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Financial Instruments and Fair Value Measurements | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Financial Instruments and Fair Value Measurements | 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, due to the variable interest rate on our Credit Facility and the maturity of the remaining outstanding debt. Derivative Instruments and Hedging Activities On September 30, 2023, 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 2023 and 2022. 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 Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction with the resulting adjustments included on the condensed consolidated statements of operations within Other (income) expense, net. These foreign currency transaction (gains) losses, including the impact of hedging activities, were $(1,359) and $2,259 for the the three months ended September 30, 2023 and 2022, respectively and $2,099 and $6,500 for the nine months ended September 30, 2023 and 2022, respectively. 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 used 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. Net Investment Hedges During 2021, the Company entered into two cross-currency swaps, designated as net investment hedges, with notional values of $25,000 each that were scheduled to mature in August 2026 and August 2028. These swaps hedged a portion of the net investment in a certain euro-denominated subsidiary. As a result of favorable market conditions, on May 5, 2022, the Company unwound the two net investment hedges and recognized a net gain of $3,716, which was recorded on the Company’s condensed consolidated statement of operations as a component of other expense, net for the second quarter ended June 30, 2022. The cash received from the settlement of these swaps of $3,820 was classified in investing activities in the condensed consolidated statement of cash flows. In the fourth quarter ended December 31, 2022, the Company determined it had incorrectly recognized the net gain in the condensed consolidated statement of operations and reclassified the net gain of $3,716 to other comprehensive loss, net of tax and accumulated other comprehensive loss. This item would have increased the loss for the three months ended June 30, 2022, six months ended June 30, 2022 and nine months ended September 30, 2022 by $0.10 per share. The Company recorded the item in the three-months ended December 31, 2022 which resulted in decreased income per share by $0.10. The Company assessed the materiality of this matter from a qualitative and quantitative perspective and concluded that the impact of the error was not material to the current or previous quarterly results. The Company elected to assess hedge effectiveness of the net investment hedges under the spot method. Accordingly, periodic changes in the fair value of the derivative instruments attributable to factors other than spot exchange rate variability were excluded from the measurement of hedge ineffectiveness and reported directly in earnings each reporting period. The change in fair value of these derivative instruments was recorded in cumulative translation adjustment, which is a component of accumulated other comprehensive loss in the condensed consolidated balance sheets. The Company had no outstanding net investment hedges at September 30, 2023 or December 31, 2022. Cash Flow Hedges The Company entered into foreign currency forward contracts to hedge the Mexican peso currency in 2023 and 2022. 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 loss, to the extent that hedges are effective, until the underlying transactions are recognized in earnings. Unrealized amounts in accumulated other comprehensive loss 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 was measured 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 statements of operations as a component of other (income) expense, net. During 2023 and 2022, 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: 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, 2023 of $22,973 which expire ratably on a monthly basis from October 2023 to August 2024. The notional amount at December 31, 2022 related to Mexican peso-denominated foreign currency forward contracts was $0. The Company evaluated the effectiveness of the Mexican peso and U.S. dollar-denominated forward contracts held as of September 30, 2023 and concluded that the hedges were highly 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 “Interest Rate 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 Interest Rate Swap matured on March 10, 2023. The Interest Rate Swap was designated as a cash flow hedge of the variable interest rate obligation under the Company's Credit Facility. Accordingly, the change in fair value of the Interest Rate Swap was recognized in accumulated other comprehensive loss. The Interest Rate Swap agreement required monthly settlements on the same days that the Credit Facility interest payments were due and had a maturity date of March 10, 2023, which was prior to the Credit Facility maturity date of June 5, 2024. Under the Interest Rate Swap terms, the Company paid a fixed interest rate and received a floating interest rate based on the one-month LIBOR, with a floor. The critical terms of the Interest Rate Swap were aligned with the terms of the Credit Facility, resulting in no hedge ineffectiveness. The difference between amounts to be received and paid under the Interest Rate Swap were recognized as a component of interest expense, net on the condensed consolidated statements of operations. The Interest Rate Swap settlements reduced interest expense, net by $100 for the three months ended September 30, 2022. The Interest Rate Swap settlements reduced interest expense, net by $290 and increased interest expense, net by $133 for the nine months ended September 30, 2023 and 2022, respectively. The notional amounts and fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
|  | Notional amounts (A) |  | Prepaid expenses and other current assets |  |
|  | September 30, 2023 |  | December 31, 2022 |  | September 30, 2023 |  | December 31, 2022 |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Cash flow hedges: |  |  |  |  |  |  |  |  |  |  |  |
Forward currency contracts |  | $ | 22,973 |  |  | $ | — |  |  | $ | 205 |  |  | $ | — |  |  |  |  |
Interest rate swap |  | $ | — |  |  | $ | 50,000 |  |  | $ | — |  |  | $ | 294 |  |  |  |  |
_____________________________ (A)Notional amounts represent the gross contract of the derivatives outstanding in U.S. dollars. Gross amounts recorded for the cash flow and net investment hedges in other comprehensive loss and in net income for the three months ended September 30 were as follows:
| Gain recorded in other comprehensive loss |  | Gain reclassified from other comprehensive loss into net income (A)
| 2023 |  | 2022 |  | 2023 |  | 2022
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |
Forward currency contracts | $ | 67 |  |  | $ | 97 |  |  | $ | 227 |  |  | $ | 496 |
Interest rate swap | $ | — |  |  | $ | 150 |  |  | $ | — |  |  | $ | 100 |
Derivatives designated as net investment hedges: |  |  |  |  |  |  |
Cross-currency swaps | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
_____________________________
(A) | Gains reclassified from other comprehensive loss into net income recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $54 and $115 for the three months ended September 30, 2023 and 2022, respectively. Gains reclassified from other comprehensive loss into net income recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $173 and $381 for the three months ended September 30, 2023 and 2022, respectively. Gains reclassified from other comprehensive loss into net income recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $0 and $100 for the three months ended September 30, 2023 and 2022, respectively.
Gross amounts recorded for the cash flow and net investment hedges in other comprehensive income (loss) and in net loss for the nine months ended September 30 were as follows:
| Gain (loss) recorded in other comprehensive income (loss) |  | Gain (loss) reclassified from other comprehensive income (loss) into net loss (A)
| 2023 |  | 2022 |  | 2023 |  | 2022
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |
Forward currency contracts | $ | 483 |  | $ | 1,084 |  | $ | 278 |  | $ | 1,253
Interest rate swap | $ | (4) |  | $ | 946 |  |  | $ | 290 |  | $ | (133) |
Derivatives designated as net investment hedges: |  |  |  |  |  |  |
Cross-currency swaps | $ | — |  | $ | 2,328 |  | $ | — |  | $ | 3,598
(A) | Gains reclassified from other comprehensive income (loss) into net loss recognized in selling, general and administrative expenses (“SG&A”) in the Company’s condensed consolidated statements of operations were $66 and $266 for the nine months ended September 30, 2023 and 2022, respectively. Gains reclassified from other comprehensive income (loss) into net loss recognized in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations were $212 and $987 for the nine months ended September 30, 2023 and 2022, respectively. Gains (losses) reclassified from other comprehensive income (loss) into net loss recognized in interest expense, net in the Company’s condensed consolidated statements of operations were $290 and $(133) for the nine months ended September 30, 2023 and 2022, respectively. Gains reclassified from other comprehensive (loss) income into net (loss) income recognized in other expense (income), net in the Company's condensed consolidated statements of operations were $3,598 for the nine months ended September 30, 2022.
Cash flows from derivatives used to manage foreign currency 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 and cross-currency contracts, inputs include forward foreign currency exchange rates. For the interest rate swap, inputs included 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, 2023 |  | December 31, 2022
|  |  | Fair values estimated using |  |
| Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs |  | Fair value
Financial assets carried at fair value: |  |  |  |  |  |  |  |  |
Forward currency contracts | $ | 205 |  |  | $ | — |  |  | $ | 205 |  |  | $ | — |  |  | $ | — |
Interest rate swap | — |  |  | — |  |  | — |  |  | — |  |  | 294 |
Total financial assets carried at fair value | $ | 205 |  |  | $ | — |  |  | $ | 205 |  |  | $ | — |  |  | $ | 294 |
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
|  |  | 2022
Balance at January 1 |  |  | $ | 7,351 |
Foreign currency adjustments |  |  | 921 |
Earn-out consideration cash payment |  |  | (8,272) |
Balance at September 30 |  |  | $ | — |
The Company was 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 was based on earnings before interest, taxes, depreciation and amortization in 2021. The Stoneridge Brazil earn-out consideration obligation was recorded within accrued expenses and other current liabilities in the condensed consolidated balance sheets as of December 31, 2021. The earn-out consideration obligation of $8,272 was paid in April 2022 and recorded in the condensed consolidated statement of cash flows within operating and financing activities in the amounts of $1,996 and $6,276, respectively. The foreign currency impact related to the Stoneridge Brazil earn-out consideration was included in other expense (income), net in the condensed consolidated statements of operations. 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, 2023.

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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