What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 113 added, 102 removed, 192 unchanged (53% of the section changed)

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Factors That May Influence Results of Operations

The following paragraphs describe factors that have influenced results of operations for the six months ended June 30, 2021, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

The following paragraphs describe factors that have influenced results of operations for the nine months ended September 30, 2021, that management believes are important to provide an understanding of the business and results of operations or that may influence operations in the future.

Global COVID-19 Pandemic

The COVID-19 pandemic continues to disrupt the United States and global economy, and we cannot predict when a full economic recovery will occur.

Although product volumes are beginning to return to more normalized levels and our operating results in 2021 reflect momentum in the recovery of our business from the effects of the COVID-19 pandemic, a new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has begun to spread in the United States and across the globe.

A new Delta variant of COVID-19, which appears to be the most transmissible variant to date, has been spreading in the United States and across the globe.

The impact of the Delta variant cannot be predicted at this time and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against the Delta variant, and the response by governmental bodies and regulators.

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Global vehicle production decreased significantly in 2020, but production has since ramped back up.

Disruptions of normal supply chains have caused challenges in obtaining raw materials we use in the manufacture of some of our products.

However, production continues to be impacted by disruptions of global supply chains, which have caused challenges in obtaining raw materials we use in the manufacture of some of our products.

We have been increasing our inventories in the current year to mitigate the risk of supply chain disruption for our customers.

A worldwide semiconductor chip shortage is beginning to affect automotive original equipment manufacturers, causing unpredictable volumes.

The rapid development and fluidity of the situation precludes any prediction as to the ultimate impact COVID-19 will have on our business, financial condition, results of operations, and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 pandemic.

In addition, power shortages in China have resulted in widespread blackouts, often without any or little notice.

These blackouts have caused us and other manufacturers in the region to shut down production until power is restored.

Supply chain and COVID-19 related disruptions are expected to continue into 2022.

Inflation triggered by the unprecedented economic impact of the COVID-19 pandemic has increased our manufacturing cost, particularly labor and materials, and is expected to continue into future periods.

A worldwide semiconductor chip shortage is affecting automotive original equipment manufacturers, causing unpredictable volumes.

The rapid development and fluidity of the situation precludes any prediction as to the ultimate impact COVID-19 will have on our business, financial condition,

results of operations, and cash flows, which will depend largely on future developments directly or indirectly relating to the duration and scope of the COVID-19 pandemic.

While managing decreased demand in many regions across the globe, we are now operating at all of our business locations.

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We are focused on the safety of our employees, customers, and suppliers.

We have developed and implemented processes to ensure a safe environment for our employees and

any visitors to our facilities, including providing personal protective equipment and establishing social distancing protocols and temperature checks.

We are actively promoting vaccination among our employees.

We have developed and implemented processes to ensure a safe environment for our employees and any visitors to our facilities, including providing personal protective equipment and establishing social distancing protocols.

These processes include recommendations based on guidelines from the Centers for Disease Control and Prevention and the World Health Organization.

The health and safety of our employees remains our top priority.

While we are actively promoting vaccination among our employees, new federal COVID-19 vaccine mandates may affect workforce availability ranging from absences for vaccinations, booster shots, and recovery from side-effects to resignations by employees unwilling to comply with the mandate.

Significant workforce availability challenges could have a material effect on our business operations, financial results, liquidity, and financial position.

We have undertaken a number of permanent and temporary actions to manage the evolving situation, as described in our 2020 Annual Report.

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Outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month LIBOR (subject to a 1.000% floor) plus an applicable margin of 6.875% or 2) the greater of various benchmark rates plus an applicable margin of 5.875%.

At June 30, 2021, the Term Loan Facility bore interest, based on one-month LIBOR, at 7.875%.

At September 30, 2021, the Term Loan Facility bore interest, based on one-month LIBOR, at 7.875%.

The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due on the final maturity date of September 22, 2026.

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The Term Loan Facility has a first lien on all assets other than accounts receivable and inventory and has a second lien on accounts receivable and inventory.

We were in compliance with all requirements under the Term Loan Facility as of June 30, 2021.

We were in compliance with all requirements under the Term Loan Facility as of September 30, 2021.

On July 22, 2021, we entered into a new fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on $60.0 million of our variable rate debt to a fixed rate of 1.291%.

The interest rate swap, which has been designated as a cash flow hedge, has a notional amount of $60.0 million and a maturity date of July 31, 2024.

The ABL Facility provides for a senior secured revolving credit facility in the amount of $50.0 million, of which $30.0 million is available in the form of letters of credit and $5.0 million is available for the issuance of short-term swingline loans.

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Interest payments are due monthly on borrowings that utilize one-month LIBOR and quarterly on borrowings that utilize three-month or six-month LIBOR.

At June 30, 2021, using one-month LIBOR plus a 1.75% spread, the weighted average interest rate on outstanding borrowings under the ABL Facility would have been 2.25% if there had been any balance outstanding.

At September 30, 2021, using one-month LIBOR plus a 1.75% spread, the weighted average interest rate on outstanding borrowings under the ABL Facility would have been 2.25% if there had been any balance outstanding.

We pay a commitment fee of 0.375% for unused capacity under the ABL Facility and a 1.875% fee on the amount of letters of credit outstanding.

The final maturity date of the ABL Facility is March 22, 2026.

We had no outstanding borrowings under the ABL Facility at June 30, 2021.

Total capacity under the ABL Facility was $44.2 million as of June 30, 2021, of which $30.2 million was available for future borrowings after reductions for outstanding letters of credit as of June 30, 2021.

We had no outstanding borrowings under the ABL Facility at September 30, 2021.

Total capacity under the ABL Facility was $47.7 million as of September 30, 2021, of which $36.5 million was available for future borrowings after reductions for outstanding letters of credit as of September 30, 2021.

The ABL Facility has a first lien on accounts receivable and inventory.

We were in compliance with all requirements under the ABL Facility as of June 30, 2021.

We were in compliance with all requirements under the ABL Facility as of September 30, 2021.

Preferred Stock

On March 22, 2021, we completed a private placement of 65 thousand shares of newly designated Series D Perpetual Preferred Stock, with a par value of $0.01 per share (the “Series D Preferred Stock”), at a price of $1,000 per share, together with detachable warrants (the “2021 Warrants”) to purchase up to 1.9 million shares of our common stock at an exercise price of $0.01 per share.

$0.01 per share.

The Series D Preferred Stock has an initial liquidation preference of $1,000 per share and is redeemable at our option in cash at a redemption price equal to the liquidation preference then in effect.

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Sales Concentration

We recognized sales from a single customer of $13.2 million, or 11% and $26.2 million, or 11%, of consolidated net sales, during the three and six months ended June 30, 2021, respectively.

We recognized sales from this customer of $9.2 million, or 12% of consolidated net sales, during the three months ended June 30, 2020.

We recognized sales from a single customer of $11.1 million, or 10%, and $37.3 million, or 10%, of consolidated net sales, during the three and nine months ended September 30, 2021, respectively.

Revenues from this customer are primarily in our Mobile Solutions segment.

Three Months Ended June 30, 2021, compared to the Three Months Ended June 30, 2020

Three Months Ended June 30,

Three Months Ended September 30, 2021, compared to the Three Months Ended September 30, 2020

Consolidated Results

Three Months Ended September 30,

2021 2020 $ Change

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Interest expense 3,578 6,873 (3,295)

Other expense (income), net 1,680 (1,215) 2,895

Loss on extinguishment of debt and write-off of debt issuance costs — 144 (144)

Other income, net (4,346) (262) (4,084)

Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (3,844) (8,211) 4,367

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Share of net income from joint venture 842 1,136 (294)

Loss from continuing operations (5,391) (17,566) 12,175

Loss from discontinued operations, net of tax — (4,182) 4,182

Net loss $ (5,391) $ (21,748) $ 16,357

Net sales increased by $44.6 million, or 57%, during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to higher demand within all markets that were negatively impacted by the COVID-19 pandemic in the prior year and new business in the general industrial market.

Income (loss) from continuing operations (3,377) 1,640 (5,017)

Income from discontinued operations, net of tax — 20,330 (20,330)

Net income (loss) $ (3,377) $ 21,970 $ (25,347)

Net sales increased by $3.5 million, or 3%, during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to higher demand within the electrical market that was negatively impacted by the COVID-19 pandemic in the prior year and new business in the general industrial market.

In addition, sales were positively impacted by increased selling prices for precious metals allowed under customer contracts due to the sharp rise in underlying commodities costs compared with the same period of 2020.

These increases were partially offset by decreased demand for smart meter components due to inventory adjustments at a key customer.

Sales of components to the medical industry experienced recovery in the current period compared to the same period of 2020 when many elective surgeries were delayed as a result of the COVID-19 pandemic.

These increases were partially offset by decreased demand from automotive customers due largely to the 2021 global semi-conductor shortage.

We also realized favorable foreign exchange effects of $1.3 million.

Cost of Sales.

Cost of sales increased by $34.7 million, or 53%, during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to variable costs associated with the above-noted sales increase.

In addition, cost of sales increased due to the reintroduction of employee-related costs suspended in the prior year due to the pandemic, such as benefits and overtime hours.

These increases were partially offset by favorable overhead absorption due to the increase in inventory.

Cost of sales increased by $8.6 million, or 10%, during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to variable costs associated with the above-noted sales increase.

In addition, cost of sales increased due to the reintroduction of employee-related costs suspended in the prior year due to the COVID-19 pandemic, such as benefits and overtime hours.

Finally, cost of sales increased due to variable cost inefficiencies associated with global supply chain interruptions, inflation, and uneven customer ordering patterns, particularly in the

automotive market.

These increases were partially offset by more favorable overhead absorption compared to prior year due to the increase in inventory.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense decreased by $0.7 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to cost reduction initiatives that drove decreases in personnel and professional fees.

Selling, general, and administrative expense decreased by $1.6 million during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to cost reduction initiatives that drove decreases in personnel and professional fees.

Other Operating Income, Net.

Other operating income, net, changed unfavorably by $0.6 million primarily due to a gain on the sale of a building in Fairfield, Ohio, during the three months ended June 30, 2020.

Other operating income, net, changed favorably by $0.5 million primarily due to the gain on sale of an idle facility in Texas during the three months ended September 30, 2021.

Interest Expense.

Interest expense decreased by $2.8 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to settlements on the interest rate swap in the prior year that were recognized in interest expense while the hedge was effective.

Three Months Ended June 30,

Interest expense decreased by $3.3 million during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to higher settlements on the interest rate swap in the prior year as the notional amount outstanding and fixed rate were significantly higher than in the current year.

This decrease was partially offset by higher interest rates on debt in the current quarter.

Three Months Ended September 30,

Interest on debt $ 3,146 $ 2,198

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Total interest expense $ 3,578 $ 6,873

Other Expense (Income), Net.

Other expense (income), net, changed unfavorably by $2.9 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, due to noncash derivative mark-to-market losses, less favorable foreign exchange effects associated with intercompany borrowings, and a litigation settlement reached during the current quarter.

Other Income, Net.

Other income, net, changed favorably by $4.1 million during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due to noncash derivative mark-to-market gains less unfavorable foreign exchange effects associated with intercompany borrowings.

Benefit (Provision) For Income Taxes .

Our effective tax rate was 3.4% for the three months ended June 30, 2021, compared to (13.3)% for the three months ended June 30, 2020.

The difference in rates is primarily due to the estimated impacts of GILTI and the CARES Act.

Our effective tax rate was (9.8)% for the three months ended September 30, 2021, compared to 106.1% for the three months ended September 30, 2020.

The rate for the three months ended September 30, 2021 was unfavorably impacted by the limitation on the amount of tax benefit recorded for loss carryforwards in certain jurisdictions where we believe it is more likely than not that a portion of the future tax benefit may not be realized.

The rate for the three months ended September 30, 2020 was favorably impacted by the CARES Act.

Note 8 in the Notes to Condensed Consolidated Financial Statements describes the effective income tax rate for each period presented.

Share of Net Income from Joint Venture.

Our share of net income from the joint venture increased during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to improved profits resulting from higher sales volumes, expanding variable margins as a result of successful process improvement initiatives and improved product mix, and fixed cost reduction actions.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 $ Change

Net sales $ 68,586 $ 70,371 $ (1,785)

Organic growth $ 31,013

Organic decline $ (2,652)

Foreign exchange effects 867

Income (loss) from operations $ (257) $ 4,953 $ (5,210)

Net sales increased by $32.8 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, primarily due to higher demand within all markets which were negatively impacted by the COVID-19 pandemic in the prior year, new business in the general industrial market, and favorable foreign exchange effects of $1.8 million.

Income from operations increased by $7.1 million during the three months ended June 30, 2021, compared to the same period in the prior year primarily due to the contribution generated from the above-noted sales increase.

Moreover, we built up inventory in the three months ended June 30, 2021, which resulted in favorable overhead absorption during the quarter.

These positive impacts were partially offset by the reintroduction of employee-related costs suspended in the prior year due to the pandemic, such as travel, benefits and overtime hours.

Net sales decreased by $1.8 million during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the global semi-conductor shortage, partially offset by the favorable impact of new business awards in the general industrial market and favorable foreign exchange effects of $0.9 million.

Income from operations decreased by $5.2 million during the three months ended September 30, 2021, compared to the same period in the prior year primarily due to higher labor costs caused by the reintroduction of employee-related costs suspended in the prior year due to the COVID-19 pandemic, such as travel, benefits and overtime hours.

In addition, variable cost inefficiencies associated with global supply chain interruptions and uneven customer ordering patterns, particularly in the automotive market, reduced operating income.

These decreases were partially offset by more favorable overhead absorption during the current quarter compared to the prior year.

POWER SOLUTIONS

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 $ Change

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Income from operations $ 1,252 $ 1,143 $ 109

Net sales increased by $11.8 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020 primarily due to higher demand within the end markets which were negatively impacted by the COVID-19 pandemic in the prior year.

Net sales increased by $5.3 million during the three months ended September 30, 2021, compared to the three months ended September 30, 2020 primarily due to higher demand within the electrical market that was negatively impacted by the COVID-19 pandemic in the prior year.

Sales were also positively impacted by increased selling prices for precious metals allowed under customer contracts due to the sharp rise in underlying commodities costs compared with the same period in 2020.

Sales of components to

the medical industry experienced recovery in the current period compared to the same period of 2020 when many elective surgeries were delayed as a result of the COVID-19 pandemic.

Income from operations increased by $1.4 million compared to the same period in the prior year primarily due to the contribution generated from the above-noted sales increase, partially offset by the reintroduction of employee-related costs suspended in the prior year due to the pandemic, such as travel, benefits and overtime hours.

Six Months Ended June 30, 2021, compared to the Six Months Ended June 30, 2020

Six Months Ended June 30,

Income from operations increased by $0.1 million compared to the same period in the prior year primarily due to an increase in sales which was partially offset by higher material costs and the reintroduction of employee-related costs suspended in the prior year due to the COVID-19 pandemic, such as travel, benefits and overtime hours.

Nine Months Ended September 30, 2021, compared to the Nine Months Ended September 30, 2020

Consolidated Results

Nine Months Ended September 30,

2021 2020 $ Change

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Loss on interest rate swap 2,033 — 2,033

Other expense, net 1,558 329 1,229

Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (13,905) (125,519) 111,614

Benefit (provision) for income taxes 987 (780) 1,767

Other expense (income), net (2,788) 67 (2,855)

Loss from continuing operations before benefit for income taxes and share of net income from joint venture (17,749) (133,730) 115,981

Benefit for income taxes 612 7,935 (7,323)

Share of net income from joint venture 3,456 1,792 1,664

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Net loss $ (13,681) $ (247,969) $ 234,288

Net sales increased by $55.2 million, or 28%, during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to higher demand within all markets that were negatively impacted by the COVID-19 pandemic in the prior year and favorable foreign exchange effects of $1.8 million.

Net sales increased by $58.7 million, or 19%, during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to higher demand within all markets that were negatively impacted by the COVID-19 pandemic in the prior year and favorable foreign exchange effects of $2.5 million.

Cost of Sales.

Cost of sales increased by $39.9 million, or 25%, during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to variable costs associated with the above-noted sales increase.

In addition, cost of sales increased due to the reintroduction of employee-related costs suspended in the prior year due to the pandemic, such as travel, benefits and overtime hours, which was partially offset by favorable overhead absorption due to the increase in inventory.

Cost of sales increased by $48.5 million, or 19%, during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to variable costs associated with the above-noted sales increase.

In addition, cost of sales increased due to the reintroduction of employee-related costs suspended in the prior year due to the COVID-19 pandemic, such as travel, benefits and overtime hours.

Finally, cost of sales increased due to variable cost inefficiencies associated with global supply chain interruptions, inflation, and uneven customer ordering patterns, particularly in the automotive market.

These increases were partially offset by more favorable overhead absorption compared to prior year due to the increase in inventory.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense decreased by $2.3 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to cost reduction initiatives that drove decreases in personnel costs and professional fees.

Selling, general, and administrative expense decreased by $3.8 million during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to cost reduction initiatives that drove decreases in personnel costs and professional fees.

Goodwill Impairment.

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Other Operating Expense (Income), Net.

Other operating expense (income), net, changed favorably by $4.5 million primarily due to charges and costs associated with asset disposals and elimination of a portion of our lease obligation as a result of our

decision to vacate a portion of our corporate headquarters building in 2020.

Other operating expense (income), net, changed favorably by $5.0 million primarily due to charges and costs associated with asset disposals and elimination of a portion of our lease obligation as a result of our decision to vacate a portion of our corporate headquarters building in 2020.

These charges were partially offset by a gain on the sale of a building in Fairfield, Ohio, in the second quarter of 2020.

Interest Expense.

Interest expense decreased by $4.6 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to settlements on the interest rate swap the prior year that were recognized in interest expense while the hedge was effective.

Six Months Ended June 30,

Interest expense decreased by $7.9 million during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to higher settlements on the interest rate swap in the prior year as the notional amount outstanding and fixed rate were significantly higher than in the current year.

This decrease was partially offset by higher interest rates on debt in the current year.

Nine Months Ended September 30,

Interest on debt $ 7,695 $ 6,381

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Prior to October 2020, interest rate swap settlements were recognized in interest expense.

The interest rate swap was terminated in the first quarter of 2021.

The previous interest rate swap was terminated in the first quarter of 2021.

We entered into a new interest rate swap in the third quarter of 2021, which is designated as a cash flow hedge with the impact of settlements recognized in interest expense.

Loss on Interest Rate Swap .

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Prior to October 2020, mark-to-market adjustments on the interest rate swap were recognized in accumulated other comprehensive income.

Upon termination of the interest rate swap in March 2021, we recognized in earnings the remaining $3.3 million loss that had been deferred in accumulated other comprehensive income.

Other Expense, Net.

Other expense, net, changed unfavorably by $1.2 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, due to a litigation settlement reached during the current quarter, partially offset by more favorable foreign exchange effects associated with intercompany borrowings.

Benefit (Provision) for Income Taxes.

Our effective tax rate was 7.1% for the six months ended June 30, 2021, compared to (0.6)% for the six months ended June 30, 2020.

The difference in rates is primarily due to the estimated impacts of GILTI and the CARES Act.

Upon termination of the previous interest rate swap in March 2021, we recognized in earnings the remaining $3.3 million loss that had been deferred in accumulated other comprehensive income.

Other Expense (Income), Net.

Other expense (income), net, changed favorably by $2.9 million during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due to noncash derivative mark-to-market gains, partially offset by a litigation settlement reached during the second quarter of 2021 and unfavorable foreign exchange effects associated with intercompany borrowings.

Benefit for Income Taxes.

Our effective tax rate was 3.5% for the nine months ended September 30, 2021, compared to 5.9% for the nine months ended September 30, 2020.

The difference in rates is primarily due to the limitation on the amount of tax benefit recorded for loss carryforwards in 2021 and the impact of the CARES Act in 2020.

Note 8 in the Notes to Condensed Consolidated Financial Statements describes the effective income tax rate for each period presented.

Share of Net Income from Joint Venture.

Share of net income from the JV increased during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to improved profits from expanding variable margins as a result of successful process improvement initiatives and improved product mix, and fixed cost reduction actions.

Share of net income from the JV increased during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to recovery from the effects of the COVID-19 pandemic on prior year sales.

The JV, in which we own a 49% investment, recognized net sales of $68.4 million and $41.5

million for the nine months ended September 30, 2021 and 2020, respectively.

Additionally, profits improved from expanding variable margins as a result of successful process improvement initiatives, improved product mix, and fixed cost reduction actions.

Results by Segment

MOBILE SOLUTIONS

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 $ Change

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Foreign exchange effects 2,019

Income (loss) from operations $ 8,599 $ (4,328) $ 12,927

Net sales increased by $40.7 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to higher demand within all markets which were negatively impacted by the COVID-19 pandemic in the prior year, new business in the general industrial market, and favorable foreign exchange effects.

Income (loss) from operations increased by $12.9 million compared to the same period in the prior year primarily due to contribution generated from the above-noted sales increase.

Moreover, we built up inventory in the six months ended June 30, 2021, which resulted in favorable overhead absorption during the period.

These positive impacts were partially offset by the reintroduction of employee-related costs suspended in the prior year due to the pandemic, such as travel, benefits and overtime hours.

Income from operations $ 8,342 $ 625 $ 7,717

Net sales increased by $39.0 million during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to higher demand within all markets which were negatively impacted by the COVID-19 pandemic in the prior year, new business in the general industrial market, and favorable foreign exchange effects.

Income from operations increased by $7.7 million compared to the same period in the prior year primarily due to contribution generated from the above-noted sales increase.

Moreover, we built up inventory in the nine months ended September 30, 2021, which resulted in more favorable overhead absorption during the current year compared to the prior year.

These positive impacts were partially offset by the reintroduction of employee-related costs suspended in the prior year due to the COVID-19 pandemic, such as travel, benefits and overtime hours, and variable cost inefficiencies associated with global supply chain interruptions and uneven customer ordering patterns, particularly in the automotive market.

POWER SOLUTIONS

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 $ Change

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Income (loss) from operations $ 6,559 $ (87,737) $ 94,296

Net sales increased by $14.5 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to higher demand within the end markets which were negatively impacted by the COVID-19 pandemic in the prior year.

Net sales increased by $19.7 million during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to higher demand within the end markets which were negatively impacted by the COVID-19 pandemic in the prior year.

Income (loss) from operations increased by $94.3 million compared to the same period in the prior year primarily due to a goodwill impairment loss of $92.9 million recognized in the first quarter of 2020.

In addition, income from operations increased due to the contribution generated from the above-noted sales increase and higher precious metals commodities prices.

These favorable impacts were partially offset by the reintroduction of employee-related costs suspended in the prior year due to the pandemic, such as travel, benefits and overtime hours.

Changes in Financial Condition from December 31, 2020, to June 30, 2021

From December 31, 2020, to June 30, 2021, total assets decreased by $11.4 million primarily due to normal depreciation and amortization of fixed assets, lease right-of-use assets, and intangible assets.

These decreases were partially offset by capital expenditures and increases in inventories during the six months ended June 30, 2021.

In addition, income from operations increased due to the contribution generated from the above-noted sales increase.

These favorable impacts were partially offset by the reintroduction of employee-related costs suspended in the prior year due to the COVID-19 pandemic, such as travel, benefits and overtime hours.

Changes in Financial Condition from December 31, 2020, to September 30, 2021

From December 31, 2020, to September 30, 2021, total assets decreased by $30.3 million primarily due to normal depreciation and amortization of fixed assets, lease right-of-use assets, and intangible assets.

These decreases were partially offset by capital expenditures and increases in inventories during the nine months ended September 30, 2021.

Inventories increased as a result of a strategic decision to mitigate potential supply chain issues for our customers.

From December 31, 2020, to June 30, 2021, total liabilities increased by $66.4 million, primarily due to the refinancing of our credit facilities and redeeming the Series B Preferred Stock with debt.

Working capital, which consists of current assets less current liabilities, was $122.5 million as of June 30, 2021, compared to $112.0 million as of December 31, 2020.

The increase in working capital was primarily due to the increase in inventories discussed above.

Cash provided by operations was $5.9 million for the six months ended June 30, 2021, compared with cash provided by operations of $15.9 million for the six months ended June 30, 2020.

From December 31, 2020, to September 30, 2021, total liabilities increased by $52.8 million, primarily due to the refinancing of our credit facilities, termination of the ineffective interest rate swap, and redeeming the Series B Preferred Stock.

Working capital, which consists of current assets less current liabilities, was $122.4 million as of September 30, 2021, compared to $112.0 million as of December 31, 2020.

The increase in working capital was primarily due to the increase in inventories discussed above and a decrease in derivative liabilities after the termination of the interest rate swap.

Cash provided by operations was $5.7 million for the nine months ended September 30, 2021, compared with cash provided by operations of $19.3 million for the nine months ended September 30, 2020.

The difference was primarily due to $8.5 million in current year income tax payments and building inventory levels during the current year to mitigate potential supply chain issues for our customers.

Cash used in investing activities was $30.2 million for the six months ended June 30, 2021, compared with cash used in investing activities of $12.5 million for the six months ended June 30, 2020.

Cash used in investing activities was $32.7 million for the nine months ended September 30, 2021, compared with cash used in investing activities of $17.4 million for the nine months ended September 30, 2020.

The difference was primarily due to cash paid to settle the interest rate swap and post-closing adjustment on the sale of the Life Sciences business, partially offset by lower capital expenditures in the current year.

Cash provided by financing activities was $6.9 million for the six months ended June 30, 2021, compared with cash provided by financing activities of $53.4 million for the six months ended June 30, 2020.

The difference was primarily due to $11.9 million net inflow from the debt and preferred stock refinancing in the current year compared to the $62.5 million draw on the Senior Secured Revolver in the prior year.

Cash provided by financing activities was $4.5 million for the nine months ended September 30, 2021, compared with cash provided by financing activities of $43.9 million for the nine months ended September 30, 2020.

The difference was primarily due to $11.6 million net inflow from the debt and preferred stock refinancing in the current year compared to the $59.0 million net draw on the Senior Secured Revolver in the prior year to strengthen our cash position due to economic uncertainty associated with the COVID-19 pandemic.

Liquidity and Capital Resources

Credit Facilities

The principal amount outstanding under our Term Loan Facility as of June 30, 2021, was $149.6 million, without regard to unamortized debt issuance costs and discount.

As of June 30, 2021, we had unused borrowing capacity of $30.2 million under

the ABL Facility, subject to certain limitations.

This amount of borrowing capacity is net of $14.0 million of outstanding letters of credit at June 30, 2021, which are considered as usage of the ABL Facility.

This amount includes approximately $0.8 million of duplicate letters of credit that remained outstanding at June 30 but were terminated during the third quarter after transition to a new guarantor bank was completed.

The principal amount outstanding under our Term Loan Facility as of September 30, 2021, was $149.3 million, without regard to unamortized debt issuance costs and discount.

As of September 30, 2021, we had unused borrowing capacity of $36.5 million under the ABL Facility, subject to certain limitations.

This amount of borrowing capacity is net of $11.2 million of outstanding letters of credit at September 30, 2021, which are considered as usage of the ABL Facility.

The Term Loan Facility requires quarterly principal payments of $0.4 million with the remaining unpaid principal amount due on the final maturity date of September 22, 2026.

1 unchanged sentence

If one-month LIBOR exceeds 1.000%, then we pay the variable one-month LIBOR plus an applicable margin of 6.875%.

Based on the interest rate in effect at June 30, 2021, annual interest payments would be approximately $11.8 million.

On July 22, 2021, we entered into a new interest rate swap as discussed in Note 18 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

Based on the interest rate in effect at June 30, 2021, and the fixed rate on the new interest rate swap, annual interest payments would be approximately $12.0 million.

Based on the interest rate in effect at September 30, 2021, and the fixed rate on the 2021 interest rate swap, annual interest payments would be approximately $11.9 million.

The ABL Facility bears interest on a variable rate structure with borrowings bearing interest at one-month LIBOR plus an applicable margin of 1.75%.

The interest rate in effect at June 30, 2021, was 2.25%.

The interest rate in effect at September 30, 2021, was 2.25%.

We pay a commitment fee of 0.375% for unused capacity under the ABL Facility.

We were in compliance as of June 30, 2021, with all requirements under our Term Loan Facility and ABL Facility.

We were in compliance as of September 30, 2021, with all requirements under our Term Loan Facility and ABL Facility.

Both credit facilities allow for optional expansion of available borrowings, subject to certain terms and conditions.

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Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2020 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2020 Annual Report.

There have been no changes to these policies during the six months ended June 30, 2021, except as discussed in Note 1 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

There have been no changes to these policies during the nine months ended September 30, 2021, except as discussed in Note 1 to the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

Recent Accounting Pronouncements

1 unchanged sentence

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