What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-06 compared with 2024-03-12 · 82 added, 72 removed, 139 unchanged (53% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and the Selected Financial Data included elsewhere in this Annual Report.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report.

Historical operating results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period.

Unless otherwise noted herein, all amounts are in thousands, except per share numbers.

Unless as otherwise noted indicated, all U.S.

dollar amounts presented in tables are in thousands.

A detailed discussion of our results of operations and liquidity and capital resources for the year ended December 31, 2023 compared to the year ended December 31, 2022 are not included herein and can be found in Item 7.

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Overview and Management Focus

During 2023, the Company initiated an enterprise transformation plan to grow sales, profits, free cash flow and shareholder value.

During 2024, the Company continued its enterprise transformation plan to grow sales, profits, free cash flow and shareholder value.

The main tenets of the Company’s transformation plan are:

• Empowered leadership team that is accountable to outcomes;

• Supplementing the team with added talent and experienced professionals;

• Investing $100 million of capex over a five year period with strategic intentions;

• Strategic footprint overlay to blend down the Company’s cost structure to lower total-cost product offerings;

• Building and converting upon a high-probability pipeline of new business opportunities that fit the Company’s capacity and forward direction;

• Deliver excellent customer service and quality in a safe and sustainable manner;

• Expand margins through a variety of contemporary approaches, but especially continuous improvement algorithms;

• Annually generate free cash flow;

• Face reality and address underperforming areas of the Company;

• Recruit, retain and incent the best possible team of employees globally.

• Strengthening our team with new executive and functional leadership;

• Fixing unprofitable areas of the business;

• Advancing and strengthening profitability;

• Improving our balance sheet;

• Accelerating sales growth.

We continue to execute our transformation plan through:

• Obtaining new business wins in targeted growth areas;

• Cost improvement plans and the rationalizing of our footprint;

• Improving underperforming plants;

• Achieving net cost-down through our continuous improvement program;

• Reduced leverage through improved operating performance and a strategic divestiture;

• Lowering our cost of capital and improving our capital structure.

We are a strategic partner to a diversified and global customer base with long standing business relationships and long-running business streams.

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• Residential and non-residential construction rates;

• Regulatory environment for United States public companies and manufacturing companies;

• Regulatory environment for U.S.

public companies and manufacturing companies;

• Currency and exchange rate movements and trends;

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Macroeconomic Conditions

We continue to monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from ongoing global conflicts, inflationary cost pressures, elevated interest rates, supply chain disruptions, and labor shortages and disruptions.

The ongoing global conflicts continue 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 monitor the ongoing impacts of current macroeconomic and geopolitical events, including changing conditions from ongoing military conflicts, inflationary cost pressures, elevated interest rates, supply chain disruptions, and labor shortages and disruptions.

Ongoing military conflicts continue 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 these ongoing global conflicts as of the date of this filing, we cannot reasonably 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 conflicts may impact our business, financial condition, results of operations and cash flows.

economy has experienced inflationary increases and elevated interest rates, as well as supply issues in materials, services, and labor due to economic policy, the COVID-19 pandemic and global conflicts.

While these impacts stabilized during 2023, we cannot predict the future impact on our end-markets or input costs nor our ability to recover cost increases through pricing.

Although our business has not been materially impacted by these ongoing military conflicts as of the date of this filing, we cannot reasonably 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 conflicts may impact our business, financial condition, results of operations and cash flows.

economy has experienced inflationary increases and elevated interest rates, as well as supply issues in materials, services, and labor due to economic policy and military conflicts.

We cannot predict the future impact on our end-markets or input costs nor our ability to recover cost increases through pricing.

Footprint Optimization

We have taken specific steps to consolidate our footprint by identifying less profitable end markets and focusing our strategic growth initiatives in markets where we believe we will be able to maximize profitability.

During the first half of 2023, we closed our Taunton and Irvine sites in the Power Solutions group and three underutilized Mobile Solutions sites to reduce operating costs.

Additionally, we continue to evaluate our global footprint, which may result in further consolidation or expansion actions to further improve our overall cost structure.

During the second half of 2024, we identified two manufacturing facilities to close due to volume rationalization which will reduce costs and improve operational efficiency.

In January 2025, we ceased production activities at our Mobile Solutions plant in Juarez, Mexico.

We plan to stop production activity at our Mobile Solutions plant in Dowagiac, Michigan by the end of the first quarter of 2025.

Additionally, we continue to evaluate our global footprint, which may result in further consolidation actions to further improve our overall cost structure.

Sales Concentration

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Interest expense 4.8 % 4.3 % 3.0 %

Loss on extinguishment of debt and write-off of debt issuance costs — % — % 0.5 %

Derivative payments on interest rate swap — % — % 0.4 %

Loss on interest rate swap — % — % 0.4 %

Loss on extinguishment of debt 0.1 % — % — %

Other expense (income), net (1.0) % 2.2 % (1.0) %

Loss from continuing operations before provision for income taxes and share of net income from joint venture (11.0) % (6.2) % (4.7) %

Loss before provision for income taxes and share of net income from joint venture (9.8) % (11.0) % (6.2) %

Provision for income taxes (0.5) % (0.5) % (0.3) %

Share of net income from joint venture 2.1 % 1.2 % 1.3 %

Loss from continuing operations (10.2) % (5.2) % (3.0) %

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

Net loss (8.2) % (10.2) % (5.2) %

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Interest expense 22,095 21,137 958

Loss on extinguishment of debt 349 — 349

Other expense (income), net (4,558) 10,730 (15,288)

Loss from continuing operations before provision for income taxes and share of net income from joint venture (53,671) (31,069) (22,602)

Loss before provision for income taxes and share of net income from joint venture (45,434) (53,671) 8,237

Provision for income taxes (2,410) (2,285) (125)

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Net loss $ (38,273) $ (50,150) $ 11,877

Net sales decreased by $9.5 million, or 1.9%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to reduced volume, including the impact from the closure of the Taunton and Irvine facilities, lower customer settlements and unfavorable foreign exchange effects of $0.6 million.

These decreases were partially offset by higher customer pricing.

Net sales decreased by $25.0 million, or 5.1%, during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to the sale of our Lubbock operations, customer settlements received in 2023, rationalized volume at plants undergoing turnarounds and unfavorable foreign exchange effects of $3.5 million.

These decreases were partially offset by the net impact of contractual pass-through material pricing provisions.

Cost of Sales.

Cost of sales decreased by $1.9 million, or 0.5%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower sales volume associated with facility closures.

These decreases were partially offset by higher material and labor costs, increased costs due to inefficient manufacturing processes associated with product launches, and unfavorable foreign exchange effects.

Cost of sales decreased by $24.4 million, or 5.8%, during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to lower sales volume and lower labor costs associated with facility closures.

Selling, General, and Administrative Expense.

Selling, general, and administrative expense decreased by $2.2 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower stock compensation expense and lower professional fees, partially offset by higher incentive compensation expense.

Selling, general, and administrative expense increased by $2.0 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to higher travel, stock compensation and severance expense, partially offset by lower salaries due to a reduction in headcount.

Other Operating Expense (Income), Net.

Other operating expense (income), net changed favorably by $3.5 million primarily due to sublease income recognized in 2023 and a legal settlement recorded in 2022.

Other operating expense (income), net changed unfavorably by $3.9 million primarily due to the impairment of machinery and equipment at a plant that will close in 2025, partially offset by increased sublease income earned on closed facilities and gains on sale of property, plant and equipment.

Interest Expense.

Interest expense increased by $6.1 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher interest rates and the addition of a 2.00% paid-in-kind interest component on the Term Loan subsequent to the amendment in the first quarter of 2023.

These increases were partially offset by the recognition of gains from the interest rate swap and a higher amount of interest expense that was capitalized in the current year compared with 2022.

Interest expense increased by $1.0 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to a decrease in the gain recognized on interest rate swap and an increase in the amortization of debt issuance costs.

These were partially offset by lower interest rates and lower outstanding balances.

Years Ended December 31,

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Other Expense (Income), Net.

Other expense (income), net changed unfavorably by $15.8 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to noncash derivative mark-to-market losses recognized during 2023 compared to gains recognized during 2022.

Other expense (income), net changed favorably by $15.3 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to the $7.2 million gain on sale of the Lubbock operations and a $10.8 million decrease in noncash derivative mark-to-market losses, partially offset by unfavorable foreign exchange effects associated with intercompany borrowings.

Provision for Income Taxes.

Our effective tax rate was (5.3)% for the year ended December 31, 2024, compared to (4.3)% for the year ended December 31, 2023.

Our effective tax rate for the year ended December 31, 2023 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, 2023 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, 2022 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.

Our effective tax rate for the years ended December 31, 2024 and 2023 were 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 years ended December 31, 2024 and

2023 were 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 state refund claim.

Share of Net Income from Joint Venture.

Share of net income from the joint venture decreased by $0.8 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher fixed costs and increased depreciation and interest expense, partially offset by higher revenue.

The joint venture, in which we own a 49% investment, recognized net sales of $109.6 million and $101.6 million for the year ended December 31, 2023 and 2022, respectively.

Share of net income from the joint venture increased by $3.8 million during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to higher sales and increased margin partially offset by higher fixed costs, depreciation and income taxes.

The joint venture, in which we own a 49% investment, recognized net sales of $130.8 million and $109.6 million for the years ended December 31, 2024 and 2023, respectively.

Results by Segment

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Loss from operations $ (18,078) $ (11,749) $ (6,329)

Net sales increased by $9.8 million, or 3.3%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to higher customer pricing, partially offset by lower volume, and lower customer settlements.

Loss from operations changed unfavorably by $9.6 million during the year ended December 31, 2023 compared to the prior year, primarily due to higher material and labor costs, lower sales volume, lower customer settlement and unfavorable foreign exchange effects.

In addition, costs increased due to production challenges associated with new business launches.

Net sales decreased by $19.4 million, or 6.4%, during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due rationalized volume at plants undergoing turnarounds, contractual reduction in customer pass-through material pricing, a customer settlement received in 2023 and unfavorable foreign exchange effects of $3.3 million.

Loss from operations changed unfavorably by $6.3 million during the year ended December 31, 2024 compared to the prior year, primarily due to the impairment of machinery and equipment at a plant that will close in 2025.

The change was also impacted by higher depreciation expense and selling, general and administrative costs.

POWER SOLUTIONS

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Income from operations $ 13,111 $ 11,096 $ 2,015

Net sales decreased by $19.3 million, or 9.4%, during the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to lower volumes, including the impact from the closure of the Taunton and Irvine facilities.

These decreases were partially offset by higher customer pricing and premium pricing on a certain customer project.

Income from operations increased by $7.6 million during the year ended December 31, 2023 compared to the same period in the prior year, primarily due to lower costs associated with the facilities that closed in the second quarter of 2023, premium pricing on a certain customer project in the first quarter of 2023, a legal settlement reached during the first quarter of 2022, and sublease income earned on closed facilities.

These increases were partially offset by lower sales volume.

Net sales decreased by $5.4 million, or 2.9%, during the year ended December 31, 2024, compared to the year ended December 31, 2023, primarily due to the sale of our Lubbock operations, premium pricing received on a certain customer project during the first quarter of 2023 and unfavorable foreign exchange effects of $0.2 million.

These decreases were partially offset by higher precious metals pass-through pricing.

Income from operations increased by $2.0 million during the year ended December 31, 2024 compared to the same period in the prior year, primarily due to an increase in sublease income earned on closed facilities and lower depreciation and amortization expense due to sold or fully utilized assets.

Changes in Financial Condition from December 31, 2023 to December 31, 2024

From December 31, 2022 to December 31, 2023, total assets decreased by $35.2 million primarily due to decreases in accounts receivable, inventory, property, plant and equipment and intangible assets.

The closure of two Power Solutions facilities contributed to the decrease in inventory and property, plant and equipment, and the decline in intangible assets is due to amortization.

From December 31, 2022 to December 31, 2023, total liabilities increased by $12.9 million, primarily due to an increase in other non-current liabilities due to fair value adjustments of outstanding warrants.

From December 31, 2023 to December 31, 2024, total assets decreased by $54.0 million primarily due to decreases in property, plant and equipment and intangible assets due to depreciation and amortization as well as the impairment of machinery and equipment at a plant that will close in 2025.

Additionally, accounts receivable, inventory and property, plant and equipment decreased due to the sale of our Lubbock operations during the year.

These decreases were partially offset by increases in our investment in a joint venture.

From December 31, 2023 to December 31, 2024, total liabilities decreased by $19.2 million, primarily due to a decrease in accounts payable, a decrease in other non-current liabilities due to the exercise of warrants in 2024 and a reduction in long-term debt due to the partial pay down of the outstanding balance with proceeds from the sale of our Lubbock operations.

These decreases were partially offset by an increase in accrued salaries, wages and benefits.

Working capital, which consists of current assets less current liabilities, was $83.7 million as of December 31, 2024, compared to $100.9 million as of December 31, 2023.

The decrease in working capital was primarily due to a decrease in accounts receivable and inventory and increases in accrued salaries, wages and benefits.

Cash provided by operations was $29.3 million for the year ended December 31, 2023, compared with cash provided by operations of $7.7 million for the year ended December 31, 2022.

The difference was primarily due to decreases in accounts

receivable and inventory during the year ended 2023 compared to increases in these balance during the corresponding period of 2022.

Cash used in investing activities during the year ended December 31, 2023 changed minimally from the prior year as higher expenditures for property, plant and equipment was partially offset by the proceeds from the sale of equipment at the Taunton and Irvine facilities in the first half of 2023.

Cash used in financing activities was $2.9 million for the year ended December 31, 2023, compared with $5.2 million for the year ended December 31, 2022.

The decrease was primarily due to an increase in international loans during 2023.

The decrease in working capital was primarily due to decreases in accounts receivable and inventory, and an increase in accrued salaries, wages and benefits.

These were partially offset by a decrease in accounts payable.

Cash provided by operations was $11.1 million for the year ended December 31, 2024, compared with $29.3 million for the year ended December 31, 2023.

The decline was due to decreases in accounts receivable and inventory during 2023 compared

with a decrease in accounts payable during 2024.

These declines were partially offset by a larger dividend received from the JV in 2024.

Cash used in investing activities was $1.0 million for the year ended December 31, 2024, compared with cash used in investing activities of $17.6 million for the year ended December 31, 2023.

The favorable change is primarily due to the $17.0 million received for the sale of the Lubbock operations during 2024.

Cash used in financing activities increased by $10.4 million during the year ended December 31, 2024 compared to the same period in 2023, primarily due to higher repayments of long-term debt and debt issuance costs in 2024, partially offset by proceeds from the sale-leaseback transactions in 2024 and proceeds from international loans in 2023.

Liquidity and Capital Resources

Credit Facility

The principal amount outstanding under our term loan facility (the “Term Loan Facility”) as of December 31, 2023, was $148.1 million, without regard to unamortized debt issuance costs and discount.

As of December 31, 2023, we had $26.4 million available for future borrowings under the ABL Facility.

Credit Facilities

The principal amount outstanding under our Term Loan Facility as of December 31, 2024, was $114.4 million, without regard to unamortized debt issuance costs and discount.

As of December 31, 2024, we had $5.4 million outstanding borrowings under the ABL Facility and $15.0 million available for future borrowings under the ABL Facility.

This amount of borrowing capacity is net of $10.4 million of outstanding letters of credit at December 31, 2024, 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, including accrued paid-in-kind interest, due on the final maturity date of September 22, 2026.

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.

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.

Outstanding borrowings under the Term Loan Facility bear interest at either 1) one-month, three-month, or six-month Adjusted SOFR, 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%.

Beginning in the second quarter of 2023, interest expense was increased on a paid-in-kind basis at a rate between 1.00% and 2.00%, dependent on the Company’s leverage ratio.

Outstanding borrowings under the Term Loan Facility bear interest at either:

1) one-month, three-month, or six-month Adjusted Term SOFR, subject to a 1.00% floor, plus an applicable margin of 6.875%;

or 2) the greater of various benchmark rates plus an applicable margin of 5.875%.

Beginning with the second quarter of 2023, interest was increased on a paid-in-kind basis at a rate between 1.00% and 2.00%, dependent on our net leverage ratio, for the most recently reported fiscal quarter and subject to reduction upon the occurrence of certain conditions as set forth in the credit agreement governing the Term Loan Facility.

Based on the interest rate in effect at December 31, 2024, annual cash interest payments would be approximately $13.0 million, with an additional $1.1 million accrued as paid-in-kind interest.

On March 5, 2024, we entered into a Purchase and Sale and Escrow Agreement to sell and leaseback three of our properties (the “Properties”).

The sale is expected to close on or around March 15, 2024, with the buyer’s obligation to close subject to inspection, due diligence and other customary closing conditions.

The aggregate purchase price for the Properties is $16.8 million, the net proceeds from which will be used to repay a portion of the outstanding borrowings under the Term Loan Facility.

The ABL Facility bears interest on a variable borrowing rate based on either 1) Adjusted SOFR 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.

The ABL Facility bears interest on a variable borrowing rate based on either:

1) the one, three or six month SOFR plus 1.50%, plus an adjustment of 0.10% (“Term SOFR Rate”);

or 2) the highest of the base commercial lending rate of the lender or various benchmark rates plus an applicable margin of 0.50% or 1.0%, depending on the benchmark.

We pay a commitment fee of 0.25% for unused capacity under the ABL Facility.

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

Sale Leaseback Transactions

During the year ended December 31, 2024, we entered into several sale-leaseback transactions.

We received $16.9 million from the sale and leaseback of three properties, with the net proceeds used to repay a portion of the outstanding borrowings under the Term Loan Facility.

The effective interest rate of 9.715% on this transaction, which terminates in 2044, was lower than the borrowings on the Term Loan Facility.

In addition, we received $8.3 million from the sale and leaseback of equipment, with $3.4 million of the net proceeds used to repay a portion of the outstanding borrowings under the Term Loan Facility and the balance used for ongoing operational investments

Accounts Receivable Sales Programs

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In 2021, we filed a refund claim with the IRS as a result of the Coronavirus Aid, Relief, and Economic Security Act.

Including interest accrued on the initial refund amount, we have a $11.6 million tax refund receivable at December 31, 2023, which is in the process of IRS review and approval.

The timing of the receipt of the refund remains uncertain.

Including interest accrued on the initial refund amount, we have a $12.3 million tax refund receivable at December 31, 2024, which is in the process of IRS review.

The timing of the receipt of the refund is expected in the first half of 2025.

Functional Currencies

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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-K

Item 7. Management’s Discussion and Analysis