Allient Inc 10-K for FY2021
Allient Inc (ALNT)
About this 10-K
Allient Inc filed this 10-K on March 9, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $403.52M
- up 10.0% from $366.69M a year earlier
- Net income
- $24.09M
- up 76.6% from net income of $13.64M a year earlier
- Diluted EPS
- $1.66
- up 74.7% from $0.95 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
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For the transition period from to |
Commission file number: |
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
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 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, a 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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of such stock as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $
Number of shares of the only class of Common Stock outstanding:
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated into Part III.
Table of Contents
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Disclosure Regarding Forward-Looking Statements
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, and in particular those 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 from the Company’s forward-looking statements. 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.
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PART I
All dollar amounts are in thousands except share and per share amounts.
Item 1. Business.
OVERVIEW
Allied Motion Technologies Inc. (“Allied Motion” or the “Company” or “we” or “our”) is 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 (A&D), and Industrial. We are headquartered in Amherst, NY, and have global operations and sell to markets across the United States, Canada, South America, Europe and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical and electronic motion technology. Our products include brush and brushless DC (BLDC) 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, mission critical electro-mechanical automation solutions, advanced linear and rotary motion systems for nano-precision applications, input/output (“I/O”) modules, industrial gateways, and other controlled motion-related products.
Allied Motion was established in 1962 under the laws of Colorado and operates in the United States, Canada, Mexico, Europe and Asia-Pacific. We are headquartered in Amherst, New York and the mailing address of our corporate headquarters is 495 Commerce Drive, Suite 3, Amherst, New York 14228. The telephone number at this location is (716) 242-8634. Our website is www.alliedmotion.com. We trade under the ticker symbol “AMOT” on the NASDAQ exchange.
The Company maintains a website at www.alliedmotion.com. We make available, free of charge on or through our website our annual reports on Form 10 K, quarterly reports on Form 10 Q, current reports on Form 8 K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.
We have a Code of Ethics for our chief executive officer and president and senior financial officers regarding their obligations in the conduct of Company affairs. We also have a Code of Ethics and Business Conduct that is applicable to all directors, officers and employees. The Codes are available on our website. We intend to disclose on our website any amendment to, or waiver of, the Codes that would otherwise be required to be disclosed under the rules of the SEC and the Nasdaq Global Market. A copy of both Codes is also available in print to any stockholder upon written request addressed to Allied Motion Technologies Inc., 495 Commerce Drive, Suite 3, Amherst, NY 14228-2313, Attention: Secretary.
IMPACT OF COVID-19
The outbreak of the novel strain of Coronavirus (“COVID-19”) and the impact of the variants has created significant impacts and disruptions to the U.S. and global economies and are likely to do so for the foreseeable future. We expect that COVID-19 will continue to adversely affect portions of our business, including our global supply chain and manufacturing operations. We experienced reductions in customer demand in certain of our served markets and increases in demand in other of these markets during the periods of 2020 and 2021 due to the impact of COVID-19. The net result was a record level of total bookings in 2021. The operational ability of our suppliers to provide the necessary quantity of materials on a timely basis has been reduced, which has impacted the predictability of our global supply chain, and resulted in some increased costs to secure and place materials into production and forced us to delay product shipments. Throughout 2022, we expect the impact of COVID-19 on our operations will continue to challenge certain aspects of our business, particularly our global supply chain and our ability to hire direct labor. Certain materials and components used in our products are required and qualified to be sourced from a single or a limited number of suppliers. Any interruption in the supply from any supplier that serves as a sole source could delay product shipments and have a material adverse effect on our business.
In response to COVID-19, 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 continue to follow rigorous safety
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measures in all of our sites, including social distancing protocols, incorporating a work from home model at certain times for those employees that do not need to be physically present to perform their work, limiting 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 have been 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 some 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 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 supplied the critical motion control components for the ventilators. 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 in 2021, 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 throughout 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 7, Debt Obligations from our 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, maintain and enhance key engineering capabilities, and control discretionary spending. The Company continues to closely monitor events and conditions resulting from COVID-19.
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, suppliers 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.
Recent Events
The current conflict in Ukraine has created general economic uncertainty with regard to energy prices, interest rates and our supply chain. We are monitoring the developments as they unfold in order to react accordingly. The impact of the conflict on our operational and financial performance will depend on future developments that cannot be predicted, the Company does not believe the impacts to be material at this time.
During the last half of 2021, certain regions of China experienced energy shortages which impacted our facilities. One of our China locations was shut down for one week as a result of the restrictions on energy usage imposed by the Chinese government. The impact was not material to our results during 2021, however, there continue to be uncertainties related to the energy shortages that may impact us in 2022 and beyond. We have been able to proactively
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mitigate the impact of the restrictions on energy usage to date by managing our scheduling at the impacted facilities.
Twinsburg Consolidation
In September 2021, the Company announced its plans to consolidate its manufacturing facility in Twinsburg, Ohio with its Watertown, New York and Reynosa, Mexico facilities in 2022. Costs of $545 are included in business development on the consolidated statement of income and comprehensive income for the year ended December 31, 2021 related to the consolidation of the Twinsburg facility. Total costs of approximately $1,000 are expected to be incurred in connection with this initiative and will include accelerated lease costs, severance and other payroll related costs, legal costs, accelerated depreciation, and costs to relocate inventory and machinery and equipment. This initiative is expected to be completed during the second quarter of 2022.
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, Business and Summary of Significant Accounting Policies in the notes the consolidated financial statements contained in Item 8 of this report for further information.
Cyber Breach
During the second quarter 2021, we were the subject of a cyber security breach. We discovered the issue soon after the intrusion and implemented our contingency and disaster recovery plans, including engaging legal, security and forensic experts in this field. We were able to contain the issue and were successful in getting our operations back up and running without a material impact to our results. We have implemented additional security measures that further safeguard our systems. No ransom was paid related to this breach.
ACQUISITIONS
Spectrum Controls: On December 30, 2021, we acquired Spectrum Controls, Inc. (“Spectrum Controls”), a Washington headquartered innovator and manufacturer of I/O and Universal Communications Gateway products. Spectrum Controls designs and manufactures a wide range of highly sophisticated I/O modules, marquee displays, and industrial gateways for broad industrial controls applications through partnerships with Programmable Logic Controller (“PLC”) manufacturers and distributors. This acquisition provides us with the opportunity to enhance our position as a value-added solutions supplier to the industrial automation and industrial controls market.
ALIO Industries: On November 4, 2021, we acquired ALIO Industries (“ALIO”), a Colorado headquartered innovator and manufacturer of advanced linear and rotary motion systems for nano-precision applications. ALIO designs, engineers, and manufactures nano technology motion systems for state-of-the-art applications in silicon photonics, micro assembly, digital pathology, genome sequencing, laser processing and microelectronics. ALIO is well recognized for their technology and expertise in nanometer level positioning. This expertise in high precision positioning and robotic technology solutions will enhance our portfolio of motion solution offerings.
ORMEC Systems Corp.: On November 2, 2021, the Company acquired ORMEC Systems Corp. (“ORMEC”), a New York headquartered developer and manufacturer of mission critical electro-mechanical automation solutions and motion control products including multi-axis controls, electronic drives and actuators for the automation and aerospace industries. In addition to its products, ORMEC designs and manufactures complete electro-mechanical and software solutions for custom automation applications. ORMEC strengthens the Company’s technical expertise and adds a higher level of precision motion control systems and solutions to its offerings.
Dynamic Controls Group: On March 7, 2020, we acquired Dynamic Controls Group (“Dynamic Controls”), a wholly owned subsidiary of Invacare Corporation, a market-leading designer and manufacturer of equipment for the medical mobility and rehabilitation markets. Dynamic Controls provides the Company with market leading electronic control solutions and products that further strengthen our medical market position, as well as enable us to further develop higher
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level solutions with embedded electronics across our other major served markets. The acquisition of Dynamic Controls allows us to build out our ability to leverage controlled motion system solutions in a wide range of markets.
MARKETS AND APPLICATIONS
One of the Company’s growth initiatives includes product line platform development to meet the emerging needs of its selected target markets. The platform development emphasizes a combination of technologies to create increased value solutions for customers. The emphasis on new opportunities has allowed the Company to evolve from being an individual component provider to becoming a solutions provider emphasizing the utilization of multiple Company technologies in a system solution approach. The Company believes this approach will allow it to provide increased value to its customers and improved margins for the Company. Our strong financial condition, along with Allied Systematic Tools (“AST”) continuous improvement initiatives in quality, delivery, and cost provide a positive outlook for the continued long-term growth and profitability of the Company.
The Company’s growth strategy is focused on becoming the recognized controlled motion solution leader in its selected target markets by further developing its products and services platform to utilize multiple Allied Motion technologies to create increased value solutions for its customers. Our strategy further defines Allied Motion as being a “technology/know-how” driven company and to be successful, the Company continues to invest in its areas of excellence.
The Company sells its products into a subset of the following broad markets:
Vehicle: electronic power steering and drive-by-wire applications to electrically replace, or provide power-assist to, a variety of mechanical linkages, traction / drive systems and pumps, automated and remotely guided power steering systems, various high performance vehicle applications, actuation systems (e.g., lifts, slide-outs, covers, etc.), HVAC systems, solutions to improve energy efficiency of vehicles while idling and alternative fuel systems such as liquified petroleum gas (“LPG”), fuel cell and hybrid vehicles. Vehicle types include off- and on-road construction and agricultural equipment; trucks, buses, boats, utility, recreational (e.g., RVs, ATVs (all-terrain vehicles), specialty automotive, automated and remotely guided vehicles).
Medical: surgical robots, prosthetics, electric powered surgical hand pieces, programmable pumps to meter and administer infusions associated with chemotherapy, pain control and antibiotics, nuclear imaging systems, radiology equipment, automated pharmacy dispensing equipment, kidney dialysis equipment, respiratory ventilators, heart pumps, and patient handling equipment (e.g., wheel chairs, scooters, stair lifts, patient lifts, transport tables and hospital beds).
Aerospace & Defense: inertial guided missiles, mid-range smart munitions systems, weapons systems on armed personnel carriers, unmanned vehicles, security and access control, camera systems, door access control, airport screening and scanning devices.
Industrial: products are used in factory automation, specialty equipment, material handling equipment, commercial grade floor polishers and cleaners, commercial building equipment such as welders, cable pullers and assembly tools, the handling, inspection, and testing of components and final products such as PCs, high definition printers, tunable lasers and spectrum analyzers for the fiber optic industry, test and processing equipment for the semiconductor manufacturing industry, power quality products to filter distortion caused by variable frequency drives and other power electronic equipment, nano technology motion systems in silicon photonics, micro assembly, digital pathology, genome sequencing, laser processing and microelectronics, PLC manufacturers and distributors.
OTHER FACTORS IMPACTING OUR OPERATIONS
Sales and Marketing
We design and develop our products within our Technology Centers and can manufacture these products in various facilities located in the United States, Canada, Mexico, Europe and Asia-Pacific. We also operate Allied Motion Solution Centers that evaluate and focus all Allied Motion products to create integrated controlled motion solutions for our customers. We sell our products and solutions globally to a broad spectrum of customers through our own direct sales force and authorized manufacturers’ representatives and distributors. Our customers include end users and original
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equipment manufacturers (“OEMs”).
Allied Motion Sales Organization:
The Company’s sales organization is focused on becoming the best sales and service force in its industry. Through the One Team approach for providing controlled motion solutions and components that best address customers’ needs, the Company has broadened the knowledge and skills of its direct sales force, while creating sales and service support in its Solution Centers. This enables the entire sales organization to be capable of selling all products designed, developed and produced by Allied Motion globally. The Company’s primary channels to market include the direct sales force and external authorized Sales Representatives, Agents and Distributors that provide field coverage in Asia-Pacific, Europe, Canada, Israel and the Americas. While the majority of the Company’s sales are directly to OEMs, it is working to expand its market reach through Distribution channels.
Allied Motion Solution Centers:
Allied Motion has Solution Centers in China, Europe and North America that enable the design and sale of individual component products as well as integrated controlled motion systems that utilize multiple Allied Motion products and technology. In addition to providing sales and applications support, the solution center function may include final assembly, integration and tests as required to support customers within their geographic region.
Sales Backlog:
Backlog as of December 31, 2021 was $249,927 compared with $141,344 as of December 31, 2020. Included in backlog as of December 31, 2021 is $47,934 from the acquisitions completed in the fourth quarter of 2021. The time to convert the majority of backlog to sales is approximately three to nine months. Given the short product lead times, we do not believe that the amount of our backlog of orders is a reliable indication of our future sales. We may on occasion receive multi-year orders from customers for product to be delivered on demand over that time frame. There is no assurance that the Company’s backlog from these customers will be converted into revenue.
Major Customer
Sales to one customer were 15% of total sales in 2021 and 2020. We believe the diversification of the target markets we serve reduces our exposure to negative developments with any single customer.
Competitive Environment
Our products and solutions are sold into the global market with a large and diverse group of competitors that vary by product, geography, industry and application. We believe the controlled motion market is highly fragmented with many competitors, some of which are substantially larger and have greater resources than Allied Motion. We believe our competitive advantages include our electro-magnetic, mechanical and electronic controlled motion expertise, the breadth of our motor technologies and our ability to integrate these technologies with our encoders, gearing, power electronics, digital control technologies and network/feedback communications capabilities, as well as our global presence. Unlike many of our competitors, we are unique in our ability to provide custom-engineered controlled motion solutions that integrate the products we manufacture such as embedded or external electrical control solutions with our motors. We compete on technological capabilities, quality, reliability, service responsiveness, delivery speed and price. Our competitors include Altra Industrial Motion Corp., Ametek, Inc., Parker Hannifin Corporation and other smaller competitors.
Availability and Prices of Parts and Raw Materials
We purchase critical raw materials from a limited number of suppliers due to the technically challenging requirements of the supplied product and/or the lengthy process required to qualify these materials both internally and with our customers. We cannot quickly establish additional or replacement suppliers for these materials in some cases because of these rigid requirements. For these critical raw materials, we maintain minimum safety stock levels and partner with suppliers through contract to help ensure the continuity of supply. As a result of the COVID-19 pandemic and resulting economic and supply chain disruptions, we continue to face upward pricing pressure on parts and raw materials. This
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has also resulted in increased operational challenges from workplace disruptions and restrictions on the movement of raw materials and goods, both at our own facilities and at our customers and suppliers, leading to increases in prices and freight costs. As we seek to secure supply during these uncertain times, we have proactively increased the levels of certain inventories to put us in the position to meet the needs of our customers.
Patents, Trademarks, Licenses, Franchises and Concessions
We hold a number of patents and trademarks for components manufactured by our various subsidiaries, and we have several patents pending on new products recently developed, which are considered to be of significance.
Working Capital Items
We currently maintain inventory levels adequate for our short-term needs based upon present levels of production. We consider the component parts of our different product lines to be generally available and current suppliers to be reliable and capable of satisfying anticipated needs under normal conditions. As discussed herein, as a result of the COVID-19 pandemic and supply chain disruptions, we have experienced increased costs and have purposely increased certain inventories to deal with global supply chain issues.
Engineering and Development Activities
Our engineering and development (E&D) activities are for the development of new products, enhancement of the functionality, effectiveness and reliability of current products, to redesign products to reduce the cost of manufacturing of products or to expand the types of applications for which our products and solutions can be used. Our engineering and development expenditures for the years ended December 31, 2021 and 2020 were $27,818 and $25,487, respectively, or 7% of sales in 2021 and 2020. We believe E&D is critical to our success and expect to continue to invest at these levels in the future. Of these expenditures, no material amounts were charged directly to customers, although we record non-recurring engineering charges to certain customers for custom engineering required to develop products that meet the customer’s specifications.
Environmental Issues
No significant pollution or other types of hazardous emission result from the Company’s operations and it is not anticipated that our operations will be materially affected by Federal, State or local provisions concerning environmental controls. Our costs of complying with environmental, health and safety requirements are not material.
We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on our business or markets that we serve, nor on our results of operations, capital expenditures or financial position. The board of directors provide oversight as part of their environmental, social and governance (“ESG”) initiatives and we will continue to monitor emerging developments and assess our performance in this area.
International Operations
Our operations outside the United States are conducted through wholly-owned foreign subsidiaries and are located primarily in Europe and Asia-Pacific. Our international operations are subject to the usual risks inherent in international trade, including currency fluctuations, local government contracting regulations, local governmental restrictions on foreign investment and repatriation of profits, exchange controls, regulation of the import and distribution of foreign goods, as well as changing economic and social conditions in countries in which our operations are conducted. The information required by this item is set forth in Note 13, Segment Information, of the notes to consolidated financial statements contained in Item 8 of this report.
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Human Capital
Employment
At December 31, 2021, we employed approximately 1,950 full-time employees worldwide. Of those, approximately 52% are located in North America, 37% are located in Europe and the remainder are located in Asia-Pacific. As of December 31, 2021, 19% of our total workforce were employed in engineering functions, demonstrating our commitment to invest significantly in engineering resources.
Employee Health and Safety
The Company complies in all respects with the national and local laws of the jurisdictions in which we operate regarding workers safety and health. The Company strives to continuously improve employee safety and health through consistent measurement and reporting on progress and leading indicators. It has programs that emphasize that each employee in the organization is responsible for safety in the workplace. The Company provides a comprehensive safety program that focuses on a zero-incident mindset by providing ongoing training opportunities and review of safety activities and initiative. This highly visible effort encourages employee engagement and active management and leadership involvement.
Human Capital Management
The Company believes that its workforce is one of the Company’s greatest assets, and it has a proactive human capital management and talent development program. The Human Capital and Compensation Committee recognizes human capital as a key driver of long-term value and is responsible for oversight of the Company’s human capital management and talent development programs.
| ● | Attraction: The Company competes within each world-wide market for a finite number of skilled and talented workers. The Company leverages its broad resources and reputation to deliver an outstanding career opportunity and workplace experience to its candidates and employees. |
| ● | Engagement: The Company strives to provide engaging and meaningful career opportunities for its employees, so they can thrive and be satisfied in its technology and innovation-based culture. |
| ● | Development: The Company strengthens its employees’ skills and experiences through diverse career development and learning opportunities, both internal and external. This emphasizes the Company’s key attribute as a compelling place to work and grow at all levels. |
| ● | Retention: The Company supports a workplace that provides an environment of trust, personal and professional development and work-life balance which is vital to its successful retention of engaged, top-notch talent. |
Diversity and Inclusion
The Company is committed to apply fair labor practices while respecting the national and local laws of the countries and communities where we have operations. The Company is also committed to providing equal opportunity in all aspects of employment. The Company does not engage in or tolerate unlawful conduct, including discrimination, intimidation, or harassment. The Company strives to establish relationships with key organizations and associations that foster diversity and inclusion initiatives in the communities where it is located. The Company is committed to identifying a talented and innovative workforce through a culture that promotes human equity and emphasizes the benefits of a diverse and inclusive workforce and pipeline of talent. The Human Capital and Compensation Committee is responsible for the setting the tone at the top and the oversight of the Company’s diversity and inclusion initiatives.
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Ethical Business Practices
The Company is dedicated to conducting its business with integrity and responsibility. The Company promotes honest and ethical conduct, and the Board has adopted a Code of Ethics and Business Conduct which applies to all employees, directors, and officers. The Company does not tolerate human rights abuses, human trafficking and or slavery, the use of child labor and will not engage or be complicit in any activity that solicits or encourages human rights abuse.
Item 1A. Risk Factors
In the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have a material impact on our business, reputation, financial condition or results of operations. Our most significant risks are set forth below and elsewhere in this Report. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties.
RISKS RELATED TO THE COVID-19 PANDEMIC
Our financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19.
The COVID-19 pandemic has subjected our business, operations, financial performance, cash flows and financial condition to a number of risks, including, but not limited to those discussed below.
Operations-related risks: As a result of the COVID-19 pandemic, we have faced and are facing increased operational challenges from the need to protect employee health and safety, workplace disruptions and restrictions on the movement of people, raw materials and goods, both at our own facilities and at our customers and suppliers. For example, we have experienced and will continue to experience incremental operating costs due to increased challenges with our workforce (including as a result of illness, absenteeism or government orders), access to necessary components and supplies, and access to fundamental support services (such as shipping and transportation). The ultimate significance of these disruptions to our business, financial condition, results of operations, and cash flows will depend greatly on how long the disruptions continue. Any inability to operate at full capacity, and/or any similar delay with respect to resumption of operations by one or more of our key suppliers, would result in further challenges to our business and may negatively affect our business, financial condition, results of operations, and cash flows.
Customer-related risks: As a result of the COVID-19 pandemic, there have been and could continue to be changes in our customers’ priorities and practices, as our customers in both the United States and globally confront competing budget priorities and more limited resources. To the extent that COVID-19 continues to impact demand for our products and services and impairs the viability of some of our customers, our financial condition, results of operations, and cash flows could be adversely affected, and those impacts could be material.
Other risks: The magnitude and duration of the global COVID-19 pandemic continues to be uncertain. As the pandemic continues to adversely affect portions of our business and our overall operating and financial results, it may also adversely affect our operating and financial results in a manner that is not presently known to us or that we currently do not expect to present significant risks to our operations or financial results. The extent of the pandemic’s effect on our business will depend on future developments, including the duration, spread and intensity of the pandemic and the successful distribution and acceptance of vaccines for COVID-19, all of which are uncertain and difficult to predict.
OPERATIONAL RISKS
Our global sales and operations are subject to a variety of economic, market and financial risks and costs that could affect our profitability and operating results.
We do business around the world and are continuing our strategy of enhancing our global optimization. Our international sales are primarily to customers in Europe, Canada and Asia-Pacific. In addition, our manufacturing operations, suppliers and employees are located in many places around the world. The future success of our business includes
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growth in our sales in non-U.S. markets. Our global operations are subject to numerous financial, legal and operating risks, such as political and economic instability; imposition of trade or foreign exchange restrictions, including in the U.S.; trade protection measures such as the imposition of or increase in tariffs and other trade barriers, including in the U.S.; unexpected changes in regulatory requirements, including in the U.S., prevalence of corruption in certain countries; enforcement of contract and intellectual property rights and compliance with existing and future laws, regulations and policies, including those related to tariffs, investments, taxation, trade controls, product content and performance, employment and repatriation of earnings. In addition, we are affected by changes in foreign currency exchange rates, inflation rates and interest rates.
Our growth could suffer if the markets into which we sell our products and services decline.
Our growth depends in part on the growth of the markets which we serve. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which would adversely affect our financial results. Certain of our businesses operate in industries that may experience periodic, cyclical downturns. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, changes in incentive programs, new product introductions and customer inventory levels. Any of these factors could adversely affect our growth and results of operations in any given period.
We could experience a failure of a key information technology system, process or site or a breach of information security, including a cybersecurity breach 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.
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.
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
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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.
We rely on suppliers to provide equipment, components and services, which creates certain risks and uncertainties that may adversely affect our business.
Our business requires that we buy equipment, components and services from third parties. Our reliance on suppliers involves certain risks, including poor quality or an insecure supply chain, which could adversely affect the reliability and reputation of our products; changes in the cost of these purchases due to inflation, exchange rates, tariffs, or other factors; shortages of components, commodities or other materials, which could adversely affect our manufacturing efficiencies and ability to make timely delivery.
Any of these uncertainties could adversely affect our profitability and ability to compete. The effect of unavailability or delivery delays would be more severe if associated with our higher volume and more profitable products. Even where substitute sources of supply are available, qualifying the alternate suppliers and establishing reliable supplies could cost more or could result in delays and a loss of sales.
Certain materials and components used in our products are required and qualified to be sourced from a single or a limited number of suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for materials and components that are otherwise generally available, because some customers require extensive certification of suppliers which is a considerable and time consuming undertaking. Although we believe that alternative suppliers are available to supply materials and components to replace those currently used, doing so may require redesign work and would require having those new sources qualified by our customers prior to making use of those new alternatives. Any interruption in the supply from any supplier that serves as a sole source could delay product shipments and have a material adverse effect on our business, financial condition and results of operations.
Our profits may decline if the price of raw materials rise and we cannot recover the increases from our customers.
We use various raw materials, such as copper, steel, zinc and rare earth magnets, in our manufacturing operations. The prices of these raw materials have been subject to volatility. As a result of price increases, we have generally implemented price surcharges to our customers; however, we may be unable to collect surcharges without suffering reductions in unit volume, revenue and operating income. There can be no assurance that we will be able to fully recover the price increases through surcharges in a timely manner. We are also subject to risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or restrictions
13
on imports, which could adversely affect our operations and our ability to import products at current or increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties, tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, or other restrictions on our imports will be imposed upon the importation of our products in the future or adversely modified, or what effect such actions would have on our costs of operations.
We face competition that could harm our business and we may be unable to compete successfully against new entrants and established companies with greater resources.
Competition in connection with the manufacturing of our products may intensify in the future. The market for our technologies is competitive and subject to rapid technological change. We compete globally on the basis of product performance, customer service, availability, reliability, productivity and price. Our competitors may be larger and may have greater financial, operational, economies of scale, personnel, sales, technical and marketing resources than us. Certain of our competitors also may pursue aggressive pricing or product strategies that may cause us to reduce the prices we charge for our original equipment and aftermarket products and services or lose sales. These actions may lead to reduced revenues, lower margins and/or a decline in market share, any of which may adversely affect our business, financial condition and results of operations.
Quality problems with our products could harm our reputation, erode our competitive advantage and could result in warranty claims and additional costs.
Quality is important to us and our customers, and our products are held to high quality and performance standards. In the event our products fail to meet these standards, our reputation could be harmed, which could damage our competitive advantage, causing us to lose customers and resulting in lower revenues. We generally allow customers to return defective or damaged products for credit, replacement, repair or exchange. We generally warrant that our products will meet customer specifications and will be free from defects in materials and workmanship. We reserve for our exposure to warranty claims based upon recent historical experience and other specific information as it becomes available. However, these reserves may not be adequate to cover future warranty claims and additional warranty costs or inventory write-offs may be incurred which could harm our operating results.
If we are unable to attract and retain qualified personnel, our ability to operate and grow our company will be in jeopardy.
We are required to hire and retain skilled employees at all levels of our operations in a market where such qualified employees are in high demand and are subject to receiving competing offers. We believe that there is, and will continue to be, competition for qualified personnel in our industry, and there is no assurance that we will be able to attract or retain the personnel necessary for the management and development of our business. The inability to attract or retain employees currently or in the future may have a material adverse effect on our business.
Our future success depends in part on the continued service of our engineering and technical personnel and our ability to identify, hire and retain personnel.
Our success will depend in large part upon our ability to attract, train, retain and motivate highly skilled engineering and technical employees. There is currently aggressive competition for employees who have experience in technology and engineering. We may not be able to continue to attract and retain engineers or other qualified technical personnel necessary for the development and growth of our business or to replace personnel who may leave our employ in the future. The failure to retain and recruit key engineering and technical personnel could cause additional expense, potentially reduce the efficiency of our operations and could harm our business.
We depend heavily upon a limited number of customers, and if we lose any of them or they reduce their business with us, we would lose a substantial portion of our revenues.
A significant portion of our revenues and trade receivables are concentrated with a small group of customers. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us, including
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demands on product pricing and on contractual terms, often resulting in the allocation of risk to us as the supplier. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a key customer, if any of our key customers reduce their orders of our products or require us to reduce our prices before we are able to reduce costs, if a customer is acquired by one of our competitors or if a key customer suffers financial hardship, our operating results would likely be harmed as well as the collectability of accounts receivable.
If we do not respond to changes in technology, our products may become obsolete and we may experience a loss of customers and lower revenues.
We sell our products to customers in several industries that experience rapid technological changes, new product introductions and evolving industry standards. Without the timely introduction of new products and enhancements, our products and services will likely become technologically obsolete over time and we may lose a significant number of our customers. Our product development efforts may be affected by a number of factors, including our ability to anticipate customer needs, allocate our research and development funding, innovate and develop new products, differentiate our offerings and commercialize new technologies, secure intellectual property protection for our products and manufacture products in a cost-effective manner. We would be harmed if we did not meet customer requirements and expectations. Our inability, for technological or other reasons, to successfully develop and introduce new and innovative products could result in a loss of customers and lower revenues.
We face the challenge of accurately aligning our capacity with our demand.
We have experienced capacity constraints and longer lead times for certain products in times of growing demand and have also experienced idle capacity as economies slow or demand for certain products decline. Accurately forecasting our expected volumes and appropriately adjusting our capacity have been, and will continue to be, important factors in determining our results of operations. We cannot guarantee that we will be able to increase manufacturing capacity to a level that meets demand for our products, which could prevent us from meeting increased customer demand and could harm our business. However, if we overestimate our demand and overbuild our capacity, we may have significantly underutilized assets and we may experience reduced margins. If we do not accurately align our manufacturing capabilities with demand it could have a material adverse effect on our results of operations.
The manufacture of many of our products is a highly exacting and complex process, and if we directly or indirectly encounter problems manufacturing products, our reputation, business and financial results could suffer.
The manufacture of many of our products is an exacting and complex process. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors, and if not discovered before the product is released to market could result in recalls and product liability exposure. Because of the time required to develop and maintain manufacturing facilities, an alternative manufacturer may not be available on a timely basis to replace such production capacity. Any of these manufacturing problems could result in significant costs and liability, as well as negative publicity and damage to our reputation that could reduce demand for our products.
We face the potential harms of natural disasters, pandemics, acts of war, terrorism, international conflicts or other disruptions to our operations.
Natural disasters, pandemics, acts or threats of war or terrorism, international conflicts, political instability, and the actions taken by governments could cause damage to or disrupt our business operations, our suppliers or our customers, and could create economic instability. Although it is not possible to predict such events or their consequences, these events could decrease demand for our products or make it difficult or impossible for us to deliver products.
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STRATEGIC RISKS
Our strong organic growth has been and will continue to be enhanced by strategic acquisitions that complement, enhance or expand our business. We may not be able to find or complete these transactions, and, if completed, we may experience operational and financial risks in connection with our acquisitions that prevent us from realizing the anticipated benefits and may materially adversely affect our business, financial condition and operating results.
Acquisitions are part of our strategic growth plans. We may have difficulty finding these opportunities, or if we do identify these opportunities, we may not be able to complete the transactions for various reasons including a failure to secure financing.
To the extent that we are able to complete the transactions (including our recent acquisitions of Dynamic Controls, ORMEC, ALIO and Spectrum Controls), we will face the operational and financial risks commonly encountered with an acquisition strategy. These risks include the challenge of integrating acquired businesses while managing the ongoing operations of each business, the challenge of combining the business cultures of each company, and the need to retain key personnel of our existing business and the acquired business. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the acquired business and our existing business. Members of our senior management may be required to devote considerable amounts of time to the integration process, which will decrease the time they will have to manage our businesses, service existing customers, attract new customers and develop new products. If our senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could be adversely affected.
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the liability of the former owners is limited, and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that adversely affect our financial results.
We intend to develop new products and expand into new markets, which may not be successful and could harm our operating results.
We intend to expand into new markets and develop new and modified products based on our existing technologies and engineering capabilities, including the continued expansion of our controlled motion systems and integrated electronics. These efforts have required and will continue to require us to make substantial investments, including significant research, development and engineering expenditures and capital expenditures for new, expanded or improved manufacturing facilities. Specific risks in connection with expanding into new products and markets include longer product development cycles, the inability to transfer our quality standards and technology into new products, and the failure of our customers to accept the new or modified products.
We may experience difficulties that could delay or prevent the successful development of new products or product enhancements under new and existing contracts, and new products or product enhancements may not be accepted by our customers. In addition, the development expenses we incur may exceed our cost estimates, and new products we develop may not generate sales sufficient to offset our costs. If any of these events occur, our sales and profits could be adversely affected.
Our competitiveness depends on successfully executing our growth initiatives and our global optimization strategies.
We continue to invest in initiatives to support future growth, such as the creation of a more effective corporate structure,
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implementation of our enterprise resource planning system, launch of a new integrated website, implementation of a structured approach to identify target markets, and the expansion of our AST (continuous improvement initiatives in quality, delivery, and cost). The failure to achieve our objectives on these initiatives could have an adverse effect on our operating results and financial condition. Our global optimization strategy includes localization of our products and services to be closer to our customers and identified growth opportunities. Localization of our products and services includes expanding our capabilities, including supply chain and sourcing activities, product design, manufacturing, engineering, marketing and sales and support. These activities expose us to risks, including those related to political and economic uncertainties, transportation delays, labor market disruptions and challenges to protect our intellectual property.
FINANCIAL RISKS
Foreign currency exchange rates may adversely affect our financial results.
Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our financial results. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase from non-U.S. denominated locations. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. The Company also faces exchange rate risk from its investments in subsidiaries owned and operated in foreign countries.
Economic and credit market uncertainty could interrupt our access to capital markets, borrowings, or financial transactions to hedge certain risks, which could adversely affect our financial condition.
To date, we have been able to access debt and equity financing that has allowed us to make investments in growth opportunities and fund working capital requirements. In addition, we enter into financial transactions to hedge certain risks, including foreign exchange and interest rate risk. Our continued access to capital markets, the stability of our lenders and their willingness to support our needs, and the stability of the parties to our financial transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could affect our business prospects and financial condition.
Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that apply to our indebtedness could adversely affect our liquidity and financial results.
Our ability to service our indebtedness depends on our financial performance, which is affected by prevailing economic conditions and financial, business, regulatory and other factors. Some of these factors are beyond our control. Our debt level and related debt service obligations can have negative consequences, including requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which reduces the funds we have available for other purposes such as acquisitions and capital investment; reducing our flexibility in planning for or reacting to changes in our business and market conditions; and exposing us to interest rate risk since a portion of our debt obligations are at variable rates. In addition, certain of our indebtedness will have significant outstanding principal balances on their maturity dates, commonly known as balloon payments. Therefore, we will likely need to refinance at least a portion of our outstanding debt as it matures. We may incur more debt in the future, particularly to finance acquisitions, and there can be no assurance that our cost of funding will not substantially increase.
Our existing credit agreements contain, and any future debt agreements we may enter into may contain, certain financial tests and other covenants that limit our ability to incur indebtedness, pay dividends, acquire other businesses and impose various other restrictions. If we breach any of the covenants and do not obtain a waiver from the lenders, the outstanding indebtedness could be declared immediately due and payable. If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures and other expenses. Any such actions could have a material adverse effect on our business, financial condition, results of operations and liquidity.
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In addition, certain of our variable rate debt uses London Interbank Offer Rate ("LIBOR") as a benchmark for establishing the interest rate, a portion of which is hedged with LIBOR-based interest rate derivatives. LIBOR has been the subject of proposals for reform, and is currently scheduled to be discontinued on June 30, 2023. While all of our material financing arrangements indexed to LIBOR provide procedures for determining an alternative base rate when LIBOR is discontinued, there can be no assurances as to whether such alternative base rate will be more or less favorable than LIBOR. We intend to monitor developments with respect to the phasing out of LIBOR and will work to minimize the impact of any LIBOR transition. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable rate indebtedness.
Unforeseen exposure to additional income tax liabilities may negatively affect our operating results.
Our distribution of taxable income is subject to domestic tax and, as a result of our significant manufacturing and sales presence in foreign countries, foreign tax. Our effective tax rate may be affected by shifts in our mix of earnings in countries with varying statutory tax rates, changes in reinvested foreign earnings, alterations to tax rates, regulations or interpretations and outcomes of any audits performed on previous tax returns.
Our operating results could fluctuate significantly.
Our quarterly and annual operating results are affected by a wide variety of factors that could materially adversely affect revenues and profitability, including: the timing of customer orders and the deferral or cancellation of orders previously received, the level of orders received which can be shipped in a quarter, fulfilling backlog on a timely basis, competitive pressures on selling prices, changes in the mix of products sold, the unavailability or delays in the receipt of critical inventories, the timing of investments in engineering and development, development of and response to new technologies, and delays in new product qualifications.
As a result of the foregoing and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect our business, financial condition, operating results and stock price.
We may never realize the full value of our substantial intangible assets.
These intangible assets consist primarily of goodwill, customer lists, trade names and patented technology arising from our acquisitions. Goodwill is not amortized; it is tested annually or upon the occurrence of certain events which indicate that the assets may be impaired. Definite lived intangible assets are amortized over their estimated useful lives and are tested for impairment upon the occurrence of certain events which indicate that the assets may be impaired. We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. In addition, intangible assets with definite lives will continue to be amortized. Amortization expenses relating to these intangible assets will continue to reduce our future earnings.
Increased healthcare, pension and other costs under the Company’s benefit plans could adversely affect the Company’s financial condition and results of operations.
We provide health benefits to many of our employees and the costs to provide such benefits continue to increase annually. The amount of any increase or decrease in the cost of Company-sponsored health plans will depend on a number of different factors including new governmental regulations mandating types of coverage and reporting and other requirements.
We also sponsor defined benefit pension, defined contribution pension, and other postretirement benefit plans. Our costs to provide such benefits generally continue to increase annually. We use actuarial valuations to determine the Company’s benefit obligations for certain benefit plans, which require the use of significant estimates, including the discount rate, expected long-term rate of return on plan assets, mortality rates and the rates of increase in compensation and health care costs. Changes to these significant estimates could increase the cost of these plans, which could also have a material adverse effect on the Company’s financial condition and results of operations.
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Failure of our internal controls over financial reporting could limit our ability to report our financial results accurately and timely or prevent fraud.
We believe that effective internal controls are necessary to provide reliable financial reports and to assist in the effective prevention of fraud. If we are unable to detect or correct any issues in the design or operating effectiveness of internal controls over financial reporting or fail to prevent fraud, current and potential customers and shareholders could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.
Our operating results depend in part on our ability to contain or reduce costs. There is substantial price competition in our industry and upward pressure on material and labor costs. Our success and profitability will depend on our ability to maintain a competitive cost and price structure.
Our efforts to maintain and improve profitability depend in part on our ability to maintain or reduce the costs of materials, components, supplies and labor, including establishing production capabilities at our low cost regional subcontractors. While the failure of any single cost containment effort by itself would most likely not significantly impact our results, we cannot give any assurances that we will be successful in controlling material and labor costs to maintain a competitive cost structure.
There is substantial price competition in our industry, and our success and profitability will depend on our ability to maintain a competitive cost and price structure. We may have to reduce prices in the future to remain competitive. Also, our future profitability will depend in part upon our ability to continue to improve our manufacturing efficiencies and maintain a cost structure that will enable us to offer competitive prices in the face of upward pressure on material and labor costs. Our inability to maintain a competitive cost structure could have a material adverse effect on our business, financial condition and results of operations.
LEGAL AND REGULATORY RISKS
Our international operations expose us to legal and regulatory risks, which could have a material effect on our business.
Our profitability and international operations are, and will continue to be, subject to risks relating to changes in foreign legal and regulatory requirements. In addition, our international operations are governed by various U.S. laws and regulations, including Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act and other foreign anti-bribery laws. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. Other countries in which we operate also have anti-bribery laws, some of which prohibit improper payments to government and non-government persons and entities. Any alleged or actual violations of these regulations may subject us to government scrutiny, severe criminal or civil sanctions and other liabilities and could negatively affect our business, reputation, operating results and financial condition.
We are required to comply with various import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons and dealings between our employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations or embargos may prohibit the export of certain products, services and technologies. In other circumstances, we may be required to obtain an export license before exporting the controlled item. Compliance with the various import laws that apply to our businesses can restrict our access to, and increase the cost of obtaining, certain products and at times can interrupt our supply of imported inventory. In addition to government regulations regarding sale and export, we are subject to other regulations regarding our products. For example, the U.S. Securities and Exchange Commission has adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements impose additional costs on us and on our suppliers, and may limit the sources or increase the cost of materials used in our products. Further, if we are unable to certify that our products are conflict free, we may face challenges with our customers that could place us at a competitive disadvantage, and our reputation may be harmed.
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Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete.
We rely on patents, trademarks and proprietary knowledge and technology, both internally developed and acquired, in order to maintain a competitive advantage. Our inability to defend against the unauthorized use of these rights and assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. This litigation could result in significant costs and divert our management’s focus away from operations.
We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our financial results.
We are subject to a variety of litigation and other legal and regulatory proceedings incidental to our business, including claims for damages arising out of the use of products or services and claims relating to intellectual property, employment, tax, commercial disputes, competition, sales and trading practices, environmental, personal injury, insurance coverage, acquisition, as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions including liabilities retained from, or representations, warranties or indemnities provided in connection with these acquisitions. These lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and financial results. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. We estimate loss contingencies and establish reserves based on our assessment where liability is deemed probable and reasonably estimable given the facts and circumstances known to us at a particular point in time. Subsequent developments may affect our assessment and estimates of the loss contingencies recorded as liabilities. We cannot guarantee that our liabilities in connection with litigation and other legal and regulatory proceedings will not exceed our estimates or adversely affect our financial results and reputation.
Our business is subject to environmental regulations that could negatively affect our operating results.
Our worldwide operations are subject to environmental laws and regulations that impose various environmental controls on the manufacturing, transportation, storage, use and disposal of hazardous chemicals and other materials used in, and hazardous waste produced by the manufacturing of our products. Conditions relating to our historical operations may require expenditures for clean-up in the future and changes in environmental laws and regulations may impose costly compliance requirements on us or otherwise subject us to future liabilities. Additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our products or restricting disposal or transportation of our products may be imposed that may result in higher costs or lower operating results. In addition, we cannot predict the affect that additional or modified environmental regulations may have on us or our customers.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
As of December 31, 2021, the Company occupies facilities as follows:
|
| |
| Approximate |
| |
| | | | Square | | Owned |
Description / Use | | Location | | Footage | | Or Leased |
Corporate headquarters |
| Amherst, New York |
| 6,000 |
| Leased |
Office and manufacturing facility |
| Amherst, New York |
| 6,000 |
| Leased |
Office and manufacturing facility | | Arvada, Colorado | | 15,000 |
| Leased |
Office and manufacturing facility |
| Bellevue, Washington |
| 30,000 |
| Leased |
Office and manufacturing facility |
| Changzhou, China |
| 40,000 |
| Leased |
Office |
| Christchurch, New Zealand |
| 27,000 |
| Leased |
Office |
| Dayton, Ohio |
| 29,000 |
| Owned |
Office and manufacturing facility |
| Dayton, Ohio |
| 25,000 |
| Leased |
Office and manufacturing facility |
| Dordrecht, The Netherlands |
| 32,000 |
| Leased |
Office and manufacturing facility |
| Dothan, Alabama |
| 88,000 |
| Owned |
Office |
| Ferndown, Great Britain |
| 1,000 |
| Leased |
Office and manufacturing facility |
| Germantown, Wisconsin |
| 66,000 |
| Leased |
Office and manufacturing facilities |
| Kelheim, Germany |
| 168,000 |
| Leased |
Office |
| Kidderminster, Great Britain |
| 6,200 |
| Leased |
Office and manufacturing facility |
| Mrakov, Czech Republic |
| 42,000 |
| Leased |
Office |
| Oakville, Ontario, Canada |
| 3,500 |
| Leased |
Office and manufacturing facility |
| Owosso, Michigan |
| 85,000 |
| Owned |
Office and manufacturing facility |
| Porto, Portugal |
| 53,000 |
| Owned |
Office and manufacturing facility |
| Reynosa, Mexico |
| 50,000 |
| Leased |
Office and manufacturing facility |
| Rochester, New York |
| 15,000 |
| Leased |
Office and manufacturing facility |
| Stockholm, Sweden |
| 25,000 |
| Leased |
Office and manufacturing facility |
| Suzhou, China |
| 41,000 |
| Leased |
Office and manufacturing facility |
| Tulsa, Oklahoma |
| 33,000 |
| Leased |
Office and manufacturing facility |
| Twinsburg, Ohio |
| 57,600 |
| Leased |
Office and manufacturing facility |
| Watertown, New York |
| 107,000 |
| Owned |
The Company’s management believes the above-described facilities are adequate to meet the Company’s current and foreseeable needs. Operating leases for the Company’s properties expire at various times through 2033. Upon the expiration of the Company’s current leases, management believes that the Company will be able to secure renewal terms or enter into leases for alterative locations at market terms.
Item 3. Legal Proceedings.
The Company is involved in certain actions that have arisen out of the ordinary course of business. Management believes that resolution of the actions will not have a significant adverse effect on the Company’s consolidated financial statements.
Item 4. Mine Safety Disclosures.
Not applicable.
21
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Allied Motion’s common stock is listed on the Nasdaq Global Market System and trades under the symbol AMOT. The number of holders of record as reported by the Company’s transfer agent of the Company’s common stock as of the close of business on March 9, 2022 was 217.
Dividends
During 2021 and 2020, we declared regular quarterly cash dividends on our common stock. We paid $0.02 in the first quarter of 2021 and $0.025 per quarter for the remainder of 2021. We paid $0.02 per quarter in 2020. While it is our current intention to pay regular quarterly cash dividends, any decision to pay future cash dividends will be made by our Board and will depend on our earnings, financial condition and other factors.
Performance Graph
The following performance graph and tables reflect the five year change in the Company’s cumulative total stockholder return on Common Stock as compared with the cumulative total return of the NASDAQ Stock Market Index and the S&P Electrical Components and Equipment Index for a $100 investment made on December 31, 2016, including reinvestment of any dividends.
|
| 12/31/2016 |
| 12/31/2017 |
| 12/31/2018 |
| 12/31/2019 |
| 12/31/2020 |
| 12/31/2021 | ||||||
Allied Motion Technologies | | $ | 100.00 | | $ | 155.45 | | $ | 210.49 | | $ | 229.19 | | $ | 242.31 | | $ | 260.25 |
NASDAQ (U.S.) | | $ | 100.00 | | $ | 129.64 | | $ | 125.96 | | $ | 172.18 | | $ | 249.51 | | $ | 304.85 |
S&P Electrical Components & Equipment | | $ | 100.00 | | $ | 127.31 | | $ | 109.28 | | $ | 151.38 | | $ | 182.77 | | $ | 240.09 |
22
Issuer Purchases of Equity Securities
|
| |
| | |
| 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) | | per Share | | Announced Plans or Programs | | Under the Plans or Programs | |
10/01/21 to 10/31/21 |
| 273 | | $ | 32.20 |
| — |
| — |
11/01/21 to 11/30/21 |
| — | |
| — |
| — |
| — |
12/01/21 to 12/31/21 |
| 5,311 | |
| 40.64 |
| — |
| — |
Total |
| 5,584 | | $ | — |
| — |
| — |
(1) As permitted under the Company’s equity compensation plan, these shares were withheld by the Company to satisfy tax withholding obligations for employees 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 December 31, 2021, the Company did not have an authorized stock repurchase plan in place.
Item 6. [Reserved]
23
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Amounts presented in Item 7 are in thousands, except per share data.
Overview
We are a global company that designs, manufactures and sells precision and specialty controlled motion 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 United States, Canada, Mexico, Europe and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical and electronic motion technology. We sell component and integrated controlled motion solutions to end customers and OEMs through our own direct sales force and authorized manufacturers’ representatives and distributors. Our products include 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.
Financial Overview
Highlights for our fiscal year ended December 31, 2021, include:
| ● | Revenue was $403,516 for 2021 compared with $366,694 in 2020. The increase in revenues reflects improved sales in certain markets we serve, specifically Vehicle and Industrial. The increase reflects the economic recovery and the increases in demand from many of our served markets, as certain markets were negatively affected in the prior year period due to the economic environment brought on by the COVID-19 pandemic. Sales to U.S. customers were 54% of total sales for 2021 and 53% for 2020, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific. |
| ● | Gross profit was $121,056 for 2021, a 11% increase from $108,575 in 2020. As a percentage of revenue, gross margin increased 40 basis points to 30.0% in 2021 from 29.6% in 2020. The gross margin increase was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins. The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers. |
| ● | Operating income was $26,026, or 6% of revenue, for 2021 compared with $22,994, or 6% of revenue, for 2020. |
| ● | Net income was $24,094 for 2021, or $1.66 per diluted share, compared with $13,643, or $0.95 per diluted share, for 2020. Net income was 77% higher in 2021 compared to 2020, and earnings per diluted share increased by 75%. These increases reflect the impact of increased revenue along with the effect of a $7,373 discrete tax benefit in the first quarter of 2021. |
| ● | Bookings were a record $468,449 for 2021 compared with $370,712 for 2020, an increase of 26%. Backlog as of December 31, 2021 was $249,927, an increase of 77% from $141,344 at year end 2020. Included in backlog as of December 31, 2021 is $47,934 contributed by 2021 business acquisitions. |
| ● | Debt of $158,960, net of cash of $22,463, increased by $39,549 to $136,497 at December 31, 2021 from debt of $120,079, net of cash of $23,131 of $96,948 at December 31, 2020, primarily as a result of completing three acquisitions in the fourth quarter of 2021. |
| ● | We declared and paid a dividend of $0.02 in the first quarter of 2021 and $0.025 per quarter for the remainder of 2021, and paid a dividend of $0.02 per quarter in 2020 pursuant to our quarterly dividend program. Dividends to shareholders for 2021 and 2020 were $0.095 and $0.08 per share, respectively. The |
24
| dividend payout ratio was 6% and 8% for 2021 and 2020, respectively when compared with the diluted earnings per share of $1.66 and $0.95, respectively. |
We remain focused on executing our strategy for growth while streamlining the organization and emphasizing continuous improvement in quality, delivery, cost and innovation as we drive the One Allied approach and expand our value proposition for our customers. Solid strides continue to be made with our multi-product, fully integrated solutions that are leading to increased business. Also, we continue to build a pipeline of exciting market-based application opportunities. Sales cycles are long and the time from being selected for the solution development to full rate production can be longer, yet we believe we continue to build a scalable foundation which can deliver strong returns on those investments.
Our Strategy
Our growth strategy is focused on becoming a leading global controlled motion solution provider in our selected target markets by further developing our products and services platform to utilize multiple Allied Motion technologies which create increased value solutions for our customers. Our strategy further defines Allied Motion as being a “technology/know-how” driven company and to be successful, we continue to invest in our areas of excellence.
We have set growth targets for our Company and we will align and focus our resources to meet those targets. First and foremost, we invest in our people as we believe that attracting and retaining the right people is the most important element in our strategy. We will continue to invest significantly in applied and design engineering resources.
Our strategic focus is addressing the critical issues that we believe are necessary to meet the stated long-term goals and objectives of the Company. The majority of the critical issues are focused on growth and profitability initiatives for the Company.
One of these initiatives includes product line platform development to meet the emerging needs of our target markets. Our platform development emphasizes a combination of our technologies to create increased value solutions for our customers. The emphasis with new opportunities has evolved from being an individual component provider to becoming a solutions provider whereby the new opportunities utilize multiple Allied Motion technologies in a system solution approach. We believe this approach will allow us to provide increased value to our customers and improved margins for our Company, and are demonstrated in our acquisitions completed in the fourth quarter of 2021. Our strong financial condition, along with AST continuous improvement initiatives in quality, delivery, and cost allow us to have a positive outlook for the continued long-term growth of our Company.
Outlook for 2022
During 2021, we continued to navigate a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results. We experienced record orders during 2021 reflecting increases in our Vehicle and Industrial markets. This demand, combined with supply chain constraints, resulted in some inefficiencies and unintended costs as our teams worked hard to support and meet customer demand and schedules.
While the economic outlook for 2022 remains uncertain and we expect continued upward pressure on material and labor costs, we believe we are in a strong operational, financial and reputational position. Our record level of backlog, diversified end market penetration and demonstrated agility position us well to perform across varied market trends and give us confidence that we can drive further efficiency, profitable growth and enhanced free cash flow while delivering long-term value for our shareholders.
In 2022, we will continue to focus on leveraging our resources to expand our business in our served markets. In addition, we will continue to execute the ongoing critical issues as defined by our board approved strategy.
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The critical issues from that strategy include:
| 1) | Create and drive a long-term global optimization strategy, including acquisitions, to consolidate a fragmented market. |
| 2) | Successfully integrate and realize the anticipated benefits from the three acquisitions completed in the fourth quarter of 2021. |
| 3) | Pursue target (niche) markets where we can gain a leadership market position. |
| 4) | Innovate leading edge products and solutions to meet the emerging needs of our target markets. |
| 5) | Develop a lean culture by utilizing our lean tool kit to enhance and continuously improve company performance. |
| 6) | Continuously develop talent throughout the organization through training and deployment of Allied Systematic Tools. |
Allied Motion is an applied technology/know-how motion company, and to grow, we will continue to invest in the technical resources to ensure we can move forward with our mantra to “create controlled motion solutions that change the game” and to meet the emerging needs of our customers in our served market segments. We anticipate that our investment in these key resources will continue to drive our growth now and in the future. We expect to continue the shift from being a component supplier to a more complete solutions provider, along with the application of AST, to drive cost reduction.
Our global production footprint provides us with the opportunity to be a value added supplier for global companies who require support around the world. We will continue to evaluate and find areas to leverage our current manufacturing and sales footprint to drive sales and improve efficiencies.
In addition to our strategy described above, time and resources have been spent during 2021 to further understand the ESG ecosystem and developments impacting stakeholder expectations and assess our performance. The Company has a number of initiatives focused on individual components of ESG, and, under the oversight of the board of directors is continuing to integrate ESG with our broader strategy and Enterprise Risk Management (ERM). The strategy will include looking to further enhance the Company’s ability to meet ongoing and emerging challenges, including the impacts of the COVID-19 pandemic.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.
We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information.
26
The Company’s critical accounting policies and estimates include:
Revenue Recognition
The Company considers control of most products to transfer at a single point in time when control is transferred to the customer, generally when the products are shipped in accordance with an agreement and/or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product. The Company satisfies its performance obligations under a contract with a customer by transferring goods and services generally in exchange for monetary consideration from the customer. The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgment as the contract with the customer. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The Company establishes provisions for estimated returns and warranties. All contracts include a standard warranty clause to guarantee that the product complies with agreed specifications.
Inventories
Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory costing requires complex calculations that include assumptions for overhead absorption, scrap, sample calculations, manufacturing yield estimates, costs to sell, and the determination of which costs may be capitalized. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.
Historically, our inventory adjustment has been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-downs or expense a greater amount of overhead costs, which would negatively impact our net income. As of December 31, 2021, we have $89,733 of inventory recorded on our consolidated balance sheet, representing approximately 19% of total assets. A 1% write-down of our inventory would decrease our 2021 net income by approximately $627, or $0.04 per diluted share.
Evaluation of Goodwill for impairment
We test the reporting unit’s goodwill for impairment as of October 31st of each fiscal year and between annual tests if an event occurs or circumstances change that may indicate that the fair value of the reporting unit is below its carrying value. In conducting this annual impairment test, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value. If we determine that it is not more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, no further goodwill impairment testing is required. If it is more-likely-than-not that the reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.
We performed a qualitative assessment of our single reporting unit as of October 31, 2021. As part of this analysis, we evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall financial performance of our reporting unit. The assessment indicated that it was more-likely-than-not that the fair value of our reporting unit exceeded its carrying amount, and as such, a quantitative assessment was not perfomed.
We do not believe that our reporting unit is at risk for impairment. However, changes to the factors considered above could affect the estimated fair value of our reporting unit and could result in a goodwill impairment charge in a future period. As of December 31, 2021, we have $106,633 of goodwill recorded on our consolidated balance sheet, representing approximately 23% of total assets. A 1% write-down of our goodwill would decrease our 2021 net income approximately $745, or $0.05 per diluted share.
27
Business Combinations
The Company allocates the purchase price of an acquired company, including when applicable, the acquisition date fair value of contingent consideration between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Third party appraisal firms and other consultants are engaged to assist management in determining the fair values of certain assets acquired and liabilities assumed. Estimating fair values requires significant judgments, estimates and assumptions, including but not limited to: discount rates, future cash flows and the economic lives of trade names, technology, customer relationships, and property, plant and equipment. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
During the year ended December 31, 2021, we completed three business combinations for an aggregate purchase price of $102,169. We identified and assigned value to identifiable intangible assets of customer lists, technology, and trade names, and estimated the useful lives over which these intangible assets would be amortized. The estimates of fair values of these identifiable intangible assets were based upon discounted cash flow models, which include assumptions such as forecasted cash flows, customer attrition rates, discount rates, and royalty rates. The fair value estimates resulted in identifiable intangible assets, in the aggregate, of $45,000. The resulting goodwill, in the aggregate, from these three acquisitions was $46,431.
The contingent consideration fair value measurement, in connection with the acquisition of ALIO Industries (“ALIO”), of $4,900 is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The Company determines the initial fair value of contingent consideration liabilities using a Monte Carlo valuation model, which involves a simulation of future earnings generated by ALIO during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.
Stock-based Compensation
Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units.
The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Impact of Recently Issued Accounting Pronouncements
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”) or other authoritative accounting bodies to determine the potential impact they may have on our consolidated financial statements. See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
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Operating Results
The following discussion is a comparison between fiscal year 2021 and fiscal year 2020 results. For a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the SEC on March 10, 2021.
Year 2021 compared to 2020
| | For the year ended |
| 2021 vs. 2020 | | |||||||
| | December 31, | | Variance |
| |||||||
(Dollars in thousands, except per share data) |
| 2021 |
| 2020 | | $ |
| % | | |||
Revenues | | $ | 403,516 | | $ | 366,694 | | $ | 36,822 | | 10 | % |
Cost of goods sold | |
| 282,460 | |
| 258,119 | |
| 24,341 | | 9 | % |
Gross profit | |
| 121,056 | |
| 108,575 | |
| 12,481 | | 11 | % |
Gross margin percentage | |
| 30.0 | % |
| 29.6 | % |
|
| |
| |
Operating costs and expenses: | |
|
| |
|
| |
|
| |
| |
Selling | |
| 17,249 | |
| 15,392 | |
| 1,857 | | 12 | % |
General and administrative | |
| 42,419 | |
| 38,301 | |
| 4,118 | | 11 | % |
Engineering and development | |
| 27,818 | |
| 25,487 | |
| 2,331 | | 9 | % |
Business development | |
| 1,299 | |
| 473 | |
| 826 | | 175 | % |
Amortization of intangible assets | |
| 6,245 | |
| 5,928 | |
| 317 | | 5 | % |
Total operating costs and expenses | |
| 95,030 | |
| 85,581 | |
| 9,449 | | 11 | % |
Operating income | |
| 26,026 | |
| 22,994 | |
| 3,032 | | 13 | % |
Interest expense | |
| 3,236 | |
| 3,716 | |
| (480) | | (13) | % |
Other (income) expense, net | |
| (323) | |
| 502 | |
| (825) | | (164) | % |
Total other expense | |
| 2,913 | |
| 4,218 | |
| (1,305) | | (31) | % |
Income before income taxes | |
| 23,113 | |
| 18,776 | |
| 4,337 | | 23 | % |
Income tax benefit (provision) | |
| 981 | |
| (5,133) | |
| 6,114 | | (119) | % |
Net income | | $ | 24,094 | | $ | 13,643 | | $ | 10,451 | | 77 | % |
| |
|
| |
|
| |
|
| |
| |
Effective tax rate | |
| (4.2) | % |
| 27.3 | % | | | | | |
Diluted earnings per share | | $ | 1.66 | | $ | 0.95 | | $ | 0.71 | | 75 | % |
Bookings | | $ | 468,449 | | $ | 370,712 | | $ | 97,737 | | 26 | % |
Backlog | | $ | 249,927 | | $ | 141,344 | | $ | 108,583 | | 77 | % |
REVENUES: The increase in revenues in 2021 reflects improved sales in certain markets we serve, specifically Vehicle and Industrial. The increase reflects the economic recovery and the increases in demand from many of our served markets, as certain markets were negatively affected in the prior year period due to the economic environment brought on by the COVID-19 pandemic. Our sales for 2021 were comprised of 54% to U.S. customers and 46% to customers primarily in Europe, Canada and Asia-Pacific. The overall increase in revenue was due to an 8% volume increase and a 2% favorable currency impact. See information included in “Non – GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of revenue to revenue excluding foreign currency impacts. Incremental revenues for 2022 from the three acquisitions completed in the fourth quarter of 2021, collectively, are forecasted to be approximately $60,000.
ORDER BOOKINGS AND BACKLOG: The 26% increase in orders in 2021 compared to 2020 is due to a 24% increase in volume and a 2% favorable currency impact. The increase in bookings during 2021 compared to 2020 is largely due to increases in our Vehicle and Industrial markets reflecting improvements in the general economy along with growth in our core businesses. The increase in backlog as of December 31, 2021, compared to December 31, 2020 was related to these factors as well as incremental backlog of $47,934 from the three acquisitions that were completed during the fourth quarter 2021.
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GROSS PROFIT AND GROSS MARGIN: Gross margins improved to 30.0% for 2021, compared to 29.6% for 2020. The increase in gross margin percentage was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins. The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers.
SELLING EXPENSES: Selling expenses increased 12% during 2021 compared to 2020 primarily due to higher incentive compensation which is tied to improved revenue and profitability. Cost control efforts related to the COVID-19 pandemic in 2020, specifically travel restrictions, resulted in lower than normal expense levels compared to 2021. Selling expenses as a percentage of revenues were comparable at 4% during 2021 and 2020.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 11% during 2021 compared to 2020 due primarily to increased costs associated with incentive compensation programs which are aligned with our revenue and profit growth. Also, 2020 was favorably impacted by significant COVID-19 cost containment efforts. As a percentage of revenues, general and administrative expenses were 11% and 10% in 2021 and 2020, respectively.
ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 9% in 2021 compared to 2020. The increase is primarily due to the continued ramp up of development projects to meet the future needs of target markets, as well as supporting growing customer application development needs and higher incentive compensation which is tied to improved revenue and profitability. As a percentage of revenues, engineering and development expenses were comparable at 7% for the year ended December 31, 2021 and 2020.
BUSINESS DEVELOPMENT COSTS: The increase in business development costs in 2021 compared to 2020 is due to additional acquisition related costs due to increased merger and acquisition activity, as well as $545 of costs in 2021 related to the Twinsburg plant consolidation.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets increased 5% in 2021 compared to 2020, due to the inclusion of Dynamic Controls for the full year 2021 and the incremental amortization from the 2021 acquisitions.
INTEREST EXPENSE: Interest expense decreased by 13% in 2021 compared to 2020 primarily due to a 27 basis point decrease in average interest rates paid during 2021 due to lower leverage, which decreases the Company’s margin under its credit facility, and the lower interest rate environment. Additionally, interest expense declined due to lower average debt levels in 2021 compared to 2020 .
INCOME TAXES: For 2021 and 2020, the effective income tax rate was (4.2%) and 27.3%, respectively. The effective tax rate for 2021 includes a tax benefit of 32.3% related to the recognition of net operating loss carryforwards primarily resulting from tax legislation enacted in New Zealand and 5.6% related to investment tax credits recorded in 2021. The effective rate for 2021 is partially offset by a 7.2% discrete tax provision related to a valuation allowance recorded on a foreign subsidiary’s deferred tax assets. The Company expects its income tax rate for the full year 2022 to be approximately 24% to 26%.
NET INCOME AND ADJUSTED NET INCOME: Net income increased during 2021 compared to 2020 reflecting the impact of increased revenue, as well as the effect of a $7,373 discrete income tax benefit in the first quarter of 2021.
Adjusted net income for the years ended December 31, 2021 and 2020 was $18,238 and $14,315, respectively. Adjusted diluted earnings per share for 2021 and 2020 were $1.26 and $1.00, respectively. Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. See information included in “Non–GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of net income to Adjusted net income and diluted earnings per share to Adjusted diluted earnings per share.
EBITDA AND ADJUSTED EBITDA: EBITDA was $44,456 for 2021 compared to $38,477 for 2020. Adjusted EBITDA was $49,937 and $43,111 for 2021 and 2020, respectively. EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss and
30
certain other items. Refer to information included in “Non-GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of net income to EBITDA and Adjusted EBITDA.
Non-GAAP Measures
Revenue excluding foreign currency exchange impacts, EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share are provided for information purposes only and are not measures of financial performance under GAAP.
Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results. In particular, those charges and credits that are not directly related to operating unit performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for revenue and net income determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to net income determined in accordance with GAAP.
The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing sales results. The Company excludes the effect of currency translation from revenue for this measure because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The portion of revenue attributable to currency translation is calculated as the difference between the current period revenue and the current period revenue after applying foreign exchange rates from the prior period.
The Company believes EBITDA is often a useful measure of a Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, acquisitions, as well as our provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry.
The Company also believes that Adjusted EBITDA provides helpful information about the operating performance of its business. Adjusted EBITDA excludes stock-based compensation expense, as well as business development costs, foreign currency gains/losses on short-term assets and liabilities, and other items that are not indicative of the Company’s core operating performance. EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP.
Management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance. Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP. These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. Adjusted net income provides management with a measure of financial performance of the Company based on operational factors as it removes the impact of certain non-routine items from the Company’s operating results. Adjusted diluted earnings per share provides management with an indication of how Adjusted net income would be reflected on a per share basis for comparison to the GAAP diluted earnings per share measure. Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business. This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted expense and income items.
31
The Company’s calculation of revenue excluding foreign currency exchange impacts for 2021 is as follows (in thousands):
|
| Year ended | |
|
| December 31, 2021 | |
Revenue as reported | | $ | 403,516 |
Currency impact (favorable) unfavorable | |
| (8,332) |
Revenue excluding foreign currency exchange impacts | | $ | 395,184 |
The Company’s calculation of EBITDA and Adjusted EBITDA for 2021 and 2020 is as follows (in thousands):
|
| Year ended | ||||
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Net income as reported | | $ | 24,094 | | $ | 13,643 |
Interest expense | |
| 3,236 | |
| 3,716 |
Income tax (benefit) provision | |
| (981) | |
| 5,133 |
Depreciation and amortization | |
| 18,107 | |
| 15,985 |
EBITDA | |
| 44,456 | |
| 38,477 |
Stock-based compensation expense | |
| 4,161 | |
| 3,550 |
Business development costs | |
| 1,299 | |
| 473 |
Foreign currency loss | | | 21 | | | 1,035 |
Non income-based tax refund | |
| — | |
| (424) |
Adjusted EBITDA | | $ | 49,937 | | $ | 43,111 |
The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2021 and 2020 is as follows (in thousands, except per share data):
|
| For the year ended | ||||||||||
| | December 31, | ||||||||||
|
| | |
| Per diluted |
| | |
| Per diluted | ||
| | 2021 | | share | | 2020 | | share | ||||
Net income as reported | | $ | 24,094 | | $ | 1.66 | | $ | 13,643 | | $ | 0.95 |
Non-GAAP adjustments, net of tax | |
| | |
|
| |
|
| |
|
|
Discrete income tax benefit | |
| (7,373) | |
| (0.51) | |
| — | |
| — |
Non income-based tax refund | |
| — | |
| — | |
| (424) | |
| (0.03) |
Income tax valuation allowance | |
| 506 | | | 0.03 | |
| — | |
| — |
Foreign currency loss - net | |
| 16 | |
| — | |
| 752 | |
| 0.05 |
Business development costs - net | |
| 995 | |
| 0.07 | |
| 344 | |
| 0.02 |
Non-GAAP adjusted net income | | $ | 18,238 | | $ | 1.26 | | $ | 14,315 | | $ | 1.00 |
| | | | | | | | | | | | |
Liquidity and Capital Resources
The Company’s liquidity position as measured by cash and cash equivalents decreased by $668 to a balance of $22,463 at December 31, 2021 from 2020.
| | Year Ended December 31, | | 2021 vs. 2020 | |||||
|
| 2021 |
| 2020 |
| $ | |||
Net cash provided by operating activities | | $ | 25,402 | | $ | 24,838 | | $ | 564 |
Net cash used in investing activities | | | (60,970) |
| | (24,099) | |
| (36,871) |
Net cash provided by financing activities | | | 35,832 |
| | 7,489 | |
| 28,343 |
Effect of foreign exchange rates on cash | | | (932) |
| | 1,487 | |
| (2,419) |
Net (decrease) increase in cash and cash equivalents | | $ | (668) | | $ | 9,715 | | $ | (10,383) |
| | | | | | | | | |
Of the $22,463 cash and cash equivalents on hand at December 31, 2021, $15,943 was located at our foreign subsidiaries and may be subject to withholding tax if repatriated back to the U.S.
32
During 2021, the cash provided by operating activities remained consistent with 2020 due to increased net income adjusted for non-cash items, offset by cash used for working capital (primarily inventory) required to support our customer base in the current supply chain environment.
The increased cash used in investing activities in 2021 relates to the $47,254 net cash consideration paid for the ORMEC, ALIO and Spectrum Controls acquisitions in the fourth quarter. Purchases of property and equipment were $13,716 during the 2021 compared to $9,371 during the year ended December 31, 2020 reflecting continued commitments to projects supporting growth initiatives. Cash used in investing activities in the prior year period included a $14,728 outflow related to the acquisition of Dynamic Controls. The Company expects 2022 capital expenditures to be approximately $15,000 to $20,000.
The increase in cash provided by financing activities in 2021 from 2020 includes Amended Revolving Facility borrowings of $50,500 to fund the three acquisitions in the fourth quarter of 2021. Debt payments of $12,248 were made during 2021. The cash provided by financing activities in 2020 reflects the Amended Revolving Facility borrowing for the acquisition of Dynamic Controls for approximately $26,000 in the first quarter of 2020, net of payments of $16,897 during the year. At December 31, 2021, we had $159,395 of obligations under the Amended Revolving Facility, excluding deferred financing costs.
The Amended Credit Agreement contains certain financial covenants related to minimum interest coverage, total leverage ratio, and non-material subsidiaries assets to consolidated total assets at the end of each quarter. The Amended Credit Agreement also includes other covenants and restrictions, including limits on the amount of additional indebtedness, and restrictions on the ability to merge, consolidate or sell all, or substantially all, of our assets. Under the provisions of the Amended Credit Agreement, we may elect to increase our Leverage Ratio to a 4.0 to 1.0 ratio (a “Leverage Increase”) during the fiscal quarter in which a Material Acquisition (as defined in the Amended Credit Agreement) takes place and for the next three fiscal quarters. If the Material Acquisition occurs within the last 45 days of any fiscal quarter, the Leverage Increase is applicable for the following four fiscal quarters. We qualified for and elected the Leverage Increase as a result of the Spectrum Controls acquisition. We were in compliance with all covenants at December 31, 2021.
As of December 31, 2021, the unused Amended Revolving Facility was $65,605. 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 2021 or 2020.
The Company declared dividends, in total, of $0.095 and $0.08 per share during 2021 and 2020, respectively. The Company’s working capital, capital expenditure and dividend requirements are expected to be funded from cash provided by operations and amounts available under the Amended Credit Agreement (refer to Note 7, Debt Obligations, of the notes to consolidated financial statements for definition and terms).
Although there is ongoing uncertainty related to the anticipated impact of COVID-19 and variants on our future results, we believe our diverse markets, our strong market position in many of our businesses, and the steps we have taken to strengthen our balance sheet, such as retaining cash to support shorter term needs and extending the maturity of our revolving credit facility in early 2020 leaves us well-positioned to manage our business through the crisis as it continues to unfold. We continually assess our liquidity and cash positions and have assessed the impact of COVID-19 on our Company. Based on our analysis, we believe our existing balances of cash, the flexibility of our Amended Credit Agreement and our currently anticipated operating cash flows will be more than sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Foreign Currency
We have international operations in The Netherlands, Sweden, Germany, China, Portugal, Canada, Czech Republic, Mexico, the United Kingdom and New Zealand which expose us to foreign currency exchange rate fluctuations due to
33
transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively. We continuously evaluate our foreign currency risk and we take action from time to time in order to best mitigate these risks. 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 $16,500 on our 2021 sales. This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on cost of sales and operating expenses in those currencies. We estimate that foreign currency exchange rate fluctuations increased sales in 2021 compared to 2020 by approximately $8,332.
We translate all assets and liabilities of 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 consolidated financial statements as comprehensive income. The translation adjustment was a loss of $7,193 for 2021 and a gain of $8,410 for 2020. 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 $11,000 and $10,000 on our foreign net assets as of December 31, 2021 and 2020, respectively.
Beginning in the first quarter of 2021, we began entering into contracts to hedge our short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $13,500 at December 31, 2021. The foreign currency contracts are recorded in the consolidated balance sheets at fair value and resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income. During the year ended December 31, 2021, we recorded a loss of $170 on foreign currency contracts which is included in other (income) expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other (income) expense, net. Net foreign currency transaction gains and losses included in total other expense, net amounted to losses of $21 and $1,035 in 2021 and 2020, respectively.
Interest Rates
Interest rates on our Amended Credit Agreement are based on the LIBOR or EURIBOR plus a margin of 1.00% to 1.75% (1.375% at December 31, 2021) or the Prime Rate plus a margin of 0% to 0.75% (0.375% at December 31, 2021), in each case depending on the Company’s ratio of total funded indebtedness to Consolidated EBITDA. 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, we entered into three interest rate swaps with a combined notional amount of $40,000 that matures in February 2022. In March 2020, the Company entered into two additional interest rate swaps with a combined notional amount of $20,000 that increases to $60,000 in March 2022 and matures in December 2024.
As of December 31, 2021, we had $159,395 outstanding under the Amended Revolving Facility (excluding deferred financing fees), of which $60,000 is currently being hedged. Refer to Note 7, Debt Obligations, of the notes to 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 $99,395 of unhedged floating rate debt outstanding at December 31, 2021 would have an impact of approximately $994 on our interest expense for 2021. A hypothetical one percentage point (100 basis points) change in the Base Rate on the $60,656 of unhedged floating rate debt outstanding at December 31, 2020 would have an impact of approximately $607 on our interest expense for 2020.
34
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Allied Motion Technologies Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Allied Motion Technologies Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2022 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventories – Refer to Note 1 to the financial statements
Critical Audit Matter Description
Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. The valuation of inventory requires the Company to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality. The Company’s estimate of the appropriate amount of obsolete or excess inventory, as well as inventory that is
35
not of saleable quality, uses certain inputs and involves judgment. Such inputs include data associated with historic trends, the demand forecast for inventory on-hand which includes customer orders, and item specific estimates about the timing or level of demand for a specific part. Inventories at December 31, 2021 totaled approximately $89.7 million.
We identified the estimate of obsolete or excess inventory, as well as inventory that is not of saleable quality, as a critical audit matter because of the significant amount of judgment required by management when evaluating the demand forecast for inventory on-hand and assumptions for item specific estimates about the timing or level of demand for a specific part. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of the demand forecast for inventory on-hand and item specific estimates about the timing or level of demand for a specific part.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of obsolete or excess inventory, as well as inventory that is not of saleable quality, included the following, among others:
| ● | We tested the effectiveness of controls over management’s review of the periodic calculation of the valuation for obsolete or excess inventory, as well as inventory that is not of saleable quality. |
| ● | We tested management’s process for determining the valuation of inventory, including: |
| o | We evaluated the appropriateness of specified inputs supporting management’s estimate, including the historic inventory trends and the demand forecasts. |
| o | We tested the demand forecast for inventory on-hand by obtaining documentation to support customer orders, historical and future sales used in the Company’s analysis. |
| o | We evaluated the appropriateness of management’s methodology and assumptions used in developing the estimate, including item specific estimates about the timing or level of demand for a specific part. |
| o | We evaluated management’s ability to accurately estimate obsolete or excess inventory, as well as inventory that is not of saleable quality by comparing actual results to management’s historical estimates. |
| o | We evaluated inventory write-offs subsequent to December 31, 2021 for indications that the estimate for obsolete or excess inventory, as well as inventory that is not of saleable quality may be understated. |
Acquisitions — Spectrum Controls, Inc. — Customer Lists Intangible Asset — Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company completed the acquisition of Spectrum Controls, Inc. for approximately $68.7 million on December 30, 2021. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including a customer lists intangible asset of approximately $21.0 million. The fair value determination of the customer lists intangible asset required management to make significant estimates and assumptions related to the selection of the discount rate.
We identified the selection of the discount rate used in the valuation of the customer lists intangible asset as a critical audit matter because of the significant estimates and assumptions used by the Company to determine the fair value of this asset. Auditing the estimates and assumptions related to the customer lists intangible asset required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s selection of the discount rate for the customer lists intangible asset.
36
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the selection of the discount rate for the customer lists intangible asset included the following, among others:
| ● | We tested the effectiveness of controls over the valuation of the customer lists intangible asset, including management’s selection of the discount rate. |
| ● | We performed sensitivity analyses of the significant assumptions used in the valuation model to evaluate the change in fair value resulting from changes in the significant assumptions, including the discount rate. |
| ● | With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate by: |
| o | Testing the source information underlying the determination of the discount rate and testing the mathematical accuracy of the calculation. |
| o | Developing a range of independent estimates and comparing those to the discount rate selected by management. |
| o | We evaluated the appropriateness and consistency of the Company’s methods and assumptions used to select the discount rate. |
/s/
March 9, 2022
We have served as the Company’s auditor since 2018.
37
ALLIED MOTION TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | | | $ | |
Trade receivables, net of provision for credit losses of $ | | | | | | |
Inventories | |
| | |
| |
Prepaid expenses and other assets | |
| | |
| |
Total current assets | |
| | |
| |
Property, plant and equipment, net | |
| | |
| |
Deferred income taxes | |
| | |
| |
Intangible assets, net | |
| | |
| |
Goodwill | |
| | |
| |
Right of use assets | | | | | | |
Other long-term assets | |
| | |
| |
Total Assets | | $ | | | $ | |
Liabilities and Stockholders’ Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | | | $ | |
Accrued liabilities | |
| | |
| |
Total current liabilities | |
| | |
| |
Long-term debt | |
| | |
| |
Deferred income taxes | |
| | |
| |
Pension and post-retirement obligations | |
| | |
| |
Right of use liabilities | | | | | | |
Other long-term liabilities | | | | | | |
Total liabilities | |
| | |
| |
Commitments and contingencies (Note 11) | | | | | | |
Stockholders’ Equity: | | | | | | |
Common stock, | |
| | |
| |
Preferred stock, par value $ | |
| |
| ||
Retained earnings | |
| | |
| |
Accumulated other comprehensive loss | |
| ( | |
| ( |
Total stockholders’ equity | |
| | |
| |
Total Liabilities and Stockholders’ Equity | | $ | | | $ | |
See accompanying notes to consolidated financial statements.
38
ALLIED MOTION TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
| | For the year ended | |||||||
| | December 31, | | December 31, | | December 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Revenues | | $ | | | $ | | | $ | |
Cost of goods sold | |
| | |
| | |
| |
Gross profit | |
| | |
| | |
| |
Operating costs and expenses: | | | | | | | | | |
Selling | |
| | |
| | |
| |
General and administrative | |
| | |
| | |
| |
Engineering and development | |
| | |
| | |
| |
Business development | |
| | |
| | |
| |
Amortization of intangible assets | |
| | |
| | |
| |
Total operating costs and expenses | |
| | |
| | |
| |
Operating income | |
| | |
| | |
| |
Other expense, net: | | | | | | | | | |
Interest expense | |
| | |
| | |
| |
Other (income) expense, net | |
| ( | |
| | |
| |
Total other expense, net | |
| | |
| | |
| |
Income before income taxes | |
| | |
| | |
| |
Income tax benefit (provision) | |
| | |
| ( | |
| ( |
Net income | | $ | | | $ | | | $ | |
Basic earnings per share: | | | | | | | | | |
Earnings per share | | $ | | | $ | | | $ | |
Basic weighted average common shares | |
| | |
| | |
| |
Diluted earnings per share: | | | | | | | | | |
Earnings per share | | $ | | | $ | | | $ | |
Diluted weighted average common shares | |
| | |
| | |
| |
Net income | | $ | | | $ | | | $ | |
Foreign currency translation adjustment | | | ( | | | | | | ( |
Change in accumulated income (loss) on derivatives | | | | | | ( | | | ( |
Pension adjustments | | | | | | ( | | | ( |
Comprehensive income | | $ | | | $ | | | $ | |
See accompanying notes to consolidated financial statements.
39
ALLIED MOTION TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share data)
|
| Common Stock |
| |
| Accumulated Other Comprehensive Income (Loss) |
| | |||||||||||||||
| | | | | | Unamortized | | | | Foreign Currency | | Accumulated | | | | Total | |||||||
| | | | | | Cost of Equity | | Retained | | Translation | | income (loss) on | | Pension | | Stockholders' | |||||||
(In thousands except per share data) |
| Shares |
| Amount |
| Awards |
| Earnings |
| Adjustments |
| derivatives |
| Adjustments |
| Equity | |||||||
Balances, December 31, 2018 |
| | | $ | | | $ | ( | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
Stock transactions under employee benefit stock plans |
| | | | | | | | | | | | | | | | | | | | |
| |
Issuance of restricted stock, net of forfeitures |
| | | | | | | ( | | | | | | | | | | | | | |
| |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | |
| |
Shares withheld for payment of employee payroll taxes | | ( | | | ( | | | | | | | | | | | | | | | | | | ( |
Comprehensive loss | | | | | | | | | | | | | | ( | | | ( | | | ( | |
| ( |
Tax effect | | | | | | | | | | | | | | | | | | | | | |
| |
Net income | | | | | | | | | | | | | | | | | | | | | |
| |
Dividends to stockholders - $ | | | | | | | | | | | ( | | | | | | | | | | |
| ( |
Balances, December 31, 2019 |
| | | | | | | ( | | | | | | ( | | | ( | | | ( | | | |
Stock transactions under employee benefit stock plans |
| | | | | | | | | | | | | | | | | | | | |
| |
Issuance of restricted stock, net of forfeitures |
| | | | | | | ( | | | | | | | | | | | | | |
| |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | |
| |
Shares withheld for payment of employee payroll taxes | | ( | | | ( | | | | | | | | | | | | | | | | | | ( |
Comprehensive income (loss) | | | | | | | | | | | | | | | | | ( | | | ( | |
| |
Tax effect | | | | | | | | | | | | | | | | | | | | | |
| |
Net income | | | | | | | | | | | | | | | | | | | | | |
| |
Dividends to stockholders - $ | | | | | | | | | | | ( | | | | | | | | | | |
| ( |
Balances, December 31, 2020 |
| | | | | | | ( | | | | | | ( | | | ( | | | ( | | | |
Stock transactions under employee benefit stock plans |
| | | | | | | | | | | | | | | | | | | | |
| |
Issuance of restricted stock, net of forfeitures |
| | | | | | | ( | | | | | | | | | | | | | |
| |
Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | |
| |
Shares withheld for payment of employee payroll taxes | | ( | | | ( | | | | | | | | | | | | | | | | | | ( |
Common stock issued in connection with acquisitions (Note 2) |
| | | | | | | | | | | | | | | | | | | | |
| |
Comprehensive (loss) income | | | | | | | | | | | | | | ( | | | | | | | |
| ( |
Tax effect | | | | | | | | | | | | | | | | | ( | | | ( | |
| ( |
Net income | | | | | | | | | | | | | | | | | | | | | |
| |
Dividends to stockholders - $ | | | | | | | | | | | ( | | | | | | | | | | |
| ( |
Balances, December 31, 2021 |
| | | $ | | | $ | ( | | $ | | | $ | ( | | $ | | | $ | ( | | $ | |
See accompanying notes to consolidated financial statements.
40
ALLIED MOTION TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | For the year ended | |||||||
| | December 31, | | December 31, | | December 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Cash Flows From Operating Activities: | | | | | | | | | |
Net income | | $ | | | $ | | | $ | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | |
Depreciation and amortization | |
| | |
| | |
| |
Deferred income taxes | |
| ( | |
| ( | |
| ( |
Provision for excess and obsolete inventory | |
| | |
| | |
| |
Provision for warranty | | | | | | | | | |
Debt issue cost amortization recorded in interest expense | | | | | | | | | |
Stock-based compensation expense | |
| | |
| | |
| |
Other | |
| ( | |
| ( | |
| |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | |
Trade receivables | |
| ( | |
| | |
| ( |
Inventories | |
| ( | |
| ( | |
| |
Prepaid expenses and other assets | |
| ( | |
| ( | |
| ( |
Accounts payable | |
| | |
| ( | |
| ( |
Accrued liabilities | |
| | |
| ( | |
| |
Net cash provided by operating activities | |
| | |
| | |
| |
| | | | | | | | | |
Cash Flows From Investing Activities: | | | | | | | | | |
Consideration paid for acquisitions, net of cash acquired | |
| ( | |
| ( | |
| — |
Purchase of property and equipment | | | ( | | | ( | | | ( |
Net cash used in investing activities | |
| ( | |
| ( | |
| ( |
| | | | | | | | | |
Cash Flows From Financing Activities: | | | | | | | | | |
Principal payments of long-term debt | | | ( | | | ( | | | ( |
Proceeds from issuance 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 provided by (used in) financing activities | |
| | |
| | |
| ( |
Effect of foreign exchange rate changes on cash | |
| ( | |
| | |
| ( |
Net (decrease) increase in cash and cash equivalents | |
| ( | |
| | |
| |
Cash and cash equivalents at beginning of period | |
| | |
| | |
| |
Cash and cash equivalents at end of period | | $ | | | $ | | | $ | |
| | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | |
Interest paid | | $ | | | $ | | | $ | |
Income taxes paid | | $ | | | $ | | | $ | |
| | | | | | | | | |
Supplemental non-cash investing and financing activities: | | | | | | | | | |
Accrued consideration for acquisitions | | $ | | | $ | — | | $ | — |
Stock issued for acquisitions | | $ | | | $ | — | | $ | — |
Contingent consideration for acquisition | | $ | | | $ | — | | $ | — |
Property, plant and equipment purchases in accounts payable or accrued expenses | | $ | | | $ | | | $ | |
See accompanying notes to consolidated financial statements.
41
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Allied Motion Technologies Inc. (“Allied Motion” or the “Company”) is engaged in the business of designing, manufacturing and selling precision and specialty controlled motion components and systems, which include integrated system solutions as well as individual controlled motion products, to a broad spectrum of customers throughout the world primarily for the vehicle, medical, aerospace and defense, and industrial markets.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
For business combinations, net assets acquired and liabilities assumed are recorded at their estimated fair values.
Cash and Cash Equivalents
Cash and cash equivalents include instruments which are readily convertible into cash (original maturities of three months or less) and which are not subject to significant risk of changes in interest rates.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The provision for credit losses is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional provisions in the future.
| | December 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Beginning balance | | $ | | | $ | |
Additional reserves | |
| | |
| |
Write-offs | |
| ( | |
| ( |
Effect of foreign currency translation | | | ( | | | |
Ending balance | | $ | | | $ | |
| | | | | | |
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):
| | December 31, | | December 31, | ||
| | 2021 |
| 2020 | ||
Parts and raw materials | | $ | | | $ | |
Work-in-process | |
| | |
| |
Finished goods | |
| | |
| |
| | $ | | | $ | |
42
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Property, Plant and Equipment
Property, plant and equipment is classified as follows (in thousands):
|
| |
| December 31, |
| December 31, | ||
| | Useful lives | | 2021 | | 2020 | ||
Land | | | | $ | | | $ | |
Building and improvements |
| |
| | |
| | |
Machinery, equipment, tools and dies |
| |
| | |
| | |
Construction work in progress | | | | | | | | |
Furniture, fixtures and other |
| |
| | |
| | |
| | | |
| | |
| |
Less accumulated depreciation | | | |
| ( | |
| ( |
Property, plant and equipment, net | | | | $ | | | $ | |
Depreciation expense is provided using the straight-line method over the estimated useful lives of the assets. Amortization of building improvements is provided using the straight-line method over the life of the lease term or the life of the asset, whichever is shorter. Maintenance and repair costs are charged to operations as incurred. Major additions and improvements are capitalized. The cost and related accumulated depreciation of retired or sold property are removed from the accounts and the resulting gain or loss, if any, is reflected in earnings.
Depreciation expense was $
Intangible Assets
Intangible assets, other than goodwill, are initially recorded at fair value and are amortized over their estimated useful lives using an accelerated or straight-line method which approximates the pattern of expected cash flows over the remaining useful lives of the intangible assets.
Impairment of Long-Lived Assets
The Company reviews the carrying values of its long-lived assets, including property, plant and equipment and intangible assets, on an annual basis and whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Long-lived assets are recorded at their carrying amounts if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering interest. If projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair value. Judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived assets. The Company did not record any impairment charges for the years ended December 31, 2021, 2020 or 2019.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination.
Goodwill is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise. The Company has defined
43
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Company can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill.
At October 31, 2021, the Company performed its annual goodwill impairment test and determined, after performing a qualitative test of the reporting unit, that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount. Accordingly, there was
Other Long-Term Assets
Other long-term assets include securities that the Company has purchased with the intent of funding the deferred compensation arrangements for certain executives of the Company. These items are accounted for at fair value on a recurring basis. Any changes in value are included in net income in the Company’s consolidated statements of income and comprehensive income.
Warranty
The Company offers warranty coverage for its products. The length of the warranty period for its products is generally
Changes in the Company’s reserve for product warranty claims during 2021, 2020 and 2019 were as follows (in thousands):
| | December 31, | | December 31, | | December 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Warranty reserve at beginning of the year | | $ | | | $ | | | $ | |
Warranty reserves acquired | |
| | |
| | |
| — |
Provision | |
| | |
| | |
| |
Warranty expenditures | |
| ( | |
| ( | |
| ( |
Effect of foreign currency translation | |
| ( | |
| | |
| ( |
Warranty reserve at end of year | | $ | | | $ | | | $ | |
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| | December 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Compensation and fringe benefits | | $ | | | $ | |
Accrued business acquisition consideration (Note 2) | | | | | | — |
| | | | | | |
Warranty reserve | |
| | |
| |
Income taxes payable | | | | | | |
Other accrued expenses | |
| | |
| |
| | $ | | | $ | |
44
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Foreign Currency Translation
The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end of period exchange rates. Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment. Foreign currency translation adjustment is included in accumulated other comprehensive loss, a component of stockholders’ equity in the accompanying consolidated statements of stockholders’ equity. Revenue and expense transactions use an average rate prevailing during the month of the related transaction. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of each of the operating locations are included in the other (income) expense, net as incurred.
Revenue Recognition
Refer to Note 3, Revenue Recognition, for description of the Company’s policies regarding revenue recognition.
Engineering and Development Costs
The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. Engineering and design as well as research and development costs are expensed as incurred.
Basic and Diluted Earning per Share
Basic earnings per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share is determined by dividing the net income by the sum of: (1) the weighted average number of common shares outstanding and (2) if not anti-dilutive, the effect of potential common shares determined utilizing the treasury stock method.
Basic and diluted weighted-average shares outstanding are as follows (in thousands):
| | | | | | |
| | Year ended December 31, | ||||
|
| 2021 |
| 2020 |
| 2019 |
Basic weighted average shares outstanding |
| |
| |
| |
Dilutive effect of potential common shares |
| |
| |
| |
Diluted weighted average shares outstanding |
| |
| |
| |
For 2021, 2020 and 2019, the anti-dilutive common shares excluded from the calculation of diluted income per share were immaterial.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to stockholders.
Fair Value Accounting
Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
45
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The guidance establishes a framework for measuring fair value, which utilizes observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Preference is given to observable inputs. These two types of inputs create the following three-level fair value hierarchy:
Level 1: Quoted prices for identical assets or liabilities in active markets.
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
Level 3: Significant inputs to the valuation model that are unobservable.
The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, debt obligations, accounts payable, and accrued liabilities. The carrying amounts reported in the consolidated balance sheets for these assets approximate fair value because of the immediate or short-term maturities of these financial instruments.
The following table presents the Company’s financial assets that are accounted for at fair value on a recurring basis as of December 31, 2021 and 2020, respectively, by level within the fair value hierarchy (in thousands):
| | December 31, 2021 | |||||||
|
| Level 1 |
| Level 2 |
| Level 3 | |||
Assets (liabilities) | | | | | | | | | |
Pension plan assets | | $ | | | $ | — | | $ | — |
Deferred compensation plan assets | |
| | |
| — | |
| — |
Foreign currency hedge contracts | |
| — | |
| | |
| — |
Interest rate swaps, net | |
| — | |
| | |
| — |
Contingent consideration (Note 2) | |
| — | |
| — | |
| ( |
| | December 31, 2020 | |||||||
|
| Level 1 |
| Level 2 |
| Level 3 | |||
Assets (liabilities) | | | | | | | | | |
Pension plan assets | | $ | | | $ | — | | $ | — |
Deferred compensation plan assets | |
| | |
| — | |
| — |
Interest rate swaps | |
| — | |
| ( | |
| — |
The contingent consideration fair value measurement in connection with the acquisition of ALIO Industries (“ALIO”) is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The Company determines the initial fair value of contingent consideration liabilities using a Monte Carlo valuation model, which involves a simulation of future earnings generated during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.
Derivative Financial Instruments
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") No. 815, Derivatives and Hedging ("ASC 815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as
46
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.
Income Taxes
The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. A valuation allowance may be provided to the extent management deems it is more likely than not that deferred tax assets will not be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income, in the appropriate taxing jurisdictions, during the periods in which temporary differences, net operating losses and tax credits become realizable. Management believes that it is more likely than not that the Company will realize the benefits of these temporary differences and operating loss and tax credit carryforwards, net of valuation allowances.
It is the Company's policy to include interest and penalties related to income tax liabilities in income tax expense on the consolidated statements of income and comprehensive Income. In addition, the Company records uncertain tax positions in accordance with ASC 740, Income Taxes, ("ASC 740").
Pension and Postretirement Welfare Plans
The Company records the service cost component of net benefit costs in cost of goods sold, selling, and general and administrative expenses. The interest cost component of net benefit costs is recorded in interest expense and the remaining components of net benefit costs, amortization of net losses and expected return on plan assets is recorded in other expense, net.
Concentration of Credit Risk
Trade receivables subject the Company to the potential for credit risk. To reduce this risk, the Company performs evaluations of its customers’ financial condition and creditworthiness at the time of sale, and updates those evaluations when necessary. See Note 13, Segment Information, for additional information regarding customer concentration.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the
47
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Stock Split
On March 10, 2021, the Board of Directors approved a -for-2 common stock split to be paid in the form of a stock dividend to holders of record on April 16, 2021. The additional shares were issued on April 30, 2021. In lieu of fractional shares, shareholders received a cash payment based on the closing share price of the common stock on the record date. All share and per share information presented in the consolidated financial statements have been adjusted to reflect the stock split on a retrospective basis for all periods presented.
Twinsburg Consolidation
In September 2021, the Company announced its plans to consolidate its manufacturing facility in Twinsburg, Ohio with its Watertown, New York and Reynosa, Mexico facilities in 2022. Costs of $
Recently adopted accounting pronouncements
In December 2019, the 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 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 consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company early adopted this ASU in the fourth quarter of 2021. The adoption did not have a material impact on its consolidated financial statements.
2. ACQUISITIONS
2021 Acquisitions
Spectrum Controls
On December 30, 2021, the Company acquired Spectrum Controls, Inc. (“Spectrum Controls”), a Washington headquartered innovator and manufacturer of industrial Input/Output (“I/O”) and universal communications gateway products. Spectrum Controls designs and manufactures a wide range of highly sophisticated I/O modules, marquee displays, and industrial gateways for broad industrial controls applications through partnerships with programmable logic controller (“PLC”) manufacturers and distributors. This acquisition provides the Company with the opportunity to enhance its position as a value-added solutions supplier to the industrial automation and industrial controls market.
48
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The purchase price was $
The Company incurred $
The preliminary allocation of the purchase price paid for Spectrum Controls is based on estimated fair values of the assets acquired and liabilities assumed of Spectrum Controls as of December 30, 2021 and is as follows (in thousands):
Cash and cash equivalents |
| $ | |
Trade receivables | | | |
Inventories | | | |
Other assets, net | |
| |
Property, plant and equipment | |
| |
Intangible assets | | | |
Goodwill | |
| |
Current liabilities | | | ( |
Net purchase price | | $ | |
The intangible assets acquired consist of customer lists of $
The operating results of this acquisition are included in the consolidated financial statements beginning on the date of the acquisition. Revenue and earnings related to Spectrum Controls included within the consolidated statement of income and comprehensive income for the year ended December 31, 2021 were inconsequential.
The goodwill resulting from the Spectrum Controls acquisition is tax deductible.
ORMEC & ALIO
On November 2, 2021, the Company acquired
On November 4, 2021, the Company acquired
49
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
assembly, digital pathology, genome sequencing, laser processing and microelectronics. ALIO is well recognized for their technology and expertise in nanometer level positioning. This expertise in high precision positioning and robotic technology solutions is expected to enhance the Company’s portfolio of motion solution offerings.
The purchase price, collectively, for ORMEC and ALIO was $
The Company incurred $
The preliminary allocation of the purchase price paid is based on estimated fair values of the assets acquired and liabilities assumed as of November 2, 2021 for ORMEC and November 4, 2021 for ALIO and is, collectively, as follows (in thousands):
Cash and cash equivalents |
| $ | |
Trade receivables | | | |
Inventories | | | |
Other assets, net | |
| |
Property, plant and equipment | |
| |
Right of use assets | | | |
Intangible assets | | | |
Goodwill | |
| |
Other current liabilities | | | ( |
Deferred revenue | | | ( |
Lease liabilities | | | ( |
Net deferred income tax liabilities | | | ( |
Net purchase price | | $ | |
The intangible assets acquired consist of technology of $
The operating results of these acquisitions are included in the consolidated financial statements beginning on the date of the acquisition. Revenue included within the consolidated statement of income and comprehensive income for the year ended December 31, 2021, related to ORMEC and ALIO, collectively, was $
The goodwill resulting from the ORMEC acquisition is not tax deductible. The goodwill resulting from the ALIO acquisition is tax deductible.
50
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
2020 Acquisitions
Dynamic Controls
On March 7, 2020, the Company acquired
Dynamic Controls brings strong leadership and a very experienced electronics and software engineering design team, providing market leading electronic control solutions and products that will further strengthen the Company’s medical market position, as well as enable it to further develop higher level solutions with embedded electronics across our other major served markets.
The Company incurred $
The allocation of the purchase price paid for Dynamic Controls is based on fair values of the assets acquired and liabilities assumed of Dynamic Controls as of March 7, 2020 and is as follows (in thousands):
Cash and cash equivalents |
| $ | |
Trade receivables | | | |
Inventories | | | |
Other assets, net | |
| |
Property, plant and equipment | |
| |
Right of use assets | | | |
Intangible assets | | | |
Goodwill | |
| |
Current liabilities | | | ( |
Lease liabilities | | | ( |
Net deferred income tax liabilities | | | ( |
Net purchase price | | $ | |
During the second quarter of 2020, measurement period adjustments primarily related to deferred income taxes and the true-up of closing net working capital were recognized, which resulted in a reduction of goodwill by $
The intangible assets acquired consist of customer lists of $
The operating results of this acquisition are included in the consolidated financial statements beginning on the date of the acquisition. Included within the consolidated statement of income and comprehensive income for the year ended December 31, 2020, revenues and earnings related to Dynamic Controls were $
51
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The goodwill resulting from the Dynamic Controls acquisition is not tax deductible.
Pro Forma Financial Information
Unaudited pro forma revenue is $
The pro forma information includes certain adjustments, including depreciation and amortization expense, interest expense, and certain other adjustments, together with related income tax effects. The pro forma amounts do not reflect adjustments for anticipated operating efficiencies that the Company expects to achieve as a result of these acquisitions. The pro forma financial information is for informational purposes only and does not purport to present what the Company’s results would have been had these transactions actually occurred on the date presented or to project the combined company’s results of operations or financial position for any future period.
3. 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 when control is transferred to the customer, generally when the products are shipped in accordance with an agreement and/or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product.
The Company satisfies its performance obligations under a contract with a customer by transferring goods and services in exchange for generally 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 the Company collects 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 brushed 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
52
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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 December 31, 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 in Note 13, Segment Information, the Company’s business consists of
The revenues by geography in the table below are revenues derived from the Company’s foreign subsidiaries as provided in Note 13. A reconciliation of disaggregated revenue to segment revenue as well as revenue by geographical regions is provided in Note 13.
| | | | | | | | | |
| | Year ended December 31, | |||||||
Target Market | | 2021 |
| 2020 |
| 2019 | |||
Vehicle | | $ | | | $ | | | $ | |
Industrial | |
| | |
| | |
| |
Medical | |
| | |
| | |
| |
Aerospace & Defense | |
| | |
| | |
| |
Other | |
| | |
| | |
| |
Total | | $ | | | $ | | | $ | |
| | | | | | | | | |
| | Year ended December 31, | |||||||
Geography | | 2021 |
| 2020 |
| 2019 | |||
United States | | $ | | | $ | | | $ | |
Europe | |
| | |
| | |
| |
Asia-Pacific | |
| | |
| | |
| |
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 liability are as follows (in thousands):
|
| December 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
Contract liabilities in accrued liabilities | | $ | | | $ | |
Contract liabilities in other long-term liabilities | | | | | | |
| | $ | | | $ | |
| | | | | | |
53
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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 as well as balances assumed in acquisitions.
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.
Practical Expedients
Incremental costs of obtaining a contract - the Company elected to expense the incremental costs of obtaining a contract when the amortization period for such contracts would have been
Remaining performance obligations - the Company elected not to disclose the aggregate amount of the transaction price allocated to remaining performance obligations for its contracts that are
Time value of money - the Company elected not to adjust the promised amount of consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays is equal to
4. GOODWILL
The change in the carrying amount of goodwill for 2021 and 2020 is as follows (in thousands):
| 2021 | | 2020 | | ||
Beginning balance | $ | | | $ | | |
Goodwill acquired (Note 2) | | | | | | |
Effect of foreign currency translation |
| ( | |
| | |
Ending balance | $ | | | $ | | |
The purchase price allocations for ORMEC, ALIO and Spectrum Controls are not final as of December 31, 2021. Adjustments to these allocations may result in changes to the amounts recorded for goodwill in future periods. The purchase price allocation was finalized for the Dynamic Controls acquisition during the fourth quarter of 2020.
54
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
5. INTANGIBLE ASSETS
Intangible assets on the Company’s consolidated balance sheets consist of the following (in thousands):
| | | | December 31, 2021 | | December 31, 2020 | ||||||||||||||
|
| |
| Gross |
| Accumulated |
| Net Book |
| Gross |
| Accumulated |
| Net Book | ||||||
| | Life | | Amount | | amortization | | Value | | Amount | | amortization | | Value | ||||||
Customer lists |
| | $ | | | $ | ( | | $ | | | $ | | | $ | ( | | $ | | |
Trade name |
| |
| | |
| ( | |
| | |
| | |
| ( | |
| | |
Design and technologies |
| |
| | |
| ( | |
| | |
| | |
| ( | |
| | |
Total | | | | $ | | | $ | ( | | $ | | | $ | | | $ | ( | | $ | |
Intangible assets resulting from the 2021 acquisitions of ORMEC, ALIO and Spectrum Controls were $
Total amortization expense for intangible assets for the years 2021, 2020 and 2019 was $
Estimated amortization expense for intangible assets is as follows (in thousands):
| | Estimated | |
|
| Amortization Expense | |
2022 | | $ | |
2023 | |
| |
2024 | |
| |
2025 | | | |
2026 | |
| |
Thereafter | |
| |
Total estimated amortization expense | | $ | |
6. STOCK-BASED COMPENSATION PLANS
Stock Incentive Plans
The Company’s Stock Incentive Plans provide for the granting of stock awards, including stock options, stock appreciation rights, and restricted stock, to employees and non-employees, including directors of the Company.
As of December 31, 2021, the Company had
Restricted Stock
The following is a summary of restricted stock grants, fair value and performance based awards:
| | | | |
| Awards with | |
|
| Unvested | | Weighted average |
| performance | |
| | restricted stock | | grant date fair | | vesting | |
For the year ended December 31, |
| awards |
| value |
| requirements | |
2021 | | | | $ | | | |
2020 | | | | $ | | | |
2019 | | | | $ | | | |
55
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The value at the date of award is amortized to compensation expense over the related service period, which is generally
The following is a summary of restricted stock activity during years 2021, 2020 and 2019:
| | Number of |
|
| shares |
Balance, December 31, 2018 |
| |
Awarded |
| |
Vested |
| ( |
Forfeited |
| ( |
Balance, December 31, 2019 |
| |
Awarded |
| |
Vested |
| ( |
Forfeited |
| ( |
Balance, December 31, 2020 |
| |
Awarded |
| |
Vested |
| ( |
Forfeited |
| ( |
Balance, December 31, 2021 |
| |
The following is a summary of performance based restricted stock activity during years 2021, 2020 and 2019:
| | Performance |
|
| grants |
Outstanding, December 31, 2018 | | — |
Awarded | | |
Performance criteria met | | ( |
Forfeited | | ( |
Outstanding, December 31, 2019 | | |
Awarded | | |
Performance criteria met | | ( |
Forfeited | | ( |
Outstanding, December 31, 2020 | | |
Awarded | | |
Performance criteria met | | ( |
Forfeited | | ( |
Outstanding, December 31, 2021 | | |
The performance criteria and forfeitures in the above table did not occur until the Board of Directors approved them during the March 2022, March 2021 and February 2020 meetings.
56
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Share-Based Compensation Expense
During 2021, 2020 and 2019 compensation expense net of forfeitures of $
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan (“ESOP”) that covers all non-union U.S. employees who work over
Defined Contribution Plan
The Company sponsors the Allied Motion 401(k) Tax Advantaged Investment Plan (“401(k)”) which covers substantially all its U.S. based employees. The plan provides for the deferral of employee compensation under Section 401(k) and a discretionary Company match. In 2021, 2020 and 2019 this match was
Dividends
For the years ended December 31, 2021, 2020 and 2019 a total of $
7. DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
| | December 31, | | 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 Revolving Credit Facility is |
Amended Revolving Credit Facility
The First Amended and Restated Credit Agreement (the “Amended Credit Agreement”) includes a $
57
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
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
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. Under the provisions of the Amended Credit Agreement, the Company may elect to increase its Leverage Ratio to a
As of December 31, 2021, the unused Amended Revolving Facility was $
Other
The China Credit Facility provides credit of $
Deferred Financing Fees
Deferred financing costs net of accumulated amortization were $
8. 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 foreign currency 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
58
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
other (income) expense, net in the consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $
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. 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 derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (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 $
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2021 and 2020 (in thousands):
| | | | Asset Derivatives | ||||
| | | | Fair value as of: | ||||
Derivatives designated as | | Balance Sheet | | December 31, | ||||
hedging instruments |
| Location |
| 2021 |
| 2020 | ||
Foreign currency contracts | | Prepaid expenses and other assets | | $ | | | $ | — |
Interest rate products | | Other long-term assets | | | | | | — |
| | | | $ | | | $ | — |
| | | | Liability Derivatives | ||||
| | | | Fair value as of: | ||||
Derivatives designated as | | Balance Sheet | | December 31, | ||||
hedging instruments |
| Location |
| 2021 |
| 2020 | ||
Interest rate products | | Accrued liabilities | | $ | | | $ | — |
Interest rate products | | Other long-term liabilities | | | — | | | |
| | | | $ | | | $ | |
59
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The table below presents the effect of cash flow hedge accounting on other comprehensive income (loss) (OCI) for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| | Amount of pre-tax gain (loss) | ||||
| | recognized in OCI on derivatives | ||||
Derivatives in cash flow hedging relationships | | Year ended December 31, | ||||
|
| 2021 |
| 2020 | ||
Interest rate products | | $ | | | $ | ( |
| | Amount of pre-tax (loss) gain reclassified | |||||||
Location of (loss) gain reclassified | | from accumulated OCI into income | |||||||
from accumulated OCI into income | | Year ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Interest expense | | $ | ( | | $ | ( | | $ | |
The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of income and comprehensive income for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| | | | | | | | | | | |
| | | | Total amounts of income and expense line items presented | |||||||
| | | | that reflect the effects of cash flow hedges recorded | |||||||
| | | | Year ended December 31, | |||||||
Derivatives designated as hedging instruments |
| Income Statement Location |
| 2021 |
| 2020 |
| 2019 | |||
Interest rate products |
| Interest Expense | | $ | | | $ | | | $ | |
The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2021 and 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheets (in thousands).
Derivative assets:
| | | | | | | | Net amounts | | | | | | | | | | |
| | | | | Gross amounts | | of assets | | 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 | | | | |||||
2021 |
| assets |
| balance sheets |
| balance sheets |
| instruments |
| received |
| Net amount | ||||||
Derivatives | | $ | | | $ | | | $ | | | $ | — | | $ | — | | $ | |
Derivative liabilities:
| | | | | | | | Net amounts | | | | | | | | | | |
| | | | | Gross 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 | | | | |||||
2021 |
| liabilities |
| balance sheets |
| balance sheets |
| instruments |
| received |
| Net amount | ||||||
Derivatives | | $ | | | $ | — | | $ | | | $ | — | | $ | — | | $ | |
| | | | | | | | Net amounts | | | | | | | | | | |
| | | | | Gross 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.
60
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
9. INCOME TAXES
The provision for income taxes is based on income before income taxes as follows (in thousands):
| | For the year ended | |||||||
| | December 31, | | December 31, | | December 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Domestic | | $ | | | $ | | | $ | |
Foreign | |
| | |
| | |
| |
Income before income taxes | | $ | | | $ | | | $ | |
Components of the total income tax (benefit) provision are as follows (in thousands):
| | For the year ended | |||||||
| | December 31, | | December 31, | | December 31, | |||
|
| 2021 |
| 2020 |
| 2019 | |||
Current provision | | | | | | | | | |
Domestic | | $ | | | $ | | | $ | |
Foreign | |
| | |
| | |
| |
Total current provision | |
| | |
| | |
| |
Deferred (benefit) provision | | | | | | | | | |
Domestic | |
| | |
| | |
| |
Foreign | |
| ( | |
| ( | |
| ( |
Total deferred (benefit) provision | |
| ( | |
| ( | |
| ( |
Income tax (benefit) provision | | $ | ( | | $ | | | $ | |
The (benefit) provision for income taxes differs from the amount determined by applying the federal statutory rate as follows:
| | For the year ended |
| ||||
| | December 31, | | December 31, | | December 31, | |
|
| 2021 |
| 2020 |
| 2019 |
|
Tax provision, computed at statutory rate |
| | % | | % | | % |
State tax, net of federal impact |
| | % | | % | | % |
Change in valuation allowance | | | % | | % | | % |
Effect of foreign tax rate differences |
| | % | | % | | % |
Permanent items, other | | | % | ( | % | | % |
Section 162(m) compensation | | | % | | % | | % |
R&D tax credits | | ( | % | ( | % | ( | % |
Effect of Tax Cuts and Jobs Act | | | % | ( | % | ( | % |
Subpart F income | | ( | % | | % | | % |
Tax examinations | | | % | | % | | % |
Investment tax credits | | ( | % | | % | | % |
Net operating loss carryforwards | | ( | % | | % | | % |
Unrecognized tax benefits | | | % | | % | | % |
Other |
| ( | % | ( | % | ( | % |
Income tax (benefit) provision |
| ( | % | | % | | % |
61
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The tax effects of significant temporary differences and credit and operating loss carryforwards that give rise to the net deferred tax assets and tax liabilities are as follows (in thousands):
| | December 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Noncurrent deferred tax assets: | | | | | | |
Employee benefit plans | | $ | | | $ | |
Net operating loss and tax credit carryforwards | | | | | | |
Accrued expenses and reserves | | | | | | |
Other | |
| | |
| |
Total noncurrent deferred tax assets | |
| | |
| |
Valuation allowance | |
| ( | |
| ( |
Net noncurrent deferred tax assets: | | $ | | | $ | |
| | | | | | |
Net noncurrent deferred tax liabilities: | | | | | | |
Property and equipment | | $ | | | $ | |
Goodwill and intangibles | | | | |
| |
Other | | | | | | |
Total noncurrent deferred tax liabilities | | $ | | | $ | |
| | | | | | |
Net deferred tax asset/(deferred tax liability) | | $ | | | $ | ( |
| | | | | | |
Presented as follows: | | | | | | |
Noncurrent deferred income tax assets | | $ | | | $ | |
Noncurrent deferred income tax liabilities | | | ( | | | ( |
Net deferred tax asset (liability) | | $ | | | $ | ( |
As of December 31, 2021, the Company has the following gross carryforwards available (in thousands):
| | | | Amount | | |
|
Jurisdiction | | Tax Attribute | | (in thousands) | | Begin to expire |
|
U.S. State | | Net Operating Losses (1) | $ | |
| 2025 | |
International | | Net Operating Losses (1) | $ | |
| 2025 | |
International | | Net Operating Losses - Unlimited Carryforward (1) | $ | | | No expiration | |
U.S. Federal | | Foreign Tax Credits | $ | | | 2027 | |
International | | R&D Tax Credits | $ | | | 2026 | |
| (1) | Net operating losses (NOL’s) are presented as pre-tax amounts. |
Realization of the Company’s recorded deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses and tax credit carryforwards. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
The Company generated excess foreign tax credits in 2017 due to the one-time transition tax required by enactment of the Tax Cuts and Jobs Act in the amount of $
62
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
and tax credits generated in foreign jurisdictions and has determined it is more likely than not it would not realize a tax benefit of $
The Company files income tax returns in various U.S. and foreign taxing jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before 2018. With few exceptions, the Company is no longer subject to tax examinations in the foreign jurisdictions for tax periods prior to 2016.
Due to a New Zealand tax legislation change in 2021 allowing for the use of pre-acquisition net operating loss carryforwards to be utilized on the acquirer's future period tax returns, the Company recognized $
The summary of changes to the unrecognized tax benefit for the year ended December 31, 2021 is as follows (in thousands):
| | December 31, | |
|
| 2021 (1) | |
Beginning balance | | $ | — |
Additions from tax legislation changes for net operating loss carryforwards | |
| |
Reductions related to net operating loss usage on 2020 tax returns | |
| ( |
Ending balance | | $ | |
___________________________ | | | |
(1) | |||
It is the Company’s policy to include interest and penalties related to income tax liabilities in income tax expense in the consolidated statements of income and comprehensive income. In addition, the Company records uncertain tax positions in accordance with ASC 740.
In general, it is the practice and intention of the Company to reinvest the earnings of its non-domestic subsidiaries in activities outside the United States. Exceptions may be made on a year-by-year basis to repatriate earnings of certain foreign subsidiaries based on cash needs in the United States. In 2021, the Company distributed a portion of these foreign earnings which have been previously taxed in the United States and remitted $
In 2021, the Company made distributions between its German subsidiaries and remitted $
The Company does not intend to distribute the remaining previously taxed earnings resulting from the one-time
63
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
transition tax under the Tax Cuts and Jobs Act or capital in foreign subsidiaries, and has not recorded any deferred taxes related to such amounts. The remaining excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries is permanently reinvested, and the determination of any deferred tax liability on this amount is not practicable.
10. LEASES
The Company has operating leases for office space, manufacturing facilities and equipment, computer equipment and automobiles. The Company did not have any finance leases in 2021 or 2020. 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
For the years ended December 31, 2021 and 2020, the components of operating lease expense were as follows (in thousands):
| | | | | | |
|
| December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Fixed operating lease expense | | $ | | | $ | |
Variable operating lease expense | | $ | | | $ | |
Short-term lease expense | | $ | | | $ | |
Supplemental cash flow information related to the Company’s operating leases for the years ended December 31, 2021 and 2020 are as follows (in thousands):
| | | | | | |
| | December 31, | | December 31, | ||
| | 2021 | | 2020 | ||
Cash paid for amounts included in the measurement of operating leases |
| $ | | | $ | |
Right of use ("ROU") assets obtained in exchange for operating lease obligations | | $ | | | $ | |
ROU assets obtained in acquisitions (Note 2) | | $ | | | $ | |
The following table presents weighted average remaining lease term and discount rates related to the Company’s operating leases as of December 31, 2021 and 2020:
|
| December 31, |
| | |||||
| | 2021 | | | 2020 | | | ||
Weighted average remaining lease term (in years) | |
| | |
| | | ||
Weighted average discount rate | |
| | % | |
| | % | |
The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2021 (in thousands):
2022 |
| $ | |
2023 |
| | |
2024 | |
| |
2025 | |
| |
2026 | | | |
Thereafter | |
| |
Total undiscounted cash flows | | $ | |
Less: present value discount | | | ( |
Total lease liabilities | | $ | |
64
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
As of December 31, 2021, the Company has entered into leases for building renewal and expansion, with future minimum lease payments of $
The Company leases certain facilities from companies for which a member of management is a part owner. In connection with such leases, the Company made payments to the lessor of $
11. COMMITMENTS AND CONTINGENCIES
Severance Benefit Agreements
As of December 31, 2021, the Company has annually renewable employment agreements with certain of its executive officers. Among other things, the agreements provide for payments and other benefits if the employee’s employment terminates under certain circumstances, including the employee’s death, disability, voluntary resignation with good reason and involuntary termination without cause, as well as voluntary resignation with good reason and involuntary termination without cause within 90 days prior to or 24 months following a change in control of the Company.
Litigation
The Company is involved in certain actions that have arisen out of the ordinary course of business. Management believes that resolution of the actions will not have a significant adverse effect on the Company’s consolidated financial statements.
12. DEFERRED COMPENSATION ARRANGEMENTS
The Company has a deferred compensation arrangement with its Chief Executive Officer. This arrangement provides the Board and its committees with another mechanism to provide pay for performance based incentive compensation. It also allows for the Chief Executive Officer to make certain deferrals into the plan. The amount of the liability is comprised of liabilities from previous contributions. Amounts accrued relating to previous periods are $
13. SEGMENT INFORMATION
The Company operates in
Financial information related to the foreign subsidiaries is summarized below (in thousands):
| | | | | | | | | |
| | For the year ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
Revenues derived from foreign subsidiaries | | $ | | | $ | | | $ | |
Identifiable foreign fixed assets were $
65
ALLIED MOTION TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Revenues derived from foreign subsidiaries and identifiable assets outside of the United States are primarily attributable to Europe, China, Mexico and New Zealand.
Sales to customers outside of the United States by all subsidiaries were $
For 2021, 2020 and 2019 one customer accounted for
66
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. 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 December 31, 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 management’s evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In making our assessment of the Company’s internal control over financial reporting as of December 31, 2021, we excluded from our assessment the internal control over financial reporting at ORMEC Systems Corp., which was acquired on November 2, 2021, ALIO Industries, which was acquired on November 4, 2021, and Spectrum Controls, Inc., which was acquired on December 30, 2021 and whose financial statements collectively constitute 55% and 23% of net and total assets, respectively, less than 1% of revenues, and less than 1% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2021.
Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its attestation report which is included below.
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
67
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2021, there have been 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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Allied Motion Technologies Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Allied Motion Technologies Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 9, 2022 expressed an unqualified opinion on those consolidated financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at ORMEC Systems Corp. (“ORMEC”), which was acquired on November 2, 2021, ALIO Industries (“ALIO”), which was acquired on November 4, 2021, and Spectrum Controls, Inc. (“Spectrum Controls”), which was acquired on December 30, 2021 and whose financial statements collectively constitute 55% and 23% of net and total assets, respectively, less than 1% of revenues, and less than 1% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at ORMEC, ALIO, or Spectrum Controls.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
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principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Williamsville, New York
March 9, 2022
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Company’s definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company’s fiscal year is incorporated herein by reference.
Item 11. Executive Compensation.
The Company’s definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company’s fiscal year is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The Company’s definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company’s fiscal year is incorporated herein by reference.
Equity Compensation Plan Information
The following table shows the equity compensation plan information of the Company at December 31, 2021:
|
| Number of securities |
| | remaining available for |
| | future issuance under equity |
Plan category | | compensation plans |
Equity compensation plans approved by security holders |
| 1,031,128 |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company’s definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company’s fiscal year is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The Company’s definitive proxy statement which will be filed with the SEC pursuant to Registration 14A within 120 days of the end of the Company’s fiscal year is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
| a) | The following documents are filed as part of this Report: |
| 1. | Consolidated Financial Statements |
| a) | Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020. |
| b) | Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2021, 2020 and 2019. |
| c) | Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019. |
| d) | Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019. |
| e) | Notes to Consolidated Financial Statements. |
| f) | Reports of Independent Registered Public Accounting Firm (PCAOB ID No. |
| 2. | Financial Statement Schedules |
Financial statement schedules have been omitted because either they are not applicable, or the required information is included in the financial statements or the notes thereto.
3. Exhibits
Exhibit No. |
| Subject |
|---|---|---|
2.1 |
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3.1 |
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3.2 |
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4.1 | | Description of Securities of Allied Motion Technologies Inc. (filed herewith.) |
| | |
10.1* |
| |
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10.2* |
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10.3* |
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10.4* |
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Exhibit No. |
| Subject |
|---|---|---|
10.5* |
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10.6* |
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10.7* |
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10.8* |
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10.9* |
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10.10* |
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10.11* |
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10.12* |
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10.13* | | |
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10.14 |
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10.15 | | |
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Exhibit No. |
| Subject |
|---|---|---|
10.16 | | |
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10.17 | | |
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21 |
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23.1 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| ALLIED MOTION TECHNOLOGIES INC. | |
|
| |
| By: | /s/ MICHAEL R. LEACH |
|
| Michael R. Leach |
|
| Senior Vice President & Chief Financial Officer |
| Date: | March 9, 2022 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signatures |
| Title |
| Date |
|
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| |
|
/s/ RICHARD S. WARZALA |
| President, Chief Executive Officer and | | March 9, 2022 |
Richard S. Warzala |
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| |
/s/ MICHAEL R. LEACH |
| Senior Vice President & Chief Financial Officer | | March 9, 2022 |
Michael R. Leach |
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/s/ RICHARD D. FEDERICO |
| Lead Director of the Independent Directors | | March 9, 2022 |
Richard D. Federico |
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/s/ ROBERT B. ENGEL |
| Director | | March 9, 2022 |
Robert B. Engel |
| | ||
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/s/ STEVEN C. FINCH |
| Director | | March 9, 2022 |
Steven C. Finch |
| | ||
| | | | |
/s/ JAMES J. TANOUS |
| Director | | March 9, 2022 |
James J. Tanous |
| | ||
| | | | |
/s/ NICOLE R. TZETZO |
| Director | | March 9, 2022 |
Nicole R. Tzetzo |
| | ||
| | |||
/s/ MICHAEL R. WINTER |
| Director | | March 9, 2022 |
Michael R. Winter |
| |
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