What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-09 · 80 added, 87 removed, 235 unchanged (42% of the section changed)

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

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 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.

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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.

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

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● 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 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 .

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.

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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 Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins.

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.

● Operating income was $26,026, or 6% of revenue, for 2021 compared with $22,994, or 6% of revenue, for 2020.

● Operating income was $31,656 for 2022 compared with $26,026 for 2021, or 6% of revenue in each year.

● 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 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.

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.

● Bookings were a record $566,226 for 2022 compared with $468,449 for 2021, an increase of 21%.

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Included in backlog as of December 31, 2022 is $21,222 contributed by 2022 business acquisitions.

● 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.

● 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.

● 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.

● 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.

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.

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.

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.

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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.

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.

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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 2023

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.

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 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.

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.

The critical issues from that strategy include:

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

2) Successfully integrate and realize the anticipated benefits from the three acquisitions completed in the fourth quarter of 2021.

3) Pursue target (niche) markets where we can gain a leadership market position.

4) Innovate leading edge products and solutions to meet the emerging needs of our target markets.

5) Develop a lean culture by utilizing our lean tool kit to enhance and continuously improve company performance.

6) Continuously develop talent throughout the organization through training and deployment of Allied Systematic Tools.

1) Further develop our structure to Win within our selected target markets and customers

2) Improve speed of play in all areas of our business through process improvement

3) Strengthen our balance sheet by improving working capital turns and driving margin improvement.

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.

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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.

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.

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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 estimated 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 $28,611.

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

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

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Interest expense

Other (income) expense, net

Other expense (income), net

Total other expense

Income before income taxes

Income tax benefit (provision)

Income tax (provision) benefit

Effective tax rate

Diluted earnings per share

The increase in revenues in 2021 reflects improved sales in certain markets we serve, specifically Vehicle and Industrial.

The increase in revenues in 2022 reflects improved sales in certain markets we serve, specifically Industrial and A&D.

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customers and 42% 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.

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.

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.

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.

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 Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins.

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 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 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 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.

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.

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Engineering and development expenses increased by 39% in 2022 compared to 2021.

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.

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 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.

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 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.

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 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 .

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.

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 .

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.

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EBITDA and Adjusted EBITDA are non-GAAP measures.

EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization.

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

December 31, 2021

For the year ended December 31,

Revenue as reported

Currency impact (favorable) unfavorable

Currency impact unfavorable (favorable)

Revenue excluding foreign currency exchange impacts

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Interest expense

Income tax (benefit) provision

Provision (benefit) for income tax

Depreciation and amortization

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Foreign currency loss

Non income-based tax refund

Adjusted EBITDA

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Discrete income tax benefit

Non income-based tax refund

Amortization of intangible assets - net

Income tax valuation allowance

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Business development costs - net

Non-GAAP adjusted net income

Non-GAAP adjusted net income and diluted earnings per share

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.

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.

Year Ended December 31,

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Effect of foreign exchange rates on cash

Net (decrease) increase in cash and cash equivalents

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.

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.

Net increase (decrease) in cash and cash equivalents

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 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.

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.

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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.

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

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.

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Foreign Currency

transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively.

We have international operations in The Netherlands, Sweden, Germany, China, Portugal, Canada, Czech Republic, Mexico, the United Kingdom and New Zealand which expose us to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively.

We continuously evaluate our foreign currency risk and we take action from time to time in order to best mitigate these risks.

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This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on cost of sales and operating expenses in those currencies.

We estimate that foreign currency exchange rate fluctuations increased sales in 2021 compared to 2020 by approximately $8,332.

We estimate that foreign currency exchange rate fluctuations decreased sales in 2022 compared to 2021 by approximately $22,263.

We translate all assets and liabilities of foreign operations, where the U.S.

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The net effect of these translation adjustments is recorded in the consolidated financial statements as comprehensive income.

The translation adjustment was a loss of $7,193 for 2021 and a gain of $8,410 for 2020.

The translation adjustment were losses of $9,516 and $7,193 for 2022 and 2021, respectively.

Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries.

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dollar in relation to our most significant foreign currency net assets would have had an impact of approximately $15,335 and $11,000 on our foreign net assets as of December 31, 2022 and 2021, respectively.

Beginning in the first quarter of 2021, we began entering into contracts to hedge our short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates.

Beginning in the first quarter of 2021, we began entering into contracts to hedge our short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, Canadian Dollar, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates.

The resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income.

To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $13,500 at December 31, 2021.

The foreign currency contracts are recorded in the consolidated balance sheets at fair value and resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income.

During the year ended December 31, 2021, we recorded a loss of $170 on foreign currency contracts which is included in other (income) expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other (income) expense, net.

Net foreign currency transaction gains and losses included in total other expense, net amounted to losses of $21 and $1,035 in 2021 and 2020, respectively.

To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $18,981 and $13,500 at December 31, 2022 and 2021, respectively.

The foreign currency contracts are recorded in the consolidated balance sheets at fair value and resulting gains or losses are recorded in other expense (income), net in the consolidated statements of income and comprehensive income.

During the years ended December 31, 2022 and 2021, we recorded losses of $1,109 and $170, respectively, which is included in other expense (income), net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other expense (income), net.

Net foreign currency transaction gains and losses included in total other expense (income), net amounted to gains of $298 in 2022 and losses of $21 in 2021.

Interest Rates

Interest rates on our Amended Credit Agreement are based on the LIBOR or EURIBOR plus a margin of 1.00% to 1.75% (1.375% at December 31, 2021) or the Prime Rate plus a margin of 0% to 0.75% (0.375% at December 31, 2021), in each case depending on the Company’s ratio of total funded indebtedness to Consolidated EBITDA.

Interest rates on our Amended Credit Agreement are based on Term SOFR plus a margin of 1.00% to 2.25% (1.75% at December 31, 2022), depending on the Company’s ratio of total funded indebtedness to consolidated EBITDA.

We use interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements.

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Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

In February 2017, we entered into three interest rate swaps with a combined notional amount of $40,000 that matures in February 2022.

In March 2020, the Company entered into two additional interest rate swaps with a combined notional amount of $20,000 that increases to $60,000 in March 2022 and matures in December 2024.

In February 2017, the Company entered into three interest rate swaps with a combined notional amount of $40,000 that matured in February 2022.

In March 2020, the Company entered into two additional interest rate swaps with a combined notional amount of $20,000 that increased to $60,000 in March 2022 and matures in December 2024.

In March 2022 the Company entered into an additional interest rate swap with a notional amount of $40,000 that matures in December

As of December 31, 2022, we had $227,060 outstanding under the Amended Revolving Facility (excluding deferred financing fees), of which $100,000 is currently being hedged.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis