What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 126 added, 70 removed, 102 unchanged (66% of the section changed)

16 unchanged sentences

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

inflationary pressures and changes in the cost or availability of materials, supply chain shortages and disruptions, and the availability of labor;

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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Factors That May Influence Results of Operations

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.

The following paragraphs describe factors that have influenced results of operations for the six months ended June 30, 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

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 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.

The COVID-19 pandemic continues to impact our business operations and our customers' and suppliers' ability to operate at normal levels.

Disruptions in normal operating levels continue to create supply chain disruptions and inflationary cost pressures within our end-markets.

We anticipate supply chain constraints and the inflationary environment will continue during 2022.

The spread of COVID-19 and the responses thereto have created, and could continue to create, a disruption in the manufacturing, delivery, and overall supply chain of automobile manufacturers and suppliers, as well as disruption within the power industry.

During the first half of 2022, production continued 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.

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

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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

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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 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.

Inflation triggered by the unprecedented economic impact of the COVID-19 pandemic and current geopolitical instability has increased our manufacturing costs, particularly labor and materials, in 2022 and is expected to continue into future periods.

We have undertaken a number of permanent and temporary actions to manage the evolving situation.

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Capital expenditures and travel costs remain at relatively low levels.

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

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

We have implemented training and recruiting programs to address labor shortages, but, significant workforce availability challenges could have a material effect on our business operations, financial results, liquidity, and financial position.

COVID-19 and its impacts are unprecedented and continuously evolving, and the long-term impacts to our business, financial condition, results of operations and cash flows are still uncertain.

Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021

Consolidated Results

Three Months Ended March 31,

Three Months Ended June 30,

2022 2021 $ Change

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Depreciation and amortization 11,340 11,687 (347)

Other operating income, net (147) (324) 177

Loss from operations (4,514) (1,588) (2,926)

Interest expense 3,488 3,573 (85)

Other expense (income), net (67) 1,680 (1,747)

Loss before benefit (provision) for income taxes and share of net income from joint venture (7,935) (6,841) (1,094)

Benefit (provision) for income taxes (1,051) 231 (1,282)

Share of net income from joint venture 419 1,219 (800)

Net loss $ (8,567) $ (5,391) $ (3,176)

Net sales increased by $2.2 million, or 1.8%, during the three months ended June 30, 2022, compared to the three months ended June 30, 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 lower demand in Mobile Solutions which was impacted by the war in Ukraine, COVID disruptions in China, continued supply chain disruptions and unfavorable foreign exchange effects of $0.5 million.

Cost of Sales.

Cost of sales increased by $4.1 million, or 4.1%, during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to inflationary costs, partially offset by lower sales volume.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense increased by $1.2 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to legal fees related to litigation, higher stock compensation expense and higher professional fees.

These increases were partially offset by the reduction in severance and retention costs incurred in the prior year.

Interest Expense.

Interest expense decreased by $0.1 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to a higher amount of interest expense that was capitalized in the current quarter compared with the second quarter of 2021.

Three Months Ended June 30,

Interest on debt $ 3,109 $ 3,110

Interest rate swap settlements 38 —

Amortization of debt issuance costs and discount 330 313

Capitalized interest (175) (80)

Other 186 230

Total interest expense $ 3,488 $ 3,573

Other Expense, Net.

Other expense (income), net changed favorably by $1.7 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, due to noncash derivative mark-to-market gains during 2022 and the impact of a litigation settlement reached during the second quarter of 2021.

These impacts were partially offset by unfavorable foreign exchange effects associated with intercompany borrowings.

Benefit (Provision) For Income Taxes .

Our effective tax rate was (13.2)% for the three months ended June 30, 2022, compared to 3.4% for the three months ended June 30, 2021.

The rate for the three months ended June 30, 2022 was unfavorably impacted due to the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and 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 decreased during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to decreased profits resulting from lower sales and inflationary costs in the current quarter.

The JV, in which we own a 49% investment, recognized net sales of $22.9 million and $22.3 million for the three months ended June 30, 2022 and 2021, respectively.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended June 30,

2022 2021 $ Change

Net sales $ 73,350 $ 73,886 $ (536)

Organic decline $ (75)

Foreign exchange effects (461)

Income from operations $ 1,729 $ 2,509 $ (780)

Net sales decreased by $0.5 million, or (0.7)%, during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to lower sales of diesel components due to lower European demand which is impacted by the war in Ukraine, pandemic interruptions in China, lost sales associated with certain fuel systems reaching end of production, and unfavorable foreign exchange effects of $0.5 million.

These unfavorable impacts were partially offset by increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand.

Income from operations decreased by $0.8 million during the three months ended June 30, 2022, compared to the same period in the prior year, primarily due to inflationary costs not fully recovered in customer pricing and variable cost inefficiencies associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.

POWER SOLUTIONS

Three Months Ended June 30,

2022 2021 $ Change

Net sales $ 52,049 $ 49,271 $ 2,778

Organic growth $ 2,812

Foreign exchange effects (34)

Income from operations $ 1,430 $ 2,875 $ (1,445)

Net sales increased by $2.8 million, or 5.6%, during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

The increase in sales was the result of increased electric component sales, which were up 15.6% compared with the second quarter of 2021, primarily due to higher customer pricing to recover inflationary costs and improved volume, offset by lower sales to automotive and aerospace and defense customers.

Income from operations decreased by $1.4 million during the three months ended June 30, 2022 compared to the same period in the prior year, primarily due to inflationary costs which were not fully recovered from pricing, variable cost inefficiencies associated with supply chain interruptions and uneven customer ordering patterns.

Six Months Ended June 30, 2022, compared to the Six Months Ended June 30, 2021

Consolidated Results

Six Months Ended June 30,

2022 2021 $ Change

Net sales $ 253,429 $ 249,961 $ 3,468

Organic growth $ 3,804

Foreign exchange effects $ (336)

Cost of sales (exclusive of depreciation and amortization shown separately below) 208,467 199,485 $ 8,982

Selling, general, and administrative expense 28,248 28,160 88

Depreciation and amortization 22,769 23,255 (486)

Other operating expense (income), net 1,879 (329) 2,208

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

Loss from operations (7,934) (610) (7,324)

Interest expense 6,927 5,597 1,330

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

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

Other expense (income), net (3,063) 1,558 (4,621)

Loss before benefit (provision) for income taxes and share of net income from joint venture (11,798) (13,905) 2,107

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Net loss $ (11,869) $ (10,304) $ (1,565)

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.

Net sales increased by $3.5 million, or 1.4%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand.

Cost of Sales.

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.

Table of Conte nts

Cost of sales increased by $9.0 million, or 4.5%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to inflationary costs, partially offset by lower sales volume.

Selling, General, and Administrative Expense.

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.

Selling, general, and administrative expense increased by $0.1 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to legal fees related to litigation, higher stock compensation expense and higher professional fees.

These increases were partially offset by the reduction in severance and retention costs incurred in the prior year.

Other Operating Expense (Income), Net.

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.

Other operating expense (income), net changed unfavorably by $2.2 million primarily due to a legal settlement reached during the first quarter of 2022.

Interest Expense.

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 expense increased by $1.3 million during the six months ended June 30, 2022, compared to the six months ended June 30, 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.

Six Months Ended June 30,

Interest on debt $ 6,180 $ 4,549

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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.

Other Expense (Income), Net.

Other expense (income), net changed favorably by $4.6 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, due to noncash derivative mark-to-market gains during 2022 and the impact of a litigation settlement reached during the second quarter of 2021.

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.

Our effective tax rate was (21.9)% for the six months ended June 30, 2022, compared to 7.1% for the six months ended June 30, 2021.

The rate for the six months ended June 30, 2022 was unfavorably impacted by the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries and 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 six months ended June 30, 2021 was favorably impacted by the change in assertion and reduction in the accrual of tax on non-permanently reinvested unremitted earnings of foreign subsidiaries.

Share of Net Income from Joint Venture.

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.

Share of net income from the JV decreased during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to decreased profits resulting from inflationary costs partially offset by higher sales volume.

The JV, in which we own a 49% investment, recognized net sales of $49.4 million and $45.7 million for the six months ended June 30, 2022 and 2021, respectively.

Results by Segment

MOBILE SOLUTIONS

Three Months Ended March 31,

Six Months Ended June 30,

2022 2021 $ Change

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Income from operations $ 3,698 $ 8,599 $ (4,901)

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,

Table of Conte nts

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.

Net sales decreased by $2.2 million, or (1.5)%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to lower sales of diesel components due to lower European demand which was impacted by the war in Ukraine, pandemic interruptions in China, lost sales associated with certain fuel systems reaching end of production, and unfavorable foreign exchange effects of $0.3 million.

These unfavorable impacts were partially offset by increased pricing to recover certain inflationary costs and underutilized fixed costs caused by lower-than-expected customer demand.

Income from operations decreased by $4.9 million during the six months ended June 30, 2022 compared to the same period in the prior year, primarily due to inflationary costs not fully recovered in customer pricing and variable cost inefficiencies

associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.

POWER SOLUTIONS

Three Months Ended March 31,

Six Months Ended June 30,

2022 2021 $ Change

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Organic growth $ 5,748

Foreign exchange effects (34)

Income from operations $ 1,794 $ 5,307 $ (3,513)

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.

Net sales increased by $5.7 million, or 5.8%, during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to higher customer pricing to recover inflationary costs.

Income from operations decreased by $3.5 million during the six months ended June 30, 2022 compared to the same period in the prior year, primarily due to a $1.8 million litigation settlement to settle claims from 2016, inflationary costs which were not fully recovered from pricing, variable cost inefficiencies associated with supply chain interruptions, uneven customer ordering patterns, and labor constraints caused by pandemic interruptions.

Changes in Financial Condition from December 31, 2021 to June 30, 2022

From December 31, 2021 to June 30, 2022, total assets decreased by $5.9 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 increases in accounts receivable and inventories during the six months ended June 30, 2022.

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

The value of inventory increased due to higher material costs as well as higher quantities to maintain customer safety stock due to ongoing supply chain interruptions, especially in China.

From December 31, 2021 to June 30, 2022, total liabilities increased by $6.7 million, primarily due to increases in accounts payable attributed to higher inventory balances at June 30, 2022.

Working capital, which consists of current assets less current liabilities, was $122.3 million as of June 30, 2022 and December 31, 2021.

The balance of working capital remained constant as an increase in accounts receivable and inventory was offset by an increase in accounts payable and other current liabilities.

Cash used in operations was $2.5 million for the six months ended June 30, 2022, compared with cash provided by operations of $5.9 million for the six months ended June 30, 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.

Cash used in investing activities was $9.3 million for the six months ended June 30, 2022, compared with cash used in investing activities of $30.2 million for the six months ended June 30, 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.

Cash used in financing activities was $1.0 million for the six months ended June 30, 2022, compared with cash provided by financing activities of $6.9 million for the six months ended June 30, 2021.

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

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Credit Facilities

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 principal amount outstanding under our Term Loan Facility as of June 30, 2022, was $148.1 million, without regard to unamortized debt issuance costs and discount.

As of June 30, 2022, we had $36.9 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $2.0 million of outstanding borrowings and $11.1 million of outstanding letters of credit at June 30, 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.

If one-month LIBOR is less than 1.00%, then we pay 7.875% per annum in interest.

If one-month LIBOR exceeds 1.00%, then we pay the variable one-month LIBOR plus an applicable margin of

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.

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%.

Based on the interest rate in effect at June 30, 2022, and the fixed rate on the 2021 interest rate swap, annual interest payments would be approximately $12.4 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 March 31, 2022, was 2.25%.

The interest rate in effect at June 30, 2022, was 3.00%.

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

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

We were in compliance with all requirements under our Term Loan Facility and ABL Facility as of June 30, 2022.

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 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 material changes to these policies during the three months ended March 31, 2022.

There have been no material changes to these policies during the six months ended June 30, 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