Mayville Engineering Company, Inc. (MEC) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” in Part I, Item 1A and “Cautionary Statement Regarding Forward-Looking Statements” of this Annual Report on Form 10-K. This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. In this discussion, we use certain financial measures that are not prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP financial measures are included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Investors should not consider non-GAAP financial measures in isolation or as substitutes for financial information presented in compliance with GAAP.

All amounts are presented in thousands except share amounts, per share data, years and ratios.

Critical Accounting Policies and Estimates

Critical accounting policies are those policies that, in management’s view, are most important in the portrayal of our financial condition and results of operations. The notes to the consolidated financial statements include full disclosure of significant accounting policies. The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Those critical accounting policies and estimates that require the most significant judgment are discussed further below. See Note 1 – Nature of Business and summary of significant accounting policies, in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more specifics.

Goodwill, Intangible Assets and Other Long-Lived Assets

Our long-lived assets consist primarily of property, equipment, purchased intangible assets and goodwill. The valuation and the impairment testing of these long-lived assets involve significant judgments and assumptions, particularly as they relate to the identification of reporting units, asset groups and the determination of fair value.

We test our tangible and intangible long-lived assets subject to amortization for impairment whenever facts and circumstances indicate that the carrying amount of an asset may not be recoverable. We test goodwill and indefinite lived intangible assets for impairment annually, or more frequently if triggering events occur indicating that there may be impairment.

We have recorded goodwill and perform testing for potential goodwill impairment at a reporting unit level. A reporting unit is an operating segment, or a business unit one level below an operating segment for which discrete financial information is available, and for which management regularly reviews the operating results. Additionally, components within an operating segment can be aggregated as a single reporting unit if they have similar economic characteristics. We have concluded we have one reporting unit.

We determine the fair value of our reporting unit using an income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. The income approach is dependent on several key management assumptions, including estimates of future sales, gross margins, operating costs, interest expense, income tax rates, capital expenditures, changes in working capital requirements and the weighted average cost of capital or the discount rate. Discount rate assumptions include an assessment of the risk inherent in the future cash flows of the reporting unit. Expected cash flows used under the income approach are developed in conjunction with our budgeting and forecasting process.

We test our goodwill for impairment on an annual basis, and more frequently if events or changes in circumstances indicate that it might be impaired. For the years ended December 31, 2022 and 2021, there were no events or changes in circumstances that would indicate a material impairment of our goodwill.

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Changes to management assumptions and estimates utilized in the income approach could negatively impact the fair value conclusions for our reporting unit resulting in goodwill impairment. All key assumptions and valuations are determined by and are the responsibility of management. The factors used in the impairment analysis are inherently subject to uncertainty. We believe that the estimates and assumptions are reasonable to determine the fair value of our reporting unit, however, if actual results are not consistent with these estimates and assumptions, goodwill and other intangible assets may be overstated which could trigger an impairment charge.

For impairment testing of long-lived assets, we identify asset groups at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flow expected to be generated by the assets. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset group. For the twelve months ended December 31, 2021, the Company recorded an impairment of its long-lived assets in the amount of $16,151. Please refer to Note 2 – Select Balance Sheet Data in the Notes to Consolidated Financial Statements for further discussion of the facts and circumstances that led to this impairment. For the year ended December 31, 2022, there were no events or changes in circumstances that indicated a material impairment of our long-lived assets.

Determining the useful life of an intangible asset also requires judgment. Certain intangible assets are expected to have indefinite lives based on their history and our plans to continue to support and build the acquired brands. Other acquired intangible assets such as customer relationships, trade names, and non-compete agreements are expected to have determinable useful lives. The costs of determinable-lived intangibles are amortized to expense over their estimated lives.

Income Taxes

The provision for, or benefit from, income taxes includes deferred taxes resulting from temporary differences in income for financial and tax purposes using the liability method. Such temporary differences result primarily from differences in the carrying value of assets and liabilities. Future realization of deferred income tax assets requires sufficient taxable income within the carryback and/or carryforward period available under tax law.

The Company evaluates on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation includes the consideration of all available evidence, both positive and negative, regarding the estimated future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, historical taxable income in prior carryback periods if carryback is permitted, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. The verifiable evidence such as future reversals of existing temporary differences and the ability to carryback are considered before the subjective sources such as estimate future taxable income exclusive of temporary differences and tax planning strategies. Additionally, we record uncertain tax positions at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in jurisdictions in which we operate.

Revenue recognition

The Company recognizes revenue for the transfer of goods or services to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. The Company enters into supply agreements and purchase orders that include both free on board (FOB) origin and FOB destination shipping terms. Depending on the terms of the agreement, the customer takes ownership at shipment or at delivery, and this is when control transfers. Sales are supported by documentation such as supply agreements and purchase orders, which specify certain terms and conditions including product specifications, quantities, fixed prices, delivery dates and payments terms. Revenue related to services is recognized in the period in which the services are performed, thus the Company recognizes revenue at a point in time.

There are many customers where the Company designs, engineers and builds production tooling, which is purchased by the customer. Most of the tooling revenue is complete at the point the customer signs off on the product through the Product Part Approval Process (PPAP) and the tool is placed into service. Revenue is recognized when control of the tooling promised under a

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contract is transferred to the customer either at a point in time or over a period of time in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services.

The Company offers certain customers discounts for early payments. These discounts are recorded against net sales in the Consolidated Statement of Comprehensive Income (Loss) and accounts receivable in the Consolidated Balance Sheets. The Company does not offer any other customer incentives, rebates or allowances.

ESOP

Under the ESOP, the Company can make annual discretionary contributions to the trust for the benefit of eligible employees in the form of cash or shares of common stock of the Company subject to approval by the Board of Directors. The stock in the ESOP is held in trust for the sole benefit of the participants. Shares allocated to a participant’s account are fully vested. For each of the twelve months ended December 31, 2022, 2021, and 2020, the Company recorded no ESOP expense. The Company elected to make annual discretionary contributions to the 401(k) Plan in these years, providing participants the opportunity to diversify their shares of common stock of the Company if they choose to.

Upon retirement, death, termination of employment or exercise of diversification rights, the eligible portion of a participant’s ESOP account is redeemable annually at the current price per share of the stock. Under the terms of the ESOP prior to the IPO, we were obligated to redeem eligible participant account balances for cash (in accordance with the redemption schedule and subject to the limitations set forth in the ESOP). Following the IPO, (i) we no longer redeem participants’ ESOP interests, as distributions from the ESOP made to a participant following retirement, death or termination of employment, or the exercise of diversification rights under the Traditional ESOP, will be made in our common stock, and upon receiving a distribution of our common stock from the ESOP a participant will be able to sell such shares of common stock in the market, subject to any requirements of federal securities law; and (ii) with respect to any participant who exercises statutory diversification rights under the ESOP, the ESOP Trustee will sell, on behalf of the participant, the shares that the participant has elected to diversify and reinvest the sale proceeds in an alternate investment option as directed by the participant.

Emerging Growth Company

The JOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to use this provision and, as a result, we will comply with new or revised accounting standards as required for private companies.

Internal Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control, and misstatements due to error or fraud may occur and not be detected on a timely basis.

Overview

MEC is a leading U.S.-based value-added manufacturing partner that provides a full suite of services from concept to production, including prototyping and tooling, production fabrication, coating, assembly and aftermarket components. Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction & access equipment,

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powersports, agriculture, military and other end markets. We have developed long-standing relationships with our blue-chip customers based upon a high level of experience, trust and confidence.

Our one operating segment focuses on producing metal components that are used in a broad range of heavy- and medium-duty commercial vehicles, construction & access equipment, powersports, agricultural, military and other products.

COVID-19 Impact and Macroeconomic Conditions

The COVID-19 pandemic has had, and could continue to have, a negative impact on our business, financial condition, cash flows, results of operations, supply chain and raw material availability, although the full extent is still uncertain and cannot be predicted.

For the twelve months ended December 31, 2020, net sales reflected the significant disruption we encountered primarily due to COVID-19 pandemic with customer shutdowns, demand changes, and continued destocking, which were most apparent in the commercial vehicle, agriculture and construction & access equipment end markets served. Despite MEC and its customer base carrying the essential business designation, customer production facilities shut down for 5 – 6 weeks on average during the second quarter of 2020 due to the pandemic. As a direct result of the customer shutdowns, MEC temporarily halted production at some of its facilities during the second quarter. Customer manufacturing facilities gradually reopened toward the end of the second quarter, but MEC production volumes remained below pre-pandemic levels through the remainder of the year with all MEC facilities open. Despite the decline in volumes for the second, third and fourth quarters of 2020 due to the pandemic, all pre-existing customer relationships and manufacturing programs remained intact.

For the twelve months ended December 31, 2021 and 2022, net sales reflected the ongoing supply chain constraints impacting many of our customers. Additionally, we continue to experience the macroeconomic conditions that originated during the pandemic, including inflationary pressures on wages, benefits, materials and manufacturing supplies due to a higher level of competition for employees and materials.

How We Assess Performance

Net Sales. Net sales reflect sales of our components and products net of allowances for returns and discounts. In addition to current macroeconomic conditions and the COVID-19 pandemic, several factors affect our net sales in any given period, including weather, timing of acquisitions and the production schedules of our customers. Net sales are recognized at the time of shipment or at delivery to the customer.

Manufacturing Margins. Manufacturing margins represents net sales less cost of sales. Cost of sales consists of all direct and indirect costs used in the manufacturing process, including raw materials, labor, equipment costs, depreciation, lease expenses, subcontract costs and other directly related overhead costs. Our cost of sales is directly affected by the fluctuations in commodity prices, primarily sheet steel and aluminum, but these changes are largely mitigated by contractual agreements with our customers that allow us to pass through these price variations based upon certain market indexes.

Depreciation and Amortization. We carry property, plant and equipment on our balance sheet at cost, net of accumulated depreciation and amortization. Depreciation on property, plant and equipment is computed on a straight-line basis over the estimated useful life of the asset. Amortization expense is the periodic expense related to leasehold improvements and intangible assets. Leasehold improvements are amortized over the lesser of the life of the underlying asset or the remaining lease term. Our intangible assets were recognized as a result of certain acquisitions and are generally amortized on a straight-line basis over the estimated useful lives of the assets.

Other Selling, General, and Administrative Expenses. Other selling, general and administrative expenses consist primarily of salaries and personnel costs for our sales and marketing, finance, human resources, information systems, administration and certain other managerial employees and corporate level administrative expenses such as incentive compensation, audit, accounting, legal and other consulting and professional services, travel and insurance.

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Other Key Performance Indicators

EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin

EBITDA represents net income (loss) before interest expense, provision (benefit) for income taxes, depreciation and amortization. EBITDA Margin represents EBITDA as a percentage of net sales for each period.

Adjusted EBITDA represents EBITDA before CEO transition costs, stock-based compensation, Hazel Park transition costs due to the former fitness customer, restructuring expenses related to the closure of the Greenwood facility and impairment charges on long-lived assets and inventory and (gain) loss on contracts specifically purchased to meet obligations under the agreement with our former fitness customer. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net sales for each period. These metrics are supplemental measures of our operating performance that are neither required by, nor presented in accordance with, GAAP. These measures should not be considered as an alternative to net income (loss) or any other performance measure derived in accordance with GAAP as an indicator of our operating performance. We present Adjusted EBITDA and Adjusted EBITDA Margin as management uses these measures as key performance indicators, and we believe they are measures frequently used by securities analysts, investors and other parties to evaluate companies in our industry. These measures have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP.

Our calculation of EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to the similarly named measures reported by other companies. Potential differences between our measures of EBITDA and Adjusted EBITDA compared to other similar companies’ measures of EBITDA and Adjusted EBITDA may include differences in capital structure and tax positions.

The following table presents a reconciliation of net income (loss) and comprehensive income (loss), the most directly comparable measure calculated in accordance with GAAP, to EBITDA and Adjusted EBITDA, and the calculation of EBITDA Margin and Adjusted EBITDA Margin for each of the periods presented.

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Consolidated Results of Operations

Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

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Net Sales. Net sales were $539,392 for the twelve months ended December 31, 2022 as compared to $454,826 for the twelve months ended December 31, 2021, an increase of $84,566, or 18.6%. This change was primarily due to customer raw material pricing pass-throughs, volume increases as end market demand strengthened and customer restocking efforts due to historically low customer inventories, and commercial pricing increases. These increases were partially offset by customer supply chain issues.

Manufacturing Margins. Manufacturing margins were $61,069 for the twelve months ended December 31, 2022 as compared to $51,375 for the twelve months ended December 31, 2021, an increase of $9,694, or 18.9%. The increase was driven by greater demand, the impact of commercial pricing increases and improved absorption of manufacturing overhead costs, offset by Hazel Park transition and launch costs, continued customer supply chain issues, and a decline in scrap income during the second half of the current year.

Manufacturing margin percentages were 11.3% for both the twelve months ended December 31, 2022 and 2021.

Amortization of Intangible Assets. Amortization of intangible assets were $6,952 for the twelve months ended December 31, 2022 as compared to $10,706 for the twelve months ended December 31, 2021, a decrease of $3,754, or 35.1%. The decrease is due to the full amortization of certain intangible assets.

Profit Sharing, Bonuses and Deferred Compensation Expenses. Profit sharing, bonuses and deferred compensation expenses were $7,997 for the twelve months ended December 31, 2022 as compared to $11,500 for the twelve months ended December 31, 2021, a decrease of $3,503, or 30.5%. The decrease is primarily driven by a reduction in deferred compensation expense as a result of fluctuations within the financial markets.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $24,692 for the twelve months ended December 31, 2022 as compared to $20,409 for the twelve months ended December 31, 2021, an increase of $4,283, or 21.0%. The increase was mainly driven by higher consulting, legal, and professional fees, CEO transition costs, wages and benefits due to continued inflationary pressures, information technology, and travel and entertainment expenses.

Impairment of Long-Lived Assets and (Gain) Loss on Contracts. At December 31, 2021, there was uncertainty as to the level of demand from the former fitness customer. The Company received a notification from this customer in February 2022 resulting in a change in forecasted future cash flow, triggering an impairment assessment of assets purchased, and assets the Company committed to purchase, to meet obligations under the agreement with the former fitness customer as of December 31, 2021. The notification

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informed the Company that it did not forecast any demand for any products or parts that were the subject of the agreement between the Company and the customer for the remainder of the agreement’s term, which ends in March 2026. Given the circumstances, GAAP required the Company to assess whether the assets were impaired. As a result of this assessment, the Company recorded an impairment on the assets purchased and loss on contracts agreed upon specifically to meet obligations under the agreement with the former fitness customer. Consequently, the Company recorded an impairment of long-lived assets and loss on contracts of $16,151 in the fourth quarter of 2021.

During the twelve months ended December 31, 2022, the Company was able to cancel $2,257 of purchase commitments for property, plant and equipment relating to the former fitness customer that had been recorded as an impairment of long-lived assets and loss on contracts at December 31, 2021, as previously described. The cancellation of purchase commitments resulted in the reversal of this amount. Additionally, the Company was able to sell property, plant and equipment resulting in a gain of $2,089 relating to the former fitness customer that had previously been recorded as an impairment of long-lived assets and written down to fair value at December 31, 2021.

Interest Expense. Interest expense was $3,380 for the twelve months ended December 31, 2022 as compared to $2,003 for the twelve months ended December 31, 2021. The change is due to higher borrowing levels and interest rates as compared to the prior year period.

Provision (Benefit) for Income Taxes. Income tax expense was $3,667 for the twelve months ended December 31, 2022 as compared to income tax benefit of $1,943 for the twelve months ended December 31, 2021. Please reference Note 7 – Income Taxes in the Consolidated Financial Statements for further details.

Due to the factors described in the preceding paragraphs, net income, comprehensive income, EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin increased during 2022.

Twelve Months Ended December 31, 2021 Compared to Twelve Months Ended December 31, 2020

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Net Sales. Net sales were $454,826 for the twelve months ended December 31, 2021 as compared to $357,606 for the twelve months ended December 31, 2020. This change was primarily driven by the improvement in market conditions from the prior year period and commercial pricing increases implemented in the fourth quarter of 2021 to combat inflationary pressures, which were slightly offset by customer supply chain issues and the timing lag related to contractual raw material price pass-throughs to customers. The prior year period was impacted by customer facility shutdowns driven by the pandemic, along with lower market demand and related destocking activities, which were most apparent in the commercial vehicle, agricultural and construction & access equipment end markets served.

Manufacturing Margins. Manufacturing margins were $51,375 for the twelve months ended December 31, 2021 as compared to $31,501 for the twelve months ended December 31, 2020. The increase was driven by production volume increases and higher scrap income. Furthermore, the improved production volumes, the utilization of the Company’s investments in new technology and automation, and efficiencies following the closure of the Greenwood, SC facility in 2020 resulted in significant improvements in absorbed manufacturing overhead costs. This was partially offset by the timing of raw material pricing passed through to customers, inflationary pressures on wages, benefits, materials, and general manufacturing supply costs during 2021, and increased utility, freight, repair, and other costs related to the improved sales volumes. Additionally, the Company incurred $2,878 in launch costs and $700 of inventory write-offs related to the agreement with the former fitness customer during 2021. Further, the prior year period was negatively impacted by the following: market demand changes, customer shutdowns related to the COVID-19 pandemic, approximately $775 of inventory obsolescence, and health care charges specific to the estimated potential impacts of the pandemic, and $2,524 of restructuring costs related to the Greenwood facility closure.

Manufacturing margin percentages were 11.3% for the twelve months ended December 31, 2021 as compared to 8.8% for the twelve months ended December 31, 2020, an increase of 2.5%, which can be attributed to the items discussed above.

Profit Sharing, Bonuses and Deferred Compensation. Profit sharing, bonuses and deferred compensation expenses were $11,500 for the twelve months ended December 31, 2021 as compared to $8,250 for the twelve months ended December 31, 2020. The increase was primarily driven by the return of normalized discretionary 401(k) and bonus accruals as business activity and sales volumes improved.

Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses were $20,409 for the twelve months ended December 31, 2021 as compared to $19,043 for the twelve months ended December 31, 2020. The increase was mainly driven by higher salary and payroll expenses which were unusually low in the prior year period due to the pandemic.

Impairment of Long-Lived Assets and Loss on Contracts. On February 18, 2022, the former fitness customer informed the Company that it did not forecast any demand for any products or parts that were the subject of the agreement between the Company and the customer for the remainder of the agreement’s term, which ends March 2026. Given the circumstances, GAAP required the Company to assess whether the assets were impaired. As a result of this assessment, the Company recorded an impairment on the assets specifically purchased to meet obligations under the agreement with the former fitness customer. As a result, the Company recorded an impairment of long-lived assets and loss on contracts of $16,151 in the fourth quarter of 2021.

Interest Expense. Interest expense was $2,003 for the twelve months ended December 31, 2021 as compared to $2,668 for the twelve months ended December 31, 2020. On average, the Company carried a lower debt balance throughout 2021 coupled with lower interest rates.

Benefit for Income Taxes. Income tax benefit was $1,943 for the twelve months ended December 31, 2021 as compared to $2,074 for the twelve months ended December 31, 2020. Please reference Note 7 – Income Taxes in the Notes to the Consolidated Financial Statements for further details.

Due to the factors described in the preceding paragraphs, net loss, comprehensive loss, EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin increased during 2021.

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Liquidity and Capital Resources

The following is a summary of our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statement of Cash Flows:

Cash Flows Analysis Twelve Months Ended December 31, 2022 Compared to Twelve Months Ended December 31, 2021

Operating Activities. Cash provided by operating activities was $52,426 for the twelve months ended December 31, 2022 as compared to $14,457 for the twelve months ended December 31, 2021. The $37,969 increase in operating cash flows was primarily due to a $4,898 increase in net income (loss) adjusted for reconciling items as a result of net income in the year ended December 31, 2022 as compared to a net loss in the year ended December 31, 2021, and $33,071 in favorable working capital changes. The largest drivers positively impacting working capital were the significant increases in accounts receivable and inventories during 2021 and then stabilizing throughout 2022 as customer demand and production levels rebounded in 2021 from COVID-19 lows.

Investing Activities. Cash used in investing activities was $50,668 for the twelve months ended December 31, 2022, as compared to $33,961 for the twelve months ended December 31, 2021. The $16,707 increase in cash used in investing activities was driven by the Company’s continued investments in new technology and automation supporting new programs and existing production processes and the costs associated with the repurposing of assets at the Company’s Hazel Park, MI facility. This was partially offset by additional proceeds from the sale of property, plant and equipment originally intended to support production for the former fitness customer during the twelve months ended December 31, 2022.

Financing Activities. Cash used by financing activities was $1,749 for the twelve months ended December 31, 2022, as compared to cash provided by financing activities of $19,501 for the twelve months ended December 31, 2021. The $21,250 decrease was driven by increased borrowings, but with higher debt repayments, resulting in a slight rise in the Company’s debt balance during the current year. Additionally, the Company repurchased 559,945 shares of our common stock during 2022 under our share repurchase program at a total cost of $4,947. In 2021, the Company repurchased 147,785 shares of our common stock under our share repurchase program at a total cost of $2,153. The Company’s decision to repurchase shares in 2023 will depend on business conditions, free cash flow generation, other cash requirements and stock price. See Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for additional information regarding share repurchases.

Cash Flows Analysis Twelve Months Ended December 31, 2021 Compared to Twelve Months Ended December 31, 2020

Operating Activities. Cash provided by operating activities was $14,457 for the twelve months ended December 31, 2021 as compared to $36,523 for the twelve months ended December 31, 2020. The $22,066 decrease in operating cash flows was primarily due to changes in net working capital, more specifically, accounts receivable rose relative to the growth in sales, while inventories and accounts payable were elevated due to higher raw material prices and other costs as production levels rebounded from the pandemic lows. Additionally, the Company carried more inventory at the end of 2021 due to the deferment of customer orders into 2022 as they navigated supply chain issues impacting their production schedules.

Investing Activities. Cash used in investing activities was $33,961 for the twelve months ended December 31, 2021, as compared to $5,774 for the twelve months ended December 31, 2020. The $28,187 increase in cash used in investing activities was driven by the Company’s continued investment in technology and automation in 2021 as compared to leveraging our investments in new technology and automation and preserving cash during the prior year period. Additionally, the Company invested $19,658 into the Hazel Park, MI facility during 2021. The Company also recorded $5,348 in proceeds from the sale of property, plant and equipment mainly driven by the sale of the Greenwood, SC facility during 2021.

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Financing Activities. Cash provided by financing activities was $19,501 for the twelve months ended December 31, 2021, as compared to cash used in financing activities of $30,629 for the twelve months ended December 31, 2020. The $50,130 change was driven by higher borrowings in excess of debt repayments in the second half of 2021 compared to debt repayments in excess of borrowings during the prior year. The Company repurchased 147,785 shares of our common stock in 2021 under our share repurchase program at a total cost of $2,153. In 2020, the Company repurchased 320,245 shares of our common stock under our share repurchase program at a total cost of $2,435.

Amended and Restated Credit Agreement

On September 26, 2019, and as last amended as of March 31, 2022, we entered into the Credit Agreement with certain lenders and Wells Fargo Bank, National Association, as administrative agent (the Agent). The Credit Agreement provides for a $200,000 Revolving Loan, with a letter of credit sub-facility in an aggregate amount not to exceed $5,000, and a swingline facility in an aggregate amount of $20,000. The Credit Agreement also provides for an additional $100,000 of capacity through an accordion feature. All amounts borrowed under the Credit Agreement mature on September 26, 2024.

Our obligations under the Credit Agreement are secured by first priority security interests in substantially all of our personal property and guaranteed by, and secured by first priority security interests in, substantially all of the personal property of, our direct and indirect subsidiaries: Center Manufacturing, Inc., Center Manufacturing Holdings, Inc., Center—Moeller Products LLC, Defiance Metal Products Co., Defiance Metal Products of Arkansas, Inc., Defiance Metal Products of PA., Inc. and Defiance Metal Products of WI, Inc.

Borrowings under the Credit Agreement bear interest at a fluctuating London Interbank Offered Rate (LIBOR) (which may be adjusted for certain reserve requirements), plus 1.00 to 2.00% depending on the current Consolidated Total Leverage Ratio (as defined in the Credit Agreement). Under certain circumstances, we may not be able to pay interest based on LIBOR. If that happens, we will be required to pay interest at the Base Rate, which is the sum of (a) the higher of (i) the Prime Rate (as publicly announced by the Agent from time to time) and (ii) the Federal Funds Rate plus 0.50%, plus (b) 0.00% to 1.00%, depending on the current Total Consolidated Leverage Ratio. The Credit Agreement also includes provisions for determining a replacement rate when LIBOR is no longer available.

At December 31, 2022, the interest rate on outstanding borrowings under the Revolving Loan was 5.69%. At December 31, 2022, we had availability of $127,764 under the Revolving Loan.

We must pay a commitment fee rate ranging from 0.20% to 0.50% per annum on the average daily unused portion of the aggregate unused revolving commitments under the Credit Agreement. We must also pay fees as specified in the Fee Letter (as defined in the Credit Agreement) and with respect to any letters of credit issued under the Credit Agreement.

The Credit Agreement contains usual and customary negative covenants for agreements of this type, including, but not limited to, restrictions on our ability to, subject to certain exceptions, create, incur or assume indebtedness, create or incur liens, make certain investments, merge or consolidate with another entity, make certain asset dispositions, pay dividends or other distributions to shareholders, enter into transactions with affiliates, enter into sale leaseback transactions or make capital expenditures. The Credit Agreement also requires us to satisfy certain financial covenants, including a minimum interest coverage ratio of 3.00 to 1.00. At December 31, 2022, our interest coverage ratio was 13.14 to 1.00. The Credit Agreement also requires us to maintain a consolidated total leverage ratio not to exceed 3.25 to 1.00, although such leverage ratio can be increased in connection with certain acquisitions. As of December 31, 2022, our consolidated total leverage ratio was 1.26 to 1.00.

The Credit Agreement includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, material money judgments and failure to maintain subsidiary guarantees. If an event of default occurs, the Agent will be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of the credit facility and all other actions permitted to be taken by a secured creditor.

On June 30, 2020, March 31, 2021 and March 31, 2022, the Company entered into amendments to the Credit Agreement. Please refer to Note 3 – Bank Revolving Credit Notes in the Notes to the Consolidated Financial Statements for a more detailed discussion.

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Capital Requirements and Sources of Liquidity

During the twelve months ended December 31, 2022 and 2021, our capital expenditures were $58,610 and $39,309, respectively. The increase of $19,301 was driven by our continued investments in new technology and automation in addition to the repurposing of assets in the Company’s Hazel Park, MI facility. Capital expenditures for the full year 2023 are expected to be between $20,000 and $25,000.

We have historically relied upon cash available through credit facilities, in addition to cash from operations, to finance our working capital requirements and to support our growth. At December 31, 2022, we had immediate availability of $127,764 through our Revolving Loan and another $100,000 through an accordion feature under our Credit Agreement, subject to covenants under the Credit Agreement. We regularly monitor potential capital sources, including equity and debt financings, in an effort to meet our planned capital expenditures and liquidity requirements. Our future success will be highly dependent on our ability to access outside sources of capital. We will continue to have access to the availability currently provided under the Credit Agreement as long as we remain compliant with the financial covenants. Based on our estimates at this time, we expect to be in compliance with these financial covenants through 2023 and the foreseeable future.

We believe that our operating cash flow and available borrowings under the Credit Agreement are sufficient to fund our operations for 2023 and beyond. However, future cash flows are subject to a number of variables, and additional capital expenditures will be required to conduct our operations. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned or future levels of capital expenditures. In the event we make one or more acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures and/or seek additional capital. If we seek additional capital, we may do so through borrowings under the Credit Agreement, joint ventures, asset sales, offerings of debt or equity securities or other means. We cannot guarantee that this additional capital will be available on acceptable terms or at all. If we are unable to obtain the funds we need, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to conduct our operations.

Contractual Obligations

The following table presents our obligations and commitments to make future payments under contracts and contingent commitments at December 31, 2022:

Capital expenditures for the full year 2023 are expected to be below 2022 levels as the Company is nearing the end of an unusually high capital expenditure cycle.

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