What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-08 · 120 added, 121 removed, 164 unchanged (60% of the section changed)

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis below described material changes in financial condition and results of operations as reflected in our condensed consolidated financial statements for the three and six months ended June 30, 2023 and 2022.

This discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 Form 10-K.

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Key Developments

During the quarter ended March 31, 2023, CVG established two new plant locations:

During the quarter ended March 31, 2023, we established two new plant locations:

one in Tangier, Morocco, and another in Aldama, Mexico.

Both locations are expected to begin production in the third quarter of 2023.

These plants are a cornerstone in CVG's strategy of globally expanding its electrification systems business.

These plants are a cornerstone in our strategy of globally expanding our electrical systems business.

Consolidated Results of Operations

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The table below sets forth certain consolidated operating data for the three months ended June 30 (dollars are in thousands):

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The table below sets forth certain consolidated operating data for the three months ended September 30 (dollars are in thousands):

2023 2022 $ Change % Change

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Selling, general and administrative expenses 21,476 17,304 4,172 24.1

Other expense 383 1,924 (1,541) (80.1)

Interest expense 2,614 2,813 (199) (7.1)

Loss on extinguishment of debt — 921 (921) (100.0)

Provision for income taxes 2,161 1,250 911 72.9

Net income 7,290 3,551 3,739 105.3

The increase in consolidated revenues resulted from:

• a $31.9 million, or 18.5%, increase in OEM;

• a $19.5 million, or 68.4%, decrease in industrial automation sales;

The decrease in consolidated revenues resulted from:

• a $0.9 million, or 0.4%, decrease in OEM and other revenues;

• a $2.7 million, or 7.4%, decrease in aftermarket and OES sales;

• a $0.3 million, or 161.7% increase in other revenues.

Second quarter 2023 revenues were favorably impacted by foreign currency exchange translation of $0.7 million, which is reflected in the change in revenues above.

The increase in revenues was primarily driven by increased pricing and volume from new Electrical Systems business, partially offset by lower volumes in the Industrial Automation segment.

• a $1.1 million, or 7.8%, decrease in industrial automation sales.

Third quarter 2023 revenues were favorably impacted by foreign currency exchange translation of $2.0 million, which is reflected in the change in revenues above.

The decrease in revenues of 1.9% is due primarily to the previous year benefiting from a post-COVID backlog in Asia-Pacific.

In addition, Industrial Automation and Aftermarket & Accessories segments experienced lower volumes.

These reductions were partially offset by increased pricing and volume from the Electrical Systems business.

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 $16.5 million increase in gross profit is primarily attributable to price increases with customers and cost reduction initiatives.

The $7.1 million increase in gross profit is primarily attributable to price increases with customers and cost reduction initiatives, partially offset by volume decreases.

Cost of revenues decreased $11.8 million, or 5.3%, as a result of a decrease in raw material and purchased component costs of $16.1 million, or 10.6%, offset by an increase in labor and overhead expenses of $4.3 million, or 5.8%.

As a percentage of revenues, gross profit margin was 14.6% for the three months ended June 30, 2023 compared to 8.7% for the three months ended June 30, 2022.

The three months ended June 30, 2023 results include charges of $0.7 million associated with the restructuring program.

As a percentage of revenues, gross profit margin was 13.8% for the three months ended September 30, 2023 compared to 10.7% for the three months ended September 30, 2022.

Selling, General and Administrative Expenses .

Selling, general and administrative expenses ("SG&A”) consist primarily of wages and benefits and other expenses such as marketing, travel, legal, audit, rent and utility costs which are not directly associated with the manufacturing of our products.

SG&A expenses increased $6.8 million compared to the three months ended June 30, 2022, primarily as a result of increased employee benefit costs and salaries including an increase in incentive compensation expenses.

As a percentage of revenues, SG&A expense was 8.6% for the three months ended June 30, 2023 compared to 6.2% for the three months ended June 30, 2022.

SG&A expenses increased $4.2 million compared to the three months ended September 30, 2022, primarily as a result of increased employee salaries including an increase in incentive compensation expenses and professional service.

As a percentage of revenues, SG&A expense was 8.7% for the three months ended September 30, 2023 compared to 6.9% for the three months ended September 30, 2022.

Other Expense.

Other expenses decreased $1.5 million in the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 due primarily to partial settlement of the Company's U.S.

Pension Plan liabilities of $1.1 million completed in the three months ended September 30, 2022 as well as favorable change in foreign currency of $0.5 million.

Interest Expense .

Interest associated with our debt was $2.8 million and $2.1 million for the three months ended June 30, 2023 and 2022, respectively.

The increase in interest expense primarily related to higher interest rates on variable rate debt, offset by lower average debt balances 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 fees associated with the new debt.

Interest associated with our debt was $2.6 million and $2.8 million for the three months ended September 30, 2023 and 2022, respectively.

The decrease in interest expense primarily related to lower average debt balances during the respective comparative periods, offset by higher interest rates on variable rate debt.

Provision for Income Taxes.

An income tax provision of $2.7 million and $0.9 million were recorded for the three months ended June 30, 2023 and 2022, respectively.

The period over period change in income tax was primarily attributable to a $9.5 million increase in domestic pre-tax income versus the prior year period.

Net income was $10.1 million for the three months ended June 30, 2023 compared to $2.5 million for the three months ended June 30, 2022.

An income tax provision of $2.2 million and $1.3 million were recorded for the three months ended September 30, 2023 and 2022, respectively.

The period over period change in income tax was primarily attributable to a $4.7 million increase in pre-tax income versus the prior year period.

Net income was $7.3 million for the three months ended September 30, 2023 compared to $3.6 million for the three months ended September 30, 2022.

The increase in net income is attributable to the factors noted above.

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Vehicle Solutions Segment Results

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The table below sets forth certain Vehicle Solutions Segment operating data for the three months ended June 30 (dollars are in thousands):

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The table below sets forth certain Vehicle Solutions Segment operating data for the three months ended September 30 (dollars are in thousands):

2023 2022 $ Change % Change

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Operating income 10,900 9,560 1,340 14.0

The increase in Vehicle Solutions Segment revenues primarily resulted from increased pricing.

The decrease in Vehicle Solutions Segment revenues was primarily as a result of high APAC sales volume in 2022 generated from COVID backlog production in region.

Gross Profit.

The increase in gross profit was primarily attributable to price increases with customers and cost reduction initiatives.

The increase in gross profit was primarily attributable to price increases with customers and cost reduction initiatives, partially offset by volume decreases.

Included in gross profit is cost of revenues, which decreased $12.5 million, or 8.9%, as a result of a decrease in raw material and purchased component costs of $15.8 million, or 15.8%, offset by an increase in labor and overhead expenses of $3.3 million, or 8.1%.

As a percentage of revenues, gross profit margin was 13.7% for the three months ended June 30, 2023 compared to 6.2% for the three months ended June 30, 2022, driven by lower startup costs, improved manufacturing efficiencies, increased pricing to offset material cost inflation and freight costs.

The three months ended June 30, 2023 results include charges of $0.3 million associated with the restructuring program.

As a percentage of revenues, gross profit margin was 12.1% for the three months ended September 30, 2023 compared to 9.0% for the three months ended September 30, 2022, driven by increased pricing and material & freight cost reduction improvements.

Selling, General and Administrative Expenses .

SG&A expenses decreased $0.6 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due nonrecurring legal expenses related to a customer dispute in the prior year period.

SG&A expenses increased $2.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to an increase in employee benefit costs and professional service.

Electrical Systems Segment Results

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The table below sets forth certain Electrical Systems Segment operating data for the three months ended June 30 (dollars are in thousands):

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The table below sets forth certain Electrical Systems Segment operating data for the three months ended September 30 (dollars are in thousands):

2023 2022 $ Change % Change

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Selling, general & administrative expenses 2,018 1,055 963 91.3

Operating income (loss) 7,659 5,942 1,717 28.9

The increase in Electrical Systems Segment revenues primarily resulted from increased sales volume and pricing.

Operating income 5,863 5,155 708 13.7

The increase in Electrical Systems Segment revenues primarily resulted from increased sales volume, pricing and favorable foreign exchange.

Gross Profit.

The increase in gross profit is primarily attributable to increase in sales volume and pricing.

The increase in gross profit is primarily attributable to increased sales volume and pricing, partially offset by startup costs related to new facilities.

Included in gross profit is cost of revenues, which increased $6.1 million, or 15.2%, as a result of an increase in raw material and purchased component costs of $1.6 million, or 6.7%, and an increase in labor and overhead expenses of $4.5 million, or 27.1%.

As a percentage of revenues, gross profit margin was 16.3% for the three months ended June 30, 2023 compared to 15.3% for the three months ended June 30, 2022, driven by sales volume, increased pricing and manufacturing efficiencies.

As a percentage of revenues, gross profit margin was 14.6% for the three months ended September 30, 2023 compared to 13.5% for the three months ended September 30, 2022, driven by increased pricing and volume leverage.

Selling, General and Administrative Expenses .

SG&A expenses increased $1.4 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, driven by increased incentive compensation expense.

SG&A expenses increased $1.0 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily driven by increased employee benefit costs and salaries including an increase in incentive compensation expenses.

Aftermarket & Accessories Segment Results

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The table below sets forth certain Aftermarket & Accessories Segment operating data for the three months ended June 30 (dollars are in thousands):

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The table below sets forth certain Aftermarket & Accessories Segment operating data for the three months ended September 30 (dollars are in thousands):

2023 2022 $ Change % Change

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Operating income 4,501 4,953 (452) (9.1)

The increase in Aftermarket & Accessories Segment revenues primarily resulted from increased pricing.

The decrease in Aftermarket & Accessories Segment revenues primarily resulted from decreased volume.

Gross Profit.

The increase in gross profit is primarily attributable to increased pricing and cost reduction.

Included in gross profit is cost of revenues, which decreased $0.3 million, or 0.9%, as a result of an increase in raw material and purchased component costs of $0.1 million, or 0.4%, offset by a decrease in labor and overhead expenses of $0.4 million, or 3.2%.

As a percentage of revenues, gross profit margin was 21.1% for the three months ended June 30, 2023 compared to 8.9% for the three months ended June 30, 2022.

This was primarily due to increased pricing offsetting moderating cost inflation.

Included in gross profit is cost of revenues, which decreased $2.9 million, or 9.6%, as a result of a decrease in raw material and purchased component costs of $1.1 million, or 6.1%, and a decrease in labor and overhead expenses of $1.8 million, or 15.1%.

As a percentage of revenues, gross profit margin was 19.2% for the three months ended September 30, 2023 compared to 17.2% for the three months ended September 30, 2022.

The increase in gross profit margin is primarily due to increased pricing offsetting moderating cost inflation.

Selling, General and Administrative Expenses .

SG&A expenses increased $0.5 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

SG&A expenses increased $0.7 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily driven by increased employee benefit costs and salaries including an increase in incentive compensation expenses.

Industrial Automation Segment Results

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

The table below sets forth certain Industrial Automation Segment operating data for the three months ended June 30 (dollars are in thousands):

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The table below sets forth certain Industrial Automation Segment operating data for the three months ended September 30 (dollars are in thousands):

2023 2022 $ Change % Change

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The decrease in Industrial Automation Segment revenues primarily resulted from lower sales volume due to

decreased customer demand.

The decrease in Industrial Automation Segment revenues primarily resulted from lower sales volume due to decreased customer demand.

Gross Profit.

The decrease in gross profit is primarily attributable to lower sales volume and an inventory charge of $1.6 million.

Included in gross profit is cost of revenues, which decreased $16.0 million, or 62.5%, as a result of a decrease in

raw material and purchased component costs of $12.9 million, or 63.2%, and a decrease in labor and overhead expenses of $3.1 million, or 59.5%.

As a percentage of revenues, gross profit loss was 7.1% for the three months ended June 30, 2023 compared to gross profit margin of 10.0% for the three months ended June 30, 2022.

The decrease in gross profit margin is primarily due to volume reduction, inventory adjustments and restructuring expenses.

The three months ended June 30, 2023 results include charges of $0.4 million associated with the restructuring program.

The increase in gross profit is primarily attributable to profit reported from the liquidation of certain excess inventories.

Included in gross profit is cost of revenues, which decreased $2.5 million, or 18.0%, as a result of a decrease in raw material and purchased component costs of $0.8 million, or 7.6%, and a decrease in labor and overhead expenses of $1.7 million, or 46.1%.

As a percentage of revenues, gross profit margin was 13.6% for the three months ended September 30, 2023 compared to 2.9% for the three months ended September 30, 2022.

The increase in gross profit margin is primarily due to the previously noted the liquidation of certain excess inventories.

The three months ended September 30, 2023 results include charges of $0.1 million associated with the restructuring program.

Selling, General and Administrative Expenses .

SG&A expenses decreased $0.1 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

SG&A expenses decreased $0.3 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Consolidated Results of Operations

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The table below sets forth certain consolidated operating data for the six months ended June 30, (dollars are in thousands):

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The table below sets forth certain consolidated operating data for the nine months ended September 30, (dollars are in thousands):

2023 2022 $ Change % Change

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Selling, general and administrative expenses 64,498 49,955 14,543 29.1

Other (income) expense 105 874 (769) (88.0)

Other expense 488 2,798 (2,310) (82.6)

Interest expense 8,308 6,892 1,416 20.5

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The increase in consolidated revenues resulted from:

• a $74.4 million, or 22.1%, increase in OEM;

• a $60.6 million, or 10.6%, increase in OEM and other revenues;

• a $9.3 million, or 9.4%, increase in aftermarket and OES sales;

• a $45.0 million, or 58.6%, decrease in industrial automation sales.

• a $1.8 million, or 1.9%, decrease in aftermarket and OES sales;

• a $0.9 million, or 27.6% increase in other revenues.

Six months ended 2023 revenues were unfavorably impacted by foreign currency exchange translation of $2.7 million, which is reflected in the change in revenues above.

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

Nine months ended 2023 revenues were unfavorably impacted by foreign currency exchange translation of $0.2 million, which is reflected in the change in revenues above.

The increase in revenues is primarily driven by increased pricing to offset material cost increases and increased sales volume from the Electrical Systems business, offset by lower sales volume in the Industrial Automation segment and Aftermarket & Accessories.

Gross Profit .

The $33.4 million increase in gross profit is primarily attributable to price increases with customers and cost reduction initiatives.

Cost of revenues increased $3.3 million, or 0.7%, as a result of a decrease in raw material and purchased component costs of $5.8 million, or 1.9%, offset by an increase in labor and overhead expenses of $9.1 million, or 6.0%.

As a percentage of revenues, gross profit margin was 14.0% for the six months ended June 30, 2023 compared to 9.5% for the six months ended June 30, 2022.

The six months ended June 30, 2023 results include charges of $1.4 million associated with the restructuring program.

Cost of revenues decreased $8.5 million, or 1.3%, as a result of a decrease in raw material and purchased component costs of $21.9 million, or 4.9%, offset by an increase in labor and overhead expenses of $13.4 million, or 5.9%.

As a percentage of revenues, gross profit margin was 13.9% for the nine months ended September 30, 2023 compared to 9.9% for the nine months ended September 30, 2022.

The nine months ended September 30, 2023 results include charges of $1.4 million associated with the restructuring program.

Selling, General and Administrative Expenses .

SG&A expenses increased $10.4 million compared to the six months ended June 30, 2022, primarily as a result of increased employee benefit costs and salaries including an increase in incentive compensation expenses.

As a percentage of revenues, SG&A expense was 8.2% for the six months ended June 30, 2023 compared to 6.6% for the six months ended June 30, 2022.

Other (Income) Expense.

Other expenses decreased $0.8 million in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 due primarily to a favorable change in foreign currency of $0.6 million.

SG&A expenses increased $14.5 million compared to the nine months ended September 30, 2022, primarily as a result of increased employee salaries and professional services.

As a percentage of revenues, SG&A expense was 8.4% for the nine months ended September 30, 2023 compared to 6.7% for the nine months ended September 30, 2022.

Other Expense.

Other expenses decreased $2.3 million in the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 due primarily to partial settlement of the Company's U.S.

Pension Plan liabilities of $1.1 million completed in three months ended September 30, 2022 as well as a favorable change in foreign currency of $1.4 million.

Interest Expense .

Interest associated with our debt was $5.7 million and $4.1 million for the six months ended June 30, 2023 and 2022, respectively.

Interest associated with our debt was $8.3 million and $6.9 million for the nine months ended September 30, 2023 and 2022, respectively.

The increase in interest expense primarily related to higher interest rates on variable rate debt, offset by lower average debt balances during the respective comparative periods.

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Provision for Income Taxes.

An income tax provision of $5.9 million and $2.3 million were recorded for the six months ended June 30, 2023 and 2022, respectively.

The period over period change in income tax was primarily attributable to the $16.1 million increase in domestic pre-tax income versus the prior year period.

Net income was $18.8 million for the six months ended June 30, 2023 compared to $6.5 million for the six months ended June 30, 2022.

An income tax provision of $8.1 million and $3.5 million were recorded for the nine months ended September 30, 2023 and 2022, respectively.

The period over period change in income tax was primarily attributable to the $20.7 million increase in pre-tax income versus the prior year period.

Net income was $26.1 million for the nine months ended September 30, 2023 compared to $10.0 million for the nine months ended September 30, 2022.

The increase in net income is attributable to the factors noted above.

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Vehicle Solutions Segment Results

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The table below sets forth certain Vehicle Solutions Segment operating data for the six months ended June 30, (dollars are in thousands):

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The table below sets forth certain Vehicle Solutions Segment operating data for the nine months ended September 30, (dollars are in thousands):

2023 2022 $ Change % Change

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The increase in gross profit was primarily attributable to price increases with customers and cost reduction initiatives.

Included in gross profit is cost of revenues, which increased $11.8 million, or 4.5%, as a result of an increase in raw material and purchased component costs of $5.0 million, or 2.8%, and an increase in labor and overhead expenses of $6.8 million, or 8.0%.

As a percentage of revenues, gross profit margin was 12.9% for the six months ended June 30, 2023 compared to 7.7% for the six months ended June 30, 2022, driven by lower startup costs, improved manufacturing efficiencies, increased pricing to offset material cost inflation and freight costs.

The six months ended June 30, 2023 results include charges of $0.4 million associated with the restructuring program.

Included in gross profit is cost of revenues, which decreased $0.6 million, or 0.2%, as a result of a decrease in raw

material and purchased component costs of $10.8 million, or 3.9%, offset by an increase in labor and overhead expenses of $10.2 million, or 8.1%.

As a percentage of revenues, gross profit margin was 12.7% for the nine months ended September 30, 2023 compared to 8.2% for the nine months ended September 30, 2022, driven by lower startup costs, improved manufacturing efficiencies, increased pricing to offset material cost inflation and freight costs.

The nine months ended September 30, 2023 results include charges of $0.4 million associated with the restructuring program.

Selling, General and Administrative Expenses .

SG&A expenses decreased $1.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily due to nonrecurring legal expenses related to a customer dispute in the prior year period.

SG&A expenses increased $1.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to an increase in employee benefit costs and salaries including an increase in incentive compensation expenses.

Electrical Systems Segment Results

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The table below sets forth certain Electrical Systems Segment operating data for the six months ended June 30, (dollars are in thousands):

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The table below sets forth certain Electrical Systems Segment operating data for the nine months ended September 30, (dollars are in thousands):

2023 2022 $ Change % Change

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Operating income 19,592 12,859 6,733 52.4

The increase in Electrical Systems Segment revenues resulted from sales volume, increased pricing to offset material cost pass-through.

The increase in Electrical Systems Segment revenues resulted from sales volume, increased pricing to offset material cost pass-through and other inflationary items.

Gross Profit.

The increase in gross profit is primarily attributable to the increase in sales volume and increased pricing to offset material cost pass-through.

The increase in gross profit is primarily attributable to volume leverage and increased pricing to offset material cost pass-through and other inflationary items.

Included in gross profit is cost of revenues, which increased $29.2 million, or 25.1%, as a result of an increase in raw material and purchased component costs of $16.5 million, or 25.4%, and an increase in labor and overhead expenses of $12.7 million, or 24.7%.

As a percentage of revenues, gross profit margin was 15.7% for the six months ended June 30, 2023 compared to 12.2% for the six months ended June 30, 2022, driven by sales volume, increased pricing and manufacturing efficiencies.

As a percentage of revenues, gross profit margin was 15.4% for the nine months ended September 30, 2023 compared to 12.6% for the nine months ended September 30, 2022, driven by volume leverage and increased pricing.

Selling, General and Administrative Expenses .

SG&A expenses increased $2.0 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, driven by increased incentive compensation expense.

SG&A expenses increased $2.9 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily driven by increased headcount and quarterly incentive adjustments.

Aftermarket & Accessories Segment Results

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The table below sets forth certain Aftermarket & Accessories Segment operating data for the six months ended June 30, (dollars are in thousands):

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The table below sets forth certain Aftermarket & Accessories Segment operating data for the nine months ended September 30, (dollars are in thousands):

2023 2022 $ Change % Change

3 unchanged sentences

Operating income 15,603 8,705 6,898 79.2

The increase in Aftermarket & Accessories Segment revenues primarily resulted from increased sales volume and increased pricing to offset material cost pass-through.

The increase in Aftermarket & Accessories Segment revenues primarily resulted from increased pricing to offset material cost pass-through and increased sales volume.

Gross Profit.

The increase in gross profit is primarily attributable to the increased pricing to offset material cost inflation and freight costs.

Included in gross profit is cost of revenues, which increased $4.0 million, or 7.2%, as a result of an increase in raw material and purchased component costs of $3.0 million, or 8.7%, and an increase in labor and overhead expenses of $1.0 million, or 4.8%.

As a percentage of revenues, gross profit margin was 20.2% for the six months ended June 30, 2023 compared to 11.1% for the six months ended June 30, 2022.

Included in gross profit is cost of revenues, which increased $1.1 million, or 1.2%, as a result of an increase in raw material and purchased component costs of $1.9 million, or 3.5%, offset by a decrease in labor and overhead expenses of $0.8 million, or 2.5%.

As a percentage of revenues, gross profit margin was 19.9% for the nine months ended September 30, 2023 compared to 13.4% for the nine months ended September 30, 2022.

This was primarily due to increased pricing offsetting moderating cost inflation.

Selling, General and Administrative Expenses .

SG&A expenses increased $0.7 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, consistent with the prior year amount on a percent of sales basis.

SG&A expenses increased $1.4 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, consistent with the prior year amount on a percent of sales basis.

Industrial Automation Segment Results

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

The table below sets forth certain Industrial Automation Segment operating data for the six months ended June 30, (dollars are in thousands):

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The table below sets forth certain Industrial Automation Segment operating data for the nine months ended September 30, (dollars are in thousands):

2023 2022 $ Change % Change

Revenues $ 31,777 $ 76,789 $ (45,012) (58.6)%

Gross profit (422) 7,846 (8,268) NM 1

Gross profit 1,355 8,249 (6,894) (83.6)

Selling, general & administrative expenses 3,588 4,242 (654) (15.4)

Operating income (loss) (2,923) 4,975 (7,898) NM 1

Operating (loss) income

(2,233) 4,007 (6,240) NM 1

Not meaningful

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Gross Profit.

The decrease in gross profit is primarily attributable to lower sales volume and an inventory charge of $1.6 million.

The decrease in gross profit is primarily attributable to lower sales volume.

Included in gross profit is cost of revenues, which decreased $38.1 million, or 55.6%, as a result of a decrease in raw material and purchased component costs of $29.5 million, or 55.5%, and a decrease in labor and overhead expenses of $8.6 million, or 55.8%.

As a percentage of revenues, gross profit loss was 2.2% for the six months ended June 30, 2023 compared to gross profit margin of 12.5% for the six months ended June 30, 2022 due to volume reduction, inventory adjustments and restructuring expenses.

The six months ended June 30, 2023 results include charges of $1.0 million associated with the restructuring program.

As a percentage of revenues, gross profit margin was 4.3% for the nine months ended September 30, 2023 compared to gross profit margin of 10.7% for the nine months ended September 30, 2022 due to volume reduction and restructuring expenses.

The nine months ended September 30, 2023 results include charges of $1.1 million associated with the restructuring program.

Selling, General and Administrative Expenses .

SG&A expenses decreased $0.4 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily driven by overhead reduction.

SG&A expenses decreased $0.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily driven by overhead reduction.

Liquidity and Capital Resources

As of June 30, 2023, the Company had total liquidity of $190.5 million, including $42.4 million of cash and $148.1 million of availability from its U.S.

As of September 30, 2023, the Company had total liquidity of $198.3 million, including $46.3 million of cash and $152.0 million of availability from its U.S.

and China credit facilities.

Our primary sources of liquidity as of June 30, 2023 were operating income, cash reserves and availability under our credit facilities.

Our primary sources of liquidity as of September 30, 2023 were operating income, cash reserves and availability under our credit facilities.

We believe that these sources of liquidity will provide adequate funds for our working capital needs, capital expenditures and debt service throughout the next twelve months.

However, no assurance can be given that this will be the case.

As of June 30, 2023, cash of $42.4 million was held by foreign subsidiaries.

The Company had a $0.6 million deferred tax liability as of June 30, 2023 for the expected future income tax implications of repatriating cash from the foreign subsidiaries for which no indefinite reinvestment assertion has been made.

As of September 30, 2023, cash of $43.5 million was held by foreign subsidiaries.

The Company had a $0.9 million deferred tax liability as of September 30, 2023 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.

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.

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Our ability to comply with the covenants in the Credit Agreement, as discussed in Note 4, Debt, 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;

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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Sources and Uses of Cash

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

(In thousands)

Net cash provided by (used in) operating activities $ 11,522 $ (4,507)

Net cash provided by operating activities $ 29,990 $ 33,794

Net cash used in investing activities (15,196) (12,525)

Net cash provided by financing activities 7,893 8,659

Net cash provided by (used in) financing activities 531 (13,031)

Effect of currency exchange rate changes on cash (857) (4,483)

Net increase (decrease) in cash $ 10,616 $ (6,458)

Net increase in cash $ 14,468 $ 3,755

Operating activities.

For the six months ended June 30, 2023, net cash provided by operating activities was $11.5 million compared to net cash used in operating activities of $4.5 million for the six months ended June 30, 2022.

Net cash provided by operating activities is primarily attributable to a smaller increase in working capital for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

For the nine months ended September 30, 2023, net cash provided by operating activities was $30.0 million compared to $33.8 million for the nine months ended September 30, 2022.

Net cash provided by operating activities is primarily attributable to a smaller increase in working capital offset by the improved financial results during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Investing activities.

For the six months ended June 30, 2023, net cash used in investing activities was mainly due to capital expenditures and was $9.2 million compared to $8.6 million for the six months ended June 30, 2022.

For the nine months ended September 30, 2023, net cash used in investing activities was mainly due to timing of capital expenditures of $15.2 million compared to $12.5 million for the nine months ended September 30, 2022.

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

Financing activities.

For the six months ended June 30, 2023, net cash provided by financing activities was $7.9 million compared $8.7 million for the six months ended June 30, 2022.

For the nine months ended September 30, 2023, net cash provided by financing activities was $0.5 million compared to net cash used in financing activities of $13.0 million for the nine months ended September 30, 2022.

Net cash used in financing activities for the nine months ended September 30, 2022 is primarily attributable to $11.3 million of net repayments under our credit facilities.

Debt and Credit Facilities

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For information about critical accounting estimates, see Critical Accounting Estimates in "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Form 10-K.

At June 30, 2023, there have been no material changes to our critical accounting estimates from those disclosed in our 2022 Form 10-K.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in

our 2022 Form 10-K.

At September 30, 2023, there have been no material changes to our critical accounting estimates from those disclosed in our 2022 Form 10-K.

Forward-Looking Statements

This Quarter Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.

strategic plans and plans to focus on certain segments, competition faced by the Company, volatility in and disruption to the global economic environment, including inflation and labor shortages, financial covenant compliance, anticipated effects of acquisitions, production of new products, plans for capital expenditures and our results of operations or financial position and liquidity, may be deemed to be forward-looking statements.

For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements under “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry outlook, the Company’s expectations for future periods with respect to its plans to improve financial results, the future of the Company’s end markets, changes in the Class 8 and Class 5-7 North America truck build rates, performance of the global construction equipment business, the Company’s prospects in the wire harness, warehouse automation and electric vehicle markets, the Company’s initiatives to address customer needs, organic growth, the Company’s strategic plans and plans to focus on certain segments, competition faced by the Company, volatility in and disruption to the global economic environment, including inflation and labor shortages, financial covenant compliance, anticipated effects of acquisitions, production of new products, plans for capital expenditures and our results of operations or financial position and liquidity, may be deemed to be forward-looking statements.

Without limiting the foregoing, the words “believe”, “anticipate”, “plan”, “expect”, “intend”, “will”, “should”, “could”, “would”, “project”, “continue”, “likely”, and similar expressions, as they relate to us, are intended to identify forward-looking statements.

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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-Q

Item 2. Management’s Discussion and Analysis