ALNT 10-Q
Allient Inc (ALNT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
For the quarterly period ended
OR
For the transition period from ________________________to _________________________
Commission file number
(Exact name of Registrant as Specified in Its Charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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(
(Registrant’s Telephone Number, Including Area Code)
(Former Address, if Changed Since Last Report)
Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act.
Large accelerated filer ◻ | Non-accelerated filer ◻ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Number of Shares of the only class of Common Stock outstanding:
ALLIED MOTION TECHNOLOGIES INC.
INDEX
PART I. FINANCIAL INFORMATION | Page No. | |||
Item 1. | Financial Statements |
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1 | ||||
Condensed Consolidated Statements of Income and Comprehensive Income – Unaudited | 2 | |||
Condensed Consolidated Statements of Stockholders’ Equity – Unaudited | 3 | |||
4 | ||||
Notes to Condensed Consolidated Financial Statements - Unaudited | 5 | |||
Management's Discussion and Analysis of Financial Condition and Results of Operations | 18 | |||
26 | ||||
27 | ||||
28 | ||||
28 | ||||
29 | ||||
29 | ||||
29 | ||||
ALLIED MOTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Trade receivables, net of provision for credit losses of $ | | | ||||
Inventories |
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Prepaid expenses and other assets |
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Total current assets |
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Property, plant and equipment, net |
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Deferred income taxes |
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Intangible assets, net |
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Goodwill |
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Right of use assets | | | ||||
Other long-term assets |
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Total Assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued liabilities |
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Total current liabilities |
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Long-term debt |
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Deferred income taxes |
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Pension and post-retirement obligations |
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Right of use liabilities | | | ||||
Other long-term liabilities | | | ||||
Total liabilities |
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Stockholders’ Equity: | ||||||
Common stock, |
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Preferred stock, par value $ |
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Retained earnings |
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Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
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Total Liabilities and Stockholders’ Equity | $ | | $ | | ||
See accompanying notes to condensed consolidated financial statements.
1
ALLIED MOTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
For the three months ended | For the six months ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Revenues | $ | | $ | | $ | | $ | | ||||
Cost of goods sold |
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Gross profit |
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Operating costs and expenses: | ||||||||||||
Selling |
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General and administrative |
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Engineering and development |
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Business development |
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Amortization of intangible assets |
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Total operating costs and expenses |
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Operating income |
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Other expense, net: | ||||||||||||
Interest expense |
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Other (income) expense, net |
| ( |
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| ( |
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Total other expense, net |
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Income before income taxes |
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Income tax (provision) benefit |
| ( |
| ( |
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| ( | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Basic earnings per share: | ||||||||||||
Earnings per share | $ | | $ | | $ | | $ | | ||||
Basic weighted average common shares |
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Diluted earnings per share: | ||||||||||||
Earnings per share | $ | | $ | | $ | | $ | | ||||
Diluted weighted average common shares |
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| |
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Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive income: | ||||||||||||
Foreign currency translation adjustment | | | ( | ( | ||||||||
Gain (loss) on derivatives | | ( | | ( | ||||||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||
See accompanying notes to condensed consolidated financial statements.
2
ALLIED MOTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share data)
(Unaudited)
| Common Stock |
| Accumulated Other Comprehensive Income (Loss) |
| ||||||||||||||||||||||
Foreign | ||||||||||||||||||||||||||
Unamortized | Common Stock | Currency | Accumulated | Total | ||||||||||||||||||||||
Cost of Equity | and Paid-in | Retained | Translation | income (loss) | Pension | Stockholders' | ||||||||||||||||||||
(In thousands except per share data) |
| Shares |
| Amount |
| Awards |
| Capital |
| Earnings |
| Adjustments |
| on derivatives |
| adjustments |
| Equity | ||||||||
Balances, December 31, 2020 |
| | $ | | $ | ( | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||||
Stock transactions under employee benefit stock plans |
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Issuance of restricted stock, net of forfeitures |
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| ( | |
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Stock-based compensation expense |
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Shares withheld for payment of employee payroll taxes | ( | ( | ( | ( | ||||||||||||||||||||||
Comprehensive (loss) income | ( | | ( | |||||||||||||||||||||||
Tax effect of derivative transactions | ( | ( | ||||||||||||||||||||||||
Net income |
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Dividends to stockholders - $ | ( | ( | ||||||||||||||||||||||||
Balances, March 31, 2021 |
| | | ( | | | ( | ( | ( | | ||||||||||||||||
Issuance of restricted stock, net of forfeitures |
| | | ( | ( |
| ( | |||||||||||||||||||
Stock-based compensation expense | | |
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Shares withheld for payment of employee payroll taxes | ( | ( | ( | ( | ||||||||||||||||||||||
Comprehensive income | | | | |||||||||||||||||||||||
Tax effect of derivative transactions | ( | ( | ||||||||||||||||||||||||
Net income | | | ||||||||||||||||||||||||
Dividends to stockholders - $ |
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| ( |
| ( | |||||||||||||||||||||
Balances, June 30, 2021 |
| | $ | | $ | ( | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||||
| Common Stock |
| Accumulated Other Comprehensive Income (Loss) |
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Foreign | ||||||||||||||||||||||||||
Unamortized | Common Stock | Currency | Accumulated | Total | ||||||||||||||||||||||
Cost of Equity | and Paid-in | Retained | Translation | income (loss) | Pension | Stockholders' | ||||||||||||||||||||
| Shares |
| Amount |
| Awards |
| Capital |
| Earnings |
| Adjustments |
| on derivatives |
| adjustments |
| Equity | |||||||||
Balances, December 31, 2019 | | $ | | $ | ( | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | |||||||||
Stock transactions under employee benefit stock plans |
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Issuance of restricted stock, net of forfeitures |
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| ( | |
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Stock-based compensation expense |
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Shares withheld for payment of employee payroll taxes | ( | ( | ( | ( | ||||||||||||||||||||||
Comprehensive loss | ( | ( | ( | |||||||||||||||||||||||
Tax effect of derivative transactions | | | ||||||||||||||||||||||||
Net income |
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Dividends to stockholders - $ | ( | ( | ||||||||||||||||||||||||
Balances, March 31, 2020 |
| | | ( | | | ( | ( | ( | | ||||||||||||||||
Issuance of restricted stock, net of forfeitures |
| | | ( | — | — | ||||||||||||||||||||
Stock compensation expense | | | | |||||||||||||||||||||||
Shares withheld for payment of employee payroll taxes | ( | ( | ( | ( | ||||||||||||||||||||||
Comprehensive loss (income) | | ( | | |||||||||||||||||||||||
Tax effect of derivative transactions | | | ||||||||||||||||||||||||
Net income | | | ||||||||||||||||||||||||
Dividends to stockholders - $ | ( | ( | ||||||||||||||||||||||||
Balances, June 30, 2020 |
| | $ | | $ | ( | $ | | $ | | $ | ( | $ | ( | $ | ( | $ | | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
ALLIED MOTION TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the six months ended | ||||||
June 30, | ||||||
| 2021 |
| 2020 | |||
Cash Flows From Operating Activities: | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||
Depreciation and amortization |
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Deferred income taxes |
| ( |
| ( | ||
Stock-based compensation expense | | | ||||
Debt issue cost amortization recorded in interest expense | | | ||||
Other |
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Changes in operating assets and liabilities, net of acquisition: | ||||||
Trade receivables |
| ( |
| ( | ||
Inventories |
| ( |
| ( | ||
Prepaid expenses and other assets |
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Accounts payable |
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| ( | ||
Accrued liabilities |
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| ( | ||
Net cash provided by operating activities |
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Cash Flows From Investing Activities: | ||||||
Purchase of property and equipment | ( | ( | ||||
Consideration paid for acquisitions, net of cash acquired |
| — |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash Flows From Financing Activities: | ||||||
Borrowings on long term debt | — | | ||||
Principal payments of long-term debt | ( | ( | ||||
Payment of debt issuance costs |
| — |
| ( | ||
Dividends paid to stockholders |
| ( |
| ( | ||
Tax withholdings related to net share settlements of restricted stock | ( | ( | ||||
Net cash (used in) provided by financing activities |
| ( |
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Effect of foreign exchange rate changes on cash |
| ( |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: | ||||||
Property, plant and equipment purchases in accounts payable or accrued expenses | $ | | $ | | ||
See accompanying notes to condensed consolidated financial statements.
4
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. BASIS OF PREPARATION AND PRESENTATION
Allied Motion Technologies Inc. (“Allied Motion” or the “Company”) is engaged in the business of designing, manufacturing and selling controlled motion solutions, which include integrated system solutions as well as individual controlled motion products, to a broad spectrum of customers throughout the world. The Company’s target markets include Vehicle, Medical, Aerospace & Defense and Industrial.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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 the 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 condensed 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 foreign subsidiaries are included in the results of operations as incurred.
The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include all adjustments which are, in the opinion of management, necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures herein are adequate to make the information presented not misleading. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.
The preparation of financial statements in accordance with U.S. GAAP 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 condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the Consolidated Financial Statements and related Notes to such statements included in the Annual Report on Form 10-K for the year ended December 31, 2020 that was previously filed by the Company.
Stock Split
On March 10, 2021, the Board of Directors approved a -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 condensed consolidated financial statements have been adjusted to reflect the stock split on a retrospective basis for all periods presented.
5
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
2. REVENUE RECOGNITION
Performance Obligations
Performance Obligations Satisfied at a Point in Time
The Company considers control of most products to transfer at a single point in time, generally when the products are shipped in accordance with an agreement and/or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product.
The Company satisfies its performance obligations under a contract with a customer by transferring goods and services in exchange for monetary consideration from the customer. The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgment as the contract with the customer. For some customers, control, and a sale, is transferred at a point in time when the product is delivered to a customer.
Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
Nature of Goods and Services
The Company sells component and integrated controlled motion solutions to end customers and original equipment manufacturers (“OEM’s”) through the Company’s own direct sales force and authorized manufacturers’ representatives and distributors. The Company’s 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. The Company’s target markets include Vehicle, Medical, Aerospace & Defense and Industrial.
Determining the Transaction Price
The majority of the Company’s contracts have an original duration of less than one year. For these contracts, the Company applies the practical expedient and therefore does not consider the effects of the time value of money. For multiyear contracts, the Company uses judgment to determine whether there is a significant financing component. These contracts are generally those in which the customer has made an up-front payment. Contracts that management determines to include a significant financing component are discounted at the Company’s incremental borrowing rate. The Company incurs interest expense and accrues a contract liability. As the Company satisfies performance obligations and recognizes revenue from these contracts, interest expense is recognized simultaneously. Management does not have any contracts that include a significant financing component as of June 30, 2021.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into geographical regions and target markets. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted below in Note 17, Segment Information, the Company’s business consists of
6
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
A disaggregation of revenue by target market and geography is provided below (in thousands):
Three months ended | Six months ended | |||||||||||
June 30, | June 30, | |||||||||||
Target Market |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Vehicle | $ | | $ | | $ | | $ | | ||||
Industrial |
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Medical |
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Aerospace & Defense |
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Other |
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Total | $ | | $ | | $ | | $ | | ||||
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
Geography |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
United States | $ | | $ | | $ | | $ | | |||||
Europe |
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Asia-Pacific |
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Total | $ | | $ | | $ | | $ | | |||||
Contract Balances
When the timing of the Company’s delivery of product is different from the timing of the payments made by customers, the Company recognizes either a contract asset (performance precedes customer payment) or a contract liability (customer payment precedes performance). Typically, contracts are paid in arrears and are recognized as receivables after the Company considers whether a significant financing component exists.
The opening and closing balances of the Company’s contract liabilities are as follows (in thousands):
| June 30, |
| December 31, | |||
2021 | 2020 | |||||
Contract liabilities in accrued liabilities | $ | | $ | | ||
Contract liabilities in other long-term liabilities | | | ||||
$ | | $ | | |||
The difference between the opening and closing balances of the Company’s contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.
Significant Payment Terms
The Company’s contracts with its customers state the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payments are typically due in full within 30-60 days of delivery. Since the customer agrees to a stated rate and price in the contract that do not vary over the contract, the majority of contracts do not contain variable consideration.
Returns, Refunds, and Warranties
In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The Company establishes provisions for estimated returns and warranties. All contracts include a standard warranty clause to guarantee that the product complies with agreed specifications.
7
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
3. INVENTORIES
Inventories include costs of materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out basis) or net realizable value, as follows (in thousands):
| June 30, |
| December 31, | ||||
2021 | 2020 | ||||||
Parts and raw materials | $ | | $ | | |||
Work-in-process |
| |
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Finished goods |
| |
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$ | | $ | | ||||
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is classified as follows (in thousands):
|
| June 30, |
| December 31, | ||||
Useful lives | 2021 | 2020 | ||||||
Land | $ | | $ | | ||||
Building and improvements |
|
| |
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Machinery, equipment, tools and dies |
|
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Construction work in progress | | | ||||||
Furniture, fixtures and other |
|
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| |
| | |||||
Less accumulated depreciation |
| ( |
| ( | ||||
Property, plant and equipment, net | $ | | $ | | ||||
Depreciation expense was approximately $
5. GOODWILL
The change in the carrying amount of goodwill for the six months ended June 30, 2021 is as follows (in thousands):
June 30, | ||
2021 | ||
Beginning balance | $ | |
Effect of foreign currency translation |
| ( |
Ending balance | $ | |
|
6. INTANGIBLE ASSETS
Intangible assets on the Company’s condensed consolidated balance sheets consist of the following (in thousands):
June 30, 2021 | December 31, 2020 | |||||||||||||||||||
|
| Gross |
| Accumulated |
| Net Book |
| Gross |
| Accumulated |
| Net Book | ||||||||
Life | Amount | Amortization | Value | Amount | Amortization | Value | ||||||||||||||
Customer lists |
| $ | | $ | ( | $ | | $ | | $ | ( | $ | | |||||||
Trade name |
|
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| ( |
| |
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| ( |
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Design and technologies |
|
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| ( |
| |
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| ( |
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Patents |
| |
| ( |
| |
| |
| ( |
| | ||||||||
Total | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||||
8
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Amortization expense for intangible assets was $
Estimated future intangible asset amortization expense as of June 30, 2021 is as follows (in thousands):
Estimated | |||
| Amortization Expense | ||
Remainder of 2021 | $ | | |
2022 |
| | |
2023 |
| | |
2024 | | ||
2025 |
| | |
2026 | | ||
Thereafter |
| | |
Total estimated amortization expense | $ | | |
7. STOCK-BASED COMPENSATION
Stock Incentive Plans
The Company’s Stock Incentive Plans provide for the granting of stock awards, including restricted stock, stock options and stock appreciation rights, to employees and non-employees, including directors of the Company.
Restricted Stock
For the six months ended June 30, 2021,
The following is a summary of restricted stock activity for the six months ended June 30, 2021:
Number of | ||
| shares | |
Outstanding at beginning of period |
| |
Awarded |
| |
Vested |
| ( |
Forfeited |
| ( |
Outstanding at end of period |
| |
Stock-based compensation expense, net of forfeitures, of $
9
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Compensation and fringe benefits | $ | | $ | | ||
Warranty reserve |
| |
| | ||
Income taxes payable | | | ||||
Right of use liabilities | | | ||||
Other accrued expenses |
| |
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$ | | $ | | |||
Changes in the Company’s reserve for product warranty claims for the six months ended June 30, 2021 were as follows (in thousands):
June 30, | |||
2021 |
| ||
Beginning balance | $ | | |
Provision |
| | |
Warranty expenditures |
| ( | |
Effect of foreign currency translation |
| ( | |
Ending balance | $ | | |
9. DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Long-term Debt | ||||||
Revolving Credit Facility, long-term (1) | $ | | $ | | ||
Unamortized debt issuance costs | ( | ( | ||||
Long-term debt | $ | | $ | | ||
(1) | The effective rate of the Amended Revolving Facility is |
Amended Revolving Credit Facility
The First Amended and Restated Credit Agreement (the “Amended Credit Agreement”) includes a $
Borrowings under the Amended Revolving Facility bear interest at the LIBOR or EURIBOR Rate (as defined in the Amended Credit Agreement) plus a margin of
10
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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 Company’s ability to merge or sell all, or substantially all, of its assets. The Company was in compliance with all covenants at June 30, 2021.
As of June 30, 2021, the unused Amended Revolving Facility was $
Other
The China Credit Facility provides credit of $
10. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, and foreign exchange risk primarily through the use of derivative financial instruments.
Beginning in the first quarter of 2021, the Company began entering into contracts with maturities to hedge its 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. The resulting gains or losses are recorded in other (income) expense, net in the condensed consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its variable-rate debt. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. 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, the Company entered into
The changes in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2021 and 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
The Company estimates that an additional $
11
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020 (in thousands):
Liability Derivatives | ||||||||
Fair value as of: | ||||||||
Derivatives designated as | Balance Sheet | June 30, | December 31, | |||||
hedging instruments |
| Location |
| 2021 |
| 2020 | ||
Interest rate products | Accrued liabilities | $ | | $ | — | |||
Interest rate products | Other long-term liabilities | | | |||||
Foreign currency contracts | Accrued liabilities | | — | |||||
$ | | $ | | |||||
The tables below present the effect of cash flow hedge accounting on other comprehensive income (loss) (“OCI”) for the three and six months ended June 30, 2021 and 2020 (in thousands):
Amount of pre-tax gain (loss) recognized | Amount of pre-tax gain (loss) recognized | |||||||||||
in OCI on derivatives | in OCI on derivatives | |||||||||||
Derivatives in cash flow hedging relationships | Three months ended June 30, | Six months ended June 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Interest rate products | $ | ( | $ | ( | $ | | $ | ( | ||||
Amount of pre-tax gain (loss) reclassified | Amount of pre-tax (loss) gain reclassified | |||||||||||
from accumulated OCI into income | from accumulated OCI into income | |||||||||||
Location of (loss) gain reclassified | Three months ended June 30, | Six months ended June 30, | ||||||||||
from accumulated OCI into income | 2021 | 2020 |
| 2021 |
| 2020 | ||||||
|
|
|
| |||||||||
Interest expense | $ | ( | $ | ( | $ | ( | $ | ( | ||||
The table below presents the line items that reflect the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2021 and 2020 (in thousands):
Total amounts of income and expense | Total amounts of income and expense | |||||||||||||
line items presented that reflect the | line items presented that reflect the | |||||||||||||
effects of cash flow hedges recorded | effects of cash flow hedges recorded | |||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||
Derivatives designated as hedging instruments |
| Income Statement Location |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Interest rate products |
| Interest Expense | $ | | $ | | $ | | $ | | ||||
12
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2021 and December 31, 2020.
Gross amounts | Net amounts of liabilities | Gross amounts not offset in the consolidated | ||||||||||||||||
As of | Gross amounts | offset in the | presented in the | balance sheets | ||||||||||||||
June 30, | of recognized | consolidated | consolidated | Financial | Cash collateral | |||||||||||||
2021 |
| liabilities |
| balance sheets |
| balance sheets |
| instruments |
| received |
| Net amount | ||||||
Derivatives | $ | | $ | — | $ | | $ | — | $ | — | $ | | ||||||
Gross amounts | Net amounts of liabilities | Gross amounts not offset in the consolidated | ||||||||||||||||
As of | Gross amounts | offset in the | presented in the | balance sheets | ||||||||||||||
December 31, | of recognized | consolidated | consolidated | Financial | Cash collateral | |||||||||||||
2020 |
| liabilities |
| balance sheets |
| balance sheets |
| instruments |
| received |
| Net amount | ||||||
Derivatives | $ | | $ | — | $ | | $ | — | $ | — | $ | | ||||||
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
11. FAIR VALUE
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 condensed consolidated balance sheets for these assets and liabilities approximate their fair value because of the immediate or short-term maturities of these financial instruments.
The following tables presents the Company’s financial assets that are accounted for at fair value on a recurring basis as of June 30, 2021 and December 31, 2020, respectively, by level within the fair value hierarchy (in thousands):
June 30, 2021 | |||||||||
| Level 1 |
| Level 2 |
| Level 3 | ||||
Assets (liabilities) | |||||||||
Pension plan assets | $ | | $ | — | $ | — | |||
Deferred compensation plan assets |
| |
| — |
| — | |||
Interest rate swaps |
| — |
| ( |
| — | |||
Foreign currency hedge contracts |
| — |
| ( |
| — | |||
13
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
December 31, 2020 | |||||||||
| Level 1 |
| Level 2 |
| Level 3 | ||||
Assets (liabilities) | |||||||||
Pension plan assets | $ | | $ | — | $ | — | |||
Deferred compensation plan assets |
| |
| — |
| — | |||
Interest rate swaps |
| — |
| ( |
| — | |||
12. INCOME TAXES
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws, settlements with taxing authorities and foreign currency fluctuations.
The effective income tax rate was
13. LEASES
The Company has operating leases for office space, manufacturing equipment, computer equipment and automobiles. Many leases include one or more options to renew, some of which include options to extend the leases for a long-term period, and some leases include
Supplemental cash flow information related to the Company’s operating leases for the six months ended June 30, 2021 and 2020 was as follows (in thousands):
June 30, | |||||||
2021 | 2020 | ||||||
Cash paid for amounts included in the measurement of operating leases |
| $ | |
| $ | |
|
Right of use assets obtained in exchange for operating lease obligations | $ | | $ | | |||
The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2021 (in thousands):
Remainder of 2021 |
| $ | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 | | ||
2026 | | ||
Thereafter |
| | |
Total undiscounted cash flows | $ | | |
Less: present value discount | ( | ||
Total lease liabilities | $ | |
As of June 30, 2021, the Company has entered into leases with future minimum lease payments of $
14
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
The Company leases certain facilities from a company for which one of our executive officers is a part owner. In connection with such leases, the Company made payments to the lessor of $
14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated Other Comprehensive Income (Loss) (“AOCI”) for the three months ended June 30, 2021 and 2020 is comprised of the following (in thousands):
Foreign Currency | |||||||||||||||
Defined Benefit | Tax Effect of | Translation | |||||||||||||
| Plan Liability |
| Cash Flow Hedges |
| Cash Flow Hedges |
| Adjustment |
| Total | ||||||
At March 31, 2021 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
Unrealized loss on cash flow hedges | — | ( | | — | ( | ||||||||||
Amounts reclassified from AOCI | — | | ( | — | | ||||||||||
Foreign currency translation loss | — | — | — | | | ||||||||||
At June 30, 2021 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
Foreign Currency | |||||||||||||||
Defined Benefit | Tax Effect of | Translation | |||||||||||||
| Plan Liability |
| Cash Flow Hedges |
| Cash Flow Hedges |
| Adjustment |
| Total | ||||||
At March 31, 2020 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
Unrealized loss on cash flow hedges | — | ( | | — | ( | ||||||||||
Amounts reclassified from AOCI | — | | ( | — | | ||||||||||
Foreign currency translation loss | — | — | — | | | ||||||||||
At June 30, 2020 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
AOCI for the six months ended June 30, 2021 and 2020 is comprised of the following (in thousands):
Foreign Currency | |||||||||||||||
Defined Benefit | Tax Effect of | Translation | |||||||||||||
| Plan Liability |
| Cash Flow Hedges |
| Cash Flow Hedges |
| Adjustment |
| Total | ||||||
At December 31, 2020 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
Unrealized gain on cash flow hedges | — | | ( | — | | ||||||||||
Amounts reclassified from AOCI | — | | ( | — | | ||||||||||
Foreign currency translation gain | — | — | — | ( | ( | ||||||||||
At June 30, 2021 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
Foreign Currency | |||||||||||||||
Defined Benefit | Tax Effect of | Translation | |||||||||||||
| Plan Liability |
| Cash Flow Hedges |
| Cash Flow Hedges |
| Adjustment |
| Total | ||||||
At December 31, 2019 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
Unrealized loss on cash flow hedges | — | ( | | — | ( | ||||||||||
Amounts reclassified from AOCI | — | | ( | — | | ||||||||||
Foreign currency translation loss | — | — | — | ( | ( | ||||||||||
At June 30, 2020 | $ | ( | $ | ( | $ | | $ | ( | $ | ( | |||||
The realized losses relating to the Company’s interest rate swap hedges were reclassified from accumulated other comprehensive income (loss) and included in interest expense in the condensed consolidated statements of income and comprehensive income.
15
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
15. DIVIDENDS PER SHARE
The Company declared a quarterly dividend of $
16. EARNINGS PER SHARE
Basic and diluted weighted-average shares outstanding are as follows (in thousands):
Three months ended | Six months ended | |||||||
June 30, | June 30, | |||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
Basic weighted average shares outstanding |
| |
| |
| |
| |
Dilutive effect of equity awards |
| |
| |
| |
| |
Diluted weighted average shares outstanding |
| |
| |
| |
| |
For the three and six months ended June 30, 2021 and 2020, the anti-dilutive common shares excluded from the calculation of diluted earnings per share were immaterial.
17. SEGMENT INFORMATION
The Company operates in
Financial information related to the foreign subsidiaries is summarized below (in thousands):
Three months ended | Six months ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Revenues derived from foreign subsidiaries | $ | | $ | | $ | | $ | | |||||
Revenues derived from foreign subsidiaries and identifiable assets outside of the United States are attributable to Europe and Asia-Pacific.
Identifiable foreign assets were $
Sales to customers outside of the United States by all subsidiaries were $
For the three months ended June 30, 2021 and 2020, one customer accounted for
16
ALLIED MOTION TECHNOLOGIES INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
18. RECENT ACCOUNTING PRONOUNCEMENTS
Recently adopted accounting pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740, and clarifies existing guidance to improve consistent application. This guidance is effective for fiscal years beginning after December 15, 2020. The Company adopted this ASU on January 1, 2021 on a prospective basis, as there were no relevant matters impacting the Company for which retrospective application was required, and the adoption did not have a material impact on its condensed consolidated financial statements.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All statements contained herein that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the word “believe,” “anticipate,” “expect,” “project,” “intend,” “will continue,” “will likely result,” “should” or words or phrases of similar meaning. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from the expected results described in the forward-looking statements. The risks and uncertainties include those associated with: the domestic and foreign general business and economic conditions in the markets we serve, including political and currency risks and adverse changes in local legal and regulatory environments; the severity, magnitude and duration of the COVID-19 pandemic, including impacts of the pandemic and of businesses’ and governments’ responses to the pandemic on our operations and personnel, and on commercial activity and demand across our and our customers’ businesses, and on global supply chains; our inability to predict the extent to which the COVID-19 pandemic and related impacts will continue to adversely impact our business operations, financial performance, results of operations, financial position, the prices of our securities and the achievement of our strategic objectives; the introduction of new technologies and the impact of competitive products; the ability to protect the Company’s intellectual property; our ability to sustain, manage or forecast our growth and product acceptance to accurately align capacity with demand; the continued success of our customers and the ability to realize the full amounts reflected in our order backlog as revenue; the loss of significant customers or the enforceability of the Company’s contracts in connection with a merger, acquisition, disposition, bankruptcy, or otherwise; our ability to meet the technical specifications of our customers; the performance of subcontractors or suppliers and the continued availability of parts and components; failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach, ransomware, or failure of one or more key information technology systems, networks, processes, associated sites or service providers; changes in government regulations; the availability of financing and our access to capital markets, borrowings, or financial transactions to hedge certain risks; the ability to attract and retain qualified personnel who can design new applications and products for the motion industry; the ability to implement our corporate strategies designed for growth and improvement in profits including to identify and consummate favorable acquisitions to support external growth and the development of new technologies; the ability to successfully integrate an acquired business into our business model without substantial costs, delays, or problems; our ability to control costs, including the establishment and operation of low cost region manufacturing and component sourcing capabilities; and the additional risk factors discussed under “Item 1A. Risk Factors” in Part II of this report and in the Company’s Annual Report in Form 10-K. Actual results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements as a prediction of actual results. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. The Company has no obligation or intent to release publicly any revisions to any forward-looking statements, whether as a result of new information, future events, or otherwise.
New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company’s expectations, beliefs and projections are believed to have a reasonable basis; however, the Company makes no assurance that expectations, beliefs or projections will be achieved.
Overview
We are a global company that designs, manufactures and sells precision and specialty controlled motion components and systems used in a broad range of industries. Our target markets include Vehicle, Medical, Aerospace & Defense, and Industrial. We are headquartered in Amherst, NY, and have operations in the North America, Europe and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical and electronic motion technology. We sell component and integrated controlled motion solutions to end customers and OEMs through our own direct sales force and authorized manufacturers’ representatives and distributors. Our products include brush and brushless DC motors, brushless servo and torque motors, coreless DC motors, integrated brushless motor-drives, gearmotors, gearing, modular digital servo drives, motion controllers, incremental and absolute optical encoders, active and passive filters for power quality and harmonic issues, and other controlled motion-related products.
18
Business Environment
COVID-19
The outbreak of the novel strain of Coronavirus (“COVID-19”) and the impact of the Delta and other variants will create significant impacts and disruptions to the U.S. and global economies for the foreseeable future; continuing to adversely affect portions of our business, including our supply chain and operations. We experienced reductions in customer demand in several of our served markets during periods of 2020 and 2021 due to the impact of COVID-19, offset by rebounds in several served markets, resulting in a record level of total bookings in the second quarter of 2021. We have been impacted by reduced operational status of our suppliers which has impacted the predictability of our supply chain, and resulted in some increased costs to secure and place materials into production. During 2021, we expect the impact of COVID-19 on our operations will continue to challenge many aspects of our business, particularly our supply chain, while providing opportunities for increased revenue in certain markets.
In response to the worldwide outbreak, we have taken and will continue to take proactive, aggressive action to protect the health and safety of our employees, customers, partners, suppliers and communities. We enacted rigorous safety measures in all of our sites, including implementing social distancing protocols, incorporating a work from home environment at certain times for those employees that do not need to be physically present to perform their work, suspending travel, implementing temperature checks at the entrances to our facilities, extensively and frequently disinfecting our workspaces and providing masks and other protective equipment to those employees who must be physically present. These measures were implemented on a worldwide basis and have been adjusted prudently as requirements and conditions change. We will continue to monitor and act in accordance with government authorities requirements or recommendations and evolving best practices.
Our Company provides essential and important products, including those that our customers rely on to address COVID-19. We manufacture and deliver critical motion control components, including electronic drives, motors and control assemblies to manufacturers of medical equipment including respirators, ventilators, infusion pumps, medical fluid pumps and other breathing assist equipment required to care for patients with respiratory issues including COVID-19. We are also a long-term, qualified supplier to leading medical device manufacturers of ventilators and respirators around the world.
Global demand and capacity to produce ventilators increased significantly during portions of 2020, and we are a reliable supplier of the critical motion control components it requires. The Company rapidly deployed resources to increase production capacity to meet the surge in demand that has been experienced for certain types of medical products related to combatting the COVID-19 virus. While the demand for certain items, such as ventilators, has returned to normalized levels, we continue to provide solutions to suppliers of other types of medical equipment, including surgical tools and equipment, surgical robots, diagnostic equipment, test equipment, patient mobility and rehabilitation equipment, hospital beds and mobile equipment carts.
Our worldwide locations are considered to be essential suppliers to our customers and therefore most of our locations have remained substantially operational during the outbreak while implementing the enhanced safety procedures.
We have taken actions since the beginning of the pandemic to strengthen our liquidity and financial condition. We renewed and increased our revolving credit facility to $225 million through February 2025 (refer to Note 9, Debt Obligations from our condensed consolidated financial statements). Through this amendment we lowered our cost of debt, and secured more favorable covenants. This liquidity preserves our financial flexibility during the pandemic and subsequent to it. We believe that our cash flows from operations and borrowing capacity are sufficient to support our short and long-term liquidity needs.
To conserve cash and maximize operational efficiency while supporting growth plans, we continue to align variable costs with demand, maintaining and enhancing key engineering capabilities, and controlling discretionary spending. The Company continues to closely monitor events and conditions resulting from COVID-19 and the resulting impact on all forms of incentive compensation.
The extent of the impact of the COVID-19 outbreak on our operational and financial performance will continue to depend on future developments, including the duration and spread of the virus and variants, the potential for additional waves, its impact on our customers and the range of governmental reactions to the pandemic, which cannot be predicted at this time. We will continue to proactively respond to the situation and will take further actions as warranted to alter our business operations as necessary.
19
Stock Split
On April 30, 2021, we effected a 3-for-2 stock split. References to numbers of shares of common stock and per share data have been adjusted to reflect the stock split on a retrospective basis. Refer to Note 1, Basis of Preparation and Presentation in the notes to condensed consolidated financial statements of Part I, Item 1 of this Form 10-Q for further information.
Cyber Breach
During the second quarter 2021, we were the subject of a cyber security breach. We discovered the issue fairly early and were able to implement our risk management playbook which entails bringing in forensic experts in this field. We were able to contain the issue and were able to get operations back up and running without a material impact to our results for the quarter. We have also since implemented additional security measures thus further safeguarding our systems. No ransom was paid related to this breach.
Recent Accounting Pronouncements
Refer to Note 18, Recent Accounting Pronouncements in the notes to condensed consolidated financial statements of Part 1, Item 1 of this Form 10-Q for information regarding recently adopted accounting standards and their potential impact on our financial condition or results of operations.
Operating Results
Three months ended June 30, 2021 compared to three months ended June 30, 2020
For the three months ended |
| 2021 vs. 2020 | ||||||||||
June 30, | Variance |
| ||||||||||
(Dollars in thousands, except per share data) |
| 2021 |
| 2020 | $ |
| % | |||||
Revenues | $ | 101,537 | $ | 86,661 | $ | 14,876 | 17 | % | ||||
Cost of goods sold |
| 70,320 |
| 60,201 |
| 10,119 | 17 | % | ||||
Gross profit |
| 31,217 |
| 26,460 |
| 4,757 | 18 | % | ||||
Gross margin percentage |
| 30.7 | % |
| 30.5 | % |
|
|
| |||
Operating costs and expenses: |
|
|
|
|
|
|
| |||||
Selling |
| 4,396 |
| 3,842 |
| 554 | 14 | % | ||||
General and administrative |
| 11,181 |
| 9,710 |
| 1,471 | 15 | % | ||||
Engineering and development |
| 7,240 |
| 6,197 |
| 1,043 | 17 | % | ||||
Business development |
| 155 |
| 177 |
| (22) | (12) | % | ||||
Amortization of intangible assets |
| 1,511 |
| 1,483 |
| 28 | 2 | % | ||||
Total operating costs and expenses |
| 24,483 |
| 21,409 |
| 3,074 | 14 | % | ||||
Operating income |
| 6,734 |
| 5,051 |
| 1,683 | 33 | % | ||||
Interest expense |
| 807 |
| 901 |
| (94) | (10) | % | ||||
Other (income) expense, net |
| (10) |
| 17 |
| (27) | (159) | % | ||||
Total other expense |
| 797 |
| 918 |
| (121) | (13) | % | ||||
Income before income taxes |
| 5,937 |
| 4,133 |
| 1,804 | 44 | % | ||||
Income tax provision |
| (1,303) |
| (1,237) |
| (66) | 5 | % | ||||
Net income | $ | 4,634 | $ | 2,896 | $ | 1,738 | 60 | % | ||||
|
|
|
|
|
|
| ||||||
Effective tax rate |
| 21.9 | % |
| 29.9 | % | ||||||
Diluted earnings per share | $ | 0.32 | $ | 0.20 | $ | 0.12 | 60 | % | ||||
Bookings | $ | 118,974 | $ | 80,365 | $ | 38,609 | 48 | % | ||||
Backlog | $ | 170,364 | $ | 127,701 | $ | 42,663 | 33 | % | ||||
20
REVENUES: For the quarter, the increase in revenues is primarily due to increases in our Vehicle and Industrial markets, which had experienced significant decreases in demand in the second quarter of 2020 due to COVID-19. Sales to our Medical market declined during the second quarter from the prior year as that market experienced COVID-19 related demand increases in the prior year period.
Sales to U.S. customers were 55% of total sales for the second quarter 2021 compared with 50% for the same period last year, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific. The overall increase in revenue was due to a 12.4% volume increase along with a 4.7% favorable currency impact. See information included in “Non – GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of revenue to revenue excluding foreign currency impacts.
ORDER BOOKINGS AND BACKLOG: We experienced a record level of bookings during the second quarter of 2021. The increase in bookings in the second quarter of 2021 compared to the second quarter of 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 June 30, 2021, compared to at June 30, 2020, was related to these factors along with supply chain challenges we have been facing during the recovery.
GROSS PROFIT AND GROSS MARGIN: Gross margins were slightly higher at 30.7% for the second quarter of 2021, compared to 30.5% for the second quarter of 2020. The increase in gross margin percentage was driven by volume increases of higher margin products in our Vehicle market compared to lower volumes of certain Medical market products with lower margins. The margin expansion was somewhat muted by costs associated with our willingness to proactively address the challenging supply chain environment to meet the needs of our customers.
SELLING EXPENSES: Selling expenses increased 14% in the second quarter of 2021 compared to the same period of 2020. This is reflective of higher incentive compensation costs driven by the recovery of our sales activities, along with the cost control efforts related to the COVID-19 pandemic that were present in the second quarter of 2020. Selling expenses as a percentage of revenues in the second quarter of 2021 were flat to the same period last year at approximately 4%.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 15% in the second quarter 2021 from the second quarter 2020 due to increased costs from our incentive compensation programs which are aligned with our revenue and profit growth, along with cost control efforts that were present in the second quarter of 2020 due to COVID-19. As a percentage of revenues, general and administrative expenses were flat for the quarter ended June 30, 2021 compared to the same period in 2020 at approximately 11%.
ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 17% in the second quarter of 2021 compared to the same quarter last year. The increase is due to higher incentive compensation costs, 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 consistent at 7% for the quarter ended June 30, 2021 compared same period in 2020.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization expense was consistent in the current quarter compared to the same period in the prior year.
INTEREST EXPENSE: Interest expense decreased by 10% in the second quarter 2021 due to lower debt levels compared to the same period in 2020.
INCOME TAXES: The effective income tax rate as a percentage of income before income taxes was 21.9% and 29.9% in the second quarter 2021 and 2020, respectively. The effective tax rate is net of a discrete tax benefit of (4.3%) and a discrete tax expense of 1.7%, for the second quarters of 2021 and 2020, respectively. The discrete benefit in the second quarter of 2021 and the discrete expense in the prior year period are both primarily due to share-based payments.
We are subject to tax laws in the U.S. at the federal and state levels and in numerous foreign jurisdictions. The new U.S. Presidential Administration and Congress are considering significant changes to the existing U.S. tax law, including an increase in the corporate tax rate and the tax rate on foreign earnings. If enacted into law, these proposed changes could substantially increase U.S. taxation on our operations both in and outside of the U.S. and could have a material impact on our effective tax rate in future periods. We will continue to monitor U.S., foreign, and state tax legislative developments.
21
On March 11, 2021, the American Rescue Plan of 2021 was enacted. The new law extends and enhances several current-law incentives for individuals and businesses in response to the COVID-19 pandemic. We do not expect any significant tax benefit from this new law.
NET INCOME: Net income increased during the second quarter 2021 compared to the second quarter 2020 reflecting the results of increased revenue, improved gross margins, as well as the lower effective tax rate, partially offset by increased operating costs and expenses.
EBITDA AND ADJUSTED EBITDA: EBITDA was $11,203 for the second quarter of 2021 compared to $8,911 for the same quarter last year. The increase in the second quarter of 2021 compared to the second quarter of 2020 is primarily due to higher gross profit driven by sales growth, partially offset by increased operating expenses. Adjusted EBITDA was $12,397 and $10,137 for the second quarters of 2021 and 2020, respectively. EBITDA and Adjusted EBITDA are non-GAAP measurements. EBITDA consists of income before interest expense, benefit (provision) for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss, and certain other items. Refer to information included in “Non-GAAP Measures” below for a reconciliation of net income to EBITDA and Adjusted EBITDA.
Six months ended June 30, 2021 compared to six months ended June 30, 2020
For the six months ended |
| 2021 vs. 2020 | ||||||||||
June 30, | Variance |
| ||||||||||
(Dollars in thousands, except per share data) |
| 2021 |
| 2020 | $ |
| % | |||||
Revenues | $ | 203,214 | $ | 179,043 | $ | 24,171 | 14 | % | ||||
Cost of goods sold |
| 141,929 |
| 124,541 |
| 17,388 | 14 | % | ||||
Gross profit |
| 61,285 |
| 54,502 |
| 6,783 | 12 | % | ||||
Gross margin percentage |
| 30.2 | % |
| 30.4 | % |
|
|
| |||
Operating costs and expenses: |
|
|
|
|
|
|
| |||||
Selling |
| 8,614 |
| 8,085 |
| 529 | 7 | % | ||||
General and administrative |
| 21,929 |
| 18,872 |
| 3,057 | 16 | % | ||||
Engineering and development |
| 14,199 |
| 12,431 |
| 1,768 | 14 | % | ||||
Business development |
| 174 |
| 424 |
| (250) | (59) | % | ||||
Amortization of intangible assets |
| 3,023 |
| 2,924 |
| 99 | 3 | % | ||||
Total operating costs and expenses |
| 47,939 |
| 42,736 |
| 5,203 | 12 | % | ||||
Operating income |
| 13,346 |
| 11,766 |
| 1,580 | 13 | % | ||||
Interest expense |
| 1,668 |
| 1,955 |
| (287) | (15) | % | ||||
Other (income) expense, net |
| (129) |
| 76 |
| (205) | (270) | % | ||||
Total other expense, net |
| 1,539 |
| 2,031 |
| (492) | (24) | % | ||||
Income before income taxes |
| 11,807 |
| 9,735 |
| 2,072 | 21 | % | ||||
Income tax benefit (provision) |
| 4,754 |
| (2,804) |
| 7,558 | (270) | % | ||||
Net income | $ | 16,561 | $ | 6,931 | $ | 9,630 | 139 | % | ||||
|
|
|
|
|
|
| ||||||
Effective tax rate |
| (40.3) | % |
| 28.8 | % | ||||||
Diluted earnings per share | $ | 1.14 | $ | 0.49 | $ | 0.65 | 133 | % | ||||
Bookings | $ | 233,618 | $ | 173,288 | $ | 60,330 | 35 | % | ||||
Backlog | $ | 170,364 | $ | 127,701 | $ | 42,663 | 33 | % | ||||
REVENUES: For the year to date 2021, the increase in revenues reflects improved sales in certain markets we serve, specifically Vehicle and Industrial, as well as having Dynamic Controls for the full six months of 2021. The increase reflects the economic recovery and the increases in demand from our served markets.
Sales to U.S. customers were 53% of total sales for the year to date 2021 compared with 52% for the same period last year, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific. The overall increase in revenue was due to a 8.8% volume increase in addition to a 4.7% favorable currency impact. See information included in “Non – GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of revenue to revenue excluding foreign currency impacts.
22
ORDER BOOKINGS AND BACKLOG: 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 June 30, 2021, compared to June 30, 2020 was related to these factors as well as supply chain challenges we have been facing during the recovery.
GROSS PROFIT AND GROSS MARGIN: Gross margins were slightly lower at 30.2% for year to date 2021, compared to 30.4% for the first half of 2020. The decrease in gross margin percentage was largely driven by increased costs resulting from the tight supply chain and our proactive decision to incur incremental costs to ensure on time deliveries to customers. Additionally, lower margin Medical market sales in the first quarter 2021 impacted our year to date results.
SELLING EXPENSES: Selling expenses increased 7% during the six months ended June 30, 2021 compared to the same period of 2020 primarily due to higher incentive compensation as well as having Dynamic Controls for the full six months of 2021. Cost control efforts related to the COVID-19 pandemic in 2020, specifically travel restrictions, resulted in lower than normal expense levels compared to 2021. Selling expenses as a percentage of revenues were comparable at approximately 4% during the first six months of 2021 and 2020.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 16% during the six months ended June 30, 2021 compared to the same period of 2020 due partly to the increased costs associated with our incentive compensation programs which are aligned with our revenue and profit growth, as well as having Dynamic Controls for the full six months of 2021. Also, the first half of 2020 was impacted heavily by the COVID-19 cost containment efforts. As a percentage of revenues, general and administrative expenses were consistent at 11% in each period.
ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 14% in the first half of 2021 compared to the same period last year. Part of the increase relates to the addition of Dynamic Controls for the full six months of 2021, whose focus is electronics and software engineering. The increase is also 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. As a percentage of revenues, engineering and development expenses were comparable at approximately 7% for the six months ended June 30, 2021 and 2020, respectively.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization expense increased 3% in the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to the inclusion of a full six months of intangible amortization from the Dynamic Controls acquisition in 2020.
INTEREST EXPENSE: Interest expense decreased by 15% in the first half of 2021 due to lower interest rates and lower debt balances compared to the same period in 2020.
INCOME TAXES: For the six months ended June 30, 2021 and 2020, the effective income tax rate was (40.3%) and 28.8%, respectively. The effective tax rate includes a discrete tax benefit of (67.1%) and provision of 0.9%, respectively. The discrete benefit in the six months ended June 30, 2021 is primarily related to the recognition of net operating loss carryforwards resulting from tax legislation enacted in New Zealand during the period. The remaining variance in 2021 and 2020 are both primarily due to share-based payments.
NET INCOME: Net income increased during the first half of 2021 compared to the first half of 2020 reflecting the results of increased revenue, as well as the effect of a $7,373 discrete tax benefit in the first quarter of 2021.
EBITDA AND ADJUSTED EBITDA: EBITDA was $22,365 for the six months ended June 30, 2021 compared to $19,317 for the six months ended June 30, 2020. The increase in 2021 compared to 2020 is primarily due to higher gross profit driven by sales growth, partially offset by increased operating expenses. Adjusted EBITDA was $24,363 and $21,671 for the first six months of 2021 and 2020, respectively. EBITDA and Adjusted EBITDA are non-GAAP measurements. EBITDA consists of income before interest expense, benefit (provision) for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss, and certain other items. Refer to information included in “Non-GAAP Measures” below for a reconciliation of net income to EBITDA and Adjusted EBITDA.
23
Non-GAAP Measures
Revenue excluding foreign currency exchange impacts, EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share are provided for information purposes only and are not measures of financial performance under GAAP.
Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results. In particular, those charges and credits that are not directly related to operating unit performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for revenue and net income determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to net income determined in accordance with GAAP.
The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing sales results. The Company excludes the effect of currency translation from revenue for this measure because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The portion of revenue attributable to currency translation is calculated as the difference between the current period revenue and the current period revenue after applying foreign exchange rates from the prior period.
The Company believes EBITDA is often a useful measure of a Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, acquisitions, as well as our provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry.
The Company also believes that Adjusted EBITDA provides helpful information about the operating performance of its business. Adjusted EBITDA excludes stock-based compensation expense, as well as certain income or expenses which are not indicative of the ongoing performance of the Company. EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP.
Management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance. Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP. These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. Adjusted net income provides management with a measure of financial performance of the Company based on operational factors as it removes the impact of certain non-routine items from the Company’s operating results. Adjusted diluted earnings per share provides management with an indication of how Adjusted net income would be reflected on a per share basis for comparison to the GAAP diluted earnings per share measure. Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business. This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted charges and income items.
The Company’s calculation of revenues excluding foreign currency exchange impacts for the three and six months ended June 30, 2021 is as follows (in thousands):
| Three months ended | Six months ended | ||||
| June 30, 2021 |
| June 30, 2021 | |||
Revenue as reported | $ | 101,537 | $ | 203,214 | ||
Currency impact (favorable) unfavorable |
| (4,104) |
| (8,378) | ||
Revenue excluding foreign currency exchange impacts | $ | 97,433 | $ | 194,836 | ||
24
The Company’s calculation of EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2021 and 2020 is as follows (in thousands):
| Three months ended |
| Six months ended | |||||||||
June 30, | June 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Net income as reported | $ | 4,634 | $ | 2,896 | $ | 16,561 | $ | 6,931 | ||||
Interest expense |
| 807 |
| 901 |
| 1,668 |
| 1,955 | ||||
Provision (benefit) for income tax |
| 1,303 |
| 1,237 |
| (4,754) |
| 2,804 | ||||
Depreciation and amortization |
| 4,459 |
| 3,877 |
| 8,890 |
| 7,627 | ||||
EBITDA |
| 11,203 |
| 8,911 |
| 22,365 |
| 19,317 | ||||
Stock-based compensation expense |
| 1,000 |
| 931 |
| 1,797 |
| 1,720 | ||||
Business development costs |
| 155 |
| 177 |
| 174 |
| 424 | ||||
Foreign currency loss | 39 | 118 | 27 | 210 | ||||||||
Adjusted EBITDA | $ | 12,397 | $ | 10,137 | $ | 24,363 | $ | 21,671 | ||||
The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for the three and six months ended June 30, 2021 and 2020 is as follows (in thousands except per share amounts):
| For the three months ended | |||||||||||
June 30, | ||||||||||||
|
| Per diluted |
|
| Per diluted | |||||||
2021 | share | 2020 | share | |||||||||
Net income as reported | $ | 4,634 | $ | 0.32 | $ | 2,896 | $ | 0.20 | ||||
Non-GAAP adjustments, net of tax |
|
|
|
|
|
|
|
| ||||
Foreign currency loss - net |
| 30 |
| — |
| 83 |
| 0.01 | ||||
Business development costs - net |
| 121 |
| 0.01 |
| 124 |
| 0.01 | ||||
Non-GAAP adjusted net income and diluted earnings per share | $ | 4,785 | $ | 0.33 | $ | 3,103 | $ | 0.22 | ||||
| For the six months ended | |||||||||||
June 30, | ||||||||||||
|
| Per diluted |
|
| Per diluted | |||||||
2021 | share | 2020 | share | |||||||||
Net income as reported | $ | 16,561 | $ | 1.14 | $ | 6,931 | $ | 0.49 | ||||
Non-GAAP adjustments, net of tax |
|
|
|
|
|
|
|
| ||||
Discrete income tax benefit |
| (7,373) | (0.51) |
| — |
| — | |||||
Foreign currency loss - net |
| 21 |
| — |
| 150 |
| 0.01 | ||||
Business development costs - net |
| 135 |
| 0.01 |
| 302 |
| 0.02 | ||||
Non-GAAP adjusted net income and diluted earnings per share | $ | 9,344 | $ | 0.65 | $ | 7,383 | $ | 0.52 | ||||
Liquidity and Capital Resources
The Company’s liquidity position as measured by cash and cash equivalents increased by $253 to a balance of $23,384 at June 30, 2021 from December 31, 2020.
| 2021 vs. | ||||||||
Six Months Ended | 2020 | ||||||||
June 30, | Variance | ||||||||
| 2021 |
| 2020 |
| $ | ||||
Net cash provided by operating activities | $ | 16,471 | $ | 6,599 | $ | 9,872 | |||
Net cash used in investing activities | (5,885) |
| (18,342) |
| 12,457 | ||||
Net cash (used in) provided by financing activities | (9,865) |
| 17,275 |
| (27,140) | ||||
Effect of foreign exchange rates on cash | (468) |
| 71 |
| (539) | ||||
Net increase in cash and cash equivalents | $ | 253 | $ | 5,603 | $ | (5,350) | |||
During the six months ended June 30, 2021, the increase in cash provided by operating activities is primarily due to net income adjusted for non-cash items and cash provided from working capital activity in 2021 compared to 2020.
25
Cash used in investing activities in the six months ended June 30, 2021 relates entirely to purchases of property and equipment. Purchases of property and equipment were $5,885 during the six months ended June 30, 2021 compared to $3,614 during the six months ended June 30, 2020 reflecting continued commitments to capital expenditure projects supporting customer and growth initiatives. Cash used in investing activities in the prior year period included a $14,728 outflow related to the acquisition of Dynamic Controls. Capital expenditures are expected to be between $12,000 and $15,000 for 2021.
The decrease in cash provided by financing activities in the six months ended June 30, 2021 from the six months ended June 30, 2020 is because the 2020 period included the acquisition of Dynamic Controls for approximately $14,700, net of cash received. At June 30, 2021, we had $112,897 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. We were in compliance with all covenants at June 30, 2021.
As of June 30, 2021, the unused Amended Revolving Facility was $112,103. The amount available to borrow may be lower and may vary from period to period based upon our debt and EBITDA levels, which impacts our covenant calculations. The Amended Credit Agreement matures in February 2025.
There were no borrowings under the China Facility during the six months ended June 30, 2021 and 2020, respectively.
The Company declared dividends of $0.045 and $0.040 per share during the six months ended June 30, 2021 and 2020, respectively.
Although there is ongoing uncertainty related to the anticipated impact of COVID-19 and variants on our future results, we believe our diverse markets, 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 the second quarter of 2020 leaves us well-positioned to manage our business through the crisis as it continues to unfold. We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on our Company. Based on our analysis, we believe our existing balances of cash, the flexibility of our Amended Credit Agreement and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Foreign Currency
We have foreign operations in The Netherlands, Sweden, Germany, China, Portugal, Czech Republic, Canada, Mexico, the United Kingdom and New Zealand which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Czech Krona, Canadian dollar, Mexican pesos, British Pound Sterling and New Zealand dollar, respectively. We continuously evaluate our foreign currency risk and will take action from time to time in order to best mitigate these risks. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $4,000 on our sales for the three months ended June 30, 2021 and $8,500 on our sales for the six months ended June 30, 2021. 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 during the three months ended June 30, 2021 increased sales in comparison to the quarter ended June 30, 2020 by $4,104. For the six months ended June 30, 2021, we estimate that foreign currency exchange rate fluctuations increased sales $8,378 in 2021 compared to 2020.
We translate all assets and liabilities of our foreign operations, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translate sales and expenses at the average exchange rates in effect during the period. The net effect of these translation adjustments is recorded in the condensed consolidated financial statements as comprehensive income. The translation adjustment was a gain of $955 and $1,932 for the three months ended June 30, 2021 and 2020, respectively. The translation adjustment was a loss of $3,052 and $496 for the six months ended June 30, 2021 and 2020, respectively. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency net assets would have had an impact of approximately
26
$10,900 on our foreign net assets as of June 30, 2021. 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. The resulting gains or losses are recorded in other (income) expense, net in the condensed consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $10,000 at June 30, 2021. The foreign currency contracts are recorded in the condensed consolidated balance sheets at fair value and resulting gains or losses are recorded in other (income) expense, net in the condensed consolidated statements of income and comprehensive income. During the three and six months ended June 30, 2021, we recorded a gain of $74 and a loss of $66 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 other expense, net amounted to a loss of $39 and $118 for the three months ended June 30, 2021 and 2020, respectively. Net foreign currency transaction gains and losses included in other expense, net amounted to a loss of $27 and $210 for the six months ended June 30, 2021 and 2020, respectively.
Interest Rates
Borrowings under the Amended Revolving Facility bear interest at the LIBOR or EURIBOR Rate plus a margin of 1.00% to 1.75% (1.50% at June 30, 2021) or the Prime Rate plus a margin of 0% to 0.75% (0.50% at June 30, 2021), in each case depending on the Company’s Total Leverage Ratio. We use interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements. We primarily use interest rate swaps as part of our interest rate risk management strategy. 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, the Company entered into three interest rate swaps with a combined notional amount of $40,000 that mature 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.
As of June 30, 2021, we had $112,897 outstanding under the Amended Revolving Facility (excluding deferred financing fees), of which $60,000 is currently being hedged. Refer to Note 9, Debt Obligations of the Notes to condensed consolidated financial statements for additional information about our outstanding debt. A hypothetical one percentage point (100 basis points) change in the Base Rate on the $52,897 of unhedged floating rate debt outstanding at June 30, 2021 would have approximately a $130 and $265 impact on our interest expense for the three and six months ended June 30, 2021, respectively.
Item 4. Controls and Procedures
Conclusion regarding the effectiveness of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2021. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2021, the Company’s disclosure controls and procedures were effective.
Changes in internal control over financial reporting
During the quarter ended June 30, 2021, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
27
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Except as noted below and to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors, there have been no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2020. For a full discussion of these risk factors, please refer to “Item 1A. Risk Factors” in the 2020 Annual Report and 10-K.
We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach, ransomware, or failure of one or more key information technology systems, networks, processes, associated sites or service providers.
We rely extensively on information technology (“IT”) systems for the storage, processing, and transmission of our electronic, business-related information assets used in or necessary to conduct business. We leverage our internal information technology infrastructures, and those of our business partners, to enable, sustain, and support our global business activities. In addition, we rely on networks and services, including internet sites, data hosting and processing facilities and tools and other hardware, software and technical applications and platforms, some of which are managed, hosted, provided and/or used by third-parties or their vendors, to assist in conducting our business. The data we store, and process may include customer payment information, personal information concerning our employees, confidential financial information, and other types of sensitive business-related information. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality, availability and integrity of our technology systems and data. In addition, the laws and regulations governing security of data on IT systems is evolving and adding another layer of complexity in the form of new requirements. In the past, we have had cybersecurity incidents and we have made, and continue to make investments, seeking to address these threats, including monitoring of networks and systems, hiring of experts to evaluate and test our systems, employee training and security policies for employees and third-party providers.
As of late, the frequency and the techniques used in these attacks has increased significantly and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. While the breaches of our IT systems to date have not been material to our business or results of operations, the costs of attempting to protect our IT systems and data will increase, and there can be no assurance that these added security efforts will prevent all breaches of our IT systems or thefts of our data. If our IT systems are damaged or cease to function properly, the networks or service providers we rely upon fail to function properly, or we or one of our third-party providers suffer a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling or security breaches (including ransomware, denial-of-service attacks, a malicious website, the use of social engineering and other means to affect the confidentiality, integrity and availability of our technology systems and data) and our business continuity plans do not effectively address these failures on a timely basis, we may be exposed to potential disruption in operations, loss of customers, reputational, competitive and business harm as well as significant costs from remediation, ransom payments, litigation and regulatory actions.
28
We are also subject to an increasing number of evolving data privacy and security laws and regulations. Failure to comply with such laws and regulations could result in the imposition of fines, penalties and other costs. The European Union (“EU”) and United Kingdom’s General Data Protection Regulations and the EU’s pending ePrivacy Regulation could disrupt our ability to sell products and solutions or use and transfer data because such activities may not be in compliance with applicable laws. Additionally, cybersecurity incidents related to export control technology information of our Aerospace & Defense customers could subject us to additional reporting requirements, could disrupt our ability to sell products to those customers and could subject us to additional costs, penalties, and fines all of which may be material to our operating results.
The Audit Committee of the Board of Directors is responsible for information security oversight and is comprised entirely of independent directors. Additionally, two members of the Company’s Board of Directors have relevant information security and cybersecurity experience. As part of their oversight, senior leadership meets with the Audit Committee at least annually to discuss information security and cybersecurity matters.
Over the last three years, the Company has experienced one known information security breach, in connection with a ransomware incident that occurred in June 2021. Over the last three years, costs incurred related to information security breaches did not have a material adverse effect on our results of operations. However, as cybersecurity incidents continue to increase in scope and frequency, we may be unable to prevent a significant incident in the future which may materially impact our results of operations. Every two to three years, the Company is audited by an external security services provider to the National Institute of Standards and Technology (NIST) SP 800-171 standards and enhances its security framework based upon the results of those audits. For new associates, and on an annual basis, the Company requires associates to take security awareness training and has an on-going phishing recognition training and testing programs.
Item 5. Unregistered Sales of Equity Securities and Use of Proceeds
|
|
| Total Number of Shares |
| Maximum Number of Shares | ||||
Number of Shares | Average Price Paid | Purchased as Part of Publicly | that May Yet Be Purchased | ||||||
Period | Purchased (1) (2) | per Share (2) | Announced Plans or Programs | Under the Plans or Programs | |||||
04/01/21 to 04/30/21 |
| 22,985 | $ | 34.85 |
| — |
| — | |
05/01/21 to 05/31/21 |
|
|
| — |
| — | |||
06/01/21 to 06/30/21 |
|
|
| — |
| — | |||
Total |
| 22,985 | $ | 34.85 |
| — |
| — | |
| (1) | As permitted under the Company’s equity compensation plan, these shares were withheld by the Company to satisfy tax withholding obligations in connection with the vesting of stock. Shares withheld for tax withholding obligations do not affect the total number of shares available for repurchase under any approved common stock repurchase plan. At June 30, 2021, the Company did not have an authorized stock repurchase plan in place. |
| (2) | Shares of common stock and related per share amounts give retroactive effect for stock splits. A three-for-two common stock split, effected as a stock dividend, occurred on April 30, 2021. |
Item 6. Other Information
None.
Item 7. Exhibits
(a) | Exhibits | ||
10.1 | |||
10.2* | |||
29
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101.1 SCH | Inline XBRL Taxonomy Extension Schema Document (filed herewith). | ||
101.2 CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). | ||
101.3 DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). | ||
101.4 LAB | Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith). | ||
101.5 PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith). | ||
104 | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in exhibits 101.*) (filed herewith). | ||
* Denotes management contract or compensatory plan or arrangement. | |||
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: | August 4, 2021 | ALLIED MOTION TECHNOLOGIES INC. | |
|
| By: | /s/ Michael R. Leach |
|
| Michael R. Leach | |
|
| Chief Financial Officer | |
31