What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-06 compared with 2022-03-02 · 145 added, 167 removed, 227 unchanged (58% of the section changed)

5 unchanged sentences

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.

CVG is a global provider of systems, assemblies and components to the global commercial vehicle market, the electric vehicle market, and the industrial automation markets.

We deliver real solutions to complex design, engineering and manufacturing problems while creating positive change for our customers, industries, and communities we serve.

We have manufacturing operations in the United States, Mexico, China, United Kingdom, Belgium, Czech Republic, Ukraine, Thailand, India and Australia.

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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

Commercial Trends in the Vehicle Solutions and Aftermarket & Accessories 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.

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North American heavy-duty truck production was 315,128 units in 2022.

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.

According to a February 2023 report by ACT Research, a publisher of industry market research, North American Class 8 production levels are expected to decrease to 305,000 units in 2023.

ACT Research estimated that the average age of active North American Class 8 trucks was 5.8 years in 2022.

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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.

Commercial Trends in the Electrical Systems Segment

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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.

In the first quarter of 2022, Russian military forces invaded Ukraine.

We have approximately 1,200 employees in the Ukraine located in our facility near L'viv.

While the facility was temporarily shut-down, we have resumed operations in L'viv and also set up additional capacity in the Czech Republic.

The invasion of Ukraine by Russia and the retaliatory measures taken by the U.S., NATO and other countries have created global security concerns and economic uncertainty that could have a lasting impact on regional and global economies.

We cannot be certain that international tensions will not affect our facility in the Ukraine, including due to the Russian invasion, electrical outages, cyber-attacks and periodic battles with separatists closer to our facility.

In addition, certain of our employees in Ukraine may be conscripted into the military and/or sent to fight in the ongoing conflict.

Furthermore, most of our products manufactured in Ukraine are shipped across the border from Ukraine to the Czech Republic for further delivery to our customers.

If the border crossing were to be closed or restricted for any reason, or if our customers decide to stop ordering from us or shift orders to our competitors, we would experience a loss of the use of our Ukrainian facility, which could have an adverse effect on our results of operations and financial condition.

The COVID-19 pandemic has caused and continues to cause, significant volatility, uncertainty and economic disruptions to our business.

During the twelve months ended December 31, 2022, we experienced shutdowns at our plant in Shanghai, China due to the COVID-19 pandemic.

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.

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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.

While backlog continues to be strong in the truck markets, 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.

The impact of the pandemic, the related economic recovery and global inflationary pressures 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 seek to minimize 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.

Our Long-term Strategy

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We believe we are having success with our strategy to strengthen our business, including:

• 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;

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Selling, general and administrative expenses 66,361 69,406 (3,045) (4.4)

Goodwill and other impairment — 29,017 (29,017) (100.0)

Other (income) expense 10,463 (878) 11,341 NM 1

1 unchanged sentence

Loss on extinguishment of debt 921 7,155 (6,234) (87.1)

Provision (benefit) for income taxes 8,393 (7,451) 15,844 NM 1

Provision (benefit) for income taxes 20,904 8,393 12,511 149.1

Net income (loss) (21,971) 23,732 (45,703) NM 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.

The increase in consolidated revenues resulted from:

• a $68.5 million, or 11.1%, increase in sales to OEM;

• a $99.1 million, or 151.9%, increase in warehouse automation sales;

• a $91.6 million, or 55.7%, decrease in industrial automation sales;

• a $12.2 million, or 6.8%, increase in aftermarket and OES sales;

• a $20.9 million, or 228.4%, 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.

Twelve months ended December 31, 2022 revenues were unfavorably impacted by foreign currency exchange translation of $18.6 million, which is reflected in the change in revenues above.

The increase in revenues was primarily driven by increased pricing to offset material cost increases and increased sales volume, offset by sales volume decreases in the Industrial Automation segment.

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%;

The decrease in gross profit is primarily attributable to the Industrial Automation segment which experienced decreased sales volume and an inventory charge of $10.4 million during the year ended December 31, 2022.

Cost of revenues increased $42.5 million, or 5.0% as a result of an increase in raw material and purchased component

costs of $23.5 million, or 4.1%;

an increase in wages and benefits of $3.5 million, or 4.8%;

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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.

SG&A expenses decreased $3.0 million in the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to lower incentive compensation and health care expense.

As a percentage of revenues, SG&A expense was 6.8% for the twelve months ended December 31, 2022 compared to 7.1% for the twelve months ended December 31, 2021.

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.

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.

Other expense increased $11.3 million in the year ended December 31, 2022 as compared to the year ended December 31, 2021 due primarily to a settlement of the Company's U.S.

Pension Plan liabilities of $9.2 million as well as an unfavorable change in foreign currency of $1.3 million.

Interest Expense.

Interest associated with our debt was $9.8 million and $11.2 million for the years ended December 31, 2022 and 2021, 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.

The decrease primarily related to lower interest rates, partially offset by a higher average debt balance during the respective comparative periods.

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.

On May 12, 2022, the Company refinanced its long-term debt, which resulted in a loss of $0.9 million, including a $0.6 million non-cash write off relating to deferred financing costs of the Term Loan facility due 2026 and $0.3 million of other associated fees.

During the twelve months ended December 31, 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 repayment premium of $3.0 million and $0.5 million of other associated fees.

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.

Income tax expense of $20.9 million and $8.4 million were recorded for the year ended December 31, 2022 and 2021, respectively.

The period over period change in income tax was primarily impacted by establishing a full valuation allowance on our U.S.

deferred tax assets of $24.5 million offset by the elimination of a $9.9 million valuation allowance on our United Kingdom (U.K.) deferred tax asset.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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Selling, general and administrative expenses 69,406 68,228 1,178 1.7

Goodwill and other impairment 29,017 — 29,017 NM 1

Other expense 728 2,225 (1,497) (67.3)

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

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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.

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;

• a $2.4 million, or 57.1%, decrease in other revenues.

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.

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 industrial automation sales;

• a $6.4 million, or 6.4%, increase in aftermarket and OES sales;

• 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.

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.

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.

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.

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 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.

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.

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 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.

Loss on extinguishment of 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.

SEGMENT RESULTS OF OPERATIONS

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Selling, general & administrative expenses 24,930 26,959 (2,029) (7.5) 22,510 4,449 19.8

Goodwill and other impairment — 7,245 (7,245) (100.0) — 7,245 NM 1

Goodwill and other impairment — — — — 7,245 (7,245) (100.0)

Operating income (loss) 21,049 23,649 (2,600) (11.0) 2,643 21,006 794.8

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.

The increase in 2022 revenues of $80.8 million from 2021 primarily resulted from increased pricing to offset material cost pass-through and new business wins offset by lower shipments caused by the COVID-19 shutdown in China.

The increase in 2021 revenues of $132.3 million from 2020 was primarily a result of increased sales volume and increased pricing to offset material cost increases.

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 decrease in 2022 gross profit of $4.6 million from 2021 was primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases.

Included in gross profit is cost of revenues, which increased $85.4 million, or 19.1%, in line with the sales increase of 16.2%.

The cost of revenue increase included an increase in raw material and purchased component costs of $66.4 million, or 22.3%;

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and an increase in overhead expenses of $15.8 million, or 13.2%.

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.

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.

As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2022, was 7.9%, 10.1%, and 8.8%, respectively.

The decrease in 2020 was primarily due to fixed cost pressure during the height of the COVID-19 related disruptions.

The decrease in gross profit in 2022 from 2021 was primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases.

The increase in gross profit in 2021 from 2020 was primarily due to recovery from COVID-19 related disruptions which peaked during 2020.

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.

The decrease in 2022 SG&A expenses of $2.0 million from 2021 was primarily due to lower incentive compensation and health care expense.

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 Company's temporary actions taken in response to the COVID-19 pandemic.

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

Electrical Systems Segment Results

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 and Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The table below sets forth certain Warehouse Automation Segment operating data for the twelve months ended, (dollars are in thousands):

The table below sets forth certain Electrical Systems Segment operating data for the twelve months ended, (dollars are in thousands):

2022 2021 Dollar Change % Change 2020 Dollar Change % Change

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Selling, general & administrative expenses 5,775 6,213 (438) (7.0) 3,996 2,217 55.5

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

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.

Goodwill and other impairment — — — — $ 1,150 (1,150) (100.0)

Operating income 18,218 14,560 3,658 25.1 7,039 7,521 106.8

The increase in 2022 revenues of $11.4 million from 2021 is primarily attributable to increased pricing to offset material cost pass-through and new business wins.

The increase in 2021 revenues of $27.9 million from 2020 was primarily a result of increased sales volume and increased pricing to offset material cost increases.

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 increase in 2022 gross profit of $3.2 million from 2021 was primarily due to increased sales volume and increased pricing to offset material cost increases.

Included in gross profit is cost of revenues, which increased $8.2 million, or 5.5%, in line with the sales increase of 6.8%.

The cost of revenue increase included an increase in raw material and purchased component costs of $4.7 million, or 5.6%;

an increase in wages and benefits of $3.8 million, or 16.3%;

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.

and a decrease in overhead expenses of $0.3 million, or 0.7%.

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.

As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2022, was 13.3%, 12.3%, and 8.6%, respectively.

The sequential increase is primarily due to fixed cost leverage.

The increase in 2022 gross profit margin was primarily due to increased sales volume and increased pricing to offset material cost increases.

The increase in 2021 from 2020 was primarily due to recovery from COVID-19 related disruptions which peaked during 2020.

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.

2022 SG&A expenses decreased $0.4 million from 2021, essentially flat on a percent of sales basis.

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 by the Company in response to the COVID-19 pandemic.

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

Aftermarket & Accessories Segment Results

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 and Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The table below sets forth certain Electrical Systems Segment operating data for the twelve months ended, (dollars are in thousands):

The table below sets forth certain Aftermarket & Accessories Segment operating data for the twelve months ended, (dollars are in thousands):

2022 2021 Dollar Change % Change 2020 Dollar Change % Change

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Selling, general & administrative expenses 6,925 5,889 1,036 17.6 5,396 493 9.1

Goodwill and other impairment — 1,150 (1,150) (100.0) — 1,150 NM 1

Operating income 11,911 12,091 (180) (1.5) 11,262 829 7.4

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.

The increase in 2022 revenues of $17.9 million from 2021 resulted from increased sales volume and increased pricing to offset material cost pass-through.

The increase in 2021 revenues of $7.5 million from 2020 was primarily a result of increased sales volume and increased pricing to offset material cost increases.

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 increase in 2022 gross profit of $0.9 million from 2021 is primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases.

Included in gross profit is cost of revenues, which increased $17.0 million, or 17.4%.

The cost of revenue increase included an increase in raw material and purchased component costs of $7.9 million, or 12.6%;

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and an increase in overhead expenses of $6.2 million, or 23.3%.

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.

The increase in 2021 gross profit of $1.3 million from 2020 was consistent with the revenue increase.

As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2022, was 14.1%, 15.5%, and 15.4%, respectively.

The decrease in 2020 was primarily due to fixed cost pressure during the height of the COVID-19 related disruptions.

The decrease in 2022 gross profit margin is primarily due to global supply chain and market disruptions which have resulted in increased labor costs, raw material inflation, and freight cost increases.

The twelve months ended December 31, 2022 results include charges of $1.4 million associated with the restructuring program.

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.

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

The increase in 2022 SG&A expenses of $1.0 million from 2021, consistent with the prior year amount on a percent of sales basis.

Industrial Automation Segment Results

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 and Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The table below sets forth certain Aftermarket & Accessories Segment operating data for the twelve months ended, (dollars are in thousands):

Contemporaneously with the filing of this Form 10-K, we updated our reportable segments to rename Warehouse Automation to Industrial Automation.

The table below sets forth certain Industrial Automation Segment operating data for the twelve months ended, (dollars are in thousands):

2022 2021 Dollar Change % Change 2020 Dollar Change % Change

Revenues $ 87,747 $ 187,912 $ (100,165) (53.3)% $ 101,655 $ 86,257 84.9%

Gross profit 17,980 16,658 1,322 7.9 22,252 (5,594) (25.1)

Gross profit (2,303) 29,669 (31,972) NM 1

13,205 16,464 124.7

Selling, general & administrative expenses 5,564 6,106 (542) (8.9) 9,698 (3,592) (37.0)

Operating income 12,091 11,262 829 7.4 15,658 (4,396) (28.1)

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.

Goodwill and other impairment — — — — 19,829 (19,829) (100.0)

Operating income (loss) (7,867) 23,563 (31,430) NM 1

(16,322) 39,885 NM 1

Not meaningful

The decrease in 2022 revenues of $100.2 million from 2021 primarily resulted from lower sales volume due to decreased customer demand.

The increase in 2021 revenues of $86.3 million from 2020 was primarily a result of increased volume of sales and increased pricing to offset material cost increases.

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.

The decrease in 2022 gross profit of $32.0 million from 2021 was primarily attributable to lower sales volume and an inventory charge of $10.4 million.

Included in gross profit is cost of revenues, which decreased $68.2 million, or 43.1%, in line with the sales decrease of 53.3%.

The cost of revenue decrease included a decrease in raw material and purchased component costs of $55.5 million, or 44.0%;

a decrease in wages and benefits of $6.4 million, or 63.3%;

and a decrease in overhead expenses of $6.3 million, or 28.8%.

The increase in 2021 gross profit of $16.5 million from 2020 was primarily attributable to the increase in sale volume and increased pricing to offset material cost increases.

As a percentage of revenues, gross profit for each of the years in the three‑year period ended December 31, 2022, was (2.6)%, 15.8%, and 13.0%, respectively.

The decrease in 2020 was primarily due to fixed cost pressure during the height of the COVID-19 related disruptions.

The decrease in gross profit as a percentage of revenues in 2022 from 2021 is a result of lower sales volumes and the increase in 2021 from 2020 was primarily due to fixed cost leverage.

The twelve months ended December 31, 2022 results include charges of $1.7 million associated with the restructuring program.

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.

SG&A expenses decreased $0.5 million in 2022 compared to 2021.

SG&A expenses decreased $3.6 million in 2021 compared to 2020 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 Company's temporary actions taken in response to the COVID-19 pandemic, offset by a $5.0 million decrease in charge for Contingent Consideration.

Impairment Expense .

The Company recorded an impairment of goodwill and long-lived assets for the twelve months ended December 31, 2020.

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.

At December 31, 2022, the Company had no borrowings under its revolving credit facility.

At December 31, 2022, the Company had liquidity of $180.6 million, consisting of $31.8 million of cash and $148.8 million availability from its revolving credit facility.

We intend to allocate resources consistent with the following priorities:

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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

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, 2022, we had no borrowings under our revolving credit facility, outstanding letters of credit of $1.2 million and borrowing availability of $148.8 million.

As of December 31, 2022, cash of $31.7 million was held by foreign subsidiaries.

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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;

On May 12, 2022, the Company entered into an amendment to increase its existing senior secured credit facilities to $325 million from $275 million consisting of a $175 million Term Loan A and a $150 million Revolving Credit Facility.

The amendment provides the Company with additional capital flexibility to execute upon its transformation and growth initiatives.

As part of the amended terms of the agreement, the maturity date of the Senior Secured Credit Facilities has been extended by twelve months to May 12, 2027, the interest rate decreased by 50 bps at various leverage ratios based on SOFR, and the maximum consolidated total leverage ratio increased from 3.25x to 3.75x until December 31, 2022 with a quarterly step down of 25 bps to 3.00x leverage by September 30, 2023 and the maximum consolidated total leverage ratio will remain at this level thereafter.

Further, separate from the Company’s annual $35 million capital spending cap, a one-time $45 million capital project basket was included in the amendment.

All other key provisions, including the $75 million accordion, acquisition holiday, and other baskets remain unchanged.

Our ability to comply with the covenants in the Credit Agreement, as discussed in Note 3, Debt, of our Consolidated Financial Statements 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 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.

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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.

2022 2021 2020

(In thousands)

Net cash (used) provided by operating activities $ (29,832) $ 34,372 $ 36,746

Net cash provided (used) by operating activities $ 68,947 $ (29,832) $ 34,372

Net cash used in investing activities (19,710) (17,566) (6,420)

Net cash provided (used) in financing activities 31,011 (19,262) (10,113)

Net cash (used) provided in financing activities (50,091) 31,011 (19,262)

Effect of currency exchange rate changes on cash (2,279) 842 2,302

Net increase (decrease) in cash $ (15,545) $ 10,992 $ (31,402)

Net (decrease) increase in cash $ (3,133) $ (15,545) $ 10,992

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.

For the year ended December 31, 2022, net cash provided by operations was $68.9 million compared to net cash used in operations of $29.8 million for the year ended December 31, 2021.

Net cash provided by operating activities is

primarily attributable to the decrease in working capital expenditures for the year ended December 31, 2022 as compared to the prior year period.

For the year ended December 31, 2021, net cash used in operations was $29.8 million compared to 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 expenditures for the year ended December 31, 2021 as compared to the prior year period.

In 2023, we expect capital expenditures to be in the range of $20 million to $25 million.

Investing activities.

For the year ended December 31, 2022, net cash used in investing activities was $19.7 million compared to $17.6 million for the year ended December 31, 2021.

In 2022, we expect capital expenditures to be in the range of $20 million to $25 million.

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.

The decrease in investing activities is primarily due to the FSE Acquisition for $34.0 million during 2019, and decreased capital spending in 2020.

The increase in net cash used in investing activities is primarily due to a return to normal investment following the COVID-19 pandemic slowdown which impacted 2020.

Financing activities.

For the year ended December 31, 2022, net cash used in financing activities was $50.1 million compared to the net cash provided by financing activities of $31.0 million for the year ended December 31, 2021.

Net cash used in financing activities for the year ended December 31, 2022 is primarily attributable to $43.2 million of net repayments under our credit facilities compared to net borrowings of $43.0 million in the prior year.

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

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.

Net cash provided by 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.

Debt and Credit Facilities

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Since December 31, 2022, 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.

We expect to contribute approximately $1.1 million to our U.K.

pension plan in 2023.

During the year ended December 31, 2022, the Company settled its U.S.

Pension Plan liabilities.

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.

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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

the platform and we have no provisions to terminate such contracts.

Once we enter into such agreements, fulfillment of our requirements is our obligation for the entire production life of 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis