSIL joint venture and the PM Sensor business. and higher material costs from supply chain disruptions. Offsetting these gains were increased contribution from higher sales levels and 2022 non-recurring commercial and legal settlements. The increase in operating income in South America was primarily due to an unfavorable change in fair value of earn-out consideration adjustments of $2.1 million in 2021 and lower selling costs offset by lower contribution from lower sales levels and an unfavorable net adjustments for Brazilian indirect tax credits. Our operating results in Europe and Other increased slightly primarily due to higher contribution from increased sales levels and the favorable impact of negotiated pricing offset by higher costs from supply chain disruptions including spot purchases of electronic components net of recoveries and adverse foreign exchange fluctuations and inflation.
Interest Expense, net. Interest expense, net increased by $1.9 million compared to 2021 due to higher Credit Facility interest rates and $0.4 million related to the write-off of deferred financing fees as a result of Amendment No. 3 to the Credit Facility.
Equity in Loss (Earnings) of Investee. Equity loss (earnings) for Autotech Fund II were $0.8 million and $(1.9) million for the years ended December 31, 2022 and 2021. The decrease in Autotech Fund II earnings was due to unfavorable 2022 fair value adjustments to fund investments. Equity earnings for MSIL were $1.8 million for the year ended December 31, 2021. As discussed in Note 2 to the consolidated financial statements, the Company sold its equity interest in MSIL on December 30, 2021.
Other Expense, net. We record certain foreign currency transaction losses (gains) as a component of other income, net on the consolidated statement of operations. Other expense, net of $5.7 million, increased by $4.3 million in 2022 compared to other expense, net of $1.4 million for 2021 primarily due to foreign currency transaction losses in our Electronics, Control Devices and Stoneridge Brazil segments from the strengthening of the U.S. dollar.
Provision for Income Taxes. In 2022, income tax expense of $3.4 million was attributable to the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions and U.S. taxes on foreign earnings offset by tax credits and incentives. The effective tax rate of (31.4)% varies from the statutory tax rate primarily due to tax credits and incentives offset by the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions as well as U.S. tax on foreign earnings.
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In 2021, income tax expense of $9.0 million was attributable to the gain on the sale of the Canton facility, the gain on the sale of the Company’s minority interest in MSIL, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 72.6% was greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions, the tax impact of the sale of the Company’s minority interest in MSIL, partially offset by tax incentives.
Liquidity and Capital Resources
Summary of Cash Flows for the years ended December 31, 2023 and 2022 (in thousands):
Year ended December 31, 2023 2022 Dollar
increase /
(decrease)
Net cash provided by (used for):
Operating activities $ 4,946 $ 6,806 $ (1,860)
Investing activities (36,979) (28,581) (8,398)
Financing activities 17,485 (7,297) 24,782
Effect of exchange rate changes on cash and cash equivalents 591 (1,677) 2,268
Net change in cash and cash equivalents $ (13,957) $ (30,749) $ 16,792
Cash provided by operating activities decreased compared to 2022 primarily due to an increase in cash used to fund working capital levels from a combination of higher inventory levels for new product launches and the residual impact of supply chain issues on inventory , lower accounts payable and the 2022 increase in assets for spot buys not yet invoiced. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash used for investing activities increased compared to the prior year due to higher capital expenditures and capitalized software development costs and cash proceeds from the 2022 settlement of the net investment hedges offset by increased proceeds from the sale of fixed assets.
Net cash provided by financing activities increased compared to the prior year primarily due to higher Credit Facility net borrowings, offset by the 2022 cash payment of Stoneridge Brazil earn-out consideration and 2023 debt issuance costs.
Summary of Cash Flows for the years ended December 31, 2022 and 2021 (in thousands):
Years ended December 31, 2022 2021 Dollar
increase /
(decrease)
Net cash provided by (used for):
Operating activities $ 6,806 $ (36,248) $ 43,054
Investing activities (28,581) 28,041 (56,622)
Financing activities (7,297) 22,876 (30,173)
Effect of exchange rate changes on cash and cash equivalents (1,677) (3,041) 1,364
Net change in cash and cash equivalents $ (30,749) $ 11,628 $ (42,377)
Cash provided by operating activities increased compared to 2021 primarily due to a reduction in cash used to fund working capital levels primarily for inventory due to supply chain disruptions and new product launches. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash used for investing activities increased compared to the prior year due to 2021 proceeds from the sale of the Canton Facility, from the disposal of the MSIL joint venture and from the disposal of the PM sensor business as well as higher capital expenditures and capitalized software costs which were offset by 2022 proceeds from the settlement of the net investment hedges and lower investments in the Autotech Fund II.
Net cash used for financing activities increased compared to the prior year primarily due to lower Credit Facility net borrowings and the 2022 cash payment of Stoneridge Brazil earn-out consideration.
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Summary of Future Cash Flows
The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2023 (in thousands):
Total Less than
1 year 2-3 years 4-5 years After
5 years
Credit Facility $ 189,346 $ — $ 189,346 $ — $ —
Debt 2,113 2,113 — — —
Interest payments (A)
45,116 15,498 29,618 — —
Operating leases 12,959 4,220 5,622 2,125 992
Total contractual obligations (B)
$ 249,534 $ 21,831 $ 224,586 $ 2,125 $ 992
(A) Includes estimated payments under the Company’s Credit Facility and other debt obligations using the most current interest rate and principal balance information available at December 31, 2023, extended through the end of the term.
(B) In December 2018, the Company entered into an agreement to make a $10.0 million investment in Autotech Fund II managed by Autotech, a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten year life of the fund. The Company has contributed $8.4 million to the Autotech Fund II since December 2018.
Management will continue to focus on efficiently managing its weighted-average cost of capital and believes that cash flows from operations and the availability of funds from our Credit Facility provides sufficient liquidity to meet our future growth and operating needs.
As outlined in Note 5 to our consolidated financial statements, the Credit Facility permits borrowing up to a maximum level of $275.0 million through November 2, 2026. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants that place restrictions and/or limitations on the Company’s ability to borrow money, make capital expenditures and pay dividends. The Credit Facility had an outstanding balance of $189.3 million at December 31, 2023.
The Company was in compliance with all covenants at December 31, 2023. The Company has not experienced a violation that would limit the Company’s ability to borrow under the Credit Facility and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the Credit Facility may be limited as a result of lower than expected financial performance. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations and to remain in compliance with all covenants.
The Company’s wholly-owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary’s bank account up to a daily maximum level of 20.0 million Swedish krona, or $2.0 million and $1.9 million, at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, there were no borrowings outstanding on this overdraft credit line. During the year ended December 31, 2023, the subsidiary borrowed and repaid 358.5 million Swedish krona, or $35.6 million.
The Company’s wholly-owned subsidiary located in Suzhou, China, has lines of credit which allow up to a maximum borrowing level of 20.0 million Chinese yuan, or $2.8 million and $2.9 million, at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022 there was $2.1 million and $1.5 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary has a bank acceptance draft line of credit which facilitates the extension of trade payable payment terms by 180 days. The bank acceptance draft line of credit allows up to a maximum borrowing level of 60.0 million Chinese yuan, or $8.5 million, at December 31, 2023 and $8.7 million at December 31, 2022. There was $2.4 million and $2.0 million utilized on the Suzhou bank acceptance draft line of credit at December 31, 2023 and 2022, respectively.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in Autotech Fund II managed by Autotech. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. As of December 31 2023, the Company’s cumulative investment in the Autotech Fund II was $8.4 million. The Company contributed $0.4 million and $1.0 million, net to the Autotech Fund II during the years ended December 31, 2023 and 2022, respectively.
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Our future results could also be adversely affected by unfavorable changes in foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden, Estonia, the Netherlands, United Kingdom and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 10 to the consolidated financial statements for additional details. Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of our raw material purchases.
At December 31, 2023, we had a cash and cash equivalents balance of approximately $40.8 million, of which 94.1 % was held in foreign locations. The Company has approximately $85.7 million of undrawn commitments un der the Credit Facility as of December 31, 2023, which results in total undrawn commitments and cash balances of more th an $126.5 million.
Commitments and Contingencies
See Note 11 to the consolidated financial statements for disclosures of the Company’s commitments and contingencies.
Seasonality
Our Control Devices and Electronics segments are moderately seasonal, impacted by mid-year and year-end shutdowns and the ramp-up of new model production at key customers. In addition, the demand for our Stoneridge Brazil segment consumer products is generally higher in the second half of the year.
Inflation and International Presence
By operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Furthermore, given the current economic climate and recent fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 10 to the consolidated financial statements for additional details on the Company’s commodity price and foreign currency exchange rate risks.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions used in our consolidated financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Our critical accounting policies, those most important to the financial presentation and those that are the most complex, subjective or require significant judgment, are as follows. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies.”
Revenue Recognition and Sales Commitments. We recognize revenue when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our products and services, which is usually when the parts are shipped or delivered to the customer’s premises. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The transaction price will include estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Incidental items that are not significant in the context of the contract are recognized as expense. Revenue for OEM and Tier 1 supplier customers and aftermarket products are recognized at the point in time it satisfies a performance obligation by transferring control of a part to the customer. A small portion of our sales are comprised of monitoring services of which the revenue is recognized over the life of the contract. See Note 3 to the consolidated financial statements for additional information on our revenue recognition policies, including recognizing revenue based on satisfying performance obligations.
Warranties. Our warranty liability is established based on our best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to hold the company responsible for their product warranties. Although we believe that our warranty liability is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
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Contingencies. We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters.
We have accrued for estimated losses when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating that amount of probable loss. The liabilities may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Income Taxes. Deferred income taxes are provided for temporary differences between the amount of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred tax assets include, among other items, net operating loss carryforwards and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Our U.S. state and foreign net operating losses expire at various times or have indefinite expiration dates. Our U.S. federal general business credits, if unused, begin to expire in 2027, and the state and foreign tax credits expire at various times.
Accounting standards require that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment, and in making this evaluation, the Company considers available positive and negative evidence, including the potential to carryback net operating losses and credits, the future release of certain taxable temporary differences, actual and forecasted results, and tax planning strategies that are both prudent and feasible. Certain deferred tax assets are dependent on future taxable income to be realized. Risk factors include U.S. and foreign economic conditions that affect the automotive and commercial vehicle markets of which the Company has significant operations.
The Company has recognized deferred taxes related to foreign withholding taxes and the expected foreign currency impact upon repatriation from foreign subsidiaries not considered indefinitely reinvested.
The Company has made an accounting policy election to reflect the impact of global intangible low-taxed income (“GILTI”) taxes, if any, as a current period tax expense when incurred.
Recently Adopted Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 2023.
In February 2022, the Company amended its credit facility to incorporate hardwired mechanics to permit a future replacement of LIBOR as the interest reference rate without lender consent. The Company has applied the guidance to impacted transactions during the transition period. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2023
In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures", which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. The updated standard is effective for annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026. Early adoption is permitted. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.
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In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740) – Improvements to Income Tax Disclosures," which requires companies to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, companies are required to disclose additional information about income taxes paid. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The standard is to be adopted on a prospective basis; however, retrospective application is permitted. We are currently evaluating the impact on our annual consolidated financial statement disclosures.