What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-11 · 77 added, 179 removed, 161 unchanged (61% of the section changed)

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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.

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.

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• Cost reduction;

• optimization of manufacturing footprint;

• Efficient capital deployment;

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• 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:

• Costs subject to regional and global inflationary environments, including, but not limited to:

• Raw materials;

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• Global automotive production rates;

• Defense spending;

• Global industrial growth and economics;

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• Changes in tariff regulations.

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Management generally focuses on the following key indicators of operating performance

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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 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 are accounted for under the asset and liability method.

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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

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management weighting the current positive and negative evidence for recording tax benefits and expenses.

Specifically, the realization of deferred tax assets and the certainty of tax positions taken are largely dependent upon 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, 2022.

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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

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The following paragraphs describe factors that have influenced results of operations for the year ended December 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.

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

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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

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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.

Macroeconomic Conditions

We continue to monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from the COVID-19 pandemic, the ongoing Russia-Ukraine conflict, inflationary cost pressures, rising interest rates, supply chain disruptions, and labor shortages.

The COVID-19 pandemic and governmental responses thereto, including COVID-19 lockdowns in China, continue 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 that supply chain constraints and the inflationary environment, as impacted by the COVID-19 pandemic, will continue into 2023.

The Russia-Ukraine conflict also continues to create volatility in global financial and energy markets, creating energy and supply chain shortages, which has added to the inflationary pressures experienced by the global economy.

We continue to actively work with our suppliers to minimize impacts of supply shortages on our manufacturing capabilities.

Although our business has not been materially impacted by the ongoing Russia-Ukraine conflict we cannot predict the extent to which our operations, or those of our customers or suppliers, will be impacted in the future, or the ways in which the conflict may impact our business, financial condition, results of operations and cash flows.

economy is experiencing broad and rapid inflation and rising interest rates, as well as supply issues in materials, services, and labor due to economic policy, the COVID-19 pandemic and, more recently, the Russia-Ukraine conflict.

These impacts are likely to persist into 2023 and beyond.

We cannot predict the impact on the Company’s end-markets or input costs nor the ability of the Company to recover cost increases through pricing.

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.

During the years ended December 31, 2022, 2021 and 2020, no single customer accounted for 10% or more of consolidated net sales.

Financial Data as a Percentage of Net Sales

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Loss on interest rate swap — % 0.4 % 2.7 %

Other expense (income), net (1.1) % — % 0.2 %

Other income, net (1.0) % (1.1) % — %

Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (6.2) % (4.7) % (35.6) %

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Loss from continuing operations (5.2) % (3.0) % (32.6) %

Income (loss) from discontinued operations, net of tax 0.3 % 9.1 % (3.3) %

Income from discontinued operations, net of tax — % 0.3 % 9.1 %

Net loss (5.2) % (2.8) % (23.5) %

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Year Ended December 31, 2022 compared to the Year Ended December 31, 2021

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Net sales $ 498,738 $ 477,584 $ 21,154

Organic growth $ 47,862

Foreign exchange effects 2,188

Cost of sales (exclusive of depreciation and amortization shown separately below) 421,105 389,995 $ 31,110

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Depreciation and amortization 47,231 46,195 1,036

Goodwill impairment — 92,942 (92,942)

Other operating expense (income), net 1,859 (1,091) 2,950

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Other income, net (5,064) (5,366) 302

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)

Loss from continuing operations before benefit (provision) for income taxes and share of net income from joint venture (31,069) (22,442) (8,627)

Benefit (provision) for income taxes (1,621) 1,756 (3,377)

Share of net income from joint venture 6,592 6,261 331

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Net loss $ (26,098) $ (13,225) $ (12,873)

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.

Net sales increased by $21.2 million, or 4.4%, during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to increased pricing partially offset by lower volume and unfavorable foreign exchange effects of $4.2 million.

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.

Cost of sales increased by $31.1 million, or 8.0%, during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to inflationary costs and unfavorable overhead absorption, partially offset by lower sales volume and favorable foreign exchange effects.

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.

Selling, general, and administrative expense decreased by $1.9 million during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to lower incentive compensation, severance and retention expense.

These decreases were partially offset by higher stock compensation expense, higher professional fees and increased travel costs.

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.

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Other operating expense (income), net changed unfavorably by $3.0 million primarily due to a legal settlement reached during the first quarter of 2022 and the gain on the sale of a facility that was recognized in the third quarter of 2021.

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.

Interest expense increased by $2.4 million during the year ended December 31, 2022, compared to the year ended December 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 that occurred during the first quarter of 2021.

In addition, borrowings on the ABL Facility during the year ended December 31, 2022 contributed to higher interest expense.

These increases were partially offset by a

higher amount of interest expense that was capitalized in 2022 compared with the prior year and the positive impact of the interest rate swap.

Years Ended December 31,

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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.

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 $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.

Other income, net changed unfavorably by $0.3 million during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to lower derivative mark-to-market gains recognized in 2022, partially offset by the impact of a litigation settlement in 2021 and more favorable foreign exchange effects associated with intercompany borrowings.

Benefit (Provision) for Income Taxes.

Our effective tax rate was (5.2)% for the year ended December 31, 2022, compared to 7.8% for the year ended December 31, 2021.

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.

Our effective tax rate for the year ended December 31, 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 effective tax rate for the year ended December 31, 2022 was favorably impacted by the recording of interest income on the Company’s federal income tax refund requested as a result of the Coronavirus Aid, Relief, and Economic Security Act, as well as the recording of a benefit of a pending state refund claim.

Our effective tax rate for the year ended December 31, 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 and 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 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.

Share of net income from the JV increased by $0.3 million during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to higher sales partially offset by higher operating costs in the current year.

The JV, in which we own a 49% investment, recognized net sales of $101.6 million and $94.8 million for the years ended December 31, 2022 and 2021, 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.

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We recognized a gain of $1.2 million during the year ended December 31, 2021, due to the favorable resolution of a tax indemnity that resulted from the sale of our Life Sciences business in 2020.

Results by Segment

MOBILE SOLUTIONS

Years Ended December 31,

Year Ended December 31,

2022 2021 $ Change

Net sales $ 293,536 $ 285,863 $ 7,673

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.

Income (loss) from operations $ (2,165) $ 9,039 $ (11,204)

Net sales increased by $7.7 million, or 2.7%, during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to increased pricing, partially offset by lower sales of diesel components due to lower European demand which was impacted by the war in Ukraine, COVID-19 interruptions in China, lost sales associated with certain fuel systems reaching end of production, and unfavorable foreign exchange effects of $4.1 million.

Income (loss) from operations decreased by $11.2 million during the year ended December 31, 2022 compared to the prior year, primarily due to inflationary costs not fully recovered in customer pricing, unfavorable overhead absorption, start-up costs associated with Mexico new business launches, and variable cost inefficiencies associated with supply chain interruptions,

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

These decreases were partially offset by lower incentive compensation expense.

POWER SOLUTIONS

Years Ended December 31,

Year Ended December 31,

2022 2021 $ Change

Net sales $ 205,204 $ 191,800 $ 13,404

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.

Income from operations $ 3,536 $ 6,493 $ (2,957)

Net sales increased by $13.4 million, or 7.0%, during the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to higher customer pricing.

Income from operations decreased by $3.0 million during the year ended December 31, 2022 compared to the same period in the prior year, primarily due to a $1.8 million litigation settlement to resolve a claim from 2016, an increase in amortization expense, and the absence of a gain on the sale of a facility in the third quarter of 2021.

These decreases were partially offset by the impact of higher customer pricing.

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

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.

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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.

From December 31, 2021 to December 31, 2022, total assets decreased by $33.0 million primarily due to normal depreciation and amortization of fixed assets and intangible assets.

These decreases were partially offset by increases in accounts receivable and inventories during the year ended December 31, 2022.

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

The value of inventory increased due to higher material and labor 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 December 31, 2022, total liabilities decreased by $5.9 million, primarily due to lower employee incentive compensation accruals and a decrease in the valuation of certain derivatives.

These decreases were offset by an increase in accounts payable attributed to higher inventory balances at December 31, 2022.

Working capital, which consists of current assets less current liabilities, was $112.9 million as of December 31, 2022, compared to $122.3 million as of December 31, 2021.

The decrease was primarily due to increases in accounts payable and other current liabilities, partially offset by increases in accounts receivable and inventory.

Cash provided by operations was $7.7 million for the year ended December 31, 2022, compared with cash provided by operations of $15.6 million for the year ended December 31, 2021.

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.

The decrease was primarily due to an increase in net loss and increases in accounts receivable and inventory, partially offset by dividends received from our unconsolidated joint venture and lower income tax payments in 2022.

Cash used in investing activities was $17.5 million for the year ended December 31, 2022, compared with cash used in investing activities of $36.1 million for the year ended December 31, 2021.

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

Cash used in financing activities was $5.2 million for the year ended December 31, 2022, compared with cash provided by financing activities of $2.6 million for the year ended December 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 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.

The principal amount outstanding under our term loan facility (the “Term Loan Facility”) as of December 31, 2022, was $147.4 million, without regard to unamortized debt issuance costs and discount.

As of December 31, 2022, we had $35.3 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.

This amount of borrowing capacity is net of $1.0 million of outstanding borrowings and $11.0 million of outstanding letters of credit at December 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.

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.

We may be required to make additional principal payments annually that are calculated as a percentage of our excess cash flow, as defined by the lender, based on our net leverage ratio.

interest rate in effect at December 31, 2022, and the fixed rate on the 2021 interest rate swap, annual interest payments would be approximately $14.7 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%.

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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.

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

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.

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.

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.

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On March 3, 2023, we amended our Term Loan Facility and ABL Facility to adjust certain covenants under the agreements, as well as to change the applicable base rate on which interest expense is determined.

See Note 11 of the Notes to Consolidated Financial Statements.

Accounts Receivable Sales Programs

We participate in programs established by our customers which allows us to sell certain receivables from that customer on a non-recourse basis to a third-party financial institution.

In exchange, we receive payment on the receivables, less a discount, sooner than under the customary credit terms we have extended to that customer.

These programs allow us to improve working capital and cash flows at the same or lower interest rates as available on our ABL Facility.

Our access to these programs is dependent on our customers ongoing agreements with the third-parties.

Our participation in these programs is based on our specific cash needs throughout the year, the discount charged to receive payment earlier, the length of the payment terms with our customers, as well being subject to limits in our ABL Facility and Term Loan Facility agreements.

Functional Currencies

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What changed 10-K

Item 7. Management’s Discussion and Analysis