A financial instrument is cash or a contract that imposes an obligation to deliver or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The fair value of debt approximates the carrying value of debt, due to the variable interest rate on the 2019 Credit Facility and the maturity of the remaining outstanding debt.

On December 31, 2020, the Company had open Mexican peso-denominated foreign currency forward contracts. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2020 and 2019. 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.

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 2018 and, during 2019, the Company hedged only the Mexican peso. In addition, the Company hedged the U.S. dollar against the Swedish krona and euro on behalf of its European subsidiaries in 2018.

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 consolidated statements of operations as a component of other (income) expense, net. At December 31, 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:

At December 31, 2017, the Company held foreign currency forward contracts with an underlying notional amount of $1,486 to reduce the exposure related to the Company’s euro-denominated intercompany loans. There were no contracts entered into as of December 31, 2020, 2019 or 2018 as these contracts were settled in December 2018. This euro-denominated foreign currency forward contract was not designated as a hedging instrument. For the year ended December 31, 2018, the Company recognized a gain of $73 in the consolidated statements of operations as a component of other (income) expense, net related to the euro-denominated contract.

The Company entered into U.S. dollar-denominated currency contracts on behalf of one of its European Electronics subsidiaries, whose functional currency is the euro, and expired ratably on a monthly basis during 2020. There were no such contracts at December 31, 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 December 31, 2020 of $1,242 which expire ratably on a monthly basis from January 2021 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-denominated foreign currency forward contracts held as of December 31, 2020 and the year then ended, and concluded that the hedges were effective.

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 borrowings. 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 $136,000 at December 31, 2020. Accordingly, the change in fair value of the Swap is recognized in accumulated other comprehensive income (loss). 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 consolidated statements of operations. The swap settlements increased interest expense by $433 for the year ended December 31, 2020.

The notional amounts and fair values of derivative instruments in the consolidated balance sheets were as follows:

(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 income (loss) and in net (loss) income for the years ended December 31 were as follows:


							Gain (loss) reclassified from
	Gain (loss) recorded in other						other comprehensive income
	comprehensive income (loss)						(loss) into net (loss) income ^(A)
	2020		2019			2018	2020		2019			2018
Derivatives designated as cash flow hedges:
Forward currency contracts	$	(1,244)	$	450	$	1,967	$	(1,499)	$	820	$	1,376
Interest rate swap	$	(1,751)	$	-	$	-	$	(433)	$	-	$	-

(A)

Gains (losses) reclassified from comprehensive income (loss) into net (loss) income recognized in COGS in the Company’s consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 were $(1,146), $695 and $1,259, respectively. Gains (losses) reclassified from other comprehensive income (loss) into net (loss) income recognized in D&D in the Company’s consolidated statements of operations were $(29), $125 and $117 for the years ended December 31, 2020, 2019 and 2018, respectively. Gains (losses) reclassified from other comprehensive income (loss) into net (loss) income recognized in SG&A in the Company’s consolidated statements of operations were $(324), $0 and $0 for the years ended December 31, 2020, 2019 and 2018, respectively.

For the year ended December 31, 2020, the total net gain on the foreign currency contract cash flow hedges of $255 is expected to be included in COGS, SG&A and D&D within the next 12 months. Of the total net loss on the interest rate swap cash flow hedge, $591 of loss is expected to be included in interest expense, net within the next 12 months and $727 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 consolidated statements of cash flows.

The Company has measured the ineffectiveness of the forward currency contracts and any amounts recognized in the consolidated financial statements were immaterial for the years ended December 31, 2020, 2019 and 2018.

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.



December 31			2020						2019
			Fair values estimated using
		Fair	Level 1		Level 2		Level 3
	value		inputs		inputs		inputs		Fair value
Financial assets carried at fair value:
Forward currency contract	$	255	$	-	$	255	$	-	$	-
Total financial assets carried at fair value	$	255	$	-	$	255	$	-	$	-

Financial liabilities carried at fair value:
Interest rate swap	$	1,318	$	-	$	1,318	$	-	$	-
Earn-out consideration		5,813		-		-		5,813		12,011
Total financial liabilities carried at fair value	$	7,131	$	-	$	1,318	$	5,813	$	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		(3,196)		(3,196)
Foreign currency adjustments		(3,002)		(3,002)
Balance at December 31, 2020	$	5,813	$	5,813


	Orlaco		Stoneridge Brazil		Total
Balance at December 31, 2018	$	8,602	$	10,070	$	18,672
Change in fair value		-		2,308		2,308
Foreign currency adjustments		(128)		(367)		(495)
Earn-out consideration cash payment		(8,474)		-		(8,474)
Balance at December 31, 2019	$	-	$	12,011	$	12,011

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 Stoneridge Brazil’s financial performance 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 December 31, 2020 and 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 consolidated statements of operations.

The fair value of the Orlaco earn-out consideration was based on a Monte Carlo simulation utilizing forecasted EBITDA for the 2017 and 2018 earn-out period as well as a growth rate reduced by the market required rate of return.

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. The payment of the Orlaco earn-out consideration of $8,474 was paid in March 2019 and recorded in the consolidated statement of cash flows within operating and financing activities in the amounts of $5,080 and $3,394, respectively, for the year ended December 31, 2019.

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the year ended December 31, 2020.

No non-recurring fair value adjustments were required for nonfinancial assets for the years ended December 31, 2020 and 2019.

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 sensor fixed assets at the Company’s Lexington, Ohio and Tallinn, Estonia facilities. As a result of the recoverability test performed, the Company determined that the undiscounted cash flows did not exceed the carrying value of the PM sensor fixed assets at the Company’s Tallinn, Estonia facility. As such, an impairment loss of $2,326 was recorded based on the difference between the fair value and the carrying value of the assets. The Company used the income approach to determine the fair value of the PM sensor fixed assets at the Tallinn, Estonia facility. During the year ended December 31, 2020, the impairment loss of $2,326 was recorded on the Company’s condensed consolidated statement of operations within SG&A expense. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement."