Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s consolidated financial statements and related notes appearing in Item 8 of this Form 10-K “Financial Statements and Supplementary Data”. For discussion related to changes in financial condition and the results of operations for fiscal year 2023-related items, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for fiscal year 2023, which was filed with the Securities and Exchange Commission on March 1, 2024.
We are a global supplier of safe and efficient electronics systems and technologies. Our systems and products power vehicle intelligence, while enabling safety and security for global commercial, automotive, 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 advanced driver information solutions, vision systems, connectivity and compliance solutions and control modules.
Stoneridge Brazil. This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, driver information systems, vehicle security alarms and convenience accessories, telematics solutions and multimedia devices.
Overview
During 2024, we were adversely affected by lower volumes from lower customer demand in most of our served markets, which was offset by sales in our Electronics segment related to the launches of a European OEM MirrorEye program and out next generation tachograph. Lower sales levels adversely affected gross margin contribution, however we were able to mitigate a portion of the adverse impact through material cost improvement and structural cost reduction actions. We have continued to optimize our engineering footprint to enhance capabilities and capacity for the most efficient return on our engineering spend. Further we significantly increased cash provided by operating activities by reducing working capital levels, specifically lowering inventory.
The Company had net loss of $16.5 million, or $(0.60) per diluted share, for the year ended December 31, 2024.
Net loss in 2024 increased by $11.3 million, or $(0.41) per diluted share, from $5.2 million, or $(0.19) per diluted share, for the year ended December 31, 2023 primarily due to lower contribution from lower sales levels and higher interest expense offset by other income from favorable foreign exchange fluctuations and lower business realignment costs.
In 2024, our net sales decreased by $67.5 million, or 6.9%, while our operating income decreased $13.2 million.
Our Control Devices segment net sales decreased by 14.5% primarily as a result of decreases in our North American automotive market, including the impact of expected end of life production for certain programs as well as decreases in our China commercial vehicle market. These decreases were offset by increases in our off-highway, North American commercial vehicle and China automotive markets. Segment gross margin decreased due to lower contribution from lower sales, however, gross margin as a percentage of sales remained consistent with the prior year. Segment operating income decreased from lower contribution from lower sales levels and higher selling, general and administrative expenses ("SG&A") due to a 2023 gain on sale of fixed assets offset by lower D&D from higher customer reimbursements.
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Our Electronics segment net sales decreased by 1.8% primarily due to the 2023 impact of lower customer recoveries of required electronic component spot buy purchases, a reduction in retroactive price increases, and lower sales in our agricultural, North American commercial vehicle and European off-highway vehicle markets from lower customer demand. Offsetting these decreases were higher sales volumes in our European commercial vehicle market, including sales related to the launches of a European OEM MirrorEye program and our next generation tachograph as well as our China commercial vehicle and North American off-highway vehicle markets. Segment gross margin as a percent of sales slightly improved due to material cost improvement actions and lower required electronic component spot buy purchases being offset by an increase in overhead costs including higher warranty related expense. Operating income for the segment de creased due to higher D&D as reduced product launch activity resulted in customer reimbursements decreasing more than spending.
Our Stoneridge Brazil segment net sales decreased by 13.2% primarily as a result of unfavorable foreign currency translation and lower sales of our OEM products and monitoring service fees and tracking devices. Segment gross margin de creased due to lower contribution from lower sales and adverse sales mix. Operating income de creased due lower sales and lower gross margin offset by lower SG&A because of a reduction in incentive compensation.
In 2024, SG&A expenses increased slightly compared to 2023 primarily due to higher self-insured medical costs, wages and legal fees as well as a 2023 gain on the sale of fixed assets being offset by lower business realignment costs and incentive compensation benefits as a result of Company performance.
D&D costs increased in 2024 because of lower launch activities and a shift to platform development resulting in lower customer reimbursements and capitalization of software development costs that were offset by lower consulting spend compared to 2023 for our Electronics and Control Devices segments. In addition, higher business realignment costs were incurred in our Electronics segment.
At December 31, 2024 and 2023, we had cash and cash equivalents of $71.8 million and $40.8 million, respectively. At December 31, 2024 and 2023 , we had $201.6 million and $189.3 million , respectively, in borrowings outstanding on the Credit Facility. The 2024 increase in cash and cash equivalents was due to reductions in working capital, specifically lower inventory and a higher outstanding balance on our Credit Facility.
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 financial performance. For example, we continue to develop safety, vehicle intelligence and connectivity based products, such as our OEM MirrorEye programs in North America and Europe as well as our next generation tachograph in Europe.
Global inflation has increased significantly since 2021. As a result, rising costs of materials, labor and other inputs used to manufacture and sell our products have impacted our financial performance. 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 continue 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.
The tariffs on Mexico and China proposed on February 1, 2025 by the U.S. government, should they be implemented and sustained for an extended period of time, could have a significant adverse effect on the Company. Should the tariffs be implemented, we would implement mitigation actions to reduce the impact of tariffs including but not limited to passing any incremental costs to our customers.
Based on IHS Market production forecasts, the North American automotive market is expected to slightly decrease from approximately 15.4 million units in 2024 to 15.1 million units in 2025. We expect our Control Devices segment revenues to decrease as a result of the expected reduction in North American production volumes and the impact of end of life programs. In our Control Devices segment, we remain focused on drivetrain agnostic technologies to drive new business awards as the market continues to evolve. This strategy is highlighted by our recent new business award for a leak detection module product which provides further global opportunities primarily for hybrid vehicle applications, a market that we expect to continue to grow, and is also applicable to traditional powertrain vehicles. We continue to focus on material cost reduction and improved manufacturing performance in order to stabilize margin performance.
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Based on IHS Market production forecasts, in 2025 the European commercial vehicle end market volumes are forecasted to increase 3.9% and North American commercial vehicle end market volumes are forecasted to decrease 3.3%. Over the long-term, we expect our Electronics’ segment sales to continue to outperform forecasted changes in production volumes due to strong demand for our existing products including our OEM MirrorEye programs in North America and Europe as well as our next generation tachograph in Europe. In addition, over the long-term we expect revenue growth and margin contribution from our off-highway products. We continue to focus on margin improvement through material cost reduction and product quality initiatives. We continue to invest in the development of advanced system capabilities that are complementary to our driver information solutions and vision systems such as integrated driver assistance technologies and an intelligent connected trailer system.
In 2025, we expect net D&D spend to slightly increase driven by spend for the development of next generation products as opposed to new product launch related spend. 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. For example, we expect to utilize our Stoneridge Brazil engineering resources to support Electronics segment projects.
In October 2024, the International Monetary Fund forecasted the Brazil gross domestic product to grow 2.2% in 2025, a decline from forecasted growth of 3.0% in 2024. We expect our served market channels to remain relatively stable in 2024 based on current market and economic conditions, however our sales of in region OEM products have been lower than expected due to lower customer demand and program delays. 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.
While we expect continued challenges across our end markets in 2025, we continue to focus on operating performance and enterprise-wide cost reduction. We remain focused on improving cash generation and the reduction of debt through efficient operating performance and targeted actions to reduce our inventory levels.
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 Argentine peso, Brazilian real, Mexican peso and Swedish krona in 2024 and the Chinese yuan and Argentine peso in 2023, unfavorably impacting our reported results.
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 $9.0 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 $2.6 million and $4.5 million were incurred during the years ended December 31, 2024 and 2023, respectively. Realignment expense for the year ended December 31, 2024 was primarily related to the optimization of our engineering footprint and executive separation costs. We expect to incur business realignment costs in 2025 related operations at our Juarez facility, which we expect will result in cost savings for direct and indirect labor and a more efficient overall operating structure.
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, 2024 Compared To Year Ended December 31, 2023
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Year ended December 31, 2024 2023 Dollar
increase /
(decrease)
Net sales $ 908,295 100.0 % $ 975,818 100.0 % $ (67,523)
Costs and expenses:
Cost of goods sold 719,042 79.2 774,512 79.4 (55,470)
Selling, general and administrative 117,460 12.9 117,395 12.0 65
Design and development 72,174 7.9 71,075 7.3 1,099
Operating (loss) income (381) — 12,836 1.3 (13,217)
Interest expense, net 14,447 1.6 13,000 1.3 1,447
Equity in loss of investee 1,292 0.1 522 0.1 770
Other (income) expense, net (2,523) (0.3) 1,236 0.1 (3,759)
Loss before income taxes (13,597) (1.5) (1,922) (0.2) (11,675)
Provision for income taxes 2,927 0.3 3,261 0.3 (334)
Net loss $ (16,524) (1.8) % $ (5,183) (0.5) % $ (11,341)
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Year ended December 31, 2024 2023 Dollar
decrease Percent
decrease)
Control Devices $ 292,606 32.2 % $ 342,065 35.1 % $ (49,459) (14.5) %
Electronics 566,040 62.3 576,539 59.0 (10,499) (1.8) %
Stoneridge Brazil 49,649 5.5 57,214 5.9 (7,565) (13.2) %
Total net sales $ 908,295 100.0 % $ 975,818 100.0 % $ (67,523) (6.9) %
Our Control Devices segment net sales decreased $49.5 million primarily as a result of decreases in our North American automotive market of $52.9 million, including the impact of expected end of life production for certain programs as well as decreases in our China commercial vehicle market of $5.3 million. These decreases were offset by increases in our off-highway, North American commercial vehicle and China automotive markets of $3.7 million, $2.6 million and $2.3 million, respectively, as well as the favorable impact of negotiated price increases of $0.9 million. In addition, 2024 net sales were impacted by unfavorable foreign currency translation of $0.7 million compared to 2023.
Our Electronics segment net sales decreased $10.5 million primarily due to the 2023 impact of lower customer recoveries of required electronic component spot buy purchases of $14.4 million, a reduction in retroactive price increases of $2.3 million, and lower sales volumes in our agricultural, North American commercial vehicle and European off-highway vehicle markets of $1.8 million, $1.4 million and $1.3 million, respectively. Offsetting these decreases were higher sales volumes in our European commercial vehicle market of $6.2 million, including sales related to the launches of a European OEM MirrorEye program and our next generation tachograph and higher sales in our North American off-highway and China commercial vehicle markets of $2.0 million and $1.3 million, respectively. In addition, 2024 net sales were favorably impacted by foreign currency translation of $1.4 million compared to 2023.
Our Stoneridge Brazil segment net sales decreased $7.6 million primarily as a result of unfavorable foreign currency translation of $3.8 million and lower sales of our OEM products and monitoring service fees and tracking devices.
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Net sales by geographic location are summarized in the following table (in thousands):
Year ended December 31, 2024 2023 Dollar
decrease Percent
decrease
North America $ 447,142 49.2 % $ 495,541 50.8 % $ (48,399) (9.8) %
South America 49,649 5.5 57,214 5.9 (7,565) (13.2) %
Europe and Other 411,504 45.3 423,063 43.3 (11,559) (2.7) %
Total net sales $ 908,295 100.0 % $ 975,818 100.0 % $ (67,523) (6.9) %
The decrease in North American net sales was mostly attributable to decreases in sales volume and the impact of expected end of life production for certain programs in our automotive market of $53.0 million as well as the 2023 impact of required electronic component spot buy purchases of $2.7 million. These decreases were offset by higher sales volume in our North American off-highway and commercial vehicle markets of $5.4 million and $1.2 million, respectively.
The decrease in net sales in South America was primarily as a result of unfavorable foreign currency translation of $3.8 million and lower sales of our OEM products and monitoring service fees and tracking devices.
The decrease in net sales in Europe and Other was primarily due to the 2023 impact of lower customer recoveries of required electronic component spot buys of $11.7 million, and a reduction in retroactive price increases of $2.2 million and lower sales in our China commercial vehicle, European agricultural and European off-highway markets of $4.0 million, $1.4 million and $1.3 million, respectively. Offsetting these decreases were higher sales volumes in our European commercial vehicle market of $6.2 million, including sales related to the launches of a European OEM MirrorEye program and our next generation tachograph and our China automotive market of $2.3 million. 2024 net sales were favorably impacted by foreign currency translation of $0.7 million compared to 2023.
Cost of Goods Sold and Gross Margin. Cost of goods sold decreased compared to 2023 and our gross margin increased to 20.8% in 2024 compared to 20.6% in 2023. Our material cost as a percentage of net sales de creased by 1.8% t o 57.6% in 2024 compared to 59.4% in 2023. The decrease in the material cost percentage was partially due to the impact of 2023 required electronic component spot buy purchases, reimbursed by customers. The impact of these spot buy purchases increased cost of goods sold by $14.6 million, or 1.5% of net sales during 2023 which reduced gross margin percent by 0.3 % in 2023. Other factors contributing to the reduction the material cost percentage were material cost improvement actions. Overhead as a percentage of net sales was 17.0% and 15.1% for 2024 and 2023, respectively. The increase in overhead as a percentage of sales was attributable to higher overhead spending including higher warranty related expense and amortization for capitalized software development costs as well as adverse leverage from lower sales levels.
Our Control Devices segment gross margin decreased from lower contribution from lower sales levels.
Our Electronics segment gross margin slightly improved due to material cost improvement actions and lower required electronic component spot buy purchases being offset by an increase in overhead costs including higher warranty related expense.
Our Stoneridge Brazil segment gross margin decreased because of lower contribution from lower sales levels and adverse sales mix.
Selling, General and Administrative. SG&A expenses increased by $0.1 million compared to 2023 due to higher self-insured medical costs, wages and legal fees as well as a 2023 gain on the sale of fixed assets being offset by lower business realignment costs and incentive compensation benefits due to Company performance.
Design and Development. D&D costs increased by $1.1 million because of a reduction in launch activities and a shift in platform development resulting in lower customer reimbursements and capitalization of software development costs that were offset by lower consulting spending compared to 2023 for our Electronics and Control Devices segments. In addition, higher business realignment costs were incurred in our Electronics segment.
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Operating (Loss) Income. Operating (loss) income is summarized in the following table by reportable segment (in thousands):
Year ended December 31, 2024 2023 Dollar
decrease Percent
decrease
Control Devices $ 6,178 $ 13,582 $ (7,404) (54.5) %
Electronics 25,561 27,309 (1,748) (6.4) %
Stoneridge Brazil 982 4,454 (3,472) (78.0) %
Unallocated corporate (33,102) (32,509) (593) (1.8) %
Operating (loss) income $ (381) $ 12,836 $ (13,217) (103.0) %
Our Control Devices segment operating income decreased primarily as a result of lower contribution from lower sales levels and higher SG&A due to a 2023 gain on sale of fixed assets offset by lower D&D spending.
Our Electronics segment operating income decreased primarily due to higher D&D as reduced product launch activity resulted in customer reimbursements decreasing more than spending.
Our Stoneridge Brazil segment operating income decreased primarily as a result of lower contribution from lower sales levels and adverse sales mix offset by lower SG&A because of a reduction in incentive compensation due to Company performance.
Our unallocated corporate operating loss increased due to higher self-insured medical costs and wages offset by lower incentive compensation due to Company performance and business realignment costs.
Operating (loss) income by geographic location is summarized in the following table (in thousands):
Year ended December 31, 2024 2023 Dollar
increase /
(decrease) Percent
increase /
(decrease)
North America $ (28,431) $ (13,566) $ (14,865) (109.6) %
South America 982 4,454 (3,472) (78.0) %
Europe and Other 27,068 21,948 5,120 23.3 %
Operating (loss) income $ (381) $ 12,836 $ (13,217) (103.0) %
Our North American operating loss increased primarily as a result of lower contribution from lower sales levels, higher overhead spending including warranty expense, higher self-insured medical costs, wages and a 2023 gain on disposal of fixed assets, offset by lower incentive compensation due to Company performance and lower business realignment costs. Operating income in South America decreased because of lower contribution from lower sales levels. Our operating results in Europe and Other increased primarily because of material cost actions and lower SG&A and D&D spending offset by lower contribution from lower sales levels.
Interest Expense, net. Interest expense, net increased by $1.4 million compared to 2023. The increase was the result of higher outstanding Credit Facility balances.
Equity in Loss of Investee. Equity loss for Autotech Fund II was $1.3 million and $0.5 million for the years ended December 31, 2024 and 2023, respectively .
Other (Income) Expense, net . We record certain foreign currency transaction (gains) losses as a component of other (income) expense, net on the consolidated statement of operations. Other income, net of $2.5 million, increased by $3.8 million in 2024 compared to other expense, net of $1.2 million for 2023 due to the impact of favorable foreign currency movements in our Electronics and Stoneridge Brazil segments from strengthening of the U.S. dollar.
Provision for Income Taxes. In 2024, the provision for income tax expense was $2.9 million, resulting in an effective tax rate of (21.5)%. In 2023, the provision for income tax expense was $3.3 million, resulting in an effective tax rate of (169.7)%. In 2024 and 2023, 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. A number of countries have passed legislation enacting the OECD Pillar Two model rules as issued, in a modified form or not at all which is effective in 2024. The OECD Pillar Two framework could have a material impact on our effective tax rate and cash tax payments depending on which countries enact the legislation and in what manner.
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Liquidity and Capital Resources
Summary of Cash Flows for the years ended December 31, 2024 and 2023 (in thousands):
Year ended December 31, 2024 2023 Dollar
increase /
(decrease)
Net cash provided by (used for):
Operating activities $ 47,748 $ 4,946 $ 42,802
Investing activities (24,468) (36,979) 12,511
Financing activities 11,121 17,485 (6,364)
Effect of exchange rate changes on cash and cash equivalents (3,410) 591 (4,001)
Net change in cash and cash equivalents $ 30,991 $ (13,957) $ 44,948
Cash provided by operating activities increased compared to 2023 primarily due to a reduction in working capital levels. Cash provided by receivables was favorable to 2023 as the result of lower sales levels while collection terms remained consistent. Cash provided by inventory improved from the prior year due to the ramp up of product launches occurring in the second half of 2023 and first half of 2024, lower production levels and the impact of our inventory reduction actions.
Net cash used for investing activities decreased compared to the prior year due to lower capital expenditures and capitalized software development costs as well as the 2023 impact of cash proceeds from the sale of equipment.
Net cash provided by financing activities decreased compared to the prior year primarily due to a decrease in Credit Facility borrowings net of repayments.
Summary of Future Cash Flows
The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2024 (in thousands):
Total Less than
1 year 2-3 years 4-5 years After
5 years
Credit Facility $ 201,577 $ — $ 201,577 $ — $ —
Debt — — — — —
Interest payments (A)
25,363 13,233 12,130 — —
Operating leases 11,445 4,180 4,579 2,686 —
Total contractual obligations (B)
$ 238,385 $ 17,413 $ 218,286 $ 2,686 $ —
(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, 2024, 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 $9.0 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 provide 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 $201.6 million at December 31, 2024.
On February 26, 2025, the Company entered into Amendment No. 1 to the Fifth Amended and Restated Credit Agreement and Waiver (“Amendment No. 1”). Amendment No. 1 provides for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending December 31, 2025). During the Covenant Relief Period:
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• the maximum leverage ratio of 3.50 was increased to 6.00 for the quarter ended March 31, 2025, 5.50 for the quarter ended June 30, 2025, 4.50 for the quarter ended September 30, 2025 and 3.50 for the quarter ended December 31, 2025;
• the minimum interest coverage ratio of 3.50 was waived for the quarter ended December 31, 2024 and was reduced to 2.00 for the quarters ended March 31 and June 30, 2025, and 2.50 and 3.50 for the quarter ended September 30, 2025 and December 31, 2025, respectively;
• the Company’s aggregate amount of cash and cash equivalents (as defined) cannot exceed $70.0 million;
• the sale of significant assets (as defined) will require repayment in the amount of any net cash proceeds received and result in the reduction of the Credit Facility commitment, at the lesser of $100.0 million or the net cash proceeds;
• there were certain restrictions on Restricted Payments (as defined); and
• a Permitted Acquisition (as defined) could not be consummated unless otherwise approved in writing by the required lenders.
Amendment No. 1 added an additional level to the leverage ratio based pricing grid, through maturity, when the leverage ratio is greater than 3.50.
As a result of Amendment No. 1, the Company was in compliance with all covenants at December 31, 2024. The Company has not experienced a violation that would limit the Company’s ability to borrow under the Credit Facility, as amended, and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the Credit Facility may be limited as a result of lower than expected financial performance. 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 $1.8 million and $2.0 million, at December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023, there were no borrowings outstanding on this overdraft credit line. During the year ended December 31, 2024, the subsidiary borrowed and repaid 334.5 million Swedish krona, or $30.3 million. The Stockholm subsidiary has pledged certain of its assets as collateral in order to obtain a guarantee of certain of the Stockholm subsidiary’s obligations to third parties.
The Company’s wholly-owned subsidiary located in Suzhou, China, had lines of credit that allowed up to a maximum borrowing level of 20.0 million Chinese yuan, or $2.7 million and $2.8 million, at December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023 there was $0.0 million and $2.1 million, respectively, in borrowings outstanding recorded within current portion of debt. In addition, the Suzhou subsidiary had a bank acceptance draft line of credit that expired in October 2024 which facilitated the extension of trade payable payment terms by 180 days. The bank acceptance draft line of credit allowed up to a maximum borrowing level of 60.0 million Chinese yuan, or $8.5 million at December 31, 2023. There was $2.4 million utilized on the Suzhou bank acceptance draft line of credit at December 31, 2023 recorded on the consolidated balance sheet within accounts payable.
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 2024, the Company’s cumulative investment in the Autotech Fund II was $9.0 million. The Company contributed $0.6 million and $0.4 million, net to the Autotech Fund II during the years ended December 31, 2024 and 2023, respectively.
Our future results could also be adversely affected by unfavorable changes in foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden, Estonia, the Netherlands, United Kingdom and China. We have entered into foreign currency forward contracts to reduce our exposure related to certain foreign currency fluctuations. See Note 10 to the consolidated financial statements for additional details. Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of our raw material purchases.
At December 31, 2024, we had a cash and cash equivalents balance of approximately $71.8 million, of which 65.8% was held in foreign locations. The Company has approximately $73.4 million of undrawn commitments un der the Credit Facility as of December 31, 2024, which results in total undrawn commitments and cash balances of more th an $145.3 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.
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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.
Goodwill. We test goodwill, all of which relates to our Electronics segment, for impairment on at least an annual basis, or more frequently if a triggering event indicates that an impairment may exist. In qualitatively assessing impairment, the primary qualitative factors include, but are not limited to, the results of prior year fair value calculations, changes in our market capitalization, the reporting unit and overall financial performance, and macroeconomic and industry conditions. We consider the qualitative factors and weight of the evidence obtained to determine if it is more likely than not that a reporting unit’s fair value is less than the 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 perform a quantitative assessment.
For the quantitative assessment, we utilize the income approach, or a combination of, the income approach and market approach to estimate the fair value of the reporting unit. The income approach uses a discounted cash flow method and the market approach uses valuation multiples observed for the reporting unit’s guideline public companies. The determination of discounted cash flows are based on management’s estimates of revenue growth rates and earnings before interest, taxes, depreciation and amortization (“EBITDA”) margin, taking into consideration business and market conditions for the countries and markets in which the reporting unit operates. We calculate the discount rate based on a market-participant, risk-adjusted weighted average cost of capital, which considers industry specific rates of return on debt and equity capital for a target industry capital structure, adjusted for risks associated with business size, geography and other factors specific to the reporting unit. Our quantitative assessment is affected by the uncertainty of revenue growth rates and EBITDA margin, especially in the outer years of a forecast. Further, affecting our quantitative assessment are future changes in the discount rate, as a result of a change in economic conditions or otherwise, which could result in the carrying value of the reporting unit exceeding its respective fair value.
We performed our annual goodwill impairment analysis for our Electronics reporting unit at the beginning of the fourth quarter of 2024. Based on this analysis, we determined that the fair value of this reporting unit substantially exceeded its carrying value. We performed a sensitivity analysis for the significant assumptions used in the goodwill impairment testing analysis for the Electronics reporting unit. The sensitivities were calculated in isolation using the income approach and keeping all other assumptions constant. The cash flow sensitivities do not consider the offsetting impact of a lower discount rate assumption to reflect the reduced risk in estimated future cash flow growth used under the income approach or the related impacts on pricing multiples used under the market approach.
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• A hypothetical increase in the discount rate of 100 basis points would not result in goodwill impairment; and
• A hypothetical decrease in EBITDA margin of 100 basis points for each year in the forecast period would not result in goodwill impairment.
In addition to our annual goodwill impairment analysis, we identified impairment triggering events during our fourth quarter 2024 interim evaluation, which was associated with a decrease in our publicly quoted share price and market capitalization. As such, we quantitatively assessed our Electronics reporting unit as of December 31, 2024, and we determined the fair value of the reporting unit substantially exceeded its carrying value and that no impairment of goodwill was needed.
Warranties. Our warranty liability is established based on our best estimate of the amounts necessary to settle existing and future claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. Our estimate is based on historical trends of units sold and claim payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers. The key factors in our estimate are the stated or implied warranty period, the customer source, customer policy decisions regarding warranties and customers seeking to hold the company responsible for their product warranties. Although we believe that our warranty liability is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future.
Contingencies. We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters.
We have accrued for estimated losses when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating that amount of probable loss. The liabilities may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Income Taxes. Deferred income taxes are provided for temporary differences between the amount of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred tax assets include, among other items, net operating loss carryforwards and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Our U.S. state and foreign net operating losses expire at various times or have indefinite expiration dates. Our U.S. federal general business credits, if unused, begin to expire in 2025, 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 has considered historical pre-tax income or loss and the four sources of income in determining the need for a valuation allowance when the realization of its deferred tax assets are not more likely than not. The four sources of income considered are 1.) taxable income in prior carryback years where carryback is allowable, 2.) future reversals of existing temporary differences, 3.) consideration of reasonable and prudent tax planning strategies, and 4.) forecasts of future taxable income, exclusive of reversing temporary differences and carryforwards. In the cases where a valuation allowance has been recorded, the evidence described above did not result in a conclusion that the deferred tax assets are more likely than not to be realizable. Current and future provision for income taxes is significantly impacted by the initial recognition of and changes in valuation allowances. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. The Company is significantly impacted by the Global Intangible Low-Taxed Income ("GILTI") tax provisions of the US tax code, and should those provisions change, it could have a material impact on our assessment of the realizability of general business credits in the US for which we currently believe are more likely than not to be realized based on the considerations noted above. 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 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 GILTI taxes, if any, as a current period tax expense when incurred.
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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 also allowed 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.
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 adopted this ASU retrospectively on December 31, 2024. Refer to Note 13, Segment Reporting for the inclusion of the new required disclosures.
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2024
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. This ASU will modify the Company's financial statement disclosures but will not have a significant impact on its consolidated financial statements.
In November 2024, the FASB issued ASU No. 2024-03, "Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures," which requires companies to disclose certain costs and expenses within the notes to the financial statements. The standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact on our annual consolidated financial statement disclosures.