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 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. 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 & 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. 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 315,128 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. 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 241,172 units in 2022. According to a February 2023 report by ACT Research, North American Class 5-7 truck production is expected to increase to 242,000 units in 2023. We primarily participate in the class 6 and 7 portion of the medium-duty truck market.
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.
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Other Key Developments
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. 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 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. 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, labor shortages and freight cost increases. 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
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:
• 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.
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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):
2022 2021 2020
Revenues $ 981,553 100.0 % $ 971,578 100.0 % $ 717,699 100.0 %
Cost of revenues 895,048 91.2 852,591 87.8 643,623 89.7
Gross profit 86,505 8.8 118,987 12.2 74,076 10.3
Selling, general and administrative expenses 66,361 6.8 69,406 7.1 68,228 9.5
Goodwill and other impairment — — — — 29,017 4.0
Operating income (loss) 20,144 2.1 49,581 5.1 (23,169) (3.2)
Other (income) expense 10,463 1.1 (878) (0.1) 728 0.1
Interest expense 9,827 1.0 11,179 1.2 20,603 2.9
Loss on extinguishment of debt 921 0.1 7,155 0.7 — —
Income (loss) before provision for income taxes (1,067) (0.1) 32,125 3.3 (44,500) (6.2)
Provision (benefit) for income taxes 20,904 2.1 8,393 0.9 (7,451) (1.0)
Net income (loss) $ (21,971) (2.2) % $ 23,732 2.4 % $ (37,049) (5.2) %
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Consolidated Results
The table below sets forth certain consolidated operating data for the periods indicated (dollars are in thousands):
2022 2021 Dollar Change % Change
Revenues $ 981,553 $ 971,578 $ 9,975 1.0%
Gross profit 86,505 118,987 (32,482) (27.3)
Selling, general and administrative expenses 66,361 69,406 (3,045) (4.4)
Other (income) expense 10,463 (878) 11,341 NM 1
Interest expense 9,827 11,179 (1,352) (12.1)
Loss on extinguishment of debt 921 7,155 (6,234) (87.1)
Provision (benefit) for income taxes 20,904 8,393 12,511 149.1
Net income (loss) (21,971) 23,732 (45,703) NM 1
1. Not meaningful
Revenues. The increase in consolidated revenues resulted from:
• a $68.5 million, or 11.1%, increase in sales to OEM;
• 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; and
• a $20.9 million, or 228.4%, increase in other revenues.
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 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
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costs of $23.5 million, or 4.1%; an increase in wages and benefits of $3.5 million, or 4.8%; and an increase in overhead expenses of $15.5 million, or 7.4%. As a percentage of revenues, gross profit margin was 8.8% for the year ended December 31, 2022 compared to 12.2% for the year ended December 31, 2021.
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 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.
Other (Income) Expense. 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 lower interest rates, partially offset by a higher average debt balance during the respective comparative periods.
Loss on extinguishment of 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 $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
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 industrial automation sales;
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• 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.
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.
SEGMENT RESULTS OF OPERATIONS
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Vehicle Solutions 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 Vehicle Solutions Segment operating data for the twelve months ended, (dollars are in thousands):
2022 2021 Dollar Change % Change 2020 Dollar Change % Change
Revenues $ 579,731 $ 498,913 $ 80,818 16.2% $ 366,636 $ 132,277 36.1%
Gross profit 45,979 50,608 (4,629) (9.1) 32,398 18,210 56.2
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)
Operating income (loss) 21,049 23,649 (2,600) (11.0) 2,643 21,006 794.8
Revenues. 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 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%; an increase in wages and benefits of $3.2 million, or 10.2%; and an increase in overhead expenses of $15.8 million, or 13.2%. 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 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 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.
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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 Electrical Systems Segment operating data for the twelve months ended, (dollars are in thousands):
2022 2021 Dollar Change % Change 2020 Dollar Change % Change
Revenues $ 180,404 $ 168,971 $ 11,433 6.8% $ 141,094 $ 27,877 19.8%
Gross profit 23,993 20,773 3,220 15.5 12,185 8,588 70.5
Selling, general & administrative expenses 5,775 6,213 (438) (7.0) 3,996 2,217 55.5
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
Revenues. 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 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 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 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. 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.
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 Aftermarket & Accessories Segment operating data for the twelve months ended, (dollars are in thousands):
2022 2021 Dollar Change % Change 2020 Dollar Change % Change
Revenues $ 133,671 $ 115,782 $17,889 15.5% $ 108,314 $ 7,468 6.9%
Gross profit 18,836 17,980 856 4.8 16,658 1,322 7.9
Selling, general & administrative expenses 6,925 5,889 1,036 17.6 5,396 493 9.1
Operating income 11,911 12,091 (180) (1.5) 11,262 829 7.4
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Revenues. 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 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%; an increase in wages and benefits of $2.9 million, or 35.6%; and an increase in overhead expenses of $6.2 million, or 23.3%. 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 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 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
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 (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)
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
1. Not meaningful
Revenues. 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 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 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. 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.
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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.
Liquidity and Capital Resources
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: (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, 2022 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, 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. The Company had a $0.5 million deferred tax liability as of December 31, 2022 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
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. 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.
Cash Flows
2022 2021 2020
(In thousands)
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 (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 (decrease) increase in cash $ (3,133) $ (15,545) $ 10,992
Operating activities . 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
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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.
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 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 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
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, 2022 (in thousands):
Payments Due by Period
Total
1 Year 2-3 Years 4-5 Years More than
5 Years
Debt obligations $ 152,500 $ 10,938 $ 35,001 $ 106,561 $ —
Estimated interest payments 37,321 10,451 17,969 8,901 —
Leasing obligations 35,785 9,359 11,007 6,282 9,137
Non-U.S. pension funding 22,031 1,072 2,288 2,533 16,138
Total $ 247,637 $ 31,820 $ 66,265 $ 124,277 $ 25,275
We estimated future interest payments based on the effective interest rate as of December 31, 2022. 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 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. 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, 2022, we were not a party to significant purchase obligations for goods or services.
Critical Accounting Policies and Estimates
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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 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.