# ALLIENT INC (ALNT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ALLIENT INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/46129/000155837023003041/amot-20221231x10k.htm
Accession: 0001558370-23-003041
Filing date: 2023-03-07
Report date: 2022-12-31
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/
Previous year: /company/ALNT/mda/fy2021/ (FY 2021)
Next year: /company/ALNT/mda/fy2023/ (FY 2023)

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 products and solutions used in a broad range of industries. Our target markets include Industrial, Vehicle, Medical, and Aerospace & Defense (A&D). 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 nano precision positioning systems, servo control systems, motion controllers, digital servo amplifiers and drives, brushless servo, torque, and coreless motors, brush motors, integrated motor-drives, gear motors, gearing, incremental and absolute optical encoders, active (electronic) and passive (magnetic) filters for power quality and harmonic issues, Industrial safety rated input/output Modules, Universal Industrial Communications Gateways, light-weighting technologies, and other controlled motion-related products.

Financial Overview

Highlights for our fiscal year ended December 31, 2022, include:

[[GREPCENT_TABLE]]
[["","\u25cf","Revenue was $502,988 for 2022 compared with $403,516 in 2021. The increase in revenues reflects improved sales in certain markets we serve, specifically Industrial and A&D. The increase reflects the economic growth and 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. The acquisitions completed in 2021 and 2022 contributed an incremental $73,146 of revenues in 2022. Sales to U.S. customers were 58% of total sales for 2022 and 54% for 2021, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Gross profit was $157,259 for 2022, a 30% increase from $121,056 in 2021. As a percentage of revenue, gross margin increased 130 basis points to 31.3% in 2022 from 30.0% in 2021. The gross margin increase was largely driven by volume increases of higher margin products in our Industrial and A&D markets compared to lower volumes of pandemic related Medical market products with lower margins, combined with pricing and margin accretive acquisitions. 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 $31,656 for 2022 compared with $26,026 for 2021, or 6% of revenue in each year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Net income was $17,389 for 2022, or $1.09 per diluted share, compared with $24,094, or $1.66 per diluted share, for 2021. Net income was 28% lower in 2022 compared to 2021, and earnings per diluted share decreased by 34% as the 2021 results include the impact of a $7,373 (or $0.51 per diluted share) discrete tax benefit in the first quarter of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Bookings were a record $566,226 for 2022 compared with $468,449 for 2021, an increase of 21%. Backlog as of December 31, 2022 was $330,078, an increase of 32% from $249,927 at year end 2021. Included in backlog as of December 31, 2022 is $21,222 contributed by 2022 business acquisitions."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Debt of $235,454, net of cash of $30,614, increased by $68,343 to $204,840 at December 31, 2022 from debt of $158,960, net of cash of $22,463 of $136,497 at December 31, 2021, primarily as a result of debt to fund acquisitions completed in 2022 and a finance lease obligation in connection with a manufacturing facility expansion."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","We declared and paid a dividend of $0.025 in each quarter of 2022 and declared and paid a dividend of $0.02 in the first quarter of 2021 and $0.025 per quarter for the remainder of 2021 pursuant to our quarterly dividend program. Dividends to shareholders for 2022 and 2021 were $0.10 and $0.095 per share, respectively. The dividend payout ratio was 9% and 6% for 2022 and 2021, respectively when compared with the diluted earnings per share of $1.09 and $1.66, 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 focus and align 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 second quarter of 2022 as well as 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 2023

In recent years, we navigated a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results. We experienced record orders in 2022, reflecting increases in our Vehicle and Industrial markets. This demand, combined with supply chain constraints, resulted in some inefficiencies and additional costs as our teams worked hard to support and meet customer demand and schedules.

While the economic outlook for 2023 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 increased free cash flow while delivering long-term value for our shareholders.

In 2023, we will focus on leveraging our resources to expand our business in our selected target markets. In addition, we will continue to execute the ongoing critical issues as defined by our Board approved strategy.

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The critical issues from that strategy include:

[[GREPCENT_TABLE]]
[["","1)","Further develop our structure to Win within our selected target markets and customers"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2)","Improve speed of play in all areas of our business through process improvement"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","3)","Strengthen our balance sheet by improving working capital turns and driving margin improvement."]]
[[/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 2022 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.

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.

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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, 2022, we have $117,108 of inventory recorded on our consolidated balance sheet, representing approximately 20% of total assets. A 1% write-down of our inventory would decrease our 2022 net income by approximately $860, or $0.05 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, 2022. 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 performed.

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, 2022, we have $126,366 of goodwill recorded on our consolidated balance sheet, representing approximately 21% of total assets. A 1% write-down of our goodwill would decrease our 2022 net income approximately $924, or $0.06 per diluted share.

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, 2022, we completed three business combinations for an aggregate purchase price of $57,658. 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 estimated fair values

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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 $28,611. The resulting goodwill, in the aggregate, from these three acquisitions was $21,556.

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.

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Operating Results

The following discussion is a comparison between fiscal year 2022 and fiscal year 2021 results. For a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, 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, 2021, which was filed with the SEC on March 9, 2022.

Year 2022 compared to 2021

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the year ended","","2022 vs. 2021","\u200b"],["\u200b","\u200b","December 31,","\u200b","Variance"],["(Dollars in thousands, except per share data)","","2022","","2021","\u200b","$","","%","\u200b"],["Revenues","\u200b","$","502,988","\u200b","$","403,516","\u200b","$","99,472","\u200b","25","%"],["Cost of goods sold","\u200b","","345,729","\u200b","\u200b","282,460","\u200b","","63,269","\u200b","22","%"],["Gross profit","\u200b","","157,259","\u200b","","121,056","\u200b","","36,203","\u200b","30","%"],["Gross margin percentage","\u200b","","31.3","%","","30.0","%","","","\u200b","","\u200b"],["Operating costs and expenses:","\u200b","","","\u200b","","","\u200b","","","\u200b","","\u200b"],["Selling","\u200b","","21,877","\u200b","\u200b","17,249","\u200b","","4,628","\u200b","27","%"],["General and administrative","\u200b","","50,677","\u200b","\u200b","42,419","\u200b","","8,258","\u200b","19","%"],["Engineering and development","\u200b","","38,561","\u200b","\u200b","27,818","\u200b","","10,743","\u200b","39","%"],["Business development","\u200b","","3,319","\u200b","\u200b","1,299","\u200b","","2,020","\u200b","156","%"],["Amortization of intangible assets","\u200b","","11,169","\u200b","\u200b","6,245","\u200b","","4,924","\u200b","79","%"],["Total operating costs and expenses","\u200b","","125,603","\u200b","","95,030","\u200b","","30,573","\u200b","32","%"],["Operating income","\u200b","","31,656","\u200b","","26,026","\u200b","","5,630","\u200b","22","%"],["Interest expense","\u200b","","7,692","\u200b","","3,236","\u200b","","4,456","\u200b","138","%"],["Other expense (income), net","\u200b","","283","\u200b","","(323)","\u200b","","606","\u200b","NM","%"],["Total other expense","\u200b","","7,975","\u200b","","2,913","\u200b","","5,062","\u200b","174","%"],["Income before income taxes","\u200b","","23,681","\u200b","","23,113","\u200b","","568","\u200b","2","%"],["Income tax (provision) benefit","\u200b","","(6,292)","\u200b","","981","\u200b","","(7,273)","\u200b","NM","%"],["Net income","\u200b","$","17,389","\u200b","$","24,094","\u200b","$","(6,705)","\u200b","(28)","%"],["\u200b","\u200b","","","\u200b","","","\u200b","","","\u200b","","\u200b"],["Effective tax rate","\u200b","","26.6","%","","(4.2)","%","\u200b","\u200b","\u200b","\u200b","\u200b"],["Diluted earnings per share","\u200b","$","1.09","\u200b","$","1.66","\u200b","$","(0.57)","\u200b","(34)","%"],["Bookings","\u200b","$","566,226","\u200b","$","468,449","\u200b","$","97,777","\u200b","21","%"],["Backlog","\u200b","$","330,078","\u200b","$","249,927","\u200b","$","80,151","\u200b","32","%"]]
[[/GREPCENT_TABLE]]

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REVENUES: The increase in revenues in 2022 reflects improved sales in certain markets we serve, specifically Industrial and A&D. 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 2022 were comprised of 58% to U.S. customers and 42% to customers primarily in Europe, Canada and Asia-Pacific. The overall increase in revenue was due to a 30% volume increase partially offset by a 5% unfavorable currency impact. The acquisitions completed in 2021 and 2022 contributed an incremental $73,146 of revenues in 2022. 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.

ORDER BOOKINGS AND BACKLOG: The 22% increase in orders in 2022 compared to 2021 is due to a 27% increase in volume partially offset by a 5% unfavorable currency impact. The increase in bookings during 2022 compared to 2021 is largely due to increases in our Industrial and A&D markets reflecting improvements in the general economy along with growth in our core businesses. The overall increase in orders was due to a 27% volume increase partially offset by a 6% unfavorable currency impact. The acquisitions completed in 2021 and 2022 contributed an incremental $120,529 of orders in 2022. The increase in backlog as of December 31, 2022, compared to December 31, 2021 includes incremental backlog of $21,222 from the three acquisitions that were completed during 2022.

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GROSS PROFIT AND GROSS MARGIN: Gross margins improved to 31.3% for 2022, compared to 30.0% for 2021. The increase in gross margin percentage was largely driven by volume increases of higher margin products in our Industrial and A&D markets compared to lower volumes of pandemic related Medical market products with lower margins, combined with pricing and margin accretive acquisitions. 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 27% during 2022 compared to 2021 primarily due to increased costs in connection with our acquisitions as well as sales commissions related to the revenue growth. Selling expenses as a percentage of revenues were comparable at 4% during 2022 and 2021.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 19% during 2022 compared to 2021 due primarily to increased costs in connection with our acquisitions. As a percentage of revenues, general and administrative expenses were 10% and 11% in 2022 and 2021, respectively.

ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 39% in 2022 compared to 2021. The increase is primarily due to increased costs in connection with our acquisitions and the continued ramp up of development projects to meet the future needs of target markets, as well as supporting growing customer application development needs. As a percentage of revenues, engineering and development expenses were comparable at 8% and 7% for the years ended December 31, 2022 and 2021, respectively.

BUSINESS DEVELOPMENT COSTS: The increase in business development costs in 2022 compared to 2021 is due to additional acquisition related costs due to increased merger and acquisition activity and costs related to manufacturing footprint rationalization.

AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets increased 79% in 2022 compared to 2021, due to the inclusion of the full year of intangible asset amortization of the 2021 acquisitions and the incremental intangible asset amortization from the 2022 acquisitions.

INTEREST EXPENSE: Interest expense increased by 138% in 2022 compared to 2021 primarily due to higher debt levels in 2022 compared to 2021, largely relating to business acquisition activity, and, to a lesser extent, higher interest rates, offset in part by interest rate swaps.

INCOME TAXES: For 2022 and 2021, the effective income tax rate was 26.6% and (4.2)%, respectively. The effective rate differs from the statutory rate primarily due to state income taxes, the impact of foreign tax provisions in the US, the impact of the mix of foreign and domestic income and foreign tax rates, section 162(m) compensation limits, and the benefit of Research and Development tax credits. 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.

NET INCOME AND ADJUSTED NET INCOME: Net income decreased during 2022 compared to 2021, reflecting the impact of the effect of a $7,373 discrete income tax benefit in the first quarter of 2021. Operating income increased, reflecting increased revenues and higher gross margin, partially offset by an increase in operating expenses.

Adjusted net income for the years ended December 31, 2022 and 2021 was $29,972 and $23,176, respectively. Adjusted diluted earnings per share for 2022 and 2021 were $1.88 and $1.60, 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 $56,859 for 2022 compared to $44,456 for 2021. Adjusted EBITDA was $65,549 and $49,937 for 2022 and 2021, respectively. EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA consists of income before interest expense, provision (benefit) for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss and

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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.

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The Company’s calculation of revenue excluding foreign currency exchange impacts for 2022 is as follows (in thousands):

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","For the year ended December 31,"],["\u200b","","2022","","2021"],["Revenue as reported","\u200b","$","502,988","\u200b","$","403,516"],["Currency impact unfavorable (favorable)","\u200b","","22,263","\u200b","","(8,332)"],["Revenue excluding foreign currency exchange impacts","\u200b","$","525,251","\u200b","$","395,184"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

The Company’s calculation of EBITDA and Adjusted EBITDA for 2022 and 2021 is as follows (in thousands):

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Year ended"],["\u200b","\u200b","December 31,"],["\u200b","","2022","","2021"],["Net income as reported","\u200b","$","17,389","\u200b","$","24,094"],["Interest expense","\u200b","","7,692","\u200b","","3,236"],["Provision (benefit) for income tax","\u200b","","6,292","\u200b","","(981)"],["Depreciation and amortization","\u200b","","25,486","\u200b","","18,107"],["EBITDA","\u200b","","56,859","\u200b","","44,456"],["Stock-based compensation expense","\u200b","","5,073","\u200b","","4,161"],["Business development costs","\u200b","","3,319","\u200b","","1,299"],["Foreign currency loss","\u200b","\u200b","298","\u200b","\u200b","21"],["Adjusted EBITDA","\u200b","$","65,549","\u200b","$","49,937"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2022 and 2021 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","2022","\u200b","share","\u200b","2021","\u200b","share"],["Net income as reported","\u200b","$","17,389","\u200b","$","1.09","\u200b","$","24,094","\u200b","$","1.66"],["Non-GAAP adjustments, net of tax","\u200b","","","\u200b","","","\u200b","","","\u200b"],["Discrete income tax benefit","\u200b","","\u2014","\u200b","","\u2014","\u200b","","(7,373)","\u200b","","(0.51)"],["Amortization of intangible assets - net","\u200b","","9,812","\u200b","","0.62","\u200b","","4,938","\u200b","","0.34"],["Income tax valuation allowance","\u200b","","\u2014","\u200b","\u200b","\u2014","\u200b","","506","\u200b","","0.04"],["Foreign currency loss - net","\u200b","","228","\u200b","","0.01","\u200b","","18","\u200b","","\u2014"],["Business development costs - net","\u200b","","2,542","\u200b","","0.16","\u200b","","998","\u200b","","0.07"],["Non-GAAP adjusted net income and diluted earnings per share","\u200b","$","29,971","\u200b","$","1.88","\u200b","$","23,181","\u200b","$","1.60"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

31

Table of Contents

Liquidity and Capital Resources

The Company’s liquidity position as measured by cash and cash equivalents increased by $8,151 to a balance of $30,614 at December 31, 2022 from 2021.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b","2022 vs. 2021"],["\u200b","","2022","","2021","","$"],["Net cash provided by operating activities","\u200b","$","5,596","\u200b","$","25,402","\u200b","$","(19,806)"],["Net cash used in investing activities","\u200b","\u200b","(60,011)","","\u200b","(60,970)","\u200b","","959"],["Net cash provided by financing activities","\u200b","\u200b","63,605","","\u200b","35,832","\u200b","","27,773"],["Effect of foreign exchange rates on cash","\u200b","\u200b","(1,039)","","\u200b","(932)","\u200b","","(107)"],["Net increase (decrease) in cash and cash equivalents","\u200b","$","8,151","\u200b","$","(668)","\u200b","$","8,819"]]
[[/GREPCENT_TABLE]]

​

Of the $30,614 cash and cash equivalents on hand at December 31, 2022, $18,566 was located at our foreign subsidiaries and may be subject to withholding tax if repatriated to the U.S.

During 2022, the cash provided by operating activities decreased from 2021 due largely to increases in working capital, primarily inventory, due to strategic decisions to secure critical components given the supply chain environment.

The cash used in investing activities in 2022 remained consistent with 2021, as similar capital expenditures and acquisition-related cash outflows occurred in each year. The Company expects 2023 capital expenditures to be approximately $18,000 to $23,000.

The increase in cash provided by financing activities in 2022 from 2021 includes Amended Revolving Facility borrowings of $71,000 to fund business acquisition activity in the second quarter of 2022, as compared to the $50,500 to fund the three acquisitions in the fourth quarter of 2021. Debt payments of $7,585 and $12,248 were made during 2022 and 2021, respectively. At December 31, 2022, the Company had $227,060 of obligations under the Amended Revolving Facility, excluding deferred financing costs.

The Amended Credit Agreement includes covenants and restrictions that limit the Company’s ability to incur additional indebtedness, make certain investments, create, incur or assume certain liens, merge, consolidate or sell all or substantially all of its assets and enter into transactions with an affiliate of the Company on other than an arms’ length transaction. These covenants, which are described more fully in the Amended Credit Agreement, to which reference is made for a complete statement of the covenants, are subject to certain exceptions.  The Amended Credit Agreement contains financial covenants that require that the Company maintain a minimum interest coverage ratio of at least 3.0 to 1.0 at the end of each fiscal quarter. In addition, the Company’s Leverage Ratio at the end of any fiscal quarter shall not be greater than 4.0 to 1.0 ratio (reduced to 3.5:1.0 for quarters ending on or after December 31, 2023); provided that the Company may elect to temporarily increase the Leverage Ratio by 0.5x during the twelve-month period following a material acquisition under the Amended Credit Agreement (“acquisition leverage increase”), subject to certain exceptions.  The Company was in compliance with all covenants at December 31, 2022.

As of December 31, 2022, the unused Amended Revolving Facility was $52,940. 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 2022 or 2021.

The Company declared dividends, in total, of $0.10 and $0.095 per share during 2022 and 2021, 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 continued 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

32

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strengthen our balance sheet, such as retaining cash to support shorter term needs and amending our revolving credit facility in 2022 leaves us well-positioned to manage our business through the ongoing impacts of the pandemic 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.

​