Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with the information set forth in our consolidated financial statements and the notes thereto included in Item 8 in this Annual Report on Form 10-K. The statements in this discussion regarding industry outlook, our long-term strategy, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. See “Forward-Looking Information” on page ii of this Annual Report on Form 10-K. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Item 1A - Risk Factors.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.
Business Overview
CVG is a global provider of systems, assemblies and components to the global commercial vehicle market, the electric vehicle market, and the warehouse automation markets.
We have manufacturing operations in the United States, Mexico, China, United Kingdom, Belgium, Czech Republic, Ukraine, Thailand, India and Australia. Our products are primarily sold in North America, Europe, and the Asia-Pacific region.
We primarily manufacture customized products to meet the requirements of our customer. We believe our products are used by a majority of the North American Commercial Truck markets, many construction vehicle OEMs and top e-commerce retailers.
Commercial Trends in the Vehicle Solutions and Aftermarket Segments
Demand for our products may be driven by preferences of the end-user of the vehicle, particularly with respect to heavy-duty trucks in North America. Heavy-duty truck OEMs generally dictate the specifications of component parts that will be used to manufacture the vehicle, including a wide variety of cab interior styles and colors, brand and type of seats, type of seat fabric and color, and interior styling. Certain of our products are only utilized in heavy-duty trucks, such as our storage systems, sleeper boxes and privacy curtains. To the extent that demand for higher content vehicles increases or decreases, our revenues and gross profit will be impacted positively or negatively.
Current trends include future adoption of electric vehicles in the commercial truck segment. Commercial truck makers are developing electric models of all classes of trucks and buses in their fleets. This has created an increased number of platform opportunities relative to historical trends of platform changes. The Company competes to retain its existing positions on platforms that are getting refreshed, competitively win new positions on platforms on which it is not the incumbent supplier, and gain first fit positions on new Electric Vehicle platforms. The global truck market is evolving to include many offerings aimed at low emissions and less impact on the environment.
In general, demand for our heavy-duty (or "Class 8") truck products is generally dependent on the number of new heavy-duty trucks manufactured in North America, which in turn is a function of general economic conditions, supply chain constraints, interest rates, changes in government regulations, consumer spending, fuel costs, freight costs, fleet operators' financial health and access to capital, used truck prices and our customers’ inventory levels. New heavy-duty truck demand has historically been cyclical and is particularly sensitive to the industrial sector of the economy, which generates a significant portion of the freight tonnage hauled by commercial vehicles.
North American heavy-duty truck production was 264,470 units in 2021. According to a February 2022 report by ACT Research, a publisher of industry market research, North American Class 8 production levels are expected to increase to 300,000 units in 2022. ACT Research estimated that the average age of active North American Class 8 trucks was 11 years in 2021. As vehicles age, maintenance costs typically increase. ACT Research forecasts that the vehicle age will decline as aging fleets are replaced.
North American medium-duty (or "Class 5-7") truck production was 235,335 units in 2021. According to a February 2022 report by ACT Research, North American Class 5-7 truck production is expected to increase to 261,000 units in 2022. We primarily participate in the class 6 and 7 portion of the medium-duty truck market.
Commercial Trends in Warehouse Automation Segment
Demand for our warehouse automation subsystems is derived by expansion of supply chain infrastructures to accommodate increased customer orders in e-commerce and product movement globally. As the percentage of products ordered on-line increases, the delivery mechanisms must expand to increase output. Additionally, desire for cost reduction, increased throughput volume and SKU proliferation, a greater variety of order and package types, more frequent product returns by end consumers, and COVID-19-driven social distancing protocols on warehouse floors all have driven increased investment in automated solutions by warehouse operators. The Company assembles the material handling subsystems incorporated into automated warehouses.
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Commercial Trends in the Electrical Systems Segment
Demand for our Electrical Systems products, such as wire harnesses, is primarily driven by construction equipment vehicle production. Demand for new vehicles in the global construction equipment market generally follows certain economic conditions around the world. Our products are primarily used in the medium- and heavy-duty construction equipment markets (vehicles weighing over 12 metric tons). Demand in the medium- and heavy-duty construction equipment market is typically related to the level of large scale infrastructure development projects, such as highways, dams, harbors, hospitals, airports and industrial development, as well as activity in the mining, forestry and commodities industries.
Other Key Developments
On October 25, 2021, the Company provided notice to the Volvo Group (“Volvo”) of the Company’s intention to terminate its agreement with Volvo, with such termination to become effective twelve months from the date of notice, absent the parties reaching mutually agreeable terms upon which to continue their relationship. The Company is focused on implementing customer price increases where margin on product is not meeting profitability targets. If no such agreement is reached, the loss of business from Volvo could have an adverse effect on our business, financial condition and results of operations as sales to Volvo represented more than 10% of reported consolidated net sales during each of the three most recent years.
The COVID-19 pandemic has caused and continues to cause, significant volatility, uncertainty and economic disruptions to our business. While we continue to operate our facilities, we may experience production slowdowns and/or shutdowns at our manufacturing facilities in North America, Europe and Asia Pacific as a result of government orders, our inability to obtain component parts from suppliers and/or inconsistent customer demand. In addition, many of our suppliers and customers may experience production slowdowns and/or shutdowns, which may further impact our business, sales and results of operation. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on a number of factors beyond our control.
While backlog was strong in the truck markets during the year ended December 31, 2021, all markets we operate in were impacted by supply chain constraints which caused volatility on our customers' production schedules and had a negative impact on our results. Overall, we continued to experience global supply chain disruptions and significant inflation, including longer lead-times to procure parts from China and due to port backups, labor inflation, chip shortages, steel and other raw material inflation, and freight cost increases. Th e impact of the pandemic and related economic recovery continue to be uneven from period to period and across our global footprint based on local and regional outbreaks. We continue to proactively monitor, assess and minimize to the extent possible disruptions and delays in production due to labor shortages or customer schedules, focus on cost control and recovery through pricing adjustments, and take reasonable measures to protect our workforce.
On November 1, 2021, the Company's Board of Directors approved a restructuring program to align the Company’s cost structure to support margin expansion. The program includes workforce reductions and footprint optimization across segments. We incurred $1.9 million expense during the year ended December 31, 2021 related to this program and expect the cost to be betwe en $4.0 million to $6.0 million fo r the entire program.
2022 Demand Outlook
According to a February 2022 report by ACT Research, a publisher of industry market research, 2021 North American Class 8 truck build production was 264,470 units and Class 5-7 production was 235,335 units. 2022 North American Class 8 truck production levels are forecast to be at 300,000 units. We are estimating the industry will be able to make approximately 270,000 trucks, or roughly flat to 2021. 2022 Class 5-7 production are expected to be at 261,000 units. This outlook supports demand for the Company’s truck products.
According to LogisticsIQ, demand for warehouse automation products is expected to grow approximately 14% per year through 2026. This outlook supports demand for the Company's warehouse automation products.
Our Long-term Strategy
The Company's long-term strategy is to increase its sales, profits and shareholder value by financially optimizing its core legacy businesses, organically growing in targeted areas, strengthening its product portfolio, increasing its margins and adding to its business segments through a focused M&A program. The Company expects to diversify its revenue and profits by product, customer, platform, and end market. Our products include seating systems, plastic components, cab structures, warehouse automation subsystems, electrical wire harnesses, mirrors, wipers and other accessories.
We believe we are having success with our strategy to strengthen our business, including:
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• A growing current business in the warehouse automation market primarily through business expansion enabled by the FSE acquisition in 2019;
• A growing amount of future business in new emerging electric vehicle platforms as a multi-product global provider of electric vehicle design, subsystems and components; and
• A growing amount of new business wins that are in diverse end markets but fit the company’s current know-how, assets, and footprint.
We expect to lessen our dependence on certain products and markets, broaden the company’s customer list, broaden the company’s product offering and increase our margins. The goal is to become less cyclical and less customer concentrated and increase focus in other end markets.
We have a long-term strategy to globally optimize our cost structure through manufacturing process enhancements, low cost footprint and global sourcing. We periodically evaluate our short-term and long-term strategies and may adjust actions in response to changes in our business environment and other factors, such as implementing restructuring as needed.
We are also supplementing our organic strategies by evaluating strategic acquisition opportunities. The company has many opportunities to accomplish this type of business improvement and is being selective. The goal is to strengthen / enhance current positions, enter new markets, develop relationships with new customers, and enhance service to our customers, leading to increased return to our stockholders.
CONSOLIDATED RESULTS OF OPERATIONS
The table below sets forth certain operating data expressed as a percentage of revenues for the periods indicated (dollars are in thousands):
2021 2020 2019
Revenues $ 971,578 100.0 % $ 717,699 100.0 % $ 901,238 100.0 %
Cost of revenues 852,591 87.8 643,623 89.7 796,101 88.3
Gross profit 118,987 12.2 74,076 10.3 105,137 11.7
Selling, general and administrative expenses 69,406 7.1 68,228 9.5 64,501 7.2
Goodwill and other impairment — — 29,017 4.0 — —
Operating income (loss) 49,581 5.1 (23,169) (3.2) 40,636 4.5
Other (income) expense (878) (0.1) 728 0.1 2,225 0.2
Interest expense 11,179 1.2 20,603 2.9 16,855 1.9
Loss on extinguishment of debt 7,155 0.7 — — — —
Income (loss) before provision for income taxes 32,125 3.3 (44,500) (6.2) 21,556 2.4
Provision (benefit) for income taxes 8,393 0.9 (7,451) (1.0) 5,778 0.6
Net income (loss) $ 23,732 2.4 % $ (37,049) (5.2) % $ 15,778 1.8 %
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Consolidated Results
The table below sets forth certain consolidated operating data for the periods indicated (dollars are in thousands):
2021 2020 Dollar Change % Change
Revenues $ 971,578 $ 717,699 $ 253,879 35.4%
Gross profit 118,987 74,076 44,911 60.6
Selling, general and administrative expenses 69,406 68,228 1,178 1.7
Goodwill and other impairment — 29,017 (29,017) (100.0)
Other (income) expense (878) 728 (1,606) NM 1
Interest expense 11,179 20,603 (9,424) (45.7)
Loss on extinguishment of debt 7,155 — 7,155 100.0
Provision (benefit) for income taxes 8,393 (7,451) 15,844 NM 1
Net income (loss) 23,732 (37,049) 60,781 NM 1
1. Not meaningful
Fluctuations in results from operations during the twelve months ended December 31, 2021 compared to twelve months ended December 31, 2020 were primarily driven by weak operating performance during the second and third quarters of 2020 as a result of the COVID-19 pandemic.
Revenues. The increase in consolidated revenues resulted from:
• a $143.6 million, or 26.1%, increase in sales to OEM;
• a $99.1 million, or 151.9%, increase in warehouse automation sales;
• a $6.4 million, or 6.4%, increase in aftermarket and OES sales; and
• a $4.8 million, or 112.0%, increase in other revenues.
Twelve months ended December 31, 2021 revenues were favorably impacted by foreign currency exchange translation of $13.2 million, which is reflected in the change in revenues above.
Gross Profit. Included in gross profit is cost of revenues, which consists primarily of raw materials and purchased components for our products, wages and benefits for our employees and overhead expenses such as manufacturing supplies, facility rent and utilities costs related to our operations. The increase in gross profit is primarily attributable to the increase in sales volume, increased pricing to offset material cost increases, and an improved cost structure. Cost of revenues increased $209.0 million, or 32.5% as a result of an increase in raw material and purchased component costs of $160.7 million, or 39.3%; an increase in wages and benefits of $17.0 million, or 30.3%; and an increase in overhead expenses of $31.3 million, or 17.5%. As a percentage of revenues, gross profit margin was 12.2% for the year ended December 31, 2021 compared to 10.3% for the year ended December 31, 2020.
Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses consist primarily of wages and benefits and other expenses such as Contingent Consideration, marketing, travel, legal, audit, rent and utilities costs, which are not directly or indirectly associated with the manufacturing of our products. SG&A expenses increased $1.2 million in the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily as a result of wages and benefits returning to or increasing beyond pre-pandemic levels in 2021 when compared to the reduced wages and benefits in 2020 due to the temporary actions taken in response to the COVID-19 pandemic. The increase was offset by a decrease in non-recurring payments relating to CEO transition and investigation expense incurred during the twelve months ended December 31, 2020 of $5.2 million, a $4.4 million decrease in charge for Contingent Consideration, and a $1.5 million decrease in charges associated with ongoing restructuring initiatives. As a percentage of revenues, SG&A expense was 7.1% for the twelve months ended December 31, 2021 compared to 9.5% for the twelve months ended December 31, 2020.
Impairment Expense . As a result of the Company's market capitalization having a value less than the carrying value of its equity for a period of time and market conditions impacting long-lived assets, the Company determined it had impairment indicators during the twelve months ended December 31, 2020. Accordingly, we recognized a $27.1 million impairment of goodwill and impairment of long-lived assets of $1.9 million for the twelve months ended December 31, 2020, which did not recur in 2021.
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Other (Income) Expense. Other income increased $1.6 million in the year ended December 31, 2021 as compared to the year ended December 31, 2020 due primarily to a favorable change in foreign currency of $0.9 million.
Interest Expense. Interest associated with our debt was $11.2 million and $20.6 million for the years ended December 31, 2021 and 2020, respectively. The decrease primarily related to a lower interest expense of $7.0 million due to refinancing of the Company's long term debt in April 2021, a decrease of $3.2 million in Payment In Kind interest expense resulting from the loan amendment that occurred in the second quarter of 2020 and a favorable change in interest rate swap adjustments of $1.0 million.
Loss on extinguishment of debt. On April 30, 2021, the Company refinanced its long-term debt, which resulted in a loss of $7.2 million, including a $3.7 million non-cash write off relating to deferred financing costs and unamortized discount of the 2023 Term Loan Facility, a voluntary prepayment premium of $3.0 million and $0.5 million of other fees associated with the new debt.
Provision (Benefit) for Income Taxes. Income tax expense of $8.4 million and an income tax benefit of $7.5 million were recorded for the year ended December 31, 2021 and 2020, respectively. The period over period change in income tax was primarily attributable to the $32.1 million pre-tax income generated in the current year versus the $44.5 million pre-tax loss sustained in the prior year period.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Consolidated Results
The table below sets forth certain consolidated operating data for the periods indicated (dollars are in thousands):
2020 2019 Dollar Change % Change
Revenues $ 717,699 $ 901,238 $ (183,539) (20.4)%
Gross profit 74,076 105,137 (31,061) (29.5)
Selling, general and administrative expenses 68,228 64,501 3,727 5.8
Goodwill and other impairment 29,017 — 29,017 NM 1
Other expense 728 2,225 (1,497) (67.3)
Interest expense 20,603 16,855 3,748 22.2
Provision (benefit) for income taxes (7,451) 5,778 (13,229) NM 1
Net income (loss) (37,049) 15,778 (52,827) NM 1
1. Not meaningful
In late March 2020, the Company took action to right-size the business and working capital profile to protect profit margin and liquidity levels. We implemented a comprehensive program of cost reduction initiatives and manufacturing capacity rationalization initiatives. These actions continued through the end of 2020. Actions included headcount reductions, reduction in recurring consulting expenses, re-prioritization and decrease in capital spending and reduction in sales and marketing expenses. Additionally, the Company eliminated the Corporate Business Development, Aviation, Quality, Procurement and Operating Excellence departments. The Company also implemented other temporary measures including pay reductions, plant shutdowns, furloughs, elimination of most annual incentive pay, suspension of the employer 401(k) match, and reduction in non-essential travel in an effort to mitigate the uncertainty.
Revenues. Consolidated revenues of $717.7 million decreased $183.5 million compared to 2019 primarily due to North American MD/HD truck production volume decreases in 2020, resulting in decreased sales into that market. Consolidated revenues in 2020 compared to 2019 were as follows:
• a $213.5 million, or 38.9%, decrease in sales to OEM;
• a $63.6 million, or 97.4%, increase in warehouse automation sales primarily attributable to the timing of the FSE acquisition which occurred in September 2019;
• a $31.2 million, or 24.0%, decrease in aftermarket and OES sales; and
• a $2.4 million, or 57.1%, decrease in other revenues.
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While the end markets CVG serves were anticipated to decline somewhat in 2020 as compared to 2019, the sharp market declines noted in the twelve months ended December 31, 2020 were primarily a result of the COVID-19 pandemic on the end markets we serve. These sharp market declines were partially offset by increased sales in industrial and military end markets we serve through the FSE business acquired in 2019. Revenues were adversely impacted by foreign currency exchange translation of $0.2 million, which is reflected in the change in revenue above.
Gross Profit. Included in gross profit is cost of revenues, which consists primarily of raw materials and purchased components for our products, wages and benefits for our employees and overhead expenses such as manufacturing supplies, facility rent and utilities costs related to our operations. The decrease in gross profit is primarily attributable to the decrease in sales volume. Cost of revenues decreased $152.5 million, or 19.2% in line with the sales decrease of 20.4%. The cost of revenue decrease included a decrease in raw material and purchased component costs of $99.0 million, or 19.5%; a decrease in wages and benefits of $16.2 million, or 22.4%; and a decrease in overhead expenses of $37.3 million, or 17.3%. During 2019, the Company began implementing cost reduction and manufacturing capacity rationalization initiatives (the "Restructuring Initiatives") in response to declines in end market volumes. The Restructuring Initiatives consisted primarily of headcount reductions in each segment and at corporate. Cost of revenues benefited from the Restructuring Initiatives and the Temporary Actions. The twelve months ended December 31, 2020 results include charges of $4.7 million associated with ongoing Restructuring Initiatives. As a percentage of revenues, gross profit margin was 10.3% for the year ended December 31, 2020 compared to 11.7% for the year ended December 31, 2019.
Selling, General and Administrative Expenses. SG&A expenses increased $2.2 million in the year ended December 31, 2020 as compared to the year ended December 31, 2019 due primarily to a $5.0 million charge for future milestone payments related to the performance of the FSE business, increase in charges of $1.4 million associated with ongoing Restructuring Initiatives, $3.1 million increase in incentive compensation costs, 2020 charges of $4.0 million associated with the 2018 and quarterly 2019 financial statements restatement investigation and $2.3 million in costs a ssociated with the CEO transition. These costs were offset by the Restructuring Initiatives and the Temporary Actions taken in response to the COVID-19 pandemic.
Impairment Expense . As a result of the Company's market capitalization maintaining a value less than the carrying value of its equity for a period of time, the Company determined it had an impairment indicator during the first quarter of 2020. Accordingly, we recognized a $27.1 million impairment of goodwill for the year ended December 31, 2020. Additionally during the first quarter of 2020, the Company determined it had an impairment indicator of long-lived assets due to market conditions resulting in an impairment of $1.9 million for the year ended December 31, 2020.
Other Expense. Other expenses decreased $1.5 million in the year ended December 31, 2020 as compared to the year ended December 31, 2019 due primarily to the prior year $2.5 million non-cash charge associated with the early payout of benefits to term vested participants in the U.S. pension plan, which reduced future financial risk associated with the U.S. pension plan and contributed to an improvement in funded status of that plan to approximately 100%. The offset to this decrease is primarily attributable to an unfavorable change in foreign exchange translation adjustments of $1.2 million.
Interest Expense. Interest associated with our debt was $20.6 million and $16.9 million for the years ended December 31, 2020 and 2019, respectively. The increase primarily related to a $5.4 million Payment In Kind interest expense resulting from the amendment to our credit facilities that occurred in the second quarter of 2020. The increase was offset by lower interest expense of $1.6 million due to declining interest rates.
(Benefit) Provision for Income Taxes. An income tax benefit of $7.5 million and an income tax provision of $5.8 million were recorded for the year ended December 31, 2020 and 2019, respectively. The period over period change in income tax was primarily attributable to the $44.5 million pre-tax loss sustained in 2020 versus the $21.6 million pre-tax income generated in 2019, and unfavorable valuation allowance adjustments resulting in $2.1 million income tax expense in 2020 versus a $2.1 million income tax benefit in 2019.
During the year ended December 31, 2020, the Company recorded a $1.3 million U.S. federal income tax benefit for the impact of the High-Tax Exception to GILTI which consisted of a $0.5 million tax benefit related to the year ended December 31, 2019, and a $0.8 million tax benefit related to the year ended December 31, 2018.
SEGMENT RESULTS OF OPERATIONS
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Vehicle Solutions Segment Results
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 and Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The table below sets forth certain Vehicle Solutions Segment operating data for the twelve months ended, (dollars are in thousands):
2021 2020 Dollar Change % Change 2019 Dollar Change % Change
Revenues $ 498,913 $ 366,636 $ 132,277 36.1% $ 577,989 $ (211,353) (36.6)%
Gross profit 50,608 32,398 18,210 56.2 65,121 (32,723) (50.2)%
Selling, general & administrative expenses 26,959 22,510 4,449 19.8 24,875 (2,365) (9.5)%
Goodwill and other impairment — 7,245 (7,245) (100.0) — 7,245 NM 1
Operating income (loss) 23,649 2,643 21,006 794.8 40,246 (37,603) (93.4)%
Revenues. The increase in 2021 revenues of $132.3 million from 2020 is primarily a result of volume and increased pricing to offset material cost increases. The decrease in 2020 revenues of $211.4 million from 2019 was primarily due to the COVID-19 pandemic causing demand reductions in the Class 8 truck market.
Gross Profit. The increase in 2021 gross profit of $18.2 million from 2020 was primarily attributable to the increase in sales volume and increased pricing to offset material cost increases. Cost of revenues increased $114.1 million, or 34.1%, in line with the sales increase of 36.1%. The cost of revenue increase included an increase in raw material and purchased component costs of $92.4 million, or 45.1%; an increase in wages and benefits of $6.3 million, or 25.0%; and an increase in overhead expenses of $15.4 million, or 14.8%. The decrease in 2020 gross profit of $32.7 million from 2019 was primarily due to volume declines and the related Restructuring Initiatives and temporary actions taken in response to the COVID-19 pandemic.
As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2021, was 10.1%, 8.8%, and 11.3%, respectively. The decrease in 2020 was primarily due to fixed cost pressure during the height of the COVID-19 related disruptions.
Selling, General and Administrative Expenses. The increase in 2021 SG&A expenses of $4.4 million from 2020 was primarily due to wages and benefits returning to or increasing beyond pre-pandemic levels in 2021 when compared to the reduced wages and benefits in 2020 due to the temporary actions taken in response to the COVID-19 pandemic, which were reduced $2.4 million over 2019.
Impairment Expense . The Company recorded an impairment of goodwill and long-lived assets for the twelve months ended December 31, 2020.
Warehouse Automation Segment Results
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 and Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The table below sets forth certain Warehouse Automation Segment operating data for the twelve months ended, (dollars are in thousands):
2021 2020 Dollar Change % Change 2019 Dollar Change % Change
Revenues $ 187,912 $ 101,655 $ 86,257 84.9% $ 12,803 $ 88,852 694.0%
Gross profit 29,669 13,205 16,464 124.7 1,248 11,957 958.1
Selling, general & administrative expenses 6,106 9,698 (3,592) (37.0) 1,396 8,302 594.7
Goodwill and other impairment — 19,829 (19,829) (100.0) — 19,829 NM 1
Operating income (loss) 23,563 (16,322) 39,885 NM 1
(148) (16,174) NM 1
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Revenues. The increase in 2021 revenues of $86.3 million from 2020 is primarily a result of volume and increased pricing to offset material cost increases. The increase in 2020 revenues of $88.9 million from 2019 was primarily a result of the timing of the FSE acquisition which occurred in September 2019.
Gross Profit. The increase in 2021 gross profit of $16.5 million from 2020 was primarily attributable to the increase in sales volume and increased pricing to offset material cost increases. Cost of revenues increase $69.8 million, or 78.9%, in line with the sales increase of 84.9%. The cost of revenue increase included an increase in raw material and purchased component costs of $55.3 million, or 77.9%; an increase in wages and benefits of $3.7 million, or 58.6%; and an increase in overhead expenses of $10.7 million, or 96.8%. The increase in 2020 gross profit of $12.0 million from 2019 was primarily attributable to the timing of the FSE acquisition which occurred in September 2019.
As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2021, was 15.8%, 13.0%, and 9.7%, respectively. The sequential increase is primarily due to fixed cost leverage.
Selling, General and Administrative Expenses. The decrease in 2021 SG&A expenses of $3.6 million from 2020 was primarily due to wages and benefits returning to or increasing beyond pre-pandemic levels in 2021 when compared to the reduced wages and benefits in 2020 due to the temporary actions taken in response to the COVID-19 pandemic, offset by a $5.0 million decrease in charge for Contingent Consideration. In 2020 SG&A expenses had increased by $8.3 million over 2019 due to the timing of the FSE acquisition.
Impairment Expense . The Company recorded an impairment of goodwill and long-lived assets for the twelve months ended December 31, 2020.
Electrical Systems Segment Results
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 and Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The table below sets forth certain Electrical Systems Segment operating data for the twelve months ended, (dollars are in thousands):
2021 2020 Dollar Change % Change 2019 Dollar Change % Change
Revenues $ 168,971 $ 141,094 $ 27,877 19.8 % $ 178,398 $ (37,304) (20.9)%
Gross profit 20,773 12,185 8,588 70.5 16,588 (4,403) (26.5)%
Selling, general & administrative expenses 6,213 3,996 2,217 55.5 5,331 (1,335) (25.0)%
Goodwill and other impairment — 1,150 (1,150) (100.0) — 1,150 NM 1
Operating income 14,560 7,039 7,521 106.8 11,257 (4,218) (37.5)%
Revenues. The increase in 2021 revenues of $27.9 million from 2020 is primarily a result of volume and increased pricing to offset material cost increases. The decrease in 2020 revenues of $37.3 million from 2019 was primarily a result of the COVID-19 pandemic on the end markets we serve.
Gross Profit. The increase in 2021 gross profit of $8.6 million from 2020 was primarily attributable to the increase in sales volume and increased pricing to offset material cost increases. Cost of revenues increased $19.3 million, or 15.0%, in line with the sales increase of 19.8%. The cost of revenue increase included an increase in raw material and purchased component costs of $12.0 million, or 17.0%; an increase in wages and benefits of $3.7 million, or 18.7%; and an increase in overhead expenses of $3.5 million, or 9.2%. The decrease in 2020 gross profit of $4.4 million from 2019 was primarily due to volume declines and the related Restructuring Initiatives and temporary actions taken in response to the COVID-19 pandemic.
As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2021, was 12.3%, 8.6%, and 9.3%, respectively. The decrease in 2020 was primarily due to fixed cost pressure during the height of the COVID-19 related disruptions.
Selling, General and Administrative Expenses. The increase in 2021 SG&A expenses of $2.2 million from 2020 was primarily due to wages and benefits returning to or increasing beyond pre-pandemic levels in 2021 when compared to the reduced wages and benefits in 2020 due to the temporary actions taken in response to the COVID-19 pandemic, which were reduced $1.3 million over 2019.
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Impairment Expense . The Company recorded an impairment of goodwill and long-lived assets for the twelve months ended December 31, 2020.
Aftermarket & Accessories Segment Results
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 and Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The table below sets forth certain Aftermarket & Accessories Segment operating data for the twelve months ended, (dollars are in thousands):
2021 2020 Dollar Change % Change 2019 Dollar Change % Change
Revenues $ 115,782 $ 108,314 $7,468 6.9% $ 132,048 $ (23,734) (18.0)%
Gross profit 17,980 16,658 1,322 7.9 22,252 (5,594) (25.1)
Selling, general & administrative expenses 5,889 5,396 493 9.1 6,594 (1,198) (18.2)
Operating income 12,091 11,262 829 7.4 15,658 (4,396) (28.1)
Revenues. The increase in 2021 revenues of $7.5 million from 2020 is primarily a result of volume and increased pricing to offset material cost increases. The decrease in 2020 revenues of $23.7 million from 2019 was primarily a result of the COVID-19 pandemic on the end markets we serve.
Gross Profit. The increase in 2021 gross profit of $1.3 million from 2020 was consistent with the revenue increase. Cost of revenues increased $6.1 million, or 6.7%, in line with the sales increase of 6.9%. The cost of revenue increase included an increase in raw material and purchased component costs of $1.1 million, or 1.8%; an increase in wages and benefits of $3.3 million, or 69.0%; and an increase in overhead expenses of $1.8 million, or 7.1%. The decrease in 2020 gross profit of $5.6 million from 2019 was primarily due to volume declines and the related Restructuring Initiatives and temporary actions taken in response to the COVID-19 pandemic.
As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2021, was 15.5%, 15.4%, and 16.9%, respectively. The decrease in 2020 was primarily due to fixed cost pressure during the height of the COVID-19 related disruptions.
Selling, General and Administrative Expenses. The increase in 2021 SG&A expenses of $0.5 million from 2020 was primarily due to wages and benefits returning to or increasing beyond pre-pandemic levels in 2021 when compared to the reduced wages and benefits in 2020 due to the temporary actions taken in response to the COVID-19 pandemic, which were reduced $1.2 million over 2019.
Liquidity and Capital Resources
During the year ended December 31, 2021, the Company borrowed $49.4 million under its revolving credit facility. At December 31, 2021, the Company had liquidity of $109.2 million; $35.0 million of cash and $74.2 million availability from its revolving credit facility.
We intend to allocate resources consistent with the following priorities: (1) invest in growth; (2) invest in operational improvements; (3) manage working capital; (4) to reduce debt; and (5) other actions deemed appropriate by management to improve operational performance.
Our primary source of liquidity during the year ended December 31, 2021 was cash and availability under our revolving credit facility. We believe that these sources of liquidity will provide adequate funds for our working capital needs, planned capital expenditures and servicing of our debt through the next twelve months. However, there is no assurance that these sources of capital will provide for our funding needs. We also rely on the timely collection of receivables as a source of liquidity. As of December 31, 2021, we had $49.4 million of borrowings under our revolving credit facility, outstanding letters of credit of $1.4 million and borrowing availability of $74.2 million.
On October 25, 2021, the Company entered into the Amendment to the Credit Agreement. The Amendment permits the Company to engage in supply chain financing arrangements with financial institutions to cover up to $20.0 million in accounts
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receivable from customers per month. Additionally, the Amendment increased the Company’s capital expenditure investment threshold from $25.0 million to $32.0 million.
As of December 31, 2021, cash of $34.6 million was held by foreign subsidiaries. The Company had a $0.5 million deferred tax liability as of December 31, 2021 for the expected future income tax implications of repatriating cash from the foreign subsidiaries for which no indefinite reinvestment assertion has been made.
Covenants and Liquidity
Our ability to comply with the covenants in the Credit Agreement, as discussed in Note 3, Debt, to our consolidated financial statements in Item 8 in this Annual Report on Form 10-K, may be affected by economic or business conditions beyond our control. Based on our current forecast, we believe that we will be able to maintain compliance with the financial maintenance covenants and the fixed charge coverage ratio covenant, if applicable, and other covenants in the Credit Agreement for the next twelve months; however, no assurances can be given that we will be able to comply. We base our forecasts on historical experience, industry forecasts and other assumptions that we believe are reasonable under the circumstances. If actual results are substantially different than our current forecast we may not be able to comply with our financial covenants. If we do not comply with the financial and other covenants in the Credit Agreement, the lenders could declare an event of default under the Credit Agreement and our indebtedness thereunder could be declared immediately due and payable. The Credit Agreement contain cross default provisions. If we are unable to borrow under the Credit Agreement, we will need to meet our capital requirements using alternative sources of liquidity which may not be available on acceptable terms. Any of these events would have a material adverse effect on our business, financial condition and liquidity.
Cash Flows
2021 2020 2019
(In thousands)
Net cash (used) provided by operating activities $ (29,832) $ 34,372 $ 36,746
Net cash used in investing activities (17,566) (6,420) (57,979)
Net cash provided (used) in financing activities 31,011 (19,262) (10,113)
Effect of currency exchange rate changes on cash 842 2,302 (56)
Net increase (decrease) in cash $ (15,545) $ 10,992 $ (31,402)
Operating activities . For the year ended December 31, 2021, net cash used in operations was $29.8 million compared to the net cash provided by operations of $34.4 million for the year ended December 31, 2020. Net cash used in operating activities is primarily attributable to the increase in working capital for the year ended December 31, 2021 as compared to the prior year period.
For the year ended December 31, 2020, net cash provided by operations was $34.4 million compared to $36.7 million for the year ended December 31, 2019. The decrease in net cash provided by operating activities is primarily attributable to the decrease in net income associated with the sales declines in the year ended December 31, 2020 as compared to the to the prior year period. This reduction was offset by cash generated from working capital primarily resulting from timing of the payment of payables and expenses.
Investing activities . For the year ended December 31, 2021, net cash used in investing activities was $17.6 million compared to $6.4 million for the year ended December 31, 2020. In 2022, we expect capital expenditures to be in the range of $20 million to $25 million.
For the year ended December 31, 2020, net cash used in investing activities was $6.4 million compared to $58.0 million for the year ended December 31, 2019. The decrease in investing activities is primarily due to the FSE Acquisition for $34.0 million during 2019, and decreased capital spending in 2020.
Financing activities . For the year ended December 31, 2021, net cash provided by financing activities was $31.0 million compared to the net cash used in financing activities of $19.3 million for the year ended December 31, 2020. Net cash used in financing activities for the year ended December 31, 2021 is attributable to $49.4 million of net borrowings under the revolving credit facility offset by $8.0 million of costs attributed to debt amendment and extinguishment completed during the twelve months ended December 31, 2021 and a $5.0 million Contingent Consideration payment. Net cash used in financing activities for the twelve months ended December 31, 2020 is attributable to an additional repayment of $5.0 million of the senior secured term loan credit facility and loan amendment costs of $2.8 million
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For the year ended December 31, 2020, net cash used in financing activities was $19.3 million compared to $10.1 million for the year ended December 31, 2019. Net cash used in financing activities for the year ended December 31, 2020 is attributable to additional repayment of $10.0 million of the senior secured term loan credit facility and associated fees, along with a contingent consideration milestone payment of $1.0 million related to the FSE acquisition.
Debt and Credit Facilities
The debt and credit facility summaries described in Note 3, Debt, to our consolidated financial statements in Item 8 in this Annual Report on Form 10-K are incorporated in this section by reference.
Contractual Obligations and Commercial Commitments
The following table reflects our contractual obligations as of December 31, 2021 (in thousands):
Payments Due by Period
Total
1 Year 2-3 Years 4-5 Years More than
5 Years
Debt obligations $ 195,650 $ 9,375 $ 30,000 $ 156,275 $ —
Estimated interest payments 15,002 4,354 7,620 3,028 —
Leasing obligations 32,535 10,862 12,276 8,008 1,389
Non-U.S. pension funding 16,791 1,082 2,361 2,627 10,721
Total $ 259,978 $ 25,673 $ 52,257 $ 169,938 $ 12,110
We estimated future interest payments based on the effective interest rate as of December 31, 2021. Since December 31, 2021, there have been no material changes outside the ordinary course of business to our contractual obligations as set forth above.
We expect to contribute approximately $1.1 million to our UK pension plan in 2022. No contributions are expected to be made to our U.S. pension plan in 2022.
Generally, we enter into agreements with our customers at the beginning of a given vehicle platform’s life to supply products for the entire life of that vehicle platform. These agreements generally provide for the supply of a customer’s production requirements for a particular platform rather than for the purchase of a specific quantity of products. The obligations under these agreements and regulations are not reflected in the contractual obligations table above.
As of December 31, 2021, we were not a party to significant purchase obligations for goods or services.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). For a comprehensive discussion of our significant accounting policies, see Note 1, Significant Accounting Policies, to our consolidated financial statements in Item 8 in this Annual Report on Form 10-K.
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis, particularly relating to accounts receivable reserves, inventory reserves, goodwill, intangible and long-lived assets, income taxes, warranty reserves, litigation reserves and pension and other post-retirement benefit plans. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ materially from these estimates and assumptions. See Item 1A - Risk Factors in this Annual Report on Form 10-K for additional information regarding risk factors that may impact our estimates.
Revenue Recognition — We recognize revenue when our performance obligation has been satisfied and control of products has been transferred to a customer, which typically occurs upon shipment. Revenue is measured based on the amount of consideration we expect to receive in exchange for the transfer of goods or services. We enter into agreements with certain customers in the Vehicle Solutions segment at the beginning of a vehicle platform’s life to supply products for that vehicle platform. Once we enter into such agreements, fulfillment of our requirements is our obligation for the entire production life of
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the platform and we have no provisions to terminate such contracts. Management judgments and estimates must be made in estimating sales returns and allowances relating to revenue recognized in a given period.
Inventory — Inventories are valued at the lower of first-in, first-out cost or net realizable value. Cost includes applicable material, labor and overhead. We value our finished goods inventory at a standard cost that is periodically adjusted to approximate actual cost. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based primarily on our estimated production requirements driven by expected market volumes.
Income Taxes — We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in our financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax laws and rates expected to be in place when the deferred tax items are realized. We recognize tax positions initially in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. We provide a valuation allowance for deferred tax assets when it is more likely than not that a portion of such deferred tax assets will not be realized.