What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-05 · 78 added, 211 removed, 94 unchanged (75% of the section changed)

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Such factors include, among others, general economic conditions and economic conditions in the industrial sector;

the impacts of the COVID-19 pandemic on the Company’s financial condition, business operations and liquidity;

the impacts of the COVID-19 pandemic on our financial condition, business operations and liquidity;

competitive influences;

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quality issues;

availability of raw materials;

currency and other risks associated with international trade;

material changes in the costs and availability of raw materials;

economic, social, political and geopolitical instability, currency fluctuation, and other risks of doing business outside of the United States;

our dependence on certain major customers, some of whom are not parties to long-term agreements (and/or are terminable on short notice);

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new laws and governmental regulations;

the impact of climate change on our operations;

cyber liability or potential liability for breaches of our or our service providers’ information technology systems or business operations disruptions;

and other risk factors and cautionary statements listed from time-to-time in our periodic reports filed with the Securities and Exchange Commission.

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Factors That May Influence Results of Operations

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.

The following paragraphs describe factors that have influenced results of operations for the three months ended March 31, 2022, 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.

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.

Although the United States and global economy continue to recover from the COVID-19 pandemic, we cannot predict when a full economic recovery will occur.

The impact of new and more easily transmitted variants of COVID-19, such as the Delta and Omicron 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 any 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 has since ramped back up.

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 have been increasing 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 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.

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 during 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.

A worldwide semiconductor chip shortage

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continues 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.

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 safety of our employees, customers, and suppliers.

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.

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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.

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, as described in our 2020 Annual Report.

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 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 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.

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 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.

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 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 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 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.

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.

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

Consolidated Results

Three Months Ended September 30,

2021 2020 $ Change

Net sales $ 117,244 $ 113,761 $ 3,483

Organic growth $ 2,155

Foreign exchange effects 1,328

Cost of sales (exclusive of depreciation and amortization shown separately below) 98,642 90,076 8,566

Selling, general, and administrative expense 12,181 13,745 (1,564)

Depreciation and amortization 11,605 11,435 170

Other operating income, net (572) (39) (533)

Loss from operations (4,612) (1,456) (3,156)

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

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

Benefit (provision) for income taxes (375) 8,715 (9,090)

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

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 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 $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 $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 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 $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

Interest rate swap settlements 32 4,100

Amortization of debt issuance costs and discount 331 419

Capitalized interest (89) (35)

Other 158 191

Total interest expense $ 3,578 $ 6,873

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 (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.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended September 30,

2021 2020 $ Change

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

Organic decline $ (2,652)

Foreign exchange effects 867

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

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 September 30,

2021 2020 $ Change

Net sales $ 48,680 $ 43,415 $ 5,265

Organic growth $ 4,804

Foreign exchange effects 461

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

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.

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

Three Months Ended March 31, 2022 compared to the Three Months Ended March 31, 2021

Consolidated Results

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 $ Change

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Depreciation and amortization 11,429 11,568 (139)

Goodwill impairment — 92,942 (92,942)

Other operating expense (income), net 2,026 (5) 2,031

Loss from operations (5,222) (116,483) 111,261

Income (loss) from operations (3,420) 978 (4,398)

Interest expense 3,439 2,024 1,415

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

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)

Other income, net (2,996) (122) (2,874)

Loss before benefit (provision) for income taxes and share of net income from joint venture (3,863) (7,064) 3,201

Benefit (provision) for income taxes (1,531) 756 (2,287)

Share of net income from joint venture 2,092 1,395 697

Loss from continuing operations (13,681) (124,003) 110,322

Loss from discontinued operations, net of tax — (123,966) 123,966

Net loss $ (3,302) $ (4,913) $ 1,611

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.

Net sales increased by $1.3 million, or 1%, during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand.

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

Cost of Sales.

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.

Cost of sales increased by $4.9 million, or 5%, during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to increased material costs.

In addition, the prior year cost of sales benefited from favorable overhead absorption.

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Selling, General, and Administrative Expense.

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.

We recognized goodwill impairment of $92.9 million at Power Solutions in 2020, resulting in no remaining goodwill balance.

Selling, general, and administrative expense decreased by $1.1 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to lower personnel costs.

Other Operating Expense (Income), Net.

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.

Other operating expense (income), net, changed unfavorably by $2.0 million primarily due to a legal settlement reached during the three months ended March 31, 2022.

Interest Expense.

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 expense increased by $1.4 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to higher interest rates and a larger average debt balance as a result of the credit facility and preferred stock refinance during the first quarter of 2021.

Three Months Ended March 31,

Interest on debt $ 3,071 $ 1,439

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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.

We recognized $2.4 million in the first quarter of 2021 for the write-off of unamortized debt issuance costs 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.

Derivative payments on interest rate swap represent cash settlements of an interest rate swap which 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 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.

We recognized a $2.0 million loss in the first quarter of 2021 related to the termination of the previous interest rate swap in March 2021.

Other Income, Net.

Other income, net, changed favorably by $2.9 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, due to noncash derivative mark-to-market gains and favorable foreign exchange effects associated with intercompany borrowings.

Benefit (Provision) For Income Taxes .

Our effective tax rate was (39.6)% for the three months ended March 31, 2022, compared to 10.7% for the three months ended March 31, 2021.

The rate for the three months ended March 31, 2022 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.

Share of Net Income from Joint Venture.

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.

Share of net income from the JV increased during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to higher sales volume.

The JV, in which we own a 49% investment, recognized net sales of $26.5 million and $23.4 million for the three months ended March 31, 2022 and 2021, respectively.

Results by Segment

MOBILE SOLUTIONS

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 $ Change

Net sales $ 76,070 $ 77,776 $ (1,706)

Organic growth $ 36,937

Organic decline $ (1,865)

Foreign exchange effects 159

Income from operations $ 1,969 $ 6,090 $ (4,121)

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.

Net sales decreased by $1.7 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to lower sales volume, partially offset by increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand and favorable foreign exchange effects of $0.2 million.

Income from operations decreased by $4.1 million during the three months ended March 31, 2022, compared to the same period in the prior year primarily due to lower sales volume and variable cost inefficiencies associated with supply chain interruptions,

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uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.

In addition, prior year income from operations benefited by favorable overhead absorption as the result of a build up of inventory during the three months ended March 31, 2021.

POWER SOLUTIONS

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 $ Change

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Organic growth $ 2,936

Foreign exchange effects 488

Goodwill impairment $ — $ (92,942) $ 92,942

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

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.

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 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 $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 $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.

Income from operations $ 364 $ 2,432 $ (2,068)

Net sales increased by $2.9 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due increased pricing to recover certain inflationary costs.

Income from operations decreased by $2.1 million during the three months ended March 31, 2022 compared to the same period in the prior year, primarily due to higher selling, general and administrative costs and a legal settlement reached during the three months ended March 31, 2022.

The increase in these expenses was partially offset by an increase in favorable overhead absorption during the first quarter of 2022.

Changes in Financial Condition from December 31, 2021 to March 31, 2022

From December 31, 2021 to March 31, 2022, total assets increased by $16.7 million primarily due to increases in accounts receivable and inventories during the three months ended March 31, 2022.

The increase in accounts receivable is due to higher sales during the current quarter compared with the fourth quarter of 2021.

Inventories increased due to higher sales in the current quarter compared with the fourth quarter of 2021 and due to higher material costs.

From December 31, 2021 to March 31, 2022, total liabilities increased by $15.4 million, primarily due to increases in accounts payable, accrued salaries and benefits and the accrual for a legal settlement reached during the first quarter of 2022.

The increase in accounts payable is attributed to higher inventory balances at March 31, 2022.

Working capital, which consists of current assets less current liabilities, was $125.5 million as of March 31, 2022, compared to $122.3 million as of December 31, 2021.

The increase in working capital was primarily due to the increase in accounts receivable and inventories discussed above, partially offset by a higher balance of accounts payable and other current liabilities.

Cash used in operations was $5.2 million for the three months ended March 31, 2022, compared with cash provided by operations of $7.9 million for the three months ended March 31, 2021.

The difference was primarily due to an increase in accounts receivable related to higher sales during the current quarter compared with the fourth quarter of 2021.

Cash used in investing activities was $4.2 million for the three months ended December 31, 2021, compared with cash used in investing activities of $20.9 million for the three months ended March 31, 2021.

The difference was primarily due to cash paid to settle the interest rate swap in the first quarter of 2021.

Cash used in financing activities was $1.5 million for the three months ended December 31, 2021, compared with cash provided by financing activities of $9.6 million for the three months ended March 31, 2021.

The difference was primarily due to the debt and preferred stock refinancing in the first quarter of 2021.

Liquidity and Capital Resources

Credit Facilities

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 principal amount outstanding under our Term Loan Facility as of March 31, 2022, was $148.5 million, without regard to unamortized debt issuance costs and discount.

As of March 31, 2022, we had $37.8 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $11.1 million of outstanding letters of credit at March 31, 2022, 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 1.00%, then we pay the variable one-month LIBOR plus an applicable margin of

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.

Table of Conte nts

Based on the interest rate in effect at March 31, 2022, 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 September 30, 2021, was 2.25%.

The interest rate in effect at March 31, 2022, was 2.25%.

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

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

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of March 31, 2022.

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

3 unchanged sentences

However, as a whole, we are not materially impacted by seasonality.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Policies

Critical Accounting Estimates

Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the 2021 Annual Report, including those policies as discussed in Note 1 to the Notes to Consolidated Financial Statements included in the 2021 Annual 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

See Note 1 in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.

There have been no material changes to these policies during the three months ended March 31, 2022.

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