# ALLIENT INC (ALNT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ALLIENT INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/46129/000155837022003139/amot-20211231x10k.htm
Accession: 0001558370-22-003139
Filing date: 2022-03-09
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ALNT/
All MD&A years: /company/ALNT/mda/
Next year: /company/ALNT/mda/fy2022/ (FY 2022)

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

Amounts presented in Item 7 are in thousands, except per share data.

Overview

We are a global company that designs, manufactures and sells precision and specialty controlled motion components and systems used in a broad range of industries. Our target markets include Vehicle, Medical, Aerospace & Defense, and Industrial. We are headquartered in Amherst, NY, and have operations in the United States, Canada, Mexico, Europe and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical and electronic motion technology. We sell component and integrated controlled motion solutions to end customers and OEMs through our own direct sales force and authorized manufacturers’ representatives and distributors. Our products include brush and brushless DC motors, brushless servo and torque motors, coreless DC motors, integrated brushless motor-drives, gearmotors, gearing, modular digital servo drives, motion controllers, incremental and absolute optical encoders, active and passive filters for power quality and harmonic issues, and other controlled motion-related products.

Financial Overview

Highlights for our fiscal year ended December 31, 2021, include:

[[GREPCENT_TABLE]]
[["","\u25cf","Revenue was $403,516 for 2021 compared with $366,694 in 2020. The increase in revenues reflects improved sales in certain markets we serve, specifically Vehicle and Industrial. The increase reflects the economic recovery and the increases in demand from many of our served markets, as certain markets were negatively affected in the prior year period due to the economic environment brought on by the COVID-19 pandemic. Sales to U.S. customers were 54% of total sales for 2021 and 53% for 2020, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Gross profit was $121,056 for 2021, a 11% increase from $108,575 in 2020. As a percentage of revenue, gross margin increased 40 basis points to 30.0% in 2021 from 29.6% in 2020. The gross margin increase was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins. The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Operating income was $26,026, or 6% of revenue, for 2021 compared with $22,994, or 6% of revenue, for 2020."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Net income was $24,094 for 2021, or $1.66 per diluted share, compared with $13,643, or $0.95 per diluted share, for 2020. Net income was 77% higher in 2021 compared to 2020, and earnings per diluted share increased by 75%. These increases reflect the impact of increased revenue along with the effect of a $7,373 discrete tax benefit in the first quarter of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Bookings were a record $468,449 for 2021 compared with $370,712 for 2020, an increase of 26%. Backlog as of December 31, 2021 was $249,927, an increase of 77% from $141,344 at year end 2020. Included in backlog as of December 31, 2021 is $47,934 contributed by 2021 business acquisitions."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Debt of $158,960, net of cash of $22,463, increased by $39,549 to $136,497 at December 31, 2021 from debt of $120,079, net of cash of $23,131 of $96,948 at December 31, 2020, primarily as a result of completing three acquisitions in the fourth quarter of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","We declared and paid a dividend of $0.02 in the first quarter of 2021 and $0.025 per quarter for the remainder of 2021, and paid a dividend of $0.02 per quarter in 2020 pursuant to our quarterly dividend program. Dividends to shareholders for 2021 and 2020 were $0.095 and $0.08 per share, respectively. The"]]
[[/GREPCENT_TABLE]]

24

Table of Contents

[[GREPCENT_TABLE]]
[["","","dividend payout ratio was 6% and 8% for 2021 and 2020, respectively when compared with the diluted earnings per share of $1.66 and $0.95, respectively."]]
[[/GREPCENT_TABLE]]

We remain focused on executing our strategy for growth while streamlining the organization and emphasizing continuous improvement in quality, delivery, cost and innovation as we drive the One Allied approach and expand our value proposition for our customers. Solid strides continue to be made with our multi-product, fully integrated solutions that are leading to increased business. Also, we continue to build a pipeline of exciting market-based application opportunities. Sales cycles are long and the time from being selected for the solution development to full rate production can be longer, yet we believe we continue to build a scalable foundation which can deliver strong returns on those investments.

Our Strategy

Our growth strategy is focused on becoming a leading global controlled motion solution provider in our selected target markets by further developing our products and services platform to utilize multiple Allied Motion technologies which create increased value solutions for our customers. Our strategy further defines Allied Motion as being a “technology/know-how” driven company and to be successful, we continue to invest in our areas of excellence.

We have set growth targets for our Company and we will align and focus our resources to meet those targets. First and foremost, we invest in our people as we believe that attracting and retaining the right people is the most important element in our strategy. We will continue to invest significantly in applied and design engineering resources.

Our strategic focus is addressing the critical issues that we believe are necessary to meet the stated long-term goals and objectives of the Company. The majority of the critical issues are focused on growth and profitability initiatives for the Company.

One of these initiatives includes product line platform development to meet the emerging needs of our target markets. Our platform development emphasizes a combination of our technologies to create increased value solutions for our customers. The emphasis with new opportunities has evolved from being an individual component provider to becoming a solutions provider whereby the new opportunities utilize multiple Allied Motion technologies in a system solution approach. We believe this approach will allow us to provide increased value to our customers and improved margins for our Company, and are demonstrated in our acquisitions completed in the fourth quarter of 2021. Our strong financial condition, along with AST continuous improvement initiatives in quality, delivery, and cost allow us to have a positive outlook for the continued long-term growth of our Company.

Outlook for 2022

During 2021, we continued to navigate a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results. We experienced record orders during 2021 reflecting increases in our Vehicle and Industrial markets. This demand, combined with supply chain constraints, resulted in some inefficiencies and unintended costs as our teams worked hard to support and meet customer demand and schedules.

While the economic outlook for 2022 remains uncertain and we expect continued upward pressure on material and labor costs, we believe we are in a strong operational, financial and reputational position. Our record level of backlog, diversified end market penetration and demonstrated agility position us well to perform across varied market trends and give us confidence that we can drive further efficiency, profitable growth and enhanced free cash flow while delivering long-term value for our shareholders.

In 2022, we will continue to focus on leveraging our resources to expand our business in our served markets. In addition, we will continue to execute the ongoing critical issues as defined by our board approved strategy.

25

Table of Contents

The critical issues from that strategy include:

[[GREPCENT_TABLE]]
[["","1)","Create and drive a long-term global optimization strategy, including acquisitions, to consolidate a fragmented market."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2)","Successfully integrate and realize the anticipated benefits from the three acquisitions completed in the fourth quarter of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","3)","Pursue target (niche) markets where we can gain a leadership market position."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","4)","Innovate leading edge products and solutions to meet the emerging needs of our target markets."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","5)","Develop a lean culture by utilizing our lean tool kit to enhance and continuously improve company performance."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","6)","Continuously develop talent throughout the organization through training and deployment of Allied Systematic Tools."]]
[[/GREPCENT_TABLE]]

Allied Motion is an applied technology/know-how motion company, and to grow, we will continue to invest in the technical resources to ensure we can move forward with our mantra to “create controlled motion solutions that change the game” and to meet the emerging needs of our customers in our served market segments. We anticipate that our investment in these key resources will continue to drive our growth now and in the future. We expect to continue the shift from being a component supplier to a more complete solutions provider, along with the application of AST, to drive cost reduction.

Our global production footprint provides us with the opportunity to be a value added supplier for global companies who require support around the world. We will continue to evaluate and find areas to leverage our current manufacturing and sales footprint to drive sales and improve efficiencies.

In addition to our strategy described above, time and resources have been spent during 2021 to further understand the ESG ecosystem and developments impacting stakeholder expectations and assess our performance. The Company has a number of initiatives focused on individual components of ESG, and, under the oversight of the board of directors is continuing to integrate ESG with our broader strategy and Enterprise Risk Management (ERM). The strategy will include looking to further enhance the Company’s ability to meet ongoing and emerging challenges, including the impacts of the COVID-19 pandemic.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.

We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information.

26

Table of Contents

The Company’s critical accounting policies and estimates include:

Revenue Recognition

The Company considers control of most products to transfer at a single point in time when control is transferred to the customer, generally when the products are shipped in accordance with an agreement and/or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product. The Company satisfies its performance obligations under a contract with a customer by transferring goods and services generally in exchange for monetary consideration from the customer. The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgment as the contract with the customer. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The Company establishes provisions for estimated returns and warranties. All contracts include a standard warranty clause to guarantee that the product complies with agreed specifications.

Inventories

Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory costing requires complex calculations that include assumptions for overhead absorption, scrap, sample calculations, manufacturing yield estimates, costs to sell, and the determination of which costs may be capitalized. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.

Historically, our inventory adjustment has been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-downs or expense a greater amount of overhead costs, which would negatively impact our net income. As of December 31, 2021, we have $89,733 of inventory recorded on our consolidated balance sheet, representing approximately 19% of total assets. A 1% write-down of our inventory would decrease our 2021 net income by approximately $627, or $0.04 per diluted share.

Evaluation of Goodwill for impairment

We test the reporting unit’s goodwill for impairment as of October 31st of each fiscal year and between annual tests if an event occurs or circumstances change that may indicate that the fair value of the reporting unit is below its carrying value. In conducting this annual impairment test, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value. If we determine that it is not more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, no further goodwill impairment testing is required. If it is more-likely-than-not that the reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

We performed a qualitative assessment of our single reporting unit as of October 31, 2021. As part of this analysis, we evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall financial performance of our reporting unit. The assessment indicated that it was more-likely-than-not that the fair value of our reporting unit exceeded its carrying amount, and as such, a quantitative assessment was not perfomed.

We do not believe that our reporting unit is at risk for impairment. However, changes to the factors considered above could affect the estimated fair value of our reporting unit and could result in a goodwill impairment charge in a future period. As of December 31, 2021, we have $106,633 of goodwill recorded on our consolidated balance sheet, representing approximately 23% of total assets. A 1% write-down of our goodwill would decrease our 2021 net income approximately $745, or $0.05 per diluted share.

27

Table of Contents

Business Combinations

The Company allocates the purchase price of an acquired company, including when applicable, the acquisition date fair value of contingent consideration between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Third party appraisal firms and other consultants are engaged to assist management in determining the fair values of certain assets acquired and liabilities assumed. Estimating fair values requires significant judgments, estimates and assumptions, including but not limited to: discount rates, future cash flows and the economic lives of trade names, technology, customer relationships, and property, plant and equipment. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

During the year ended December 31, 2021, we completed three business combinations for an aggregate purchase price of $102,169. We identified and assigned value to identifiable intangible assets of customer lists, technology, and trade names, and estimated the useful lives over which these intangible assets would be amortized. The estimates of fair values of these identifiable intangible assets were based upon discounted cash flow models, which include assumptions such as forecasted cash flows, customer attrition rates, discount rates, and royalty rates. The fair value estimates resulted in identifiable intangible assets, in the aggregate, of $45,000. The resulting goodwill, in the aggregate, from these three acquisitions was $46,431.

The contingent consideration fair value measurement, in connection with the acquisition of ALIO Industries (“ALIO”), of $4,900 is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The Company determines the initial fair value of contingent consideration liabilities using a Monte Carlo valuation model, which involves a simulation of future earnings generated by ALIO during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.

​

Stock-based Compensation

Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units.

The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Impact of Recently Issued Accounting Pronouncements

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”) or other authoritative accounting bodies to determine the potential impact they may have on our consolidated financial statements. See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

28

Table of Contents

Operating Results

The following discussion is a comparison between fiscal year 2021 and fiscal year 2020 results. For a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the SEC on March 10, 2021.

Year 2021 compared to 2020

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the year ended","","2021 vs. 2020","\u200b"],["\u200b","\u200b","December 31,","\u200b","Variance"],["(Dollars in thousands, except per share data)","","2021","","2020","\u200b","$","","%","\u200b"],["Revenues","\u200b","$","403,516","\u200b","$","366,694","\u200b","$","36,822","\u200b","10","%"],["Cost of goods sold","\u200b","","282,460","\u200b","","258,119","\u200b","","24,341","\u200b","9","%"],["Gross profit","\u200b","","121,056","\u200b","","108,575","\u200b","","12,481","\u200b","11","%"],["Gross margin percentage","\u200b","","30.0","%","","29.6","%","","","\u200b","","\u200b"],["Operating costs and expenses:","\u200b","","","\u200b","","","\u200b","","","\u200b","","\u200b"],["Selling","\u200b","","17,249","\u200b","","15,392","\u200b","","1,857","\u200b","12","%"],["General and administrative","\u200b","","42,419","\u200b","","38,301","\u200b","","4,118","\u200b","11","%"],["Engineering and development","\u200b","","27,818","\u200b","","25,487","\u200b","","2,331","\u200b","9","%"],["Business development","\u200b","","1,299","\u200b","","473","\u200b","","826","\u200b","175","%"],["Amortization of intangible assets","\u200b","","6,245","\u200b","","5,928","\u200b","","317","\u200b","5","%"],["Total operating costs and expenses","\u200b","","95,030","\u200b","","85,581","\u200b","","9,449","\u200b","11","%"],["Operating income","\u200b","","26,026","\u200b","","22,994","\u200b","","3,032","\u200b","13","%"],["Interest expense","\u200b","","3,236","\u200b","","3,716","\u200b","","(480)","\u200b","(13)","%"],["Other (income) expense, net","\u200b","","(323)","\u200b","","502","\u200b","","(825)","\u200b","(164)","%"],["Total other expense","\u200b","","2,913","\u200b","","4,218","\u200b","","(1,305)","\u200b","(31)","%"],["Income before income taxes","\u200b","","23,113","\u200b","","18,776","\u200b","","4,337","\u200b","23","%"],["Income tax benefit (provision)","\u200b","","981","\u200b","","(5,133)","\u200b","","6,114","\u200b","(119)","%"],["Net income","\u200b","$","24,094","\u200b","$","13,643","\u200b","$","10,451","\u200b","77","%"],["\u200b","\u200b","","","\u200b","","","\u200b","","","\u200b","","\u200b"],["Effective tax rate","\u200b","","(4.2)","%","","27.3","%","\u200b","\u200b","\u200b","\u200b","\u200b"],["Diluted earnings per share","\u200b","$","1.66","\u200b","$","0.95","\u200b","$","0.71","\u200b","75","%"],["Bookings","\u200b","$","468,449","\u200b","$","370,712","\u200b","$","97,737","\u200b","26","%"],["Backlog","\u200b","$","249,927","\u200b","$","141,344","\u200b","$","108,583","\u200b","77","%"]]
[[/GREPCENT_TABLE]]

​

REVENUES: The increase in revenues in 2021 reflects improved sales in certain markets we serve, specifically Vehicle and Industrial. The increase reflects the economic recovery and the increases in demand from many of our served markets, as certain markets were negatively affected in the prior year period due to the economic environment brought on by the COVID-19 pandemic. Our sales for 2021 were comprised of 54% to U.S. customers and 46% to customers primarily in Europe, Canada and Asia-Pacific. The overall increase in revenue was due to an 8% volume increase and a 2% favorable currency impact. See information included in “Non – GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of revenue to revenue excluding foreign currency impacts. Incremental revenues for 2022 from the three acquisitions completed in the fourth quarter of 2021, collectively, are forecasted to be approximately $60,000.

ORDER BOOKINGS AND BACKLOG: The 26% increase in orders in 2021 compared to 2020 is due to a 24% increase in volume and a 2% favorable currency impact. The increase in bookings during 2021 compared to 2020 is largely due to increases in our Vehicle and Industrial markets reflecting improvements in the general economy along with growth in our core businesses. The increase in backlog as of December 31, 2021, compared to December 31, 2020 was related to these factors as well as incremental backlog of $47,934 from the three acquisitions that were completed during the fourth quarter 2021.

29

Table of Contents

GROSS PROFIT AND GROSS MARGIN: Gross margins improved to 30.0% for 2021, compared to 29.6% for 2020. The increase in gross margin percentage was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins. The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers.

SELLING EXPENSES: Selling expenses increased 12% during 2021 compared to 2020 primarily due to higher incentive compensation which is tied to improved revenue and profitability. Cost control efforts related to the COVID-19 pandemic in 2020, specifically travel restrictions, resulted in lower than normal expense levels compared to 2021. Selling expenses as a percentage of revenues were comparable at 4% during 2021 and 2020.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 11% during 2021 compared to 2020 due primarily to increased costs associated with incentive compensation programs which are aligned with our revenue and profit growth. Also, 2020 was favorably impacted by significant COVID-19 cost containment efforts. As a percentage of revenues, general and administrative expenses were 11% and 10% in 2021 and 2020, respectively.

ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 9% in 2021 compared to 2020. The increase is primarily due to the continued ramp up of development projects to meet the future needs of target markets, as well as supporting growing customer application development needs and higher incentive compensation which is tied to improved revenue and profitability. As a percentage of revenues, engineering and development expenses were comparable at 7% for the year ended December 31, 2021 and 2020.

BUSINESS DEVELOPMENT COSTS: The increase in business development costs in 2021 compared to 2020 is due to additional acquisition related costs due to increased merger and acquisition activity, as well as $545 of costs in 2021 related to the Twinsburg plant consolidation.

AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets increased 5% in 2021 compared to 2020, due to the inclusion of Dynamic Controls for the full year 2021 and the incremental amortization from the 2021 acquisitions.

INTEREST EXPENSE: Interest expense decreased by 13% in 2021 compared to 2020 primarily due to a 27 basis point decrease in average interest rates paid during 2021 due to lower leverage, which decreases the Company’s margin under its credit facility, and the lower interest rate environment. Additionally, interest expense declined due to lower average debt levels in 2021 compared to 2020 .

INCOME TAXES: For 2021 and 2020, the effective income tax rate was (4.2%) and 27.3%, respectively. The effective tax rate for 2021 includes a tax benefit of 32.3% related to the recognition of net operating loss carryforwards primarily resulting from tax legislation enacted in New Zealand and 5.6% related to investment tax credits recorded in 2021. The effective rate for 2021 is partially offset by a 7.2% discrete tax provision related to a valuation allowance recorded on a foreign subsidiary’s deferred tax assets. The Company expects its income tax rate for the full year 2022 to be approximately 24% to 26%.

NET INCOME AND ADJUSTED NET INCOME: Net income increased during 2021 compared to 2020 reflecting the impact of increased revenue, as well as the effect of a $7,373 discrete income tax benefit in the first quarter of 2021.

Adjusted net income for the years ended December 31, 2021 and 2020 was $18,238 and $14,315, respectively. Adjusted diluted earnings per share for 2021 and 2020 were $1.26 and $1.00, respectively. Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. See information included in “Non–GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of net income to Adjusted net income and diluted earnings per share to Adjusted diluted earnings per share.

EBITDA AND ADJUSTED EBITDA: EBITDA was $44,456 for 2021 compared to $38,477 for 2020. Adjusted EBITDA was $49,937 and $43,111 for 2021 and 2020, respectively. EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss and

30

Table of Contents

certain other items. Refer to information included in “Non-GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of net income to EBITDA and Adjusted EBITDA.

Non-GAAP Measures

Revenue excluding foreign currency exchange impacts, EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share are provided for information purposes only and are not measures of financial performance under GAAP.

Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results. In particular, those charges and credits that are not directly related to operating unit performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for revenue and net income determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to net income determined in accordance with GAAP.

The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing sales results. The Company excludes the effect of currency translation from revenue for this measure because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The portion of revenue attributable to currency translation is calculated as the difference between the current period revenue and the current period revenue after applying foreign exchange rates from the prior period.

The Company believes EBITDA is often a useful measure of a Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, acquisitions, as well as our provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry.

The Company also believes that Adjusted EBITDA provides helpful information about the operating performance of its business. Adjusted EBITDA excludes stock-based compensation expense, as well as business development costs, foreign currency gains/losses on short-term assets and liabilities, and other items that are not indicative of the Company’s core operating performance. EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP.

Management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance. Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP. These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. Adjusted net income provides management with a measure of financial performance of the Company based on operational factors as it removes the impact of certain non-routine items from the Company’s operating results. Adjusted diluted earnings per share provides management with an indication of how Adjusted net income would be reflected on a per share basis for comparison to the GAAP diluted earnings per share measure. Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business. This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted expense and income items.

31

Table of Contents

The Company’s calculation of revenue excluding foreign currency exchange impacts for 2021 is as follows (in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b"],["\u200b","","Year ended"],["\u200b","","December 31, 2021"],["Revenue as reported","\u200b","$","403,516"],["Currency impact (favorable) unfavorable","\u200b","","(8,332)"],["Revenue excluding foreign currency exchange impacts","\u200b","$","395,184"]]
[[/GREPCENT_TABLE]]

​

The Company’s calculation of EBITDA and Adjusted EBITDA for 2021 and 2020 is as follows (in thousands):

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Year ended"],["\u200b","\u200b","December 31,"],["\u200b","","2021","","2020"],["Net income as reported","\u200b","$","24,094","\u200b","$","13,643"],["Interest expense","\u200b","","3,236","\u200b","","3,716"],["Income tax (benefit) provision","\u200b","","(981)","\u200b","","5,133"],["Depreciation and amortization","\u200b","","18,107","\u200b","","15,985"],["EBITDA","\u200b","","44,456","\u200b","","38,477"],["Stock-based compensation expense","\u200b","","4,161","\u200b","","3,550"],["Business development costs","\u200b","","1,299","\u200b","","473"],["Foreign currency loss","\u200b","\u200b","21","\u200b","\u200b","1,035"],["Non income-based tax refund","\u200b","","\u2014","\u200b","","(424)"],["Adjusted EBITDA","\u200b","$","49,937","\u200b","$","43,111"]]
[[/GREPCENT_TABLE]]

​

The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2021 and 2020 is as follows (in thousands, except per share data):

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","For the year ended"],["\u200b","\u200b","December 31,"],["\u200b","","\u200b","\u200b","","Per diluted","","\u200b","\u200b","","Per diluted"],["\u200b","\u200b","2021","\u200b","share","\u200b","2020","\u200b","share"],["Net income as reported","\u200b","$","24,094","\u200b","$","1.66","\u200b","$","13,643","\u200b","$","0.95"],["Non-GAAP adjustments, net of tax","\u200b","","\u200b","\u200b","","","\u200b","","","\u200b"],["Discrete income tax benefit","\u200b","","(7,373)","\u200b","","(0.51)","\u200b","","\u2014","\u200b","","\u2014"],["Non income-based tax refund","\u200b","","\u2014","\u200b","","\u2014","\u200b","","(424)","\u200b","","(0.03)"],["Income tax valuation allowance","\u200b","","506","\u200b","\u200b","0.03","\u200b","","\u2014","\u200b","","\u2014"],["Foreign currency loss - net","\u200b","","16","\u200b","","\u2014","\u200b","","752","\u200b","","0.05"],["Business development costs - net","\u200b","","995","\u200b","","0.07","\u200b","","344","\u200b","","0.02"],["Non-GAAP adjusted net income","\u200b","$","18,238","\u200b","$","1.26","\u200b","$","14,315","\u200b","$","1.00"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Liquidity and Capital Resources

The Company’s liquidity position as measured by cash and cash equivalents decreased by $668 to a balance of $22,463 at December 31, 2021 from 2020.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","2021 vs. 2020"],["\u200b","","2021","","2020","","$"],["Net cash provided by operating activities","\u200b","$","25,402","\u200b","$","24,838","\u200b","$","564"],["Net cash used in investing activities","\u200b","\u200b","(60,970)","","\u200b","(24,099)","\u200b","","(36,871)"],["Net cash provided by financing activities","\u200b","\u200b","35,832","","\u200b","7,489","\u200b","","28,343"],["Effect of foreign exchange rates on cash","\u200b","\u200b","(932)","","\u200b","1,487","\u200b","","(2,419)"],["Net (decrease) increase in cash and cash equivalents","\u200b","$","(668)","\u200b","$","9,715","\u200b","$","(10,383)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

Of the $22,463 cash and cash equivalents on hand at December 31, 2021, $15,943 was located at our foreign subsidiaries and may be subject to withholding tax if repatriated back to the U.S.

32

Table of Contents

During 2021, the cash provided by operating activities remained consistent with 2020 due to increased net income adjusted for non-cash items, offset by cash used for working capital (primarily inventory) required to support our customer base in the current supply chain environment.

The increased cash used in investing activities in 2021 relates to the $47,254 net cash consideration paid for the ORMEC, ALIO and Spectrum Controls acquisitions in the fourth quarter. Purchases of property and equipment were $13,716 during the 2021 compared to $9,371 during the year ended December 31, 2020 reflecting continued commitments to projects supporting growth initiatives. Cash used in investing activities in the prior year period included a $14,728 outflow related to the acquisition of Dynamic Controls. The Company expects 2022 capital expenditures to be approximately $15,000 to $20,000.

The increase in cash provided by financing activities in 2021 from 2020 includes Amended Revolving Facility borrowings of $50,500 to fund the three acquisitions in the fourth quarter of 2021. Debt payments of $12,248 were made during 2021. The cash provided by financing activities in 2020 reflects the Amended Revolving Facility borrowing for the acquisition of Dynamic Controls for approximately $26,000 in the first quarter of 2020, net of payments of $16,897 during the year. At December 31, 2021, we had $159,395 of obligations under the Amended Revolving Facility, excluding deferred financing costs.

The Amended Credit Agreement contains certain financial covenants related to minimum interest coverage, total leverage ratio, and non-material subsidiaries assets to consolidated total assets at the end of each quarter. The Amended Credit Agreement also includes other covenants and restrictions, including limits on the amount of additional indebtedness, and restrictions on the ability to merge, consolidate or sell all, or substantially all, of our assets. Under the provisions of the Amended Credit Agreement, we may elect to increase our Leverage Ratio to a 4.0 to 1.0 ratio (a “Leverage Increase”) during the fiscal quarter in which a Material Acquisition (as defined in the Amended Credit Agreement) takes place and for the next three fiscal quarters. If the Material Acquisition occurs within the last 45 days of any fiscal quarter, the Leverage Increase is applicable for the following four fiscal quarters. We qualified for and elected the Leverage Increase as a result of the Spectrum Controls acquisition. We were in compliance with all covenants at December 31, 2021.

As of December 31, 2021, the unused Amended Revolving Facility was $65,605. The amount available to borrow may be lower and may vary from period to period based upon our debt and EBITDA levels, which impacts our covenant calculations. The Amended Credit Agreement matures in February 2025.

There were no borrowings under the China Facility during 2021 or 2020.

The Company declared dividends, in total, of $0.095 and $0.08 per share during 2021 and 2020, respectively. The Company’s working capital, capital expenditure and dividend requirements are expected to be funded from cash provided by operations and amounts available under the Amended Credit Agreement (refer to Note 7, Debt Obligations, of the notes to consolidated financial statements for definition and terms).

Although there is ongoing uncertainty related to the anticipated impact of COVID-19 and variants on our future results, we believe our diverse markets, our strong market position in many of our businesses, and the steps we have taken to strengthen our balance sheet, such as retaining cash to support shorter term needs and extending the maturity of our revolving credit facility in early 2020 leaves us well-positioned to manage our business through the crisis as it continues to unfold. We continually assess our liquidity and cash positions and have assessed the impact of COVID-19 on our Company. Based on our analysis, we believe our existing balances of cash, the flexibility of our Amended Credit Agreement and our currently anticipated operating cash flows will be more than sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

​