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Financial Instruments and Fair Value Measurements | 9 Months Ended
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Sep. 30, 2020
Financial Instruments and Fair Value Measurements [Abstract] |
Financial Instruments and Fair Value Measurements | (5) Financial Instruments and Fair Value Measurements Financial Instruments A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair value of debt approximates the carrying value of debt. Derivative Instruments and Hedging Activities On September 30, 2020, the Company had open foreign currency forward contracts which are used solely for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings. Foreign Currency Exchange Rate Risk The Company conducts business internationally and, therefore, is exposed to foreign currency exchange rate risk. The Company uses derivative financial instruments as cash flow hedges to manage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The Company hedged the euro and Mexican peso currencies during 2020 and the Mexican peso in 2019. These forward contracts were executed to hedge forecasted transactions and have been accounted for as cash flow hedges. As such, gains and losses on derivatives qualifying as cash flow hedges are recorded in accumulated other comprehensive income, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive income will fluctuate based on changes in the fair value of hedge derivative contracts at each reporting period. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the currency. In certain instances, the foreign currency forward contracts may not qualify for hedge accounting or are not designated as hedges and, therefore, are marked-to-market with gains and losses recognized in the Company’s condensed consolidated statement of operations as a component of other income (loss), net. At September 30, 2020, all of the Company’s foreign currency forward contracts were designated as cash flow hedges. The Company’s foreign currency forward contracts offset a portion of the gains and losses on the underlying foreign currency denominated transactions as follows: U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedges The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, with a notional amount at September 30, 2020 of $800 which expire ratably on a monthly basis from October 2020 through December 2020. There were no such contracts at December 31, 2019. Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedges The Company holds Mexican peso-denominated foreign currency forward contracts with a notional amount at September 30, 2020 of $8,150 which expire ratably on a monthly basis from October 2020 to March 2021. There were no open Mexican peso-denominated foreign currency forward contracts at December 31, 2019. The Company evaluated the effectiveness of the Mexican peso and euro-denominated forward contracts held as of September 30, 2020 and 2019, and for the nine months then ended, and concluded that the hedges were effective. Interest Rate Risk Interest Rate Risk – Cash Flow Hedge On February 18, 2020, the Company entered into a floating-to-fixed interest rate swap agreement (the “Swap”) with a notional amount of $50,000 to hedge its exposure to interest payment fluctuations on a portion of its 2019 Credit Facility. The Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's 2019 Credit Facility that has a current balance of $144,000 at September 30, 2020. Accordingly, the change in fair value of the Swap is recognized in accumulated other comprehensive income. The Swap agreement requires monthly settlements on the same days that the 2019 Credit Facility interest payments are due and has a maturity date of March 10, 2023, which is prior to the 2019 Credit Facility maturity date of June 4, 2024. Under the Swap terms, the Company pays a fixed interest rate and receives a floating interest rate based on the one-month LIBOR, with a floor. The critical terms of the Swap are aligned with the terms of the 2019 Credit Facility, resulting in no hedge ineffectiveness. The difference between amounts to be received and paid under the Swap is recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Swap increased interest expense by $156 and $274 for the three and nine months ended September 30, 2020, respectively. ​ The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Prepaid expenses | ​ | Accrued expenses and
​ | ​ | Notional amounts (A) | ​ | and other current assets | ​ | other current liabilities
​ | ​ | September 30, | ​ | December 31, | ​ | September 30, | ​ | December 31, | ​ | September 30, | ​ | December 31,
​ |  | 2020 |  | 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019
Derivatives designated as hedging instruments: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash flow hedges: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Forward currency contracts | ​ | $ | 8,950 | ​ | $ | - | ​ | $ | - | ​ | $ | - | ​ | $ | 360 | ​ | $ | -
Interest rate swap | ​ | $ | 50,000 | ​ | $ | - | ​ | $ | - | ​ | $ | - | ​ | $ | 1,441 | ​ | $ | -
(A) | Notional amounts represent the gross contract of the derivatives outstanding in U.S. dollars.
Gross amounts recorded for the cash flow hedges in other comprehensive (loss) income and in net income for the three months ended September 30 were as follows:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Gain (loss) reclassified from
​ | ​ | Gain (loss) recorded in other | ​ | other comprehensive income
​ | ​ | comprehensive income (loss) | ​ | (loss) into net income (A)
​ |  | 2020 |  | 2019 |  | 2020 |  | 2019
Derivatives designated as cash flow hedges: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Forward currency contracts | ​ | $ | 642 | ​ | $ | (29) | ​ | $ | (499) | ​ | $ | 131
Interest rate swap | ​ | $ | (3) | ​ | $ | - | ​ | $ | (156) | ​ | $ | -
(A) | Gains (losses) reclassified from other comprehensive (loss) income into net income recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $(112) and $0 for the three months ended September 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net income recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $(387) and $131 for the three months ended September 30, 2020 and 2019, respectively. Losses reclassified from other comprehensive (loss) income into net income recognized in interest expense, net in the Company’s condensed consolidated statements of operations was $156 for the three months ended September 30, 2020.
​ Gross amounts recorded for the cash flow hedges in other comprehensive (loss) income and in net (loss) income for the nine months ended September 30 were as follows:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Gain (loss) reclassified from
​ | ​ | Gain (loss) recorded in other | ​ | other comprehensive income
​ | ​ | comprehensive income (loss) | ​ | (loss) into net income (A)
​ |  | 2020 |  | 2019 |  | 2020 |  | 2019
Derivatives designated as cash flow hedges: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Forward currency contracts | ​ | $ | (1,962) | ​ | $ | 397 | ​ | $ | (1,602) | ​ | $ | 646
Interest rate swap | ​ | $ | (1,715) | ​ | $ | - | ​ | $ | (274) | ​ | $ | -
(A) | Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in SG&A in the Company’s condensed consolidated statements of operations were $(347) and $0 for the nine months ended September 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in COGS in the Company’s condensed consolidated statements of operations were $(1,226) and $521 for the nine months ended September 30, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive (loss) income into net (loss) income recognized in D&D in the Company’s condensed consolidated statements of operations were $(29) and $125 for the nine months ended September 30, 2020 and 2019, respectively. Losses reclassified from other comprehensive (loss) income into net (loss) income recognized in interest expense in the Company’s condensed consolidated statements of operations was $274 for the nine months ended September 30, 2020.
​ For the nine months ended September 30, 2020, the total net losses on the foreign currency contract cash flow hedges of $360 are expected to be included in COGS, SG&A and D&D within the next 12 months. Of the total net losses on the interest rate swap cash flow hedges, $582 of losses are expected to be included in interest expense, net within the next 12 months and $859 of losses are expected to be included in interest expense, net in subsequent periods. ​ Cash flows from derivatives used to manage foreign exchange and interest rate risks are classified as operating activities within the condensed consolidated statements of cash flows. ​ Fair Value Measurements Certain assets and liabilities held by the Company are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of the inputs used. Fair values estimated using Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Fair values estimated using Level 2 inputs, other than quoted prices, are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency contracts, inputs include foreign currency exchange rates. For the interest rate swap, inputs include LIBOR. Fair values estimated using Level 3 inputs consist of significant unobservable inputs. The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the three levels of the fair value hierarchy based on the reliability of inputs used.
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | September 30, | ​ | ​ | December 31,
​ | ​ | ​ | ​ | ​ | 2020 | ​ | 2019
​ | ​ | ​ | ​ | ​ | Fair values estimated using | ​ | ​ | ​
​ | ​ | ​ | Fair | ​ | Level 1 | ​ | Level 2 | ​ | Level 3 | ​ | ​ | ​
​ |  | value |  | inputs |  | inputs |  | inputs |  | Fair value
Financial liabilities carried at fair value: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Forward currency contracts | ​ | $ | 360 | ​ | $ | - | ​ | $ | 360 | ​ | $ | - | ​ | $ | -
Interest rate swap | ​ | ​ | 1,441 | ​ | ​ | - | ​ | ​ | 1,441 | ​ | ​ | - | ​ | ​ | -
Earn-out consideration | ​ | ​ | 5,494 | ​ | ​ | - | ​ | ​ | - | ​ | ​ | 5,494 | ​ | ​ | 12,011
Total financial liabilities carried at fair value | ​ | $ | 7,295 | ​ | $ | - | ​ | $ | 1,801 | ​ | $ | 5,494 | ​ | $ | 12,011
​ The following table sets forth a summary of the change in fair value of the Company’s Level 3 financial liabilities related to earn-out consideration that are measured at fair value on a recurring basis.
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | Stoneridge Brazil |  | Total
Balance at December 31, 2019 | ​ | $ | 12,011 | ​ | $ | 12,011
Change in fair value | ​ | ​ | (3,045) | ​ | ​ | (3,045)
Foreign currency adjustments | ​ | ​ | (3,472) | ​ | ​ | (3,472)
Balance at September 30, 2020 | ​ | $ | 5,494 | ​ | $ | 5,494
​ ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | Orlaco |  | Stoneridge Brazil |  | Total
Balance at December 31, 2018 | ​ | $ | 8,602 | ​ | $ | 10,070 | ​ | $ | 18,672
Change in fair value | ​ | ​ | - | ​ | ​ | 1,862 | ​ | ​ | 1,862
Foreign currency adjustments | ​ | ​ | (128) | ​ | ​ | (754) | ​ | ​ | (882)
Earn-out consideration cash payment | ​ | ​ | (8,474) | ​ | ​ | - | ​ | ​ | (8,474)
Balance at September 30, 2019 | ​ | $ | - | ​ | $ | 11,178 | ​ | $ | 11,178
​ The Company will be required to pay the Stoneridge Brazil earn-out consideration, which is not capped, based on Stoneridge Brazil’s financial performance in either 2020 or 2021. The fair value of the Stoneridge Brazil earn-out consideration is based on discounted cash flows utilizing forecasted earnings before interest, depreciation and amortization (“EBITDA”) in 2020 or 2021 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The former Stoneridge Brazil owners may choose either the 2020 or 2021 financial performance period to be used to determine the earn-out consideration payment. The former Stoneridge Brazil owners must choose the 2020 financial performance period by March 31, 2021 otherwise the 2021 financial performance period will automatically be used. The Company has assigned a zero probability that the former owners will choose the 2020 performance period given projected results for Stoneridge Brazil which has been negatively impacted by COVID-19. As such, the earn-out fair value assumes 2021 financial performance will be the basis for the earn-out consideration obligation. The earn-out consideration obligation related to Stoneridge Brazil is recorded within other long-term liabilities in the consolidated balance sheets as of September 30, 2020 and December 31, 2019. The change in fair value of the earn-out consideration for Stoneridge Brazil was due to updated financial performance projections and favorable foreign currency translation offset by the reduced time from the current period end to the payment date. The change in fair value of the Stoneridge Brazil earn-out consideration was recorded in SG&A expense and the foreign currency impact was included in other (income) expense, net in the condensed consolidated statements of operations. The Orlaco earn-out consideration reached the capped amount of €7,500 as of the quarter ended March 31, 2018 due to actual performance exceeding forecasted performance and remained at the capped amount until it was paid out in March 2019 for $8,474. The earn-out consideration payout was recorded in the condensed consolidated statement of cash flows within operating and financing activities in the amounts of $5,080 and $3,394, respectively, for the nine months ended September 30, 2019. There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the nine months ended September 30, 2020. ​ Impairment of Long-Lived Assets or Finite-Lived Assets ​ The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. The estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results over the life of the asset or the life of the primary asset in the asset group. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired. ​ On May 19, 2020, the Company committed to the strategic exit of its Control Devices particulate matter (“PM”) sensor product line. As a result of the strategic exit of the PM sensor product line the Company determined an impairment indicator existed and performed a recoverability test of the related long-lived assets. The Company identified that there are two asset groups comprised of PM fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $2,326 was recorded based on the difference between the fair value and the carrying value of the assets. The Company used the income approach to determine the fair value of the PM fixed assets at the Tallinn, Estonia facility. During the nine months ended September 30, 2020, the impairment loss of $2,326 was recorded on the Company’s condensed consolidated statement of operations within selling, general and administrative expense. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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