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BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2022

BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

For business combinations, net assets acquired and liabilities assumed are recorded at their estimated fair values.

Cash and Cash Equivalents

Cash and cash equivalents include instruments which are readily convertible into cash (original maturities of three months or less) and which are not subject to significant risk of changes in interest rates.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The provision for credit losses is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional provisions in the future. Activity in the provision for credit losses for 2022 and 2021 was as follows (in thousands):


	December 31, 2022		December 31, 2021
Beginning balance	$	506	$	382
Additional reserves		803		174
Write-offs		(107)		(44)
Effect of foreign currency translation		(10)		(6)
Ending balance	$	1,192	$	506

Inventories


	December 31, 2022		December 31, 2021
Beginning balance	$	506	$	382
Additional reserves		803		174
Write-offs		(107)		(44)
Effect of foreign currency translation		(10)		(6)
Ending balance	$	1,192	$	506

Property, Plant and Equipment

Property, plant and equipment is classified as follows (in thousands):


		December 31,		December 31,
	Useful lives	2022		2021
Land		$	965	$	979
Building and improvements	5 - 39 years		25,093		14,398
Machinery, equipment, tools and dies	3 - 15 years		89,144		82,898
Construction work in progress			14,197		9,582
Furniture, fixtures and other	3 - 10 years		22,462		21,794
			151,860		129,651
Less accumulated depreciation			(83,220)		(72,668)
Property, plant, and equipment, net		$	68,640	$	56,983

Depreciation expense is provided using the straight-line method over the estimated useful lives of the assets. Amortization of building improvements is provided using the straight-line method over the life of the lease term or the life of the asset, whichever is shorter. Maintenance and repair costs are charged to operations as incurred. Major additions and improvements are capitalized. The cost and related accumulated depreciation of retired or sold property are removed from the accounts and the resulting gain or loss, if any, is reflected in earnings.

Depreciation expense was $12,676, $11,862 and $10,057 in 2022, 2021 and 2020, respectively.

Intangible Assets

Intangible assets, other than goodwill, are initially recorded at fair value and are amortized over their estimated useful lives using an accelerated or straight-line method which approximates the pattern of expected cash flows over the remaining useful lives of the intangible assets.

Impairment of Long-Lived Assets

The Company reviews the carrying values of its long-lived assets, including property, plant and equipment and intangible assets, on an annual basis and whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Long-lived assets are recorded at their carrying amounts if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering interest. If projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair value. Judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived assets. The Company did not record any impairment charges for the years ended December 31, 2022, 2021 or 2020.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination.

Goodwill is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise. The Company has defined one reporting unit that is the same as its operating segment. Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may be more likely than not less than its carrying amount, or if significant adverse changes in the Company’s future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, the

Company can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill.

At October 31, 2022, the Company performed its annual goodwill impairment test and determined, after performing a qualitative test of the reporting unit, that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount. Accordingly, there was no indication of impairment and the quantitative impairment test was not performed. The Company did not record any goodwill impairment charges for the years ended December 31, 2022, 2021 or 2020.

Other Long-Term Assets

Other long-term assets include interest rate derivatives that the Company has entered into in response to the variable interest rate exposure on long-term debt, as well as securities that the Company has purchased with the intent of funding the deferred compensation arrangements for certain executives of the Company. These items are accounted for at fair value on a recurring basis. Any changes in value are included in net income in the Company’s consolidated statements of income and comprehensive income.

Warranty

The Company offers warranty coverage for its products. The length of the warranty period for its products is generally three months to two years and varies based on the product sold. The Company estimates the costs of repairing products under warranty based on the historical average cost of the repairs. The assumptions used to estimate warranty accruals are re-evaluated periodically in light of actual experience and, when appropriate, the accruals are adjusted. Estimated warranty costs are recorded at the time of sale of the related product, and are considered a cost of goods sold.

Changes in the Company’s reserve for product warranty claims during 2022, 2021 and 2020 were as follows (in thousands):


	December 31,		December 31,		December 31,
	2022		2021		2020
Beginning balance	$	1,869	$	1,571	$	1,075
Warranty reserves acquired		45		15		465
Provision		(66)		543		34
Warranty expenditures		409		(204)		(97)
Effect of foreign currency translation		(97)		(56)		94
Ending balance	$	2,160	$	1,869	$	1,571

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):


	December 31,		December 31,
	2022		2021
Compensation and fringe benefits	$	15,818	$	14,666
Accrued business acquisition consideration		12,500		12,388
Warranty reserve		2,160		1,869
Operating lease liabilities - current		4,224		4,532
Finance lease obligations - current		377		—
Deferred revenue		4,807		2,425
Other accrued expenses		8,235		5,776
	$	48,121	$	41,656

Foreign Currency Translation

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end of period exchange rates. Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment. Foreign currency translation adjustment is included in accumulated other comprehensive loss, a component of stockholders’ equity in the accompanying consolidated statements of stockholders’ equity. Revenue and expense transactions use an average rate prevailing during the month of the related transaction. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of each of the operating locations are included in the other (income) expense, net as incurred.

Revenue Recognition

Refer to Note 3, Revenue Recognition, for description of the Company’s policies regarding revenue recognition.

Engineering and Development Costs

The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. Engineering and design as well as research and development costs are expensed as incurred.

Basic and Diluted Earnings per Share

Basic earnings per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share is determined by dividing the net income by the sum of: (1) the weighted average number of common shares outstanding and (2) if not anti-dilutive, the effect of potential common shares determined utilizing the treasury stock method.

Basic and diluted weighted-average shares outstanding are as follows (in thousands):



	Year ended December 31,
	2022	2021	2020
Basic weighted average shares outstanding	15,448	14,413	14,243
Dilutive effect of potential common shares	503	104	90
Diluted weighted average shares outstanding	15,951	14,517	14,333

For 2022, 2021 and 2020, the anti-dilutive common shares excluded from the calculation of diluted income per share were immaterial.

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to stockholders.

Fair Value Accounting

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

The guidance establishes a framework for measuring fair value, which utilizes observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Preference is given to observable inputs. These two types of inputs create the following three-level fair value hierarchy:

Level 1: Quoted prices for identical assets or liabilities in active markets.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3: Significant inputs to the valuation model that are unobservable.

The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, debt obligations, accounts payable, and accrued liabilities. The carrying amounts reported in the consolidated balance sheets for these assets approximate fair value because of the immediate or short-term maturities of these financial instruments.

The following table presents the Company’s financial assets that are accounted for at fair value on a recurring basis as of December 31, 2022 and 2021, respectively, by level within the fair value hierarchy (in thousands):


	December 31, 2022
	Level 1		Level 2		Level 3
Assets (liabilities)
Pension plan assets	$	5,324	$	—	$	—
Deferred compensation plan assets		3,870		—		—
Foreign currency hedge contracts		—		48		—
Interest rate swaps, net		—		7,236		—
Contingent consideration		—		—		(4,100)


	December 31, 2021
	Level 1		Level 2		Level 3
Assets (liabilities)
Pension plan assets	$	6,899	$	—	$	—
Deferred compensation plan assets		4,636		—		—
Foreign currency hedge contracts		—		39		—
Interest rate swaps, net		—		220		—
Contingent consideration		—		—		(4,900)

The contingent consideration fair value measurement in connection with the acquisition of ALIO Industries (“ALIO”) 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 during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.

Derivative Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") No. 815, Derivatives and Hedging ("ASC 815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.

Income Taxes

The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. A valuation allowance may be provided to the extent management deems it is more likely than not that deferred tax assets will not be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income, in the appropriate taxing jurisdictions, during the periods in which temporary differences, net operating losses and tax credits become realizable. Management believes that it is more likely than not that the Company will realize the benefits of these temporary differences and operating loss and tax credit carryforwards, net of valuation allowances.

It is the Company's policy to include interest and penalties related to income tax liabilities in income tax expense on the consolidated statements of income and comprehensive Income. In addition, the Company records uncertain tax positions in accordance with ASC 740, Income Taxes, ("ASC 740").

Pension and Postretirement Welfare Plans

The Company records the service cost component of net benefit costs in cost of goods sold, selling, and general and administrative expenses. The interest cost component of net benefit costs is recorded in interest expense and the remaining components of net benefit costs, amortization of net losses and expected return on plan assets is recorded in other expense, net.

Concentration of Credit Risk

Trade receivables subject the Company to the potential for credit risk. To reduce this risk, the Company performs evaluations of its customers’ financial condition and creditworthiness at the time of sale, and updates those evaluations when necessary. See Note 13, Segment Information, for additional information regarding customer concentration.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock Split

On March 10, 2021, the Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on April 16, 2021. The additional shares were issued on April 30, 2021. In lieu of fractional shares, shareholders received a cash payment based on the closing share price of the common stock on the record date. All share and per share information presented in the consolidated financial statements have been adjusted to reflect the stock split on a retrospective basis for all periods presented.

Twinsburg Consolidation

In September 2021, the Company announced its plans to consolidate its manufacturing facility in Twinsburg, Ohio with its Watertown, New York and Reynosa, Mexico facilities in 2022. Costs of $913 and $545 are included in business development on the consolidated statement of income and comprehensive income for the years ended December 31, 2022 and 2021, respectively, related to the consolidation of the Twinsburg facility. Costs incurred include accelerated lease costs, severance and other payroll related costs, and accelerated depreciation. The consolidation has been completed as of December 31, 2022. There are no expenses anticipated to be incurred in 2023 nor any associated accrued liabilities as of December 31, 2022.

Recently adopted accounting pronouncements

Accounting pronouncements not yet adopted

In December 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" from December 31, 2022 to December 31, 2024, which is superseding the date from ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU relates to LIBOR or other referenced rates that will be discontinued due to reference rate reform. The update provides optional expedients to modify contracts under these referenced rates for all entities. The standard is optional, effective for any interim reporting period beginning March 12, 2020 through December 31, 2024. The Company is assessing the impact of adopting the standard on our consolidated financial statements.