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 Credit Facility and the maturity of the remaining outstanding debt.

On December 31, 2021, the Company had open Mexican peso-denominated foreign currency forward contracts and net investment hedges of our euro-denominated subsidiary. The Company used foreign currency forward contracts solely for hedging and not for speculative purposes during 2021 and 2020. 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 and net investment 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.

During 2021 the Company entered into two cross-currency swaps, designated as net investment hedges, with notional values of $25,000 each and maturities in August 2026 and August 2028. These swaps hedge a portion of the net investment in a certain euro-denominated subsidiary.

The Company has elected to assess hedge effectiveness under the spot method. Accordingly, periodic changes in the fair value of the derivative instruments attributable to factors other than spot exchange rate variability are excluded from the measurement of hedge ineffectiveness and reported directly in earnings each reporting period. The change in fair value of these derivative instruments is recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the consolidated balance sheets. When the related currency translation adjustment is required to be reclassified, usually upon the sale or liquidation of the investment, the gain or loss included in accumulated other comprehensive loss is recorded in earnings and reflected in other expense (income), net in the consolidated statements of operations. Upon settlement, cash flows attributable to derivatives designated as net investment hedges will be classified as investing activities in the consolidated statements of cash flows.

The Company entered into foreign currency forward contracts to hedge the euro and Mexican peso currencies during 2020 and the Mexican peso currency during 2021. 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 expense (income), net. At December 31, 2021, 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:

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, 2021 or 2020.

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, 2021 of $23,923 which expire ratably on a monthly basis from January 2022 to December 2022. The notional amount at December 31, 2020 related to Mexican peso-denominated foreign currency forward contracts was $1,242.

The Company evaluated the effectiveness of the Mexican peso-denominated foreign currency forward contracts held as of December 31, 2021 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 Credit Facility borrowings. The Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's Credit Facility that has a current balance of $163,957 at December 31, 2021. Accordingly, the change in fair value of the Swap is recognized in accumulated other comprehensive loss. The Swap agreement requires monthly settlements on the same days that the Credit Facility interest payments are due and has a maturity date of March 10, 2023, which is prior to the 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 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 $651 and $433 for the years ended December 31, 2021 and 2020, respectively.

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 (loss) income and in net income (loss) 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 income (loss) ^(A)
	2021		2020			2019	2021		2020			2019
Derivatives designated as cash flow hedges:
Forward currency contracts	$	923	$	(1,244)	$	450	$	448	$	(1,499)	$	820
Interest rate swap	$	164	$	(1,751)	$	-	$	(651)	$	(433)	$	-
Derivatives designated as net investment hedges:
Cross-currency swaps	$	1,270	$	-		-	$	-	$	-	$	-

(A)

Gains (losses) reclassified from comprehensive loss into net income (loss) recognized in COGS in the Company’s consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 were $341, $(1,146) and $695, respectively. Gains (losses) reclassified from other comprehensive loss into net income (loss) recognized in D&D in the Company’s consolidated statements of operations were $0, $(29) and $125 for the years ended December 31, 2021, 2020 and 2019, respectively. Gains (losses) reclassified from other comprehensive loss into net income (loss) recognized in SG&A in the Company’s consolidated statements of operations were $107, $(324) and $0 for the years ended December 31, 2021, 2020 and 2019, respectively. Losses reclassified from other comprehensive loss into net income (loss) recognized in interest expense, net in the Company’s consolidated statements of operations were $(651) and $(433) for the years ended December 31, 2021, and 2020, respectively.

For the year ended December 31, 2021, the total net gains on the foreign currency contract cash flow hedges of $730 are 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, $468 of losses are expected to be included in interest expense, net within the next 12 months and $35 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, 2021, 2020 and 2019.

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 and cross-currency contracts, inputs include forward 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,			2021						2020
			Fair values estimated using
		Fair	Level 1		Level 2		Level 3			Fair
	value		inputs		inputs		inputs		value
Financial assets carried at fair value:
Forward currency contract	$	730	$	-	$	730	$	-	$	255
Cross-currency swaps		1,450		-		1,450		-		-
Total financial assets carried at fair value	$	2,180	$	-	$	2,180	$	-	$	255

Financial liabilities carried at fair value:
Interest rate swap		503		-		503		-		1,318
Earn-out consideration		7,351		-		-		7,351		5,813
Total financial liabilities carried at fair value	$	7,854	$	-	$	503	$	7,351	$	7,131

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
	2021		2020
Balance at January 1	$	5,813	$	12,011
Change in fair value		2,065		(3,196)
Foreign currency adjustments		(527)		(3,002)
Balance at December 31	$	7,351	$	5,813

The Company will be required to pay the Stoneridge Brazil earn-out consideration based on Stoneridge Brazil’s financial performance in 2021. The fair value of the Stoneridge Brazil earn-out consideration is based on earnings before interest, depreciation and amortization (“EBITDA”) in 2021 and was based on discounted cash flows utilizing forecasted EBITDA in 2020 using the key inputs of forecasted sales and expected operating income reduced by the market required rate of return. The earn-out consideration obligation related to Stoneridge Brazil is recorded within accrued expenses and other current liabilities in the consolidated balance sheets as of December 31, 2021 and other long-term liabilities in the consolidated balance sheets as of December 31, 2020.

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 expense (income), net in the consolidated statements of operations.

In March 2019, the Company paid earn-out consideration of $8,474 related to the January 2017 acquisition of Orlaco. The payment was 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. The Orlaco earn-out consideration expense was recognized in the years ended December 31, 2017 and 2018.

There were no transfers in or out of Level 3 from other levels in the fair value hierarchy for the year ended December 31, 2021.

No non-recurring fair value adjustments were required for nonfinancial assets for the years ended December 31, 2021 and 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 were 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 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."