Items Affecting the Comparability of our Financial Results
The Company purchased all of the issued and outstanding membership interests of
KT Acquisition LLC (name later changed to Komtek Forge LLC "Komtek"), in
Worcester, Massachusetts on January 15, 2021.
The Company purchased all of the membership interests of Global-Tek
Manufacturing LLC ("Global-Tek Manufacturing") in Ceiba, Puerto Rico and
substantially all of the assets of Machining Technology L.L.C. ("Global-Tek
Colorado"), in Longmont, Colorado on March 2, 2021. Global-Tek Manufacturing and
Global-Tek Colorado are collectively referred to as "Global-Tek".
The Company purchased substantially all of the operating assets of Emergency
Hydraulics LLC, ("Emergency Hydraulics") in Ocala, Florida on July 1, 2021.
The Company purchased substantially all of the operating assets of Reverso
Pumps, Inc, ("Reverso Pumps") and Separ of the Americas, LLC, ("Separ America"),
both located in Davie, Florida on January 10, 2022.
The Company purchased substantially all of the operating assets of KMC Corp. dba
Knitting Machinery Corp. ("Knitting Machinery") located in Cleveland, Ohio and
Greenville, Ohio on May 1, 2022.
Accordingly, in light of the timing of these transactions, the Company's results
for the year ended December 31, 2022 include the added results of operations of
Emergency Hydraulics, Reverso Pumps, Separ America and Knitting Machinery in the
Industrial and Transportation Products segment. Conversely, our results for the
year ended December 31, 2021 do not include the results of operations of Reverso
Pumps, Separ America and Knitting Machinery and also do not include a full
twelve months of results for Komtek, Emergency Hydraulics, Global-Tek
Manufacturing and Global-Tek Colorado in the Industrial and Transportation
Products segment.
Reportable Segment Information
Refer to Part 1, Item 1. Business for descriptions of our business segments.
Results of Operations
Year Ended December 31, 2022 Compared with Year ended December 31, 2021
Sales for the year ended December 31, 2022 increased to $127.8 million, an
increase of approximately $23.6 million or 22.6% from sales of $104.2 million
during the prior year. This increase in sales was attributable to the impact of
the acquisitions of Reverso Pumps, Separ America and Knitting Machinery in
addition to a full twelve months of earnings from Komtek and Emergency
Hydraulics as compared to less than twelve months in the prior year.
Specifically, the increase in sales was driven by increased sales from the
acquisitions of Reverso Pumps and Separ America ($7.2 million) and Knitting
Machinery ($1.0 million), in addition to increased revenue from Komtek ($2.5
million) and Emergency Hydraulics ($1.0 million), and a $17.9 million increase
attributable to recovery in demand as COVID-19 pandemic-related restrictions
loosened and commercial activity increased for Air Enterprises, Federal Hose,
Data Genomix and MPI. These increases were partially offset by a decline in
demand of $5.4 million attributable collectively to Global-Tek Manufacturing,
Global-Tek Colorado and CAD Enterprises.
Cost of sales for the year ended December 31, 2022 was $100.7 million compared
to $82.2 million, an increase of $18.5 million or 22.5% from the prior year.
Gross profit was $27.0 million for the year ended December 31, 2022 compared to
$21.9 million, an increase of $5.1 million from 2021. The increase in cost of
sales was primarily attributable to the impact of the acquisitions of Knitting
Machinery, Reverso Pumps and Separ America in addition to a full year of
earnings in 2022 from Komtek and Emergency Hydraulics. In addition, cost of
sales for Air Enterprises increased from $30.3 million in the year ended
December 31, 2021 to $36.9 million in the year ended December 31, 2022, an
increase of $6.6 million or 21.9% driven by increased demand for its products.
These increases were partially offset by a decline in cost of sales of $3.0
million in the year ended December 31, 2022 compared to the prior year
attributable collectively to Global-Tek Manufacturing, Global-Tek Colorado and
CAD Enterprises.
Selling, general and administrative expenses (SG&A) for the year ended December
31, 2022 were $18.5 million, or 14.5% of sales, compared to $14.9 million, or
14.3% of sales in the prior year. Selling, general and administrative expenses
increased due to $0.9 million of stock awards that were granted in 2022 compared
to $0.4 million of stock awards during 2021. An additional $1.9 million of
Selling, general and administrative expenses in 2022 were a result of the
acquisitions of Reverso Pumps and Separ America and an additional $0.1 million
of Selling, general and administrative expenses in the current year were a
result of a full twelve months of expense for Komtek, Global-Tek Manufacturing
and Global-Tek Colorado compared to less than twelve months in prior year.
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Interest charges in the year ended December 31, 2022 were approximately $1.1
million compared to $0.9 million in the prior year. The interest expense
increased in 2022 compared to 2021 due to higher levels of floating rate bank
debt and higher average interest rates. Average total debt (including notes) and
average interest rates for the year ended December 31, 2022 were $27.3 million
and 3.8% compared to $26.4 million and 2.9% in 2021.
Other income, net was $0.3 million in the year ended December 31, 2022 compared
to $1.3 million of other income, net in the prior year. The decrease in other
income was primarily driven by the forgiveness of the Company's $1.5 million in
outstanding Payroll Protection Loans ("PPP Loans") in full by the U.S. Small
Business Administration in accordance with the terms of the CARES Act in 2021 as
compared to no PPP Loan forgiveness in 2022. The forgiveness of the PPP Loans
was treated as income in 2021. The other income of $0.3 million in the year
ended December 31, 2022 was driven by the write off of a contingent liability of
$0.8 million related to Global-Tek Manufacturing and Global-Tek Colorado as the
Company determined the second year performance target would not be achieved by
Global-Tek Manufacturing and Global-Tek Colorado and no contingent consideration
was payable to the sellers. The write off of the $0.8 million contingent
liability in 2022 was treated as income in 2022. This income was partially
offset by an increase in unrealized losses on investments from $0.2 million in
the year ended December 31, 2021 to $0.9 million in 2022.
Income tax expense in the year ended December 31, 2022 was $1.2 million compared
to $1.7 million in the prior year. Tax expense was lower in 2022 compared to the
prior year driven primarily by the reversal of certain income tax reserves that
were deemed unecessary, which contributed to a lower tax rate in 2022.
Net income for the year ended December 31, 2022 was $6.6 million or $1.89 per
diluted share as compared to net income of $5.7 million or $1.66 per diluted
share for the prior year.
Commercial Air Handling Segment
Sales in the Commercial Air Handling Equipment segment for the year ended
December 31, 2022 increased to $47.6 million, an increase of approximately $9.6
million or 25.3% from sales of $38.0 million during the prior year. This
increase was primarily attributable to an increase in demand as COVID-19
pandemic-related restrictions were lifted and the on-site access necessary to
complete the installation of commercial air handling units was restored for
certain hospital and university customers.
Cost of sales in the Commercial Air Handling Equipment segment for the year
ended December 31, 2022 was $36.9 million compared to $30.3 million in the prior
year, an increase of $6.6 million or 21.9%. Gross profit was $10.8 million in
the year ended December 31, 2022 compared to $7.7 million in the prior year, an
increase of $3.0 million. Cost of sales as a percentage of sales was 77.4% in
2022 compared to 79.6% in the prior year. The decrease in cost of sales as a
percentage of sales in 2022 was primarily attributable to improved cost
management compared to the prior year.
Selling, general and administrative expenses (SG&A) in the Commercial Air
Handling Equipment segment in the year ended December 31, 2022 were $4.1
million, or 8.6% of sales, compared to $4.7 million, or 12.3% of sales, in the
prior year. The improvement in SG&A expenses as a percentage of net sales was
driven by reduced general and administrative expenses as a result of improved
cost management in the year ended December 31, 2022 compared to the prior year
There was no interest charge in the Commercial Air Handling Equipment segment
for the year ended December 31, 2022 or in the prior year because there was no
outstanding debt attributable to this segment during those periods.
Income tax expense in the Commercial Air Handling Equipment segment in the year
ended December 31, 2022 was $1.9 million compared to $0.8 million in the prior
year, an increase of $1.1 million that was primarily attributable to an increase
in income before taxes.
Net income in the Commercial Air Handling Equipment segment for the year ended
December 31, 2022 was $4.8 million compared to net income of $2.3 million in the
prior year due primarily to the factors noted above.
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Industrial and Transportation Products Segment
Sales in the Industrial and Transportation Products segment for the year ended
December 31, 2022 increased to $80.1 million, an increase of approximately $14.0
million or 21.2% from sales of $66.1 million during the prior year.
Specifically, the increase in sales was driven by the acquisitions of Reverso
Pumps and Separ America ($7.2 million) and Knitting Machinery ($1.0 million), an
increase in revenue for Komtek ($2.5 million) and Emergency Hydraulics ($1.0
million), and a $8.3 million increase attributable to recovery in demand as
COVID-19 pandemic-related restrictions loosened and commercial activity
increased for Federal Hose, Data Genomix and MPI. These increases were partially
offset by a decline in demand of $5.4 million attributable collectively to
Global-Tek Manufacturing, Global-Tek Colorado and CAD Enterprises.
Cost of sales in the Industrial and Transportation Products segment for the year
ended December 31, 2022 increased to $63.8 million, an increase of approximately
$11.8 million or 22.8% from cost of sales of $52.0 million during the prior
year. Gross profit was $16.3 million in the year ended December 31, 2022
compared to $14.2 million in the prior year, an increase of $2.1 million.
Specifically, the increase in gross profit was primarily driven by the
acquisitions of Reverso Pumps and Separ America ($3.6 million) and Knitting
Machinery ($0.3 million), an increase for Komtek ($0.8 million) and Emergency
Hydraulics ($0.3 million) and a $0.3 million increase attributable to recovery
in demand as COVID-19 pandemic-related restrictions loosened and commercial
activity increased for Federal Hose, Data Genomix and MPI. These increases were
partially offset by a decline in demand and gross profit of $3.4 million
attributable collectively to Global-Tek Manufacturing and Global-Tek Colorado
and CAD Enterprises. Cost of sales as a percentage of sales was 79.7% in the
most recent year compared to 78.6% in the prior year. The increase in cost of
sales as a percentage of sales in the current year was primarily attributable to
input costs such as steel and aluminum rising faster than sales in the most
recent year compared to prior year at Global-Tek Manufacturing and Global-Tek
Colorado and CAD Enterprises.
Selling, general and administrative expenses (SG&A) in the Industrial and
Transportation Products segment in the year ended December 31, 2022 were $10.3
million, or 12.9% of sales, compared to $9.6 million, or 14.6% of sales, in the
prior year. The improvement in SG&A expenses as a percentage of net sales was
driven by the impact of the fixed SG&A expenses over the higher revenue base in
2022 compared to 2021.
The interest charge for the Industrial and Transportation Products segment for
the year ended December 31, 2022 was $1.1 million compared to $0.8 million in
the prior year.
Other income, net in the Industrial and Transportation Products segment was $1.1
million in the year ended December 31, 2022 compared to $0.5 million of other
income, net in the same period of the prior year, an increase of $0.6 million.
The increase in other income, net was primarily attributable to the write off a
contingent liability of $0.8 million related to Global-Tek Manufacturing and
Global-Tek Colorado because management determined that the specified performance
targets likely will not be met and therefore the contingent consideration will
not be earned and paid. The write off of the $0.8 million contingent liability
in 2022 was treated as income in 2022
Income tax expense in the Industrial and Transportation Products segment in year
ended December 31, 2022 was $1.7 million compared to $0.7 million in the prior
year, an increase of $0.9 million due to higher income before taxes and higher
expected tax rates used in 2022.
Net income in the Industrial and Transportation Products segment for the year
ended December 31, 2022 was $4.3 million compared to net income of $3.5 million
in the prior year due primarily to the factors noted above.
Liquidity and Capital Resources
As described further in Note 15 to the Company's consolidated financial
statements, effective January 10, 2022, the Company completed the Reverso Pumps
and Separ America acquisitions for a purchase price of $4.2 million after
post-closing adjustments based on working capital.
As described further in Note 15 to the Company's consolidated financial
statements, effective May 1, 2022, the Company completed the Knitting Machinery
acquisition for a purchase price of $1.3 million after post-closing adjustments
based on working capital.
The Company's credit agreement, by and between the Company and JPMorgan Chase
Bank, N.A. as lender (as amended, the "Credit Agreement"), provides for a
revolving credit facility. On March 2, 2021, the Company amended its Credit
Agreement to increase availability under the revolving credit facility to $30.0
million from $20.0 million. The amendment to the loan agreement provided
additional flexibility to fund acquisitions, working capital and other strategic
initiatives.
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Total current assets at December 31, 2022 increased to $48.8 million from $42.5
million at December 31, 2021, an increase of $6.3 million. The increase in
current assets is comprised of the following: an increase of accounts receivable
of $3.5 million; an increase in inventory of $3.6 million; an increase in
contract assets of $1.2 million; and an increase in prepaid expenses and other
assets of $0.4 million; partially offset by a decrease in refundable tax assets
of $1.3 million; a decrease in investments of $0.9 million; and a decrease in
cash of $0.2 million. The increase in accounts receivable was driven by the
acquisitions in 2022 of Reverso Pumps and Separ America in addition to an
increase in new billings in the Commercial Air Handling segment for certain
early-stage projects that have achieved billing milestones in advance of certain
production milestones per their individual contract terms. Management estimates
that these new projects in the Commercial Air Handling segment will be completed
in the next 6 months. The Company is carrying lower cash balances due to
improved supply chain reliability.
Total current liabilities at December 31, 2022 increased to $26.1 million from
$23.9 million at December 31, 2021, an increase of $2.2 million. The increase
in current liabilities was primarily driven by the following: an increase in
accounts payable of $2.6 million, an increase in unearned revenue of $1.5
million, an increase in accrued income taxes of $1.2 million and an increase in
current leases payable by $0.5 million partially offset by a decrease in short
term notes payable of $1.6 million, a decrease in the current portion of bank
debt of $1.2 million and a decrease in contingent liabilities by $0.8 million.
Cash provided by operating activities for the year ended December 31, 2022 was
approximately $8.0 million, compared to cash provided by operating activities of
$1.8 million in 2021. Cash provided by operating activities for the year ended
December 31, 2022 is comprised of the following: net income of $6.6 million;
cash provided by adjustments for non-cash items of $4.7 million; and cash used
in working capital adjustments of $3.2 million. The primary drivers of decreased
working capital during 2022 were the increase in accounts receivable of $2.7
million, the increase in inventory of $2.8 million, the increase on contract
assets of $1.2 million and the increase in prepaid expenses of $0.6 million,
partially offset by the increase in accounts payable of $2.0 million, the
increase in unearned revenue of $1.1 million, the increase in lease liability of
$0.5 million and the increase in accrued expenses of $0.5 million. Cash flows
from operations were impacted by cash used in working capital adjustments
including an increase in accounts receivable of $2.7 million in the year ended
December 31, 2022, driven primarily by an increase of $2.9 million in the
Commercial Air Handling Equipment segment. This increase was the result of an
increase in new sales with high upfront billing milestones. Days sales
outstanding in the Commercial Air Handling Equipment segment were 77 days in the
year ending December 31, 2022 compared 73 days in 2021 which management will
continue to monitor but does not view as a significant change. The Industrial
and Transportation Products segment days sales outstanding was unchanged at 56
days in the years ending December 31, 2021 and 2022. The Company added Reverso
Pumps, Separ America and Knitting Machinery in 2022 and will closely monitor
days sales outstanding for the companies in this segment. The rise in days sales
outstanding has a negative impact on cashflow and management will continue to
monitor the trend in future periods. The Company does not have a history of
failure to collect payment from its customers and believes that it is reasonable
to assume that materially all of its outstanding accounts receivable will be
collectible barring unforeseen circumstances.
Cash used in investing activities for the year ended December 31, 2022 was $5.1
million, compared to cash used in investing activities of $9.5 million in the
prior year. Cash used in investing activities was for the acquisitions of
Knitting Machinery, Reverso Pumps and Separ America in the Industrial and
Transportation Products segment and capital expenditures in the normal course of
business.
Cash used in financing activities was approximately $3.2 million for the year
ended December 31, 2022, compared to cash provided by financing activities of
$3.0 million in the prior year. Cash used in financing activities for the year
ended December 31, 2022 was primarily related to: $8.9 million borrowings on
bank debt related primarily to the acquisition of Reverso Pumps and Separ
America offset by payments on bank debt of $7.1 million, payments on notes
payable of $4.1 million and a payments of a contingent consideration of $0.8
million as Global-Tek Manufacturing and Global-Tek Colorado achieved its first
year performance target.
The Company is actively managing its business to maintain cash flow and
liquidity. We believe that cash and availability on our revolving credit
facility to be sufficient to fund working capital needs and service principal
and interest payments due related to the bank debt and notes payable for at
least the next 12 months. The Company had $10.7 million available to borrow on
the revolving credit facility at December 31, 2022. Notwithstanding the
Company's expectations, if the Company's operating results decrease as the
result of pressures on the business due to, for example, supply chain
interruptions or delays, increases in material, freight or labor costs,
inflationary pressures, currency or interest rate fluctuations, regulatory
issues, a downturn in general economic conditions, or the Company's failure to
execute its business plans, the Company may require additional financing, or may
be unable to comply with its obligations under the credit facility, and its
lenders could demand repayment of any amounts outstanding under the Company's
credit facility. In addition, see Note 8 of the notes to the consolidated
financial statements.
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Off-Balance Sheet Arrangements
From time to time, the Company enters into performance and payment bonds in the
ordinary course of business. These bonds are secured by certain assets of the
Company by the surety until the Company's completion of the requirements of the
commercial air handling contract. At December 31, 2022, the Company has secured
performance and payment bonds in the amount of $8.2 million as surety on
completion of the requirements of certain commercial air handling contracts. The
Company has no other off-balance sheet arrangements (as defined in Regulation
S-K Item 303 paragraph (a)(4)(ii)) that have or are reasonably likely to have a
material current or future effect on its financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditure or capital resources.
Critical Accounting Policies and Estimates
Preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make certain estimates and
assumptions which affect amounts reported in our consolidated financial
statements. On an ongoing basis, we evaluate the accounting policies and
estimates that are used to prepare financial statements. Management has made
their best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. We do not believe that
there is great likelihood that materially different amounts would be reported
under different conditions or using different assumptions related to the
accounting policies described below. However, application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.
Certain accounting policies that require significant management estimates and
are deemed critical to our results of operations or financial position are
discussed below. On a regular basis, critical accounting policies are reviewed
with the Audit Committee of the Board of Directors.
Revenue Recognition:
We recognize revenue with respect to customer orders when our obligations under
the contract terms are satisfied and control of the product transfers to the
customer, typically upon shipment. Revenue from certain contracts in the
Commercial Air Handling Equipment segment is accounted for over time, when
products are manufactured or services are performed, as control transfers under
these arrangements. We follow the input method, as we have determined that it
allows us to make reasonably reliable estimates of revenue and costs of a
contract.
Allowance for Obsolete and Slow-Moving Inventory:
Inventories are valued using the first-in, first-out ("FIFO") method; stated at
the lower of cost or net realizable value; and are reduced by an allowance for
obsolete and slow-moving inventories. The allowance is estimated based on
management's review of inventories on hand with minimal sales activity, which is
compared to estimated future usage and sales. Inventories identified by
management as slow-moving or obsolete are reserved for based on estimated
selling prices less disposal costs. Though we consider these allowances adequate
and proper, changes in economic conditions in specific markets in which we
operate could have a material effect on allowances required.
Business Combinations:
Business combinations are accounted for using the purchase method of accounting
under ASC 805, "Business Combinations." This method requires the Company to
record assets and liabilities of the businesses acquired at their estimated fair
values as of the acquisition date. Any excess of the cost of the acquisition
over the fair value of the net assets acquired is recorded as goodwill.
Determining the fair value requires management to make estimates and assumptions
including discount rates, rates of return on assets, and long-term sales growth
rates.
Goodwill and Indefinite Lived Intangible Assets:
As referenced by ASC 350 "Intangibles- Goodwill and other" ("ASC 350"),
management performs its annual test for goodwill and intangible assets at least
annually or more frequently, if impairment indicators arise at the reporting
unit level. Our reporting units have been identified at the individual company
component level, with each individual subsidiary operating company constituting
its own reporting unit. For 2022 and 2021, management performed qualitative and
quantitative testing for each individual company with a goodwill balance other
than those companies that were newly acquired within one year.
Our goodwill impairment analysis utilizes a qualitative approach comparing
carrying amount of the reporting unit to its estimated fair value. To the extent
that the qualitative approach indicates that it is more likely than not that the
carrying amount is less than its fair value, we apply a quantitative approach as
a secondary step. In applying the quantitative approach, we use an income
approach to estimate the fair value of the reporting unit. The income approach
uses a number of factors, including future business plans and actual and
forecasted operating results. The significant assumptions employed under this
method include discount rates; revenue growth rates, including assumed terminal
growth rates; and operating margins used to project future cash flows for the
operating company. The discount rates utilized reflect market-based estimates of
capital costs and discount rates adjusted for management's assessment of a
market participant's view with respect to other risks associated with the
projected cash flows of the individual company. Our estimates are based upon
assumptions we believe to be reasonable, but which by nature are uncertain and
unpredictable. We believe we incorporate reasonable assumptions into our
analysis of goodwill impairment testing for a reporting unit, such that actual
experience would need to be materially out of the range of expected assumptions
in order for an impairment to remain undetected.
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In conducting our 2022 annual goodwill impairment analysis, we determined that
the goodwill for CAD Enterprises at December 31, 2022 was $7.3 million. In our
qualitative assessment of CAD Enterprises, we noted a decline in revenue from
$30.1 million in 2019 to $18.9 million in 2020, $18.3 million in 2021 and $15.5
million in 2022 and a decline in after-tax income margin from 5.8% in 2019 to
-4.6% in 2020, -0.5% in 2021, and -3.4% in 2022 and thus determined to conduct a
quantitative assessment of CAD Enterprises. The quantitative assessment of CAD
Enterprises confirmed that the estimated fair value exceeded carrying value by
12.2 percent, and thus no impairment existed at December 31, 2022. The key
assumptions used to estimate fair value included discount rates; revenue growth
rates, including assumed terminal growth rates; and after-tax income margins
used to project future cash flows for CAD Enterprises. The discount rate used to
estimate fair value was 10% and was based on estimates of capital costs and
management's assessment of a market participant's view with respect to other
risks associated with the projected cash flows for CAD Enterprises. Our revenue
growth rate for the 9-year period in the discounted cash flow model was 10.2%
per year, which reflects management's assessment of estimated future orders for
CAD Enterprises based in part on a Long-Term-Agreement ("LTA") with the
company's largest customer, a new $7.5 million incremental purchase order with
this customer, our previous revenue history including actual revenues of $30.1
million in 2019 before the onset of the COVID-19 pandemic, and a continued
business rebound in the aerospace industry. The assumed terminal growth rate for
CAD Enterprises was 3% based on management's assessment of long-term growth
rates for the Aerospace industry. The after-tax income margins used to project
future margins for the company were based on the historical margins for CAD
Enterprises prior to the COVID-19 pandemic. In 2019, CAD Enterprises earned a
debt-free after-tax income margin of 16.6%. The discounted cash flow model used
to estimate fair value assumes a debt-free after-tax income margin of 17.3% in
2027, or year 5 of the forecast period and expanding margins to 17.5% in the
terminal year. This is based on management's assessment of our ability to grow
SG&A expenses at a slower rate than revenues as the company achieves more scale.
Our estimates are based upon assumptions we believe to be reasonable, but which
by nature are uncertain and unpredictable. Potential events and circumstances
including global conflicts, materials shortages, inability to increase prices to
keep pace with expenses, onset of a global pandemic, departure of key employees
and loss of a key customer could negatively affect the key assumptions used for
the recent fair value test and are similar to the risk factors noted in Item 1A,
Risk Factors in the Company's Annual Report on Form 10-K for the year ended
December 31, 2022.
In conducting our 2022 annual goodwill impairment analysis, we determined that
the goodwill for Global-Tek Manufacturing and Global-Tek Colorado at December
31, 2022 was $1.9 million. In our qualitative assessment of Global-Tek
Manufacturing and Global-Tek Colorado, we noted a decline in revenue from $9.2
million in 2021 to $6.5 million in 2022 and a decline in after-tax income margin
from 17.3% in 2021 to -3.3% in 2022 and thus determined to conduct a
quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado. The
quantitative assessment of Global-Tek Manufacturing and Global-Tek Colorado
confirmed that the estimated fair value exceeded carrying value by 23.3%, and
thus no impairment existed at December 31, 2022. The key assumptions used to
estimate fair value included discount rates; revenue growth rates, including
assumed terminal growth rates; and after-tax income margins used to project
future cash flows for Global-Tek Manufacturing and Global-Tek Colorado. The
discount rate used to estimate fair value was 10% and was based on estimates of
capital costs and management's assessment of a market participant's view with
respect to other risks associated with the projected cash flows for Global-Tek
Manufacturing and Global-Tek Colorado. Our revenue growth rate for the 9-year
period in the discounted cash flow model was 6.5% per year, which reflects
management's assessment of estimated future orders for Global-Tek Manufacturing
and Global-Tek Colorado based on our previous revenue history including actual
revenues of $9.2 million in 10 months of operations after the acquisition in
2021 before the untimely passing of the General Manager. The assumed terminal
growth rate for Global-Tek Manufacturing and Global-Tek Colorado was 3% based on
management's assessment of long-term growth rates for the Aerospace and Defense
industries. The after-tax income margins used to project future margins for the
company were based on the historical margins for Global-Tek Manufacturing and
Global-Tek Colorado prior to the untimely passing of the General Manager. In
2021, Global-Tek Manufacturing and Global-Tek Colorado earned an debt-free
after-tax income margin of 16.4%. The discounted cash flow model used to
estimate fair value assumes an after-tax income margin of 6.2% in 2027, or year
5 of the forecast period and expanding margins to 7.8% in the terminal year.
This is based on management's assessment of our ability to grow SG&A expenses at
a slower rate than revenues as the company achieves more scale. Our estimates
are based upon assumptions we believe to be reasonable, but which by nature are
uncertain and unpredictable. Potential events and circumstances including global
conflicts, materials shortages, inability to increase prices to keep pace with
expenses, onset of a global pandemic, departure of key employees and loss of a
key customer could negatively affect the key assumptions used for the recent
fair value test and are similar to the risk factors noted in Item 1A, Risk
Factors in the Company's Annual Report on Form 10-K for the year ended December
31, 2022.
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Income Taxes:
In accordance with ASC 740, "Income Taxes" ("ASC 740"), we account for income
taxes under the asset and liability method, whereby deferred tax assets and
liabilities are determined based on temporary differences between the financial
reporting and the tax bases of assets and liabilities and are measured using the
currently enacted tax rates. Specifically, we measure gross deferred tax assets
for deductible temporary differences and carryforwards, such as operating losses
and tax credits, using the applicable enacted tax rates and apply the more
likely than not measurement criterion Further, at each interim reporting period,
we estimate an effective income tax rate that is expected to be applicable for
the full year. Significant judgment is involved regarding the application of
income tax laws and regulations and when projecting the jurisdictional mix of
income. Additionally, interpretation of tax laws, court decisions or other
guidance provided by taxing authorities influences our estimate of the effective
income tax rates. As a result, our actual annual effective income tax rates and
related income tax liabilities may differ materially from our interim estimated
effective tax rates and related income tax liabilities. Any resulting
differences are recorded in the period they become known.
Impact of Inflation
Inflationary economic conditions have increased, and may continue to increase,
the Company's costs of producing its products. The Company's products are
manufactured using various metals and other commodity-based materials including
steel, aluminum, rubber and silicone. Freight and labor costs also are
significant elements of the Company's production costs. Inflationary economic
conditions increase these various costs. If the Company is unable to mitigate
inflationary increases through customer pricing actions, alternative supply
arrangements or other cost reduction initiatives, its profitability may be
adversely affected.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to the
business of the Company. Generally, these statements can be identified by the
use of words such as "guidance," "outlook," "believes," "estimates,"
"anticipates," "expects," "forecasts," "seeks," "projects," "intends," "plans,"
"may," "will," "should," "could," "would" and similar expressions intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. These forward-looking statements, or other
statements made by the Company, are made based on management's expectations and
beliefs concerning future events impacting the Company and are subject to
uncertainties and factors (including, but not limited to, those specified below)
which are difficult to predict and, in many instances, are beyond the control of
the Company. As a result, actual results of the Company could differ materially
from those expressed in or implied by any such forward-looking statements. These
uncertainties and factors include (a) the moderation of the adverse effects of
the COVID-19 pandemic, including the resumption of operations by the Company's
customers, loosening of public health restrictions, or any reimposed
restrictions or tightening of public health restrictions which could impact the
demand for the Company's products; (b) shortages in supply or increased costs of
necessary products, components or raw materials from the Company's suppliers;
(c) availability shortages or increased costs of freight and labor for the
Company and/or its suppliers; (d) actions that governments, businesses and
individuals take in response to public health crises, such as the COVID-19
pandemic, including mandatory business closures and restrictions on onsite
commercial interactions; (e) conditions in the global and regional economies and
economic activity, including slow economic growth or recession, inflation,
currency and credit market volatility, reduced capital expenditures and changes
in government trade, fiscal, tax and monetary policies; (f) adverse effects from
evolving geopolitical conditions, such as the military conflict in Ukraine; (g)
the Company's ability to effectively integrate acquisitions, and manage the
larger operations of the combined businesses, (h) the Company's dependence upon
a limited number of customers and the aerospace industry, (i) the highly
competitive industry in which the Company operates, which includes several
competitors with greater financial resources and larger sales organizations, (j)
the Company's ability to capitalize on market opportunities in certain sectors,
(k) the Company's ability to obtain cost effective financing and (k) the
Company's ability to satisfy obligations under its financing arrangements, and
the other risks described in "Item 1A. Risk Factors" in our Annual Report Form
10-K and the Company's subsequent filings with the SEC.
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