NN INC 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and the Selected Financial Data included elsewhere in this Annual Report. Historical operating results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Unless otherwise noted herein, all amounts are in thousands, except per share numbers. A detailed discussion of our results of operations and liquidity and capital resources for the year ended December 31, 2020 compared to the year ended December 31, 2019 are not included herein and can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 15, 2021. Overview and Management Focus Our strategy and management focus are based upon the following long-term objectives • Organic growth within our segments; • Improved operating margins; • Cost reduction; • Efficient capital deployment; • Debt leverage ratio improvement; • Capital management initiatives; and • Employee health, safety, and satisfaction; Management generally focuses on these trends and relevant market indicators • Trends related to the geographic migration of competitive manufacturing, electric vehicles, and electrification; • Costs subject to the global inflationary environment, including, but not limited to: • Raw materials; • Wages and benefits, including health care costs; • Regulatory compliance; and • Energy; • Global automotive production rates; • Defense spending; • Global industrial growth and economics; • Residential and non-residential construction rates; • Regulatory environment for United States public companies and manufacturing companies; • Currency and exchange rate movements and trends; • Interest rate levels and expectations; and • Changes in tariff regulations. 23 Table of Content s Management generally focuses on the following key indicators of operating performance • Sales growth; • Cost of sales; • Gross margin; • Selling, general and administrative expense; • Earnings before interest, taxes, depreciation and amortization; • Return on invested capital; • Income from operations; • Net income; • Leverage ratio • Cash flow from operations and capital spending; • Certain non-GAAP measures as defined in our quarterly earnings releases and investor presentations; • Customer service reliability; • External and internal quality indicators; and • Employee development. Critical Accounting Estimates Our significant accounting policies, including the assumptions and judgment underlying them, are disclosed in Note 1 of the Notes to Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgments. Goodwill Goodwill was tested for impairment on an annual basis in the fourth quarter and between annual tests if a triggering event occurred. The impairment analysis was performed at the reporting unit level. As of December 31, 2021 and 2020, there was no remaining goodwill balance due to impairments recognized during the year ended December 31, 2020. An impairment charge was calculated based on a reporting unit’s carrying amount in excess of its fair value (i.e., step 1 of the two-step impairment test). If the carrying value of the reporting unit including goodwill was less than the fair value of the reporting unit, the goodwill was not considered impaired. Reporting units for the purpose of goodwill impairment testing were the same as our operating segments (Mobile Solutions and Power Solutions). Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of certain foreign subsidiaries as these earnings are not deemed to be permanently reinvested. We recognize income tax positions that meet the more likely than not threshold and accrue interest and potential penalties related to unrecognized income tax positions which are recorded as a component of the provision (benefit) for income taxes. We eliminate disproportionate tax effects from accumulated other comprehensive income (loss) when the circumstances upon which they are premised cease to exist. The calculation of tax assets, liabilities, and expenses under U.S. GAAP is largely dependent on management judgment of the current and future deductibility and utilization of taxable expenses and benefits using a more likely than not threshold. Specifically, the realization of deferred tax assets and the certainty of tax positions taken are largely dependent upon 24 Table of Content s management weighting the current positive and negative evidence for recording tax benefits and expenses. A significant piece of objective negative evidence evaluated is cumulative losses incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future earnings growth. We have recorded a U.S. deferred tax liability for foreign earnings which are not indefinitely reinvested. We treat global intangible low-taxed income (“GILTI”) as a periodic charge in the year in which it arises and therefore do not record deferred taxes for basis differences associated with GILTI. In the event that the actual outcome from future tax consequences differs from management estimates and assumptions or management plans and positions are amended, the resulting change to the provision for income taxes could have a material impact on the consolidated results of operations and financial position. (See Note 1 and Note 10 of the Notes to Consolidated Financial Statements). Impairment of Long-Lived Assets Long-lived tangible and intangible assets subject to depreciation or amortization are tested for recoverability when changes in circumstances indicate the carrying value of these assets may not be recoverable. A test for recoverability is also performed when management has committed to a plan to dispose of a reporting unit or asset group. Assets to be held and used are tested for recoverability when indications of impairment are evident. Recoverability of a long-lived tangible or intangible asset is evaluated by comparing its carrying value to the future estimated undiscounted cash flows expected to be generated by the asset or asset group. If the asset is deemed not recoverable, then the asset is considered impaired and adjusted to fair value which is then depreciated or amortized over its remaining useful life. Assets to be disposed of are recorded at the lesser of carrying value or fair value less costs of disposal. In assessing potential impairment for long-lived assets, we consider forecasted financial performance based, in large part, on management business plans and projected financial information which are subject to a high degree of management judgment and complexity. Future adverse changes in market conditions or adverse operating results of the underlying assets could result in having to record additional impairment charges not previously recognized. Fair Value Measurements Fair value is an exit price representing the expected amount that an entity would receive to sell an asset or pay to transfer a liability in an orderly transaction with market participants at the measurement date. Fair value principles prioritize valuation inputs across three broad levels. An asset or liability’s classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement. Results of Operations Factors That May Influence Results of Operations The following paragraphs describe factors that have influenced results of operations for the year ended December 31, 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. New and more easily transmitted variants of COVID-19, such as the Delta and Omicron variants, have emerged and spread in the United States and across the globe. The impact of these variants 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 new variants, and the response by governmental bodies and regulators. Further surges in COVID-19 infection rates could result in the reinstatement of directives and mandates requiring businesses to again curtail or cease normal operations. The spread of COVID-19 and the responses thereto have created a disruption in the manufacturing, delivery, and overall supply chain of automobile manufacturers and suppliers, as well as disruption within the power industry. Global vehicle production decreased significantly in 2020, but production ramped back up in 2021. 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 increased our inventories in the current year to mitigate the risk of supply chain disruption for our customers. In addition, power shortages in China have resulted in widespread blackouts, often without any or little notice. These blackouts caused us and other manufacturers in the region to shut down production until power was 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 25 Table of Content s 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. We have implemented training and recruiting programs to address labor shortages. We are focused on the health and 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. 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, vaccination status may affect workforce availability ranging from absences for vaccinations, booster shots, and recovery from side-effects. 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. We continue to streamline facilities and implement cost savings initiatives. Capital expenditures and travel costs remain at relatively low levels. We refinanced our credit facility and preferred stock in the first quarter of 2021 as discussed below. Credit Facilities On March 22, 2021, we entered into a new $150.0 million term loan facility (the “Term Loan Facility”) and a new $50.0 million asset backed credit facility (the “ABL Facility”). The proceeds from the Term Loan Facility were used to prepay the amounts outstanding on our previous term loans. The previous credit facility was terminated and consisted of a Senior Secured Term Loan, Incremental Term Loan, and Senior Secured Revolver. No amounts were outstanding on the Senior Secured Revolver at the time of termination. 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 December 31, 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. The Term Loan Facility is collateralized by all of our assets. 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 December 31, 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. The availability of credit under the ABL Facility is limited by a borrowing base calculation derived from accounts receivable and inventory held in the United States. Outstanding borrowings under the ABL Facility bear interest on a variable rate structure plus an interest rate spread that is based on the average amount of aggregate revolving commitment available. The variable borrowing rate is either 1) LIBOR plus an applicable margin of 1.75% or 2.00%, depending on availability, or 2) the greater of the federal funds rate or prime, plus an applicable margin of 0.75% or 1.00%, depending on availability. We may elect whether to use one-month, three-month, or six-month LIBOR, subject to a 0.50% floor. 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 December 31, 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. As of December 31, 2021, we had no outstanding borrowings under the ABL Facility, $11.2 million of outstanding letters of credit, and $36.0 million available for future borrowings under the ABL Facility. 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 December 31, 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. The Series D Preferred Stock has an initial liquidation preference of $1,000 per share and is redeemable at our 26 Table of Content s option in cash at a redemption price equal to the liquidation preference then in effect. Series D Preferred Stock shares earn cash dividends at a rate of 10.0% per year, payable quarterly in arrears, accruing whether or not earned or declared. If no cash dividend is paid, then the liquidation preference per share effective on the dividend date increases by 12.0% per year. On March 22, 2026, the cash dividend rate and in-kind dividend rate increase by 2.5% per year. Cash dividends are required beginning on September 30, 2027. Net cash proceeds of $61.8 million from the issuance of the Series D Preferred Stock, along with part of the proceeds from the Term Loan Facility, were used to redeem all of the outstanding shares of the Company’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”). The total redemption cash payment was $118.4 million. Sales Concentration We recognized sales from a single customer of $49.7 million, or 10% of consolidated net sales, during the year ended December 31, 2019. Revenues from this customer are in our Mobile Solutions segment and were less than 10% of consolidated net sales during the years ended December 31, 2021 and 2020. Financial Data as a Percentage of Net Sales The following table presents the percentage of our net sales represented by statement of operations line item. Years Ended December 31, 2021 2020 2019 Net sales 100.0 % 100.0 % 100.0 % Cost of sales (exclusive of depreciation and amortization shown separately below) 81.7 % 80.4 % 80.2 % Selling, general, and administrative expense 10.8 % 13.6 % 14.1 % Depreciation and amortization 9.7 % 10.7 % 9.2 % Goodwill impairment — % 21.7 % — % Other operating expense (income), net (0.2) % 1.1 % 0.2 % Loss from operations (1.9) % (27.5) % (3.6) % Interest expense 2.7 % 4.4 % 2.7 % Loss on extinguishment of debt and write-off of debt issuance costs 0.5 % — % 0.1 % Derivative payments on interest rate swap 0.4 % 1.0 % — % Loss on interest rate swap 0.4 % 2.7 % — % Other expense (income), net (1.1) % — % 0.2 % Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (4.7) % (35.6) % (6.6) % Benefit (provision) for income taxes 0.4 % 2.1 % (0.1) % Share of net income from joint venture 1.3 % 0.8 % 0.3 % Loss from continuing operations (3.0) % (32.6) % (6.3) % Income (loss) from discontinued operations, net of tax 0.3 % 9.1 % (3.3) % Net loss (2.8) % (23.5) % (9.5) % 27 Table of Content s Year Ended December 31, 2021, compared to the Year Ended December 31, 2020 Years Ended December 31, 2021 2020 $ Change Net sales $ 477,584 $ 427,534 $ 50,050 Organic growth $ 47,862 Foreign exchange effects 2,188 Cost of sales (exclusive of depreciation and amortization shown separately below) 389,995 343,594 46,401 Selling, general, and administrative expense 51,489 58,055 (6,566) Depreciation and amortization 46,195 45,680 515 Goodwill impairment — 92,942 (92,942) Other operating expense (income), net (1,091) 4,720 (5,811) Loss from operations (9,004) (117,457) 108,453 Interest expense 12,664 18,898 (6,234) Loss on extinguishment of debt and write-off of debt issuance costs 2,390 144 2,246 Derivative payments on interest rate swap 1,717 4,133 (2,416) Loss on interest rate swap 2,033 11,669 (9,636) Other income, net (5,366) (213) (5,153) Loss from continuing operations before benefit for income taxes and share of net income from joint venture (22,442) (152,088) 129,646 Benefit for income taxes 1,756 8,972 (7,216) Share of net income from joint venture 6,261 3,626 2,635 Loss from continuing operations (14,425) (139,490) 125,065 Income from discontinued operations, net of tax 1,200 38,898 (37,698) Net loss $ (13,225) $ (100,592) $ 87,367 Net Sales . Net sales increased by $50.1 million, or 12%, during the year ended December 31, 2021, compared to the year ended December 31, 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 $2.2 million. 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 year ended December 31, 2020. Cost of Sales. Cost of sales increased by $46.4 million, or 14%, during the year ended December 31, 2021, compared to the year ended December 31, 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, uneven customer ordering patterns (particularly in the automotive market), and inflation. 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 $6.6 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to cost reduction initiatives that drove decreases in personnel costs, professional fees, and office occupancy costs. Goodwill Impairment. We recognized goodwill impairment of $92.9 million at Power Solutions in 2020, resulting in no remaining goodwill balance. Other Operating Expense (Income), Net. Other operating expense (income), net, changed favorably by $5.8 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. 28 Table of Content s Interest Expense. Interest expense decreased by $6.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to settlements on the interest rate swap that was terminated in connection with our debt refinancing in 2021. This decrease was partially offset by higher interest rates on debt in the current year. Years Ended December 31, 2021 2020 Interest on debt $ 10,800 $ 7,714 Interest rate swap settlements 77 8,906 Amortization of debt issuance costs and discount 1,381 1,702 Capitalized interest (300) (204) Other 706 780 Total interest expense $ 12,664 $ 18,898 Loss on Extinguishment of Debt and Write-off of Debt Issuance Costs. We recognized $2.4 million for the write-off of unamortized debt issuance costs that were associated with the credit facility that was terminated in March 2021. Derivative Payments on Interest Rate Swap. Derivative payments on interest rate swap represent cash settlements of the interest rate swap after hedge accounting was discontinued in October 2020. Prior to October 2020, interest rate swap settlements were recognized in interest expense. 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 . Loss on interest rate swap represents mark-to-market adjustments on the interest rate swap after hedge accounting was discontinued in October 2020 as well as amortization of the residual loss in accumulated other comprehensive income as monthly settlements occur. Prior to October 2020, mark-to-market adjustments on the interest rate swap were recognized in accumulated other comprehensive income. 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 Income, Net. Other income, net, changed favorably by $5.2 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, due to noncash derivative mark-to-market gains and more favorable foreign exchange effects associated with intercompany borrowings, partially offset by a litigation settlement reached during the second quarter of 2021. Benefit for Income Taxes. Our effective tax rate was 7.8% for the year ended December 31, 2021, compared to 5.9% for the year ended December 31, 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 impairment of nondeductible goodwill in 2020. Note 10 in the Notes to 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 year ended December 31, 2021, compared to the year ended December 31, 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 $94.8 million and $68.2 million for the years ended December 31, 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. Income from Discontinued Operations, Net of Tax . The largest component of income from discontinued operations, net of tax, during the year ended December 31, 2020, was the $214.9 million gain on sale of our Life Sciences business. Note 2 in the Notes to Consolidated Financial Statements provides details of the results of discontinued operations. We recognized a gain of $1.2 million during the year ended December 31, 2021, due to the favorable resolution of a tax indemnity. 29 Table of Content s Results by Segment MOBILE SOLUTIONS Years Ended December 31, 2021 2020 $ Change Net sales $ 285,863 $ 256,360 $ 29,503 Organic growth $ 27,649 Foreign exchange effects 1,854 Income from operations $ 9,039 $ 5,228 $ 3,811 Net sales increased by $29.5 million during the year ended December 31, 2021, compared to the year ended December 31, 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. In the fourth quarter of 2021, we recognized a customer pricing settlement. Income from operations increased by $3.8 million compared to the same period in the prior year primarily due to contribution generated from the above-noted sales increase and customer pricing settlement. Moreover, we built up inventory in the year ended December 31, 2021, which resulted in 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), material and labor inflation, and variable cost inefficiencies associated with global supply chain interruptions and uneven customer ordering patterns, particularly in the automotive market. POWER SOLUTIONS Years Ended December 31, 2021 2020 $ Change Net sales $ 191,800 $ 171,269 $ 20,531 Organic growth $ 20,197 Foreign exchange effects 334 Goodwill impairment $ — $ (92,942) $ 92,942 Income (loss) from operations $ 6,493 $ (85,983) $ 92,476 Net sales increased by $20.5 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to higher demand within our end markets, all of which were negatively impacted by the COVID-19 pandemic in the prior year. 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 to the year ended December 31, 2020. In addition, revenue increased during the fourth quarter of 2021 due to prices increases with certain customers. Income (loss) from operations increased by $92.5 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 above-noted higher sales volume. These favorable impacts were partially offset by an adverse shift in sales mix; higher material costs as a result of inflation; operating inefficiencies in our aerospace, defense, and medical business; 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. Changes in Financial Condition from December 31, 2020, to December 31, 2021 Overview From December 31, 2020, to December 31, 2021, total assets decreased by $45.9 million primarily due to normal depreciation and amortization of fixed assets, lease right-of-use assets, and intangible assets. We used $15.4 million of cash to settle the ineffective interest rate swap as part of our refinancing during the first quarter of 2021. Accounts receivable decreased as a result of successful collection efforts, accelerated payment terms, and lower sales in the fourth quarter of 2021 compared with the fourth quarter of 2020. These decreases were partially offset by capital expenditures and increases in inventories during the year ended December 31, 2021. Inventories increased as a result of a strategic decision to mitigate potential supply chain issues for our customers. The investment in the Chinese joint venture also increased as a result of undistributed earnings of the joint venture. 30 Table of Content s From December 31, 2020, to December 31, 2021, total liabilities increased by $35.4 million, primarily due to the refinancing of our credit facilities, partially offset by the termination of the ineffective interest rate swap. Cash Flows Cash provided by operations was $15.6 million for the year ended December 31, 2021, compared with cash provided by operations of $15.5 million for the year ended December 31, 2020. Operating activities during 2021 included building inventory levels as a result of a strategic decision to mitigate potential supply chain issues for our customers. Net payments for income taxes were $5.4 million higher in the year ended December 31, 2021 when compared to 2020. The increased bonus payout to our employees during 2021 also impacted operating activities. Operating activities were positively impacted by the timing of disbursements on accounts payable compared to 2020, as well as increased income generated from operations during the year ended December 31, 2021. Cash used in investing activities was $36.1 million for the year ended December 31, 2021, compared with cash provided by investing activities of $719.3 million for the year ended December 31, 2020. The difference was primarily due to cash received from the sale of the Life Sciences business in 2020. Cash provided by financing activities was $2.6 million for the year ended December 31, 2021, compared with cash used by financing activities of $714.9 million for the year ended December 31, 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 prepayment of debt in 2020 with proceeds from the sale of the Life Sciences business. Liquidity and Capital Resources Credit Facility The principal amount outstanding under our Term Loan Facility as of December 31, 2021, was $148.9 million, without regard to unamortized debt issuance costs and discount. As of December 31, 2021, we had $36.0 million available for future borrowings under the ABL Facility. This amount of borrowing capacity is net of $11.2 million of outstanding letters of credit at December 31, 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. If one-month LIBOR is less than 1.000%, then we pay 7.875% per annum in interest. 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 December 31, 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 December 31, 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 December 31, 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. On March 3, 2022, we amended our Term Loan Facility, which increases the quarterly maximum consolidated net leverage ratio beginning with the first quarter of 2022. Hedging On July 22, 2021, we entered into a fixed-rate interest rate swap agreement to change the LIBOR-based component of the interest rate on a portion of our variable rate debt to a fixed rate of 1.291% (the “2021 Swap”). The 2021 Swap has a notional amount of $60.0 million and a maturity date of July 31, 2024. The objective of the 2021 Swap is to eliminate the variability of cash flows in interest payments on the first $60.0 million of variable rate debt attributable to changes in benchmark one-month LIBOR interest rates. Refer to Note 19 in the Notes to Consolidated Financial Statements for further discussion about the interest rate swap. Our arrangements with customers typically provide that payments are due within 30 to 60 days following the date of shipment. We invoice and receive payment from many of our customers in various other currencies. Additionally, we are party to various third party and intercompany loans, payables, and receivables denominated in currencies other than the U.S. dollar. As a result of these sales, loans, payables, and receivables, we are exposed to foreign exchange transaction and translation risk. Various strategies to manage this risk are available to management, including producing and selling in local currencies and hedging programs. As of December 31, 2021, no currency derivatives were in place. In addition, a strengthening of the U.S. dollar against foreign currencies could impair our ability to compete with international competitors for foreign as well as domestic sales. 31 Table of Content s Functional Currencies We currently have foreign operations in Brazil, China, France, Mexico, and Poland. The local currency of each foreign facility is also its functional currency. Seasonality and Fluctuation in Quarterly Results General economic conditions impact our business and financial results, and certain businesses experience seasonal and other trends related to the industries and end markets that they serve. For example, European sales are often weaker in the summer months as customers slow production and sales to original equipment manufacturers are often stronger immediately preceding and following the launch of new products. However, as a whole, we are not materially impacted by seasonality.