Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We are a leading 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.
Impacts to Global Market Conditions
The coronavirus pandemic (“COVID-19”) and the ongoing supply chain disruptions, primarily related to semiconductor shortages, have had a negative impact on the global economy in 2020 and 2021. These conditions have disrupted, and likely will continue to disrupt, the global vehicle industry and customer sales, production volumes and purchases of automotive, commercial, off-highway and agricultural vehicles by end-consumers.
The adverse impacts of the COVID-19 pandemic led to a significant vehicle production slowdown in the first half of 2020, which was followed by increased consumer demand and vehicle production schedules. This surge in demand led to a worldwide semiconductor supply shortage at the end of 2020, and other supply chain related constraints which have continued through 2021. We have experienced longer lead-times, higher costs, delays in procuring other component parts and raw materials and more recently, significant production volume reductions as a result of these shortages. In the second half of 2021, these supply chain disruptions became incrementally more challenging and as a result we are experiencing higher related costs. We are working closely with our suppliers and customers to minimize any potential adverse impacts, and we continue to closely monitor the availability of semiconductor microchips and other component parts and raw materials, customer vehicle production schedules and any other supply chain inefficiencies that may arise, due to this or any other issue. In 2021, the Company recognized $17.6 million of cost recoveries related to spot buys of materials purchased for our customers.
Global vehicle volumes are expected to increase in 2022 due to a combination of higher demand and historically low inventory levels. However, vehicle production volumes will continue to be negatively impacted by the ongoing supply chain disruptions, including semiconductor shortages. The magnitude of the adverse impact on our financial condition, results of operations and cash flows will depend on the evolution of the semiconductor supply shortage, vehicle production schedules and supply chain impacts.
Segments
We are organized by products produced and markets served. Under this structure, our operations have been reported using the following segments:
Control Devices. This segment includes results of operations that manufacture actuators, sensors, switches and connectors.
Electronics. This segment includes results of operations from the production of driver information systems, camera-based vision systems, connectivity and compliance products and electronic control units.
Stoneridge Brazil (“SRB”). This segment includes results of operations that design and manufacture vehicle tracking devices and monitoring services, vehicle security alarms and convenience accessories, in-vehicle audio and infotainment devices and telematics solutions.
Overview
Although 2021 presented a number of challenges, the Company was able to effectively navigate an incredibly volatile operating environment while at the same time continuing to execute on our long-term strategy. The Company continues to work with our customers to preserve gross margin through price increases aligned with current market conditions and is executing on initiatives to reduce supply chain related costs.
The Company had net income of $3.4 million, or $0.12 per diluted share, for the year ended December 31, 2021.
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Net income in 2021 increased by $11.4 million, or $0.41 per diluted share, from $(8.0) million, or $(0.29) per diluted share, for the year ended December 31, 2020 primarily due to the gain on sale of the Canton Facility of $30.7 million, or $0.93 per diluted share, and the pre-tax gain on the disposal of the MSIL joint venture of $1.9 million, or $(0.05) per diluted share. This increase was offset by higher D&D costs for new product launches and higher SG&A including a net unfavorable fair value adjustment for SRB earn-out consideration of $5.3 million, or $(0.19) per diluted share.
In 2021, our net sales increased by $122.5 million, or 18.9%, while our operating income increased $23.1 million.
Our Control Devices segment net sales increased by 3.9% primarily as a result of the recovery from the 2020 COVID-19 impacts in our North American and China automotive markets. These increases were partially offset by a decrease in volumes in European automotive volumes due to the exit of PM sensor production and a decrease in volumes in our North American commercial vehicle market. Segment gross margin decreased due to costs associated with supply chain disruptions offset by lower restructuring and realignment costs of $1.7 million and favorable leverage of fixed costs from higher sales levels. Segment operating income increased due to the gain on sale of the Canton Facility of $30.7 million, the gain on disposal of the PM sensor business of $1.1 million and a decrease in restructuring expense of $4.0 million offset by higher costs from supply chain disruptions.
Our Electronics segment net sales increased by 38.9% primarily as a result of the recovery from the 2020 COVID-19 impacts in our North American and European commercial and off-highway vehicle markets as well as favorable customer pricing for recoveries of semiconductor spot buy purchases and favorable foreign currency translation . Segment gross margin decreased primarily due to higher costs associated with supply chain disruptions including spot purchases of electronic components offsetting favorable leverage of fixed costs from higher sales levels. Operating loss increased primarily due to higher costs from supply chain disruptions including spot purchases of electronic components and higher D&D costs offset by higher sales.
Our Stoneridge Brazil segment net sales increased by 19.1% due to higher volumes for all of our product lines and for our Argentina market channel offset by unfavorable foreign currency translation. Segment gross margin was lower due to adverse sales mix from higher product sales compared to monitoring fees and higher costs associated with supply chain disruptions offset by favorable leverage of fixed costs. Operating income decreased primarily due to a $5.3 million increase in net unfavorable adjustments to the fair value of the Stoneridge Brazil earn-out consideration and the impairment of Brazilian indirect tax credits of $0.7 million offset by higher sales.
In 2021, SG&A expenses were higher compared to 2020 due to a $5.3 million increase in net adjustments to the fair value of the SRB earn-out consideration and higher professional service costs which were offset by lower incentive compensation costs and the 2021 gains on the MSIL joint venture of $1.8 million and the disposal of the PM sensor business of $1.1 million.
D&D costs increased in 2021 mostly due to increased spend in our Electronics segment for higher consulting and prototype costs as well as lower customer reimbursements for ongoing development activities for awarded business programs and development of advanced technologies and systems.
At December 31, 2021 and 2020, we had cash and cash equivalents of $85.5 million and $73.9 million, respectively. The 2021 increase in borrowings under the Credit Facility were to maintain a high level of liquidity to ensure adequate available capital across our global locations due to adverse economic conditions caused by COVID-19. At December 31, 2021 and 2020, we had $164.0 million and $136.0 million, respectively, in borrowings outstanding on the 2019 Credit Facility.
Outlook
The Company believes that focusing on products that address industry megatrends will have a positive impact on both our top-line growth and underlying margins. Beginning in the first quarter of 2020 and continuing through 2021, COVID-19 caused worldwide adverse economic conditions and uncertainty in our served markets. In the first quarter of 2021, we began experiencing supply chain related disruptions because of a worldwide semiconductor shortage, which has resulted in longer lead-times, higher costs and delays in procuring other component parts and raw materials. The Company expects that ongoing material cost challenges, resulting from supply chain disruptions, will put pressure on margins particularly in the first half of 2022.
The North American automotive market is expected to increase to 15.2 million units in 2022 from 13.0 million units in 2021 as the market continues to recover from supply chain disruptions. The Company expects sales volumes in our Control Devices segment to increase from 2021 based on current 2022 production forecasts and market conditions and the ramp-
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up of certain electrified vehicle program launches, however, global supply chain shortages, primarily the global semiconductor supply shortage could adversely impact our sales volumes and gross margin in 2022.
For 2022, we expect an increase in our Electronics’ segment sales compared to 2021 primarily due to the increase in production volume forecasts in our European and North American commercial markets, strong demand in our off-highway markets and new program launches in 2022. We expect increased sales from the launch of our first two MirrorEye camera-based vision systems for OEM applications as well as the continued roll out of MirrorEye in the retrofit markets. Customer pricing increased net sales by $17.6 million in the fourth quarter of 2021, primarily due to customer recoveries related to spot buys of materials purchased for our customers. This spot buy material purchasing activity, which is recognized as revenue and material costs, was passed through 100% to the customer and was driven by electronic component shortages in 2021. The Company expects continued spot buy activity in 2022 but cannot predict the duration or magnitude of continued spot buy activity due to volatile supply chains and component availability.
In 2021, our D&D spend increased to support near term launches of awarded business primarily in our Electronics segment. We expect that our D&D spending will moderate from current levels as we continue to align our global engineering capabilities in order to develop advanced technologies and systems within our portfolio of products.
Our 2021 Stoneridge Brazil segment revenues increased compared to the prior year due to the recovery of the adverse economic conditions caused by COVID-19 in 2020 offset by unfavorable foreign currency translation. In October 2021, the International Monetary Fund forecasted the Brazil gross domestic product to grow 5.2% in 2021 and 1.5% in 2022. We expect our served market channels to remain stable based on current market conditions. Our financial performance in our Stoneridge Brazil segment is also subject to uncertainty from movements in the Brazilian Real and Argentina Peso foreign currencies.
Global transportation vehicle production has been impacted by supply chain disruptions, including semiconductor shortages, in 2021, primarily in our commercial vehicle and automotive end-markets. Based on the current market conditions, we expect continued impact on production in 2022. We expect incremental costs related to supply chain disruptions and production schedule volatility to continue to adversely impact our gross margin in 2022.
In 2021, our effective tax rate increased due to atypical jurisdictional earnings mix as a result of increased supply chain costs and incremental engineering expenses to support future program launches. We expect our effective tax rate to return to previous rates in 2022.
Other Matters
A significant portion of our sales are outside of the United States. These sales are generated by our non-U.S. based operations, and therefore, movements in foreign currency exchange rates can have a significant effect on our results of operations, which are presented in U.S. dollars. A significant portion of our raw materials purchased by our Electronics and Stoneridge Brazil segments are denominated in U.S. dollars, and therefore movements in foreign currency exchange rates can also have a significant effect on our results of operations. The U.S. Dollar strengthened against the euro, Swedish krona, Brazilian real, Argentine peso and Mexican peso in 2021 and the Brazilian real, Argentine peso and Mexican peso in 2020, unfavorably impacting our material costs and 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.
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On March 8, 2021, the Company entered into an Asset Purchase Agreement (the “APA”) by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Electronics AS, as the Sellers, and Standard Motor Products, Inc. (“SMP”) and SMP Poland SP Z O.O., as the Buyers. Pursuant to the APA the Company agreed to sell to the Buyers the Company’s assets located in Lexington, Ohio and Tallinn, Estonia related to the manufacturing of particulate matter sensor products and related service part operations (together, the “PM sensor business”). In the past, the Company has sometimes referred to the PM sensor assets as the Company’s soot sensing business. The Buyers did not acquire any of the Company’s locations or employees. The purchase price for the sale of the PM sensor 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 will provide and be 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 decision to exit the PM sensor product line was made after the consideration of the decline in the market outlook for diesel passenger vehicles, the current and expected profitability of the product line and the Company’s strategic focus on aligning resources with the greatest opportunities. The estimated costs for the PM Sensor Exit include employee severance and termination costs, contract termination costs, professional fees and other related costs such as potential commercial and supplier settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM sensor production. We recognized $2.4 million and $3.4 million of expense as a result of this initiative during the years ended December 31, 2021 and 2020, respectively. The only remaining costs relate to potential commercial settlements and legal fees which we continue to negotiate. The estimated additional cost related to these settlements and fees is up to $4.2 million.
In January 2019, we committed to a restructuring plan that resulted in the closure of our Canton, Massachusetts facility (“Canton Facility”) as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The cost for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized expense as a result of these actions during the years ended December 31, 2021 and 2020 of $0.0 and $3.0 million, respectively. We do not expect to incur additional costs related to the Canton Restructuring. During the third quarter of 2020, we leased the Canton Facility to a third party. On June 17, 2021, we sold the Canton Facility for net proceeds of $35.2 million and a net gain of $30.7 million.
On April 1, 2019, the Company entered into an Asset Purchase Agreement by and among the Company, the Company’s wholly owned subsidiary, Stoneridge Control Devices, Inc. (“SCD”), and Standard Motor Products, Inc. (“SMP”). On the same day pursuant to the APA, in exchange for $40.0 million (subject to a post-closing inventory adjustment which was a payment to SMP of $1.6 million) and the assumption of certain liabilities, the Company and SCD sold to SMP product lines and assets related to certain non-core switches and connectors (the “Non-core Products”). On April 1, 2019, the Company and SMP also entered into certain ancillary agreements, including a transition services agreement, a contract manufacturing agreement and a supply agreement, pursuant to which the Company provided and was compensated for certain manufacturing, transitional, administrative and support services to SMP on a short-term basis. The products related to the Non-core Products were manufactured in Juarez, Mexico and Canton, Massachusetts, and included ball switches, ignition switches, rotary switches, courtesy lamps, toggle switches, headlamp switches and other related components. On April 1, 2019, the Company’s Control Devices segment recognized net sales and costs of goods sold of $4.2 million and $2.8 million, respectively, for the one-time sale of finished goods inventory and a gain on disposal of $33.9 million for the sale of fixed assets, intellectual property and customer lists associated with the Non-core Products less transaction costs. On June 17, 2020, the Company and SMP terminated the transition services agreement and the contract manufacturing agreement.
In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced an additional restructuring program to transfer the European production of its Controls product line to China. For the years ended December 31, 2021 and 2020, we recognized expense of $0.3 million and $2.4 million, respectively, as a result of these actions for related costs. The Company does not expect to incur additional restructuring costs related to the Electronics segment.
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On October 26, 2018, the Company announced a Board of Directors approved share repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program of $50.0 million for the repurchase of outstanding Common Shares over an 18 month period. The repurchases could be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases could also be made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of common share repurchases was at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization did not obligate the Company to acquire any particular amount of its Common Shares, and could be suspended or discontinued at any time. For the quarter ended March 31, 2020, under the new 2020 repurchase program, the Company repurchased 242,634 Common Shares for $5.0 million, which became treasury shares, in accordance with this repurchase program authorization. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19. The 2020 repurchase program authorization expired during the third quarter of 2021 and no additional shares will be repurchased under this program.
In March 2017, the Supreme Court of Brazil issued a decision concluding that a certain state value added tax should not be included in the calculation of federal gross receipts taxes. The decision reduced Stoneridge Brazil’s gross receipts tax prospectively and, potentially, retrospectively. In April 2019, the Company received judicial notification that the Superior Judicial Court of Brazil rendered a favorable decision on Stoneridge Brazil’s case granting the Company the right to recover, through offset of federal tax liabilities, amounts collected by the government from June 2010 to February 2017. Based on the Company’s determination that these tax credits will be used prior to expiration, we recorded a pre-tax benefit of $6.5 million as a reduction to SG&A expense which is inclusive of related interest income of $2.4 million, net of applicable professional fees of $1.0 million in the second quarter of 2019. The Company received administrative approval in January 2020 and is now offsetting eligible federal taxes with these tax credits. The Brazilian tax authorities have sought clarification before the Supreme Court of Brazil (in a leading case involving another taxpayer) of certain matters that could affect the rights of Brazilian taxpayers regarding these credits. The leading case was decided on May 13, 2021. The Company does not expect any impact to amounts previously recognized as a result of the Supreme Court decision.
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 $1.4 million and $4.0 million were incurred during the years ended December 31, 2021 and 2020, respectively.
Because of the competitive nature of the markets we serve, we face pricing pressures from our customers in the ordinary course of business. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which to date has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.
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Year Ended December 31, 2021 Compared To Year Ended December 31, 2020
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar
increase /
Year ended December 31,
2021
2020
(decrease)
Net sales
$
770,462
100.0
%
$
648,006
100.0
%
$
122,456
Costs and expenses:
Cost of goods sold
603,604
78.3
493,810
76.2
109,794
Selling, general and administrative
116,000
15.1
112,474
17.4
3,526
Gain on sale of Canton Facility, net
(30,718)
(4.0)
-
-
(30,718)
Design and development
66,165
8.6
49,386
7.6
16,779
Operating income (loss)
15,411
2.0
(7,664)
(1.2)
23,075
Interest expense, net
5,189
0.7
6,124
0.9
(935)
Equity in earnings of investee
(3,658)
(0.5)
(1,536)
(0.2)
(2,122)
Other expense (income), net
1,444
0.3
(1,528)
(0.2)
2,972
Income (loss) before income taxes
12,436
1.5
(10,724)
(1.7)
23,160
Provision (benefit) for income taxes
9,030
1.2
(2,774)
(0.4)
11,804
Net income (loss)
$
3,406
0.3
%
$
(7,950)
(1.3)
%
$
11,356
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar
Percent
Year ended December 31,
2021
2020
increase
increase
Control Devices
$
355,775
46.1
%
$
342,576
52.9
%
$
13,199
3.9
%
Electronics
357,910
46.5
257,767
39.7
100,143
38.9
%
Stoneridge Brazil
56,777
7.4
47,663
7.4
9,114
19.1
%
Total net sales
$
770,462
100.0
%
$
648,006
100.0
%
$
122,456
18.9
%
Our Control Devices segment net sales increased $13.2 million due to recovery from 2020 COVID-19 impacts in our North American automotive and agricultural vehicle markets of $23.4 million and $2.7 million, respectively, and an increase in our China automotive and commercial vehicle markets of $3.8 million and $0.4 million, respectively, as well as a favorable foreign currency translation of $3.2 million. These increases were partially offset by a decrease in volumes in our European automotive of $16.7 million due to the exit of PM sensor production and a decrease in volumes in our North American commercial vehicle market of $4.3 million.
Our Electronics segment net sales increased $100.1 million due to recovery from 2020 COVID-19 impacts in our North American and European commercial vehicle and European and North American off-highway vehicle markets of $28.7 million, $28.4 million, $14.4 million and $5.3 million, respectively, as well as favorable euro and Swedish krona foreign currency translation of $5.0 million compared to the prior year period. In the fourth quarter, net sales increased by $17.6 million due to customer pricing for recoveries of electronic component spot buy purchases.
Our Stoneridge Brazil segment net sales increased $9.1 million due to higher volumes for all of our product lines and for our Argentina market channel offset by unfavorable foreign currency translation of $3.0 million.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar
Percent
Year ended December 31,
2021
2020
increase
increase
North America
$
386,944
50.2
%
$
330,528
51.0
%
$
56,416
17.1
%
South America
56,777
7.4
47,663
7.4
9,114
19.1
%
Europe and Other
326,741
42.4
269,815
41.6
56,926
21.1
%
Total net sales
$
770,462
100.0
%
$
648,006
100.0
%
$
122,456
18.9
%
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The increase in North American net sales was attributable to sales volume increases in our North American commercial vehicle, automotive and off-highway markets of $24.5 million, $22.5 million and $6.2 million, respectively and customer pricing for recoveries of semiconductor spot buy purchases of $2.4 million. The increase in net sales in South America was due to higher volumes for all of our Stoneridge Brazil product lines and for our Argentina market channel offset by unfavorable Brazilian real foreign currency translation of $3.0 million. The increase in net sales in Europe and Other was primarily due to increases in our European commercial vehicle and off-highway markets of $28.4 million and $14.4 million, respectively, and increases in our China automotive and agricultural vehicle markets of $3.8 million and $2.2 million, respectively. Europe and Other net sales also increased due to customer pricing for recoveries of semiconductor spot buy purchases of $15.2 million and favorable foreign currency translation of $8.2 million. These increases were partially offset by a decrease in volumes in our European automotive market of $16.7 million due to the exit of PM sensor production.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased compared to 2020 and our gross margin decreased to 21.7% in 2021 compared to 23.8% in 2020. Our material cost as a percentage of net sales increased by 4.2% to 57.0% in 2021 compared to 52.8% in 2020 primarily caused by costs associated with supply chain disruptions including spot purchases of electronic components. In 2021, cost of goods sold increased by $17.6 million, or 2.3% of net sales, due to semiconductor spot buy purchases which was offset by customer recoveries. Overhead as a percentage of net sales decreased by 2.0% to 16.1% for 2021 compared to 18.0% for 2020 primarily due to leverage of fixed costs from higher sales levels offset by higher incremental freight costs .
Our Control Devices segment gross margin decreased due to costs associated with supply chain disruptions offset by lower restructuring and realignment costs of $1.7 million and favorable leverage of fixed costs from higher sales levels.
Our Electronics segment gross margin decreased primarily due to higher costs associated with supply chain disruptions including spot purchases of electronic components offsetting favorable leverage of fixed costs from higher sales levels.
Our Stoneridge Brazil segment gross margin decreased due to adverse sales mix from higher product sales compared to monitoring fees and higher costs associated with supply chain disruptions offset by favorable leverage of fixed costs.
Selling, General and Administrative (“SG&A”). SG&A expenses increased by $3.5 million compared to 2020 due to a $5.3 million increase in net adjustments to the fair value of the SRB earn-out consideration and higher professional service costs which were offset by lower incentive compensation costs and the 2021 gain on disposal of the PM sensor business of $1.1 million and the MSIL joint venture of $1.8 million.
Design and Development (“D&D”). D&D costs increased by $16.8 million mostly due to increased spend in our Electronics segment of $14.4 million comprised of higher consulting and prototype costs as well as lower customer reimbursements offset by higher capitalized software development costs for ongoing development activities for awarded business programs and development of advanced technologies and systems.
Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Dollar
Percent
increase /
increase /
Year ended December 31,
2021
2020
(decrease)
(decrease)
Control Devices
$
54,933
$
22,072
$
32,861
148.9
%
Electronics
(12,502)
(3,672)
(8,830)
(240.5)
%
Stoneridge Brazil
995
3,766
(2,771)
(73.6)
%
Unallocated corporate
(28,015)
(29,830)
1,815
6.1
%
Operating income (loss)
$
15,411
$
(7,664)
$
23,075
301.1
%
Our Control Devices segment operating income increased due to the gain on sale of the Canton Facility of $30.7 million, the gain on disposal of the PM sensor business of $1.1 million and a decrease in restructuring expense of $4.0 million offset by higher costs from supply chain disruptions and higher Sarasota environmental remediation costs.
Our Electronics segment operating loss increased primarily due to higher costs from supply chain disruptions including spot purchases of electronic components net of recoveries and higher D&D costs offset by higher sales.
Our Stoneridge Brazil segment operating income decreased primarily due to a $5.3 million increase in net adjustments to the fair value of the Stoneridge Brazil earn-out consideration and the impairment of Brazilian indirect tax credits of $0.7 million offset by higher sales.
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Our unallocated corporate operating loss was lower due to lower incentive compensation benefits as a result of Company performance and the gain on the disposal of the MSIL joint venture offset by higher business realignment costs of $0.8 million and higher professional service costs.
Operating income (loss) by geographic location is summarized in the following table (in thousands):
Dollar
Percent
increase
increase
Year ended December 31,
2021
2020
(decrease)
(decrease)
North America
$
13,072
$
(22,179)
$
35,251
158.9
%
South America
995
3,766
(2,771)
(73.6)
%
Europe and Other
1,344
10,749
(9,405)
(87.5)
%
Operating income (loss)
$
15,411
$
(7,664)
$
23,075
301.1
%
Our North American operating income increased due to the gain on sales of the Canton Facility, the PM sensor business and the MSIL joint venture, higher sales in our automotive and commercial vehicle markets and lower restructuring costs offsetting higher costs from supply chain disruptions. The decrease in operating income in South America was primarily due to an unfavorable change in fair value of earn-out consideration adjustments of $5.3 million offsetting higher sales. Our operating results in Europe and Other decreased primarily due to higher costs from supply chain disruptions including spot purchases of electronic components net of recoveries and higher D&D costs offset by higher sales in our commercial vehicle and off-highway markets as well as a favorable foreign currency translation impact.
Interest Expense, net. Interest expense, net decreased by $0.9 million compared to 2020 due to higher interest income of $1.2 million at Stoneridge Brazil from monetary correction on indirect tax credits. Offsetting this increase was higher interest expense from Credit Facility borrowings.
Equity in Earnings of Investee. Equity earnings for MSIL were $1.8 million and $1.5 million for the years ended December 31, 2021 and 2020, respectively. As discussed in Note 2 to the consolidated financial statements, the Company sold its equity interest in MSIL on December 30, 2021. Equity earnings for Autotech were $1.9 million and $0.1 million for the years ended December 31, 2021 and 2020 . The increase in Autotech earnings was due to favorable 2021 fair value adjustments to fund investments.
Other Expense (Income), net . We record certain foreign currency transaction losses (gains) as a component of other income, net on the consolidated statement of operations. Other expense (income), net of $1.4 million, increased by $2.9 million in 2021 compared to other income, net of $1.5 million for 2020 primarily due to 2021 foreign currency losses in our Electronics segment and 2020 foreign currency transaction gains in our Stoneridge Brazil and Electronics segments.
Provision (Benefit) for Income Taxes. In 2021, income tax expense of $9.0 million was attributable to the gain on the sale of the Canton facility, the gain on the sale of the Company’s minority interest in MSIL, the mix of earnings among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 72.6% is greater than the statutory tax rate primarily due to the impact of tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions, the tax impact of the sale of the Company’s minority interest in MSIL, partially offset by tax incentives.
In 2020, income tax benefit of $(2.8) million was attributable to the mix of earnings and losses among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 25.9% is slightly greater than the statutory tax rate primarily due to non-deductible expenses and tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions offset by the impact of certain incentives.
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Year Ended December 31, 2020 Compared To Year Ended December 31, 2019
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar
increase /
Year ended December 31,
2020
2019
(decrease)
Net sales
$
648,006
100.0
%
$
834,289
100.0
%
$
(186,283)
Costs and expenses:
Cost of goods sold
493,810
76.2
620,556
74.4
(126,746)
Selling, general and administrative
112,474
17.4
123,853
14.8
(11,379)
Gain on disposal of non-core products, net
-
-
(33,599)
(4.0)
33,599
Design and development
49,386
7.6
52,198
6.3
(2,812)
Operating (loss) income
(7,664)
(1.2)
71,281
8.5
(78,945)
Interest expense, net
6,124
0.9
4,324
0.5
1,800
Equity in earnings of investee
(1,536)
(0.2)
(1,578)
(0.2)
(42)
Other (income) expense, net
(1,528)
(0.2)
142
-
1,670
(Loss) income before income taxes
(10,724)
(1.7)
68,393
8.2
(79,117)
(Benefit) provision for income taxes
(2,774)
(0.4)
8,102
1.0
(10,876)
Net (loss) income
$
(7,950)
(1.3)
%
$
60,291
7.2
%
$
(68,241)
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar
Percent
Year ended December 31,
2020
2019
decrease
decrease
Control Devices
$
342,576
52.9
%
$
431,560
51.7
%
$
(88,984)
(20.6)
%
Electronics
257,767
39.7
335,195
40.2
(77,428)
(23.1)
%
Stoneridge Brazil
47,663
7.4
67,534
8.1
(19,871)
(29.4)
%
Total net sales
$
648,006
100.0
%
$
834,289
100.0
%
$
(186,283)
(22.3)
%
Our Control Devices segment net sales decreased primarily as a result of COVID-19 and 2019 sales of $41.6 million under the contract manufacturing agreement pursuant to the 2019 disposal of the Non-core Products. Including the impact of COVID-19, Control Devices experienced decreased sales volume in our North American automotive, North American commercial vehicle, agricultural and other markets of $61.5 million, $17.4 million, $9.6 million and $14.5 million, respectively. These decreases were offset by increased sales volume in our European and China automotive markets of $7.2 million and $6.6 million, respectively.
Our Electronics segment net sales decreased primarily as a result of COVID-19 including a decrease in sales volume in our European, North American and China commercial vehicle markets of $47.2 million, $23.4 million and $1.0 million, respectively. In addition, the Electronics segment net sales decreased due to a decrease in sales volume in our European off-highway vehicle products of $17.1 million. These decreases were offset by a favorable foreign currency translation of $11.4 million.
Our Stoneridge Brazil segment net sales decreased due to unfavorable foreign currency translation of $19.5 million and the effects of COVID-19 causing lower volumes for our aftermarket, mass retail and OES channels mostly in the second quarter of 2020.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar
Percent
Year ended December 31,
2020
2019
decrease
decrease
North America
$
330,528
51.0
%
$
457,633
54.8
%
$
(127,105)
(27.8)
%
South America
47,663
7.4
67,534
8.1
(19,871)
(29.4)
%
Europe and Other
269,815
41.6
309,122
37.1
(39,307)
(12.7)
%
Total net sales
$
648,006
100.0
%
$
834,289
100.0
%
$
(186,283)
(22.3)
%
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The decrease in North American net sales was primarily attributable to the impact of COVID-19 and 2019 sales of Non-core Products under the contract manufacturing agreement of $41.6 million. Including the impact of COVID-19, sales volume has decreased in our North American automotive, commercial vehicle, agricultural and other markets by $60.8 million, $40.8 million, $9.6 million and $14.5 million, respectively. The decrease in net sales in South America was primarily due to unfavorable foreign currency translation of $19.5 million and lower volumes for our aftermarket, mass retail and OES channels mostly in the second quarter of 2020 primarily due to COVID-19. The decrease in net sales in Europe and Other was primarily due to a decrease in our European commercial vehicle and off-highway markets of $47.2 million and $17.1 million, respectively, primarily impacted by COVID-19. Europe and Other sales were favorably impacted due to increased sales volume in our European automotive and China automotive of $6.7 million and $6.6 million, respectively, as well as favorable foreign currency translation of $11.6 million.
Cost of Goods Sold and Gross Margin. Cost of goods sold decreased compared to 2019 and our gross margin decreased to 23.8% in 2020 compared to 25.6% in 2019. Our material cost as a percentage of net sales decreased by 0.3% to 52.8% in 2020 compared to 53.1% in 2019. Overhead as a percentage of net sales increased by 2.1% to 18.0% for 2020 compared to 15.9% for 2019 primarily due to adverse fixed cost leverage on lower sales levels including COVID-19 related incremental operating costs.
Our Control Devices segment gross margin decreased due to lower sales from COVID-19, the impact of the disposal of Non-core Products in the second quarter of 2019, as well as adverse fixed cost leverage on lower sales levels including our Canton facility which ceased production in accordance with our Canton restructuring plan in December 2019 and COVID-19 related incremental operating costs for employee safety protocols.
Our Electronics segment gross margin decreased primarily due to lower sales as a result of the of COVID-19 pandemic and higher overhead costs from the adverse leverage of fixed costs and COVID-19 related incremental operating costs for employee safety protocols.
Our Stoneridge Brazil segment gross margin decreased due to lower sales volumes partially offset by lower material costs due to favorable product mix from a greater percentage of monitoring service fees.
Selling, General and Administrative (“SG&A”). SG&A expenses decreased by $11.4 million compared to 2019 due to a favorable fair value adjustment, net for earn-out consideration of $5.5 million at Stoneridge Brazil, lower incentive compensation costs, professional service fees and travel related expenses offset by the 2019 recovery of Brazilian indirect taxes of $6.5 million and higher 2020 business realignment and restructuring costs of $3.1 million.
Gain on Disposal of Non-core Products, net. The gain on disposal in 2019 relates to the disposal of Control Devices’ Non-core Products.
Design and Development (“D&D”). D&D costs decreased by $2.8 million mostly due to lower restructuring and business realignment expenses at Control Devices of $2.3 million and lower spending at Control Devices due to the pace of the restoration of the engineering function previously located at the Canton facility.
Operating (Loss) Income. Operating (loss) income is summarized in the following table by reportable segment (in thousands):
Dollar
Percent
increase /
increase /
Year ended December 31,
2020
2019
(decrease)
(decrease)
Control Devices
$
22,072
$
73,327
$
(51,255)
(69.9)
%
Electronics
(3,672)
25,006
(28,678)
NM
Stoneridge Brazil
3,766
6,539
(2,773)
(42.4)
%
Unallocated corporate
(29,830)
(33,591)
3,761
11.2
%
Operating (loss) income
$
(7,664)
$
71,281
$
(78,945)
NM
Our Control Devices segment operating income decreased due to the 2019 gain on disposal of Non-core Products, lower sales primarily related to COVID-19 as well as lower sales from the disposal of Non-core Products from the second quarter of 2019. Adverse leverage of fixed costs from lower sales volumes and COVID-19 related incremental operating costs offset by lower restructuring costs also affected operating income.
Our Electronics segment operating income decreased primarily due to lower sales as a result of COVID-19 resulting in lower gross margin. Electronics SG&A cost reductions were offset by business realignment and restructuring expenses.
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Our Stoneridge Brazil segment operating income decreased primarily from the 2019 recovery of Brazilian indirect taxes of $6.5 million, lower sales volumes and margin offset by a favorable fair value adjustment, net for earn-out consideration of $5.5 million recognized in 2020.
Our unallocated corporate operating loss decreased primarily from lower incentive compensation, professional fees and travel related expenses.
Operating (loss) income by geographic location is summarized in the following table (in thousands):
Dollar
Percent
Year ended December 31,
2020
2019
decrease
decrease
North America
$
(22,179)
$
32,694
$
(54,873)
NM
South America
3,766
6,539
(2,773)
(42.4)
%
Europe and Other
10,749
32,048
(21,299)
(66.5)
%
Operating (loss) income
$
(7,664)
$
71,281
$
(78,945)
NM
Our North American operating results decreased due to lower sales in our automotive, commercial vehicle, agriculture and off-highway markets, adverse leverage of fixed costs and COVID-19 related incremental operating costs for employee safety protocols. The decrease in operating income in South America was primarily due to the 2019 recovery of indirect Brazilian taxes and lower sales volumes offset by the favorable fair value adjustment, net for earn-out consideration. Our operating results in Europe and Other decreased primarily due to lower sales in our commercial vehicle and off-highway markets, adverse leverage of fixed costs and COIVD-19 related incremental operating costs for employee safety protocols.
Interest Expense, net. Interest expense, net increased by $1.8 million compared to 2019 due to an increase in outstanding debt balances.
Equity in Earnings of Investee. Equity earnings for MSIL were $1.5 million and $1.6 million for the years ended December 31, 2020 and 2019, respectively. The decrease in MSIL earnings was due to lower sales volume from the COVID-19 pandemic.
Other (Income) Expense, net . We record certain foreign currency transaction and forward currency hedge contract (gains) losses as a component of other income, net on the consolidated statement of operations. Other income, net increased by $1.7 million to $1.5 million in 2020 compared to other expense, net of $0.1 million in 2019 primarily due to higher foreign currency transaction gains in our Electronics, Control Devices and Stoneridge Brazil segments.
(Benefit) Provision for Income Taxes. In 2020, income tax benefit of $(2.8) million was attributable to the mix of earnings and losses among tax jurisdictions as well as tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions. The effective tax rate of 25.9% is slightly greater than the statutory tax rate primarily due to non-deductible expenses and tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions offset by the impact of certain incentives.
In 2019, income tax expense of $8.1 million was attributable to the mix of earnings amount jurisdictions and the sale of Non-core-Products on April 1, 2019. The effective tax rate of 11.8% is lower than the statutory tax rate primarily due to certain tax incentives offset by non-deductible expenses and tax losses for which no benefit is recognized due to valuation allowances in certain jurisdictions.
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Table of Contents
Liquidity and Capital Resources
Summary of Cash Flows for the years ended December 31, 2021 and 2020 (in thousands):
Dollar
increase /
Year ended December 31,
2021
2020
(decrease)
Net cash provided by (used for):
Operating activities
$
(36,248)
$
28,641
$
(64,889)
Investing activities
28,041
(33,885)
61,926
Financing activities
22,876
6,513
16,363
Effect of exchange rate changes on cash and cash equivalents
(3,041)
3,247
(6,288)
Net change in cash and cash equivalents
$
11,628
$
4,516
$
7,112
Cash used for operating activities increased compared to 2020 primarily due to an increase in cash used to fund working capital levels primarily for inventory, which was impacted by supply chain disruptions and production volatilities, offset by higher net income, net of the reconciling adjustment for the gain on the sale of the Canton Facility. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash provided by investing activities increased compared to 2020 due to proceeds from the sale of the Canton Facility, from the disposal of the MSIL joint venture and from the disposal of the PM sensor business as well as lower capital expenditures and capitalized software costs which were offset by higher investments in the Autotech Fund II.
Net cash used for financing activities increased compared to the prior year primarily due to higher Credit Facility net borrowings.
Summary of Cash Flows for the years ended December 31, 2020 and 2019 (in thousands):
Dollar
increase /
Years ended December 31,
2020
2019
(decrease)
Net cash provided by (used for):
Operating activities
$
28,641
$
24,505
$
4,136
Investing activities
(33,885)
(6,299)
(27,586)
Financing activities
6,513
(28,258)
34,771
Effect of exchange rate changes on cash and cash equivalents
3,247
(1,637)
4,884
Net change in cash and cash equivalents
$
4,516
$
(11,689)
$
16,205
Cash provided by operating activities increased compared to 2019 primarily due to a reduction in cash used to fund working capital levels and the 2019 payment of Orlaco earn-out consideration of $5.1 million offset by lower net income and the payment of dividends to former noncontrolling interest holders of Stoneridge Brazil of $6.0 million. Our receivable terms and collections rates have remained consistent between periods presented.
Net cash used for investing activities increased compared to 2019 due to proceeds from the 2019 sale of Control Devices Non-core Products offset by lower capital expenditures.
Net cash provided by (used for) financing activities increased compared to the prior year primarily due to lower Common Share repurchases of $45.0 million offset by higher Credit Facility borrowings, net of $20.0 million and the 2019 cash payment for Orlaco earn-out consideration.
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Table of Contents
Summary of Future Cash Flows
The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 2021 (in thousands):
Less than
After
Total
1 year
2-3 years
4-5 years
5 years
Credit Facility
$
163,957
$
-
$
163,957
$
-
$
-
Debt
5,248
5,248
-
-
-
Interest payments (A)
9,648
4,020
5,628
-
-
Operating leases
21,992
4,776
8,507
5,382
3,327
Stoneridge Brazil earn-out consideration
7,351
7,351
-
-
-
Total contractual obligations (B)
$
208,196
$
21,395
$
178,092
$
5,382
$
3,327
(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, 2021, extended through the end of the term.
(B) In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten year life of the fund. The Company has contributed $7.1 million to the Autotech Fund II since December 2018.
Management will continue to focus on efficiently managing its weighted-average cost of capital and believes that cash flows from operations and the availability of funds from our Credit Facility provides sufficient liquidity to meet our future growth and operating needs.
As outlined in Note 5 to our consolidated financial statements, the Credit Facility permits borrowing up to a maximum level of $400.0 million. This variable rate facility provides the flexibility to refinance other outstanding debt or finance acquisitions through June 2024. The Credit Facility contains certain financial covenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which 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 $164.0 million at December 31, 2021.
Due to the expected impact of the COVID-19 pandemic on the Company’s end-markets and the resulting expected financial impacts on the Company, on June 26, 2020, the Company entered into a Waiver and Amendment No. 1 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 1”). Amendment No. 1 provided for certain covenant relief and restrictions during the “Covenant Relief Period” (the period ending on the date that the Company delivers a compliance certificate for the quarter ending June 30, 2021). The Covenant Relief Period ended on August 14, 2021. During the Covenant Relief Period:
● the maximum net leverage ratio was suspended;
● the calculation of the minimum interest coverage ratio excluded second quarter 2020 financial results effective for the quarters ended September 30, 2020 through March 31, 2021;
● the minimum interest coverage ratio of 3.50 was reduced to 2.75 and 3.25 for the quarters ended December 31, 2020 and March 31, 2021, respectively;
● the Company’s liquidity could not be less than $150,000;
● the Company’s aggregate amount of cash and cash equivalents could not exceed $130,000;
● there were certain restrictions on Restricted Payments (as defined); and
● a Permitted Acquisition (as defined) could not be consummated unless otherwise approved in writing by the required lenders.
Amendment No. 1 increased the leverage based LIBOR pricing grid through the maturity date and also provides for a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points.
On December 17, 2021, the Company entered into Amendment No. 2 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 2”). Amendment No. 2 implemented non-LIBOR interest reference rates for borrowings in euros and British pounds.
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Due to the ongoing impacts of the COVID-19 pandemic and supply chain disruptions on the Company’s end-markets and the resulting financial impacts on the Company, on February 28, 2022, the Company entered into Amendment No. 3 to the Fourth Amended and Restated Credit Agreement (“Amendment No. 3”). Amendment No. 3 reduces the total revolving credit commitments from $400.0 million to $300.0 million and the maximum permitted amount of swing loans from $40.0 million to $30.0 million . Amendment No. 3 provides for certain financial covenant relief and additional covenant restrictions during the “Specified Period” (the period from February 28, 2022 until the date that the Company delivers a compliance certificate for the quarter ending March 31, 2023 in form and substance satisfactory to the administrative agent). During the Specified Period:
● the maximum net leverage ratio is changed to 4.0x for the year ended December 31, 2021, suspended for the quarters ending March 31, 2022 through September 30, 2022 and cannot exceed 4.75 to 1.00 for the quarter ended December 31, 2022 or 3.50 to 1.00 for the quarter ended March 31, 2023;
● the minimum interest coverage ratio of 3.50 is reduced to 2.50 for the quarter ended March 31, 2022, 2.25 for the quarter ended June 30, 2022 and 3.00 for the quarters ended September 30, 2022 and December 31, 2022;
● an additional condition to drawing on the Credit Facility has been added that restricts borrowings if the Company’s total of 100% of domestic and 65% of foreign cash and cash equivalents exceeds $70.0 million;
● there are certain additional restrictions on Restricted Payments (as defined); and
● a Permitted Acquisition (as defined) may not be consummated unless the net leverage ratio is below 3.50x during the Specified Period.
Amendment No. 3 changes the leverage based LIBOR pricing grid through the maturity date and also retains a LIBOR floor of 50 basis points on outstanding borrowings excluding any Specified Hedge Borrowings (as defined) which remain subject to a LIBOR floor of 0 basis points.
Amendment No. 3 also incorporates hardwired mechanics to permit a future replacement of LIBOR as the interest reference rate without lender consent.
As a result of Amendment No. 3, the Company was in compliance with all covenants at December 31, 2021. The Company has not experienced a violation which would limit the Company’s ability to borrow under the Credit Facility, as amended and does not expect that the covenants under it will restrict the Company’s financing flexibility. However, it is possible that future borrowing flexibility under the Credit Facility may be limited as a result of lower than expected financial performance due to the adverse impact of COVID-19 and supply chain shortages on the Company’s markets and general global demand. The Company expects to make additional repayments on the Credit Facility when cash exceeds the amount needed for operations and to remain in compliance with all covenants.
Stoneridge Brazil maintained short-term loans used for working capital purposes during 2021 and 2020. There were no borrowings outstanding on these notes at December 31, 2021.
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 $2.2 million and $2.4 million, at December 31, 2021 and December 31, 2020, respectively. At December 31, 2021, there was 19.0 million Swedish krona, or $2.1 million outstanding on this overdraft credit line. At December 31, 2020, there was 13.1 million Swedish krona, or $1.6 million outstanding on this overdraft credit line. During the year ended December 31, 2021, the subsidiary borrowed 352.4 million Swedish krona, or $39.0 million, and repaid 346.5 million Swedish krona, or $38.3 million.
The Company’s wholly-owned subsidiary located in Suzhou, China, has two credit lines which allow up to a maximum borrowing level of 50.0 million Chinese yuan, or $7.9 million and $7.7 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and December 31, 2020 there was $3.1 million and $4.5 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 allows up to a maximum borrowing level of 15.0 million Chinese yuan, or $2.4 million and $2.3 million at December 31, 2021 and December 31, 2020, respectively. There was $2.2 million and $0.4 million utilized on the Suzhou bank acceptance draft line of credit at December 31, 2021 and 2020, respectively.
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On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line (“PM Sensor Exit”). The estimated costs for the PM Sensor Exit include employee severance and termination costs, professional fees and other related costs such as potential commercial and supplier settlements. Non-cash charges include impairment of fixed assets and accelerated depreciation associated with PM sensor production. We recognized $2.4 million and $3.4 million of expense as a result of this initiative during 2021 and 2020, respectively. The only remaining costs relate to potential commercial settlements and legal fees which we continue to negotiate. The estimated additional costs related to these settlements and fees is up to $4.2 million.
In January 2019, the Company committed to a restructuring plan that resulted in the closure of its Canton Facility as of March 31, 2020 and the consolidation of manufacturing operations at that site into other Company locations (“Canton Restructuring”). The costs for the Canton Restructuring included employee severance and termination costs, contract termination costs, professional fees and other related costs such as moving and set-up costs for equipment and costs to restore the engineering function previously located at the Canton Facility. We recognized less than $0.1 million and $3.0 million of expense as a result of these actions during the years ended December 31, 2021 and 2020, respectively. During the third quarter of 2020, we leased the Canton facility to a third party. On June 17, 2021, we sold the Canton Facility for net proceeds of $35.2 million and a net gain of $30.7 million.
In the fourth quarter of 2018, the Company undertook restructuring actions for the Electronics segment affecting the European Aftermarket business and China operations. In the second quarter of 2020, the Company finalized plans to move its European Aftermarket sales activities in Dundee, Scotland to a new location which resulted in incurring contract termination costs as well as employee severance and termination costs. In addition, the Company announced a restructuring program to transfer the European production of its Controls product line to China. For the years ended December 31, 2021 and 2020, we recognized expense of $0.3 million and $2.4 million, respectively, as a result of these actions for related costs. We do not expect to incur additional costs related to the Electronics segment restructuring.
On October 26, 2018 the Company announced a Board of Directors approved repurchase program authorizing Stoneridge to repurchase up to $50.0 million of our Common Shares. Thereafter, on May 7, 2019, we announced that the Company had entered into an accelerated share repurchase agreement with Citibank N.A. to repurchase an aggregate of $50.0 million of our Common Shares. Pursuant to the accelerated share repurchase agreement in the second quarter of 2019 we made an upfront payment of $50.0 million and received an initial delivery of 1,349,528 Common Shares which became treasury shares. On February 25, 2020, Citibank N.A. terminated early its commitment pursuant to the accelerated share repurchase agreement and delivered to the Company, 364,604 Common Shares representing the final settlement of the Company’s repurchase program which became treasury shares.
On February 24, 2020, the Board of Directors authorized a new repurchase program for $50.0 million of outstanding Common Shares over an 18 month period. The repurchases could be made from time to time in either open market transactions or in privately negotiated transactions. Repurchases could also be made under rule 10b-18, which permit Common Shares to be repurchased through pre-determined criteria. The timing, volume and nature of repurchases of Common Shares was at the discretion of management, dependent on market conditions, other priorities of cash investment, applicable securities laws and other factors. This Common Share repurchase program authorization did not obligate the Company to acquire any particular amount of its Common Shares, and it could be suspended or discontinued at any time. For the quarter ended March 31, 2020, the Company repurchased 242,634 Common Shares for $5.0 million in accordance with this repurchase program authorization. In April 2020, the Company announced that it was temporarily suspending the previously announced share repurchase program in response to uncertainty surrounding the duration and magnitude of the impact of COVID-19. The 2020 repurchase program authorization expired during the third quarter of 2021 and no additional shares will be repurchased under this program.
In January 2020, Stoneridge Brazil paid dividends to former noncontrolling interest holders of Brazilian real (“R$”) 24.2 million ($6.0 million) as of December 31, 2019. The dividends payable balance included R$3.7 million ($1.0 million) in monetary correction for the year ended December 31, 2019 based on the Brazilian National Extended Consumer Price inflation index.
In December 2018, the Company entered into an agreement to make a $10.0 million investment in a fund (“Autotech Fund II”) managed by Autotech Ventures (“Autotech”), a venture capital firm focused on ground transportation technology. The Company’s $10.0 million investment in the Autotech Fund II will be contributed over the expected ten-year life of the fund. As of December 31 2021, the Company’s cumulative investment in the Autotech Fund II was $7.1 million. The Company contributed $3.2 million, net and $1.6 million to the Autotech Fund II during the years ended December 31, 2021 and 2020, 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, 2021, we had a cash and cash equivalents balance of approximately $85.5 million, of which 57.0% was held in foreign locations. The Company has approximately $236.0 million of undrawn commitments under the Credit Facility as of December 31, 2021, which results in total undrawn commitments and cash balances of more than $319.8 million. However, despite the February 28, 2022 amendment, it is possible that future borrowing flexibility under our Credit Facility may be limited as a result of our financial performance.
Commitments and Contingencies
See Note 11 to the consolidated financial statements for disclosures of the Company’s commitments and contingencies.
Seasonality
Our Control Devices and Electronics segments are moderately seasonal, impacted by mid-year and year-end shutdowns and the ramp-up of new model production at key customers. In addition, the demand for our Stoneridge Brazil segment consumer products is generally higher in the second half of the year.
Inflation and International Presence
By operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. Furthermore, given the current economic climate and recent fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. See Note 10 to the consolidated financial statements for additional details on the Company’s commodity price and foreign currency exchange rate risks.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions used in our consolidated financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Our critical accounting policies, those most important to the financial presentation and those that are the most complex, subjective or require significant judgment, are as follows. For additional information, see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies.”
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.
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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 holding 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.
Goodwill. Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In conducting our annual impairment assessment testing, we first perform a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if we elect not to perform a qualitative assessment of a reporting unit, we then compare the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized.
The Company utilizes an income statement approach to estimate the fair value of a reporting unit and a market valuation approach to further support this analysis. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based on the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using internally developed forecasts, as well as commercial and discount rate assumptions. The discount rate used is the value-weighted average of our estimated cost of equity and of debt (“cost of capital”) derived using both known and estimated customary market metrics. Our weighted average cost of capital is adjusted to reflect a risk factor, if necessary. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income statement approach provides a reasonable estimate of the fair value of a reporting unit. The market valuation approach is used to further support our analysis.
The annual impairment test for goodwill for the years ended December 31, 2021, 2020 and 2019 showed no impairment and fair value exceeded book value by more than 100%. A one percent increase in discount rates or a one percent decrease in revenue growth rates would not have resulted in a change in the conclusion regarding impairment.
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.
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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. 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 Tax Cuts and Jobs Act of 2017 created a provision known as Global Intangible Low-Taxed Income (“GILTI”) that imposes a tax on certain earnings of foreign subsidiaries. The Company has made an accounting policy election to reflect GILTI taxes, if any, as a current period tax expense when incurred.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update remove certain exceptions of Topic 740 including: exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or gain from other items; exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regards to: franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard prospectively as of January 1, 2020 using the modified retrospective basis. The impact of the adoption was a reduction to deferred tax liabilities and an increase to retained earnings of $13.8 million on the consolidated balance sheet as of December 31, 2020. The adoption of this standard did not have an impact on the Company’s consolidated results of operations and cash flows.
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2021
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance in ASU 2020-04 provides temporary optional expedient and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”) (also known as the “reference rate reform”). The guidance allows companies to elect not to apply certain modification accounting requirements to contracts affected by the reference rate reform, if certain criteria are met. The guidance will also allow companies to elect various optional expedients which would allow them to continue to apply hedge accounting for hedging relationships affected by the reference rate reform, if certain criteria are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. As of December 31, 2021, the Company has not yet had contracts modified due to rate reform.
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