Quarterly Report (10-q)

Date : 05/01/2019 @ 8:05PM
Source : Edgar (US Regulatory)
Stock : Allied Motion Technologies Inc (AMOT)
Quote : 42.45  -0.76 (-1.76%) @ 9:30PM

Quarterly Report (10-q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2019

 

Commission File Number 0-04041

 


 

ALLIED MOTION TECHNOLOGIES INC.

(Exact name of Registrant as Specified in Its Charter)

 

Colorado
(State or other jurisdiction of
incorporation or organization)

 

84-0518115
(I.R.S. Employer
Identification No.)

 

 

 

495 Commerce Drive, Amherst, New York
(Address of principal executive offices)

 

14228
(Zip Code)

 

(716) 242-8634

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Address, if Changed Since Last Report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.  Yes x   No o

 

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).  Yes x   No o

 

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 Securities Exchange Act.  (Check one):

 

Large accelerated filer  o

Accelerated filer  x

Non-accelerated filer  o

Smaller reporting company  o

Emerging growth company  o

 

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. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

 

Number of Shares of the only class of Common Stock outstanding:  9,607,081 as of May 1, 2019

 

 

 


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

INDEX

 

 

 

Page No.

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets — Unaudited

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income — Unaudited

2

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity — Unaudited

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Unaudited

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements - Unaudited

5

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

 

Item 1A.

Risk Factors

26

 

 

 

 

 

Item 5.

Other Information

26

 

 

 

 

 

Item 6.

Exhibits

27

 


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

 

 

March 31,
2019

 

December 31,
2018

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,184

 

$

8,673

 

Trade receivables, net of allowance for doubtful accounts of $560 and $530 at March 31, 2019 and December 31, 2018, respectively

 

53,795

 

43,247

 

Inventories

 

52,962

 

54,971

 

Prepaid expenses and other assets

 

3,733

 

4,003

 

Total current assets

 

120,674

 

110,894

 

Property, plant and equipment, net

 

48,083

 

48,035

 

Deferred income taxes

 

424

 

341

 

Intangible assets, net

 

66,788

 

68,354

 

Goodwill

 

52,362

 

52,639

 

Right of use asset

 

18,978

 

 

Other long-term assets

 

4,708

 

5,038

 

Total Assets

 

$

312,017

 

$

285,301

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

26,225

 

$

25,867

 

Accrued liabilities

 

18,944

 

18,722

 

Total current liabilities

 

45,169

 

44,589

 

Long-term debt

 

129,051

 

122,516

 

Deferred income taxes

 

3,604

 

3,860

 

Pension and post-retirement obligations

 

4,316

 

4,293

 

Right of use liability

 

15,818

 

 

Other long-term liabilities

 

7,261

 

8,230

 

Total liabilities

 

205,219

 

183,488

 

Stockholders’ Equity:

 

 

 

 

 

Common stock, no par value, authorized 50,000 shares; 9,607 and 9,485 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

35,564

 

33,613

 

Preferred stock, par value $1.00 per share, authorized 5,000 shares; no shares issued or outstanding

 

 

 

Retained earnings

 

80,901

 

76,718

 

Accumulated other comprehensive loss

 

(9,667

)

(8,518

)

Total stockholders’ equity

 

106,798

 

101,813

 

Total Liabilities and Stockholders’ Equity

 

$

312,017

 

$

285,301

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Revenues

 

$

93,896

 

$

76,576

 

Cost of goods sold

 

66,234

 

54,022

 

Gross profit

 

27,662

 

22,554

 

Operating costs and expenses:

 

 

 

 

 

Selling

 

4,093

 

2,697

 

General and administrative

 

8,950

 

7,456

 

Engineering and development

 

5,807

 

4,955

 

Business development

 

53

 

151

 

Amortization of intangible assets

 

1,432

 

884

 

Total operating costs and expenses

 

20,335

 

16,143

 

Operating income

 

7,327

 

6,411

 

Other expense (income):

 

 

 

 

 

Interest expense

 

1,180

 

614

 

Other (income) expense, net

 

(18

)

106

 

Total other expense, net

 

1,162

 

720

 

Income before income taxes

 

6,165

 

5,691

 

Provision for income taxes

 

(1,695

)

(1,493

)

Net income

 

$

4,470

 

$

4,198

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings per share

 

$

0.48

 

$

0.45

 

Basic weighted average common shares

 

9,340

 

9,251

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

0.48

 

$

0.45

 

Diluted weighted average common shares

 

9,375

 

9,325

 

 

 

 

 

 

 

Net income

 

$

4,470

 

$

4,198

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(887

)

1,687

 

Income (loss) on derivatives

 

(262

)

604

 

Comprehensive income

 

$

3,321

 

$

6,489

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

(Unaudited)

 

 

 

Common Stock

 

 

 

Accumulated

 

 

 

(In thousands)

 

Shares

 

Amount

 

Unamortized
Cost of Equity
Awards

 

Common Stock
and Paid-in
Capital

 

Retained
Earnings

 

Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

Balances, December 31, 2018

 

9,485

 

$

36,779

 

$

(3,166

)

$

33,613

 

$

76,718

 

$

(8,518

)

$

101,813

 

Stock transactions under employee benefit stock plans

 

27

 

1,088

 

 

 

1,088

 

 

 

 

 

1,088

 

Issuance of restricted stock, net of forfeitures

 

96

 

4,059

 

(3,729

)

330

 

 

 

 

 

330

 

Stock compensation expense

 

 

 

 

 

596

 

596

 

 

 

 

 

596

 

Shares withheld for payment of employee payroll taxes

 

(1

)

(63

)

 

 

(63

)

 

 

 

 

(63

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

(887

)

(887

)

Accumulated income (loss) on derivatives

 

 

 

 

 

 

 

 

 

 

 

(343

)

(343

)

Tax effect of derivative transactions

 

 

 

 

 

 

 

 

 

 

 

81

 

81

 

Net income

 

 

 

 

 

 

 

 

 

4,470

 

 

 

4,470

 

Dividends to stockholders - $.03

 

 

 

 

 

 

 

 

 

(287

)

 

 

(287

)

Balances, March 31, 2019

 

9,607

 

$

41,863

 

$

(6,299

)

$

35,564

 

$

80,901

 

$

(9,667

)

$

106,798

 

 

 

 

Common Stock

 

 

 

Accumulated

 

 

 

(In thousands)

 

Shares

 

Amount

 

Unamortized
Cost of Equity
Awards

 

Common Stock
and Paid-in
Capital

 

Retained
Earnings

 

Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

Balances, December 31, 2017

 

9,427

 

$

34,473

 

$

(3,422

)

$

31,051

 

$

61,882

 

$

(5,586

)

$

87,347

 

Stock transactions under employee benefit stock plans

 

26

 

849

 

 

 

849

 

 

 

 

 

849

 

Issuance of restricted stock, net of forfeitures

 

30

 

1,582

 

(1,582

)

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

460

 

460

 

 

 

 

 

460

 

Shares withheld for payment of employee payroll taxes

 

(1

)

(34

)

 

 

(34

)

 

 

 

 

(34

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

1,687

 

1,687

 

Accumulated income (loss) on derivatives

 

 

 

 

 

 

 

 

 

 

 

604

 

604

 

Net income

 

 

 

 

 

 

 

 

 

4,198

 

 

 

4,198

 

Balances, March 31, 2018

 

9,482

 

$

36,870

 

$

(4,544

)

$

32,326

 

$

66,080

 

$

(3,295

)

$

95,111

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

4,470

 

$

4,198

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Depreciation and amortization

 

3,659

 

2,791

 

Deferred income taxes

 

(297

)

2,822

 

Stock compensation expense

 

674

 

496

 

Debt issue cost amortization recorded in interest expense

 

43

 

37

 

Other

 

347

 

609

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

Trade receivables

 

(10,941

)

(8,231

)

Inventories

 

1,291

 

(3,887

)

Prepaid expenses and other assets

 

(161

)

(1,408

)

Accounts payable

 

490

 

5,479

 

Accrued liabilities

 

(2,014

)

(1,211)

 

Net cash (used in) provided by operating activities

 

(2,439

)

1,695

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Purchase of property and equipment

 

(2,505

)

(2,222

)

Cash paid for acquisitions

 

 

(13,312

)

Net cash used in investing activities

 

(2,505

)

(15,534

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Borrowings on long term debt

 

6,568

 

14,500

 

Principal payments of long-term debt

 

 

(4,350

)

Stock transactions under employee benefit stock plans

 

(63

)

849

 

Net cash provided by financing activities

 

6,505

 

10,999

 

Effect of foreign exchange rate changes on cash

 

(50

)

253

 

Net increase (decrease) in cash and cash equivalents

 

1,511

 

(2,587

)

Cash and cash equivalents at beginning of period

 

8,673

 

15,590

 

Cash and cash equivalents at end of period

 

$

10,184

 

$

13,003

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

1.               BASIS OF PREPARATION AND PRESENTATION

 

Allied Motion Technologies Inc. (“Allied Motion” or the “Company”) is engaged in the business of designing, manufacturing and selling controlled motion solutions, which include integrated system solutions as well as individual controlled motion products, to a broad spectrum of customers throughout the world primarily for the industrial, automotive, medical, and aerospace and defense markets.

 

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

 

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end of period exchange rates. Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment. Foreign currency translation adjustment is included in 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 Technology Units (“TUs”) are included in the results of operations as incurred.

 

The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include all adjustments which are, in the opinion of management, necessary for a fair presentation.  Certain information and footnote disclosures normally included in financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.  The Company believes that the disclosures herein are adequate to make the information presented not misleading.  The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions.  Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the Consolidated Financial Statements and related Notes to such statements included in the Annual Report on Form 10-K for the year ended December 31, 2018 that was previously filed by the Company.

 

Reclassifications

 

Certain items in the prior year’s condensed consolidated financial statements have been reclassified to conform to the 2019 presentation.

 

2.               ACQUISITIONS

 

TCI

 

On December 6, 2018, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”) with TCI, LLC, a Wisconsin limited liability company (“TCI”), and the members of TCI (“Sellers”), pursuant to which Allied Motion acquired 100% of the issued and outstanding common units of TCI from Sellers (the “Acquisition”) in a transaction valued at $64,100.  The Acquisition consideration is subject to adjustments based on a determination of closing net working capital, cash, indebtedness and other TCI liabilities. A portion of the Acquisition consideration was placed in escrow to secure payment of any post-closing adjustments to the purchase price and to secure the Sellers’ indemnification obligations to Allied Motion. Cash consideration was funded from borrowings on the Company’s existing credit facilities.

 

The TCI acquisition broadens and strengthens the Company’s position as a leading global diversified solutions provider in the controlled motion market.  TCI has adjacent technologies and capabilities that enable more efficient and longer life

 

5


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

solutions for motion devices in a wide variety of demanding applications.  TCI’s technology and products are expected to be a valuable addition to the Company’s expanding suite of solution offerings.

 

The Company incurred $413 of transaction costs related to the acquisition of TCI.  Transaction costs are included in business development expenses on the consolidated statements of income and comprehensive income.  The Company accounted for the acquisition pursuant to ASC 805, “Business Combinations.”  The preliminary  allocation of the purchase price paid for TCI is based on estimated fair values of the assets acquired and liabilities assumed of TCI as of December 6, 2018 (in thousands):

 

Inventory

 

$

4,332

 

Accounts receivable

 

5,822

 

Other assets, net

 

303

 

Property, plant and equipment

 

3,464

 

Amortizable intangible assets

 

36,400

 

Goodwill

 

17,843

 

Current liabilities

 

(4,064

)

Net purchase price

 

$

64,100

 

 

The purchase price excluded any cash on hand and any debt of TCI.  The allocation of the purchase price is preliminary as the valuation of both the tangible and identifiable intangible assets is being finalized.

 

The intangible assets acquired consist of customer lists, technology and a trade name, which are being amortized over 16, 15 and 19 years, respectively.  Goodwill generated in the acquisition is related to the assembled workforce, synergies between Allied Motion’s other TUs and TCI that are expected to occur as a result of the combined engineering knowledge, the ability of each of the TUs to integrate each other’s products into more fully integrated system solutions and Allied Motion’s ability to utilize TCI’s management knowledge in providing complementary product offerings to the Company’s customers.

 

The goodwill resulting from the TCI acquisition is tax deductible.

 

Pro forma Condensed Combined Financial Information

 

The following presents the Company’s unaudited pro forma financial information for the three months ended March 31, 2018 giving effect to the acquisition of TCI as if it had occurred at January 1, 2018.  Included in the pro forma information is:  the additional depreciation and amortization resulting from the valuation of amortizable tangible and intangible assets; interest on borrowings made by the Company; amortization of deferred finance costs incurred to issue the borrowings; and removal of acquisition related transaction costs.

 

 

 

March 31,
2018

 

Revenues

 

$

86,989

 

Net income

 

$

4,544

 

Diluted earnings per share

 

$

0.49

 

 

The pro forma adjustments do not reflect adjustments for anticipated operating efficiencies that the Company expects to achieve as a result of this acquisition.  The pro forma financial information is for informational purposes only and does not purport to present what the Company’s results would actually 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.

 

Maval OE Steering

 

On January 19, 2018, the Company purchased substantially all of the operating assets associated with the original equipment steering business of Maval Industries, LLC (“Maval”) for $13,312 in cash. Consistent with the Company’s strategy to provide higher level system solutions, the addition of the Maval OE steering (“Maval OE Steering”) product line enables Allied to provide a fully integrated steering system solution to its customers.

 

6


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

The following table represents the purchase price allocation and summarizes the aggregate estimated fair value of the assets acquired (in thousands):

 

 

 

January 19, 2018

 

Intangible assets

 

$

3,870

 

Goodwill

 

6,001

 

Assets acquired (net of liabilities assumed)

 

3,441

 

Fair value of net assets acquired

 

$

13,312

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired.  The purchase price allocation was completed during the fourth quarter 2018.

 

The goodwill resulting from the Maval OE Steering acquisition is tax deductible.

 

3.               REVENUE RECOGNITION

 

Performance Obligations

 

Performance Obligations Satisfied at a Point in Time

 

The Company’s standard delivery method is “free on board” shipping point. Consequently, 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 monetary consideration from the customer.  The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgment as the contract with the customer. For some customers, control, and a sale, is transferred at a point in time when the product is delivered to a customer.

 

Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

 

Nature of Goods and Services

 

The Company sells component and integrated controlled motion solutions to end customers and original equipment manufacturers (“OEM’s”) through the Company’s own direct sales force and authorized manufacturers’ representatives and distributors.  The Company’s products include brush and brushless DC motors, brushless servo and torque motors, coreless DC motors, integrated brushless motor-drives, gearmotors, gearing, modular digital servo drives, motion controllers, incremental and absolute optical encoders, active and passive filters for power quality and harmonic issues, and other controlled motion-related products. The Company’s target markets include Vehicle, Medical, Aerospace & Defense and Industrial.

 

Determining the Transaction Price

 

The majority of the Company’s contracts have an original duration of less than one year.  For these contracts, the Company applies the practical expedient and therefore does not consider the effects of the time value of money. For multiyear contracts, the Company uses judgment to determine whether there is a significant financing component. These contracts are generally those in which the customer has made an up-front payment. Contracts that management determines to include a significant financing component are discounted at the Company’s incremental borrowing rate. The Company incurs interest expense and accrues a contract liability. As the Company satisfies performance obligations and recognizes revenue from these contracts, interest expense is recognized simultaneously.  Management does not have any contracts that include a significant financing component as of March 31, 2019.

 

7


Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

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 the Segment Information footnote, the Company’s business consists of one reportable segment. A reconciliation of disaggregated revenue to segment revenue as well as revenue by geographical regions is provided in Note 16, Segment Information .

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Target Market

 

 

 

 

 

Vehicle

 

$

33,596

 

$

32,162

 

Industrial

 

31,311

 

23,892

 

Medical

 

12,410

 

10,644

 

Aerospace & Defense

 

11,253

 

7,811

 

Other

 

5,326

 

2,067

 

Total

 

$

93,896

 

$

76,576

 

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Geography

 

 

 

 

 

United States

 

$

59,314

 

$

44,170

 

Europe

 

34,167

 

31,831

 

Asia

 

412

 

574

 

Other

 

3

 

1

 

Total

 

$

93,896

 

$

76,576

 

 

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 receivables, contract asset, and contract liability are as follows (in thousands):

 

 

 

Receivables

 

Contract Asset

 

Contract Liability

 

Opening balance at 1/1/2019

 

$

 

$

 

$

533

 

Closing balance at 3/31/2019

 

 

 

442

 

Increase/(Decrease)

 

$

 

$

 

$

(91

)

 

 

 

Receivables

 

Contract Asset

 

Contract Liability

 

Opening balance at 1/1/2018

 

$

 

$

 

$

719

 

Closing balance at 3/31/2018

 

 

 

702

 

Increase/(Decrease)

 

$

 

$

 

$

(17

)

 

The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

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 one year or less.

 

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 one year or less, as the revenue is expected to be recognized within the next year.

 

The 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 one year or less.

 

4.               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):

 

 

 

March 31,
2019

 

December 31,
2018

 

Parts and raw materials

 

$

33,511

 

$

34,449

 

Work-in-process

 

7,917

 

7,557

 

Finished goods

 

11,534

 

12,965

 

 

 

52,962

 

54,971

 

 

5.               PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

 

March 31,
2019

 

December 31,
2018

 

Land

 

$

977

 

$

981

 

Building and improvements

 

13,092

 

13,054

 

Machinery, equipment, tools and dies

 

62,700

 

60,755

 

Furniture, fixtures and other

 

15,623

 

15,571

 

 

 

92,392

 

90,361

 

Less accumulated depreciation

 

(44,309

)

(42,326

)

Property, plant and equipment, net

 

$

48,083

 

$

48,035

 

 

Depreciation expense was approximately $2,227 and $1,907 for the quarters ended March 31, 2019 and 2018, respectively.

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

6.               GOODWILL

 

The change in the carrying amount of goodwill for the three months ended March 31, 2019 and year ended December 31, 2018 is as follows (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

Beginning balance

 

$

52,639

 

$

29,531

 

Adjustment to or acquisition of goodwill (Note 2)

 

35

 

23,844

 

Effect of foreign currency translation

 

(312

)

(736

)

Ending balance

 

$

52,362

 

$

52,639

 

 

7.               INTANGIBLE ASSETS

 

Intangible assets on the Company’s condensed consolidated balance sheets consist of the following (in thousands):

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

Life

 

Gross
Amount

 

Accumulated
amortization

 

Net Book
Value

 

Gross
Amount

 

Accumulated
amortization

 

Net Book
Value

 

Customer lists

 

8 - 17 years

 

$

64,316

 

$

(16,297

)

$

48,019

 

$

64,439

 

$

(15,343

)

$

49,096

 

Trade name

 

10 - 19 years

 

12,222

 

(3,502

)

8,720

 

12,249

 

(3,305

)

8,944

 

Design and technologies

 

10 - 15 years

 

12,928

 

(2,893

)

10,035

 

13,023

 

(2,723

)

10,300

 

Patents

 

17 years

 

24

 

(10

)

14

 

24

 

(10

)

14

 

Total

 

 

 

$

89,490

 

$

(22,702

)

$

66,788

 

$

89,735

 

$

(21,381

)

$

68,354

 

 

Intangible assets resulting from the acquisition of TCI were approximately $36,400 (Note 2). The intangible assets acquired consist of customer lists, a trade name and technology. The valuation and useful life of the purchased intangibles has not been finalized.

 

Intangible assets from the acquisition of the Maval OE Steering business were approximately $3,870 (Note 2). The intangible assets acquired consist of customer lists.

 

Amortization expense for intangible assets was $1,432 and $884 for the quarters ended March 31, 2019 and March 31, 2018, respectively.

 

Estimated future intangible asset amortization expense as of March 31, 2019 is as follows (in thousands):

 

 

 

Estimated
Amortization
Expense

 

Remainder of 2019

 

$

4,289

 

2020

 

5,719

 

2021

 

5,470

 

2022

 

5,470

 

2023

 

5,389

 

2024

 

5,087

 

Thereafter

 

35,364

 

Total estimated amortization expense

 

$

66,788

 

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

8.               STOCK-BASED COMPENSATION

 

Stock Incentive Plans

 

The Company’s Stock Incentive Plans provide for the granting of stock awards, including restricted stock, stock options and stock appreciation rights, to employees and non-employees, including directors of the Company.

 

Restricted Stock

 

For the quarter ended March 31, 2019, 97,430 shares of unvested restricted stock were awarded at a weighted average market value of $42.24.  Of the restricted shares granted, 76,629 shares have performance-based vesting conditions.  The value of the shares is amortized to compensation expense over the related service period, which is normally three years, or over the estimated performance period.  Shares of unvested restricted stock are generally forfeited if a recipient leaves the Company before the vesting date.  Shares that are forfeited become available for future awards.

 

The following is a summary of restricted stock activity for the quarter ended March 31, 2019:

 

 

 

Number of
shares

 

Outstanding at beginning of period

 

155,712

 

Awarded

 

97,430

 

Vested

 

(52,872

)

Forfeited

 

(1,785

)

Outstanding at end of period

 

198,485

 

 

Stock based compensation expense, net of forfeitures, of $674 and $496 was recorded for the quarters ended March 31, 2019 and 2018, respectively.

 

9.               ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

 

 

March 31,
2019

 

December 31,
2018

 

Compensation and fringe benefits

 

$

6,685

 

$

11,642

 

Warranty reserve

 

960

 

971

 

Income taxes payable

 

2,049

 

1,182

 

Right of use liability

 

3,530

 

 

Other accrued expenses

 

5,720

 

4,927

 

 

 

$

18,944

 

$

18,722

 

 

10.        DEBT OBLIGATIONS

 

Debt obligations consisted of the following (in thousands):

 

 

 

March 31,
2019

 

December 31,
2018

 

Long-term Debt

 

 

 

 

 

Revolving Credit Facility, long-term (1)

 

$

129,502

 

$

123,010

 

Unamortized debt issuance costs

 

(451

)

(494

)

Long-term debt

 

$

129,051

 

$

122,516

 

 


(1)  The effective rate of the Revolver is 4.26% at March 31, 2019.

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

Senior Secured Revolving Credit Facility

 

On October 28, 2016, the Company entered into a $125,000 revolving credit facility (the “Revolving Credit Facility”), with an initial term of five years.

 

On December 6, 2018, the Company and certain of its subsidiaries entered into a Second Amendment to Credit Agreement to exercise the $50 million accordion feature of its existing senior secured revolving credit facility and to add TCI as an additional guarantor. The Company’s credit facility, which matures in October 2021, increased capacity from $125 million to $175 million with the additional borrowing capacity being provided by the existing lenders.  Other terms and conditions under the credit facility remain unchanged. At March 31, 2019 there was approximately $45,498 available under the Revolving Credit Facility.

 

Borrowings under the Revolving Credit Facility bear interest at the LIBOR Rate (as defined in the Credit Agreement) plus a margin of 1.00% to 2.25% or the Prime Rate (as defined in the Credit Agreement) plus a margin of 0% to 1.25%, in each case depending on the Company’s ratio of total funded indebtedness (as defined in the Credit Agreement) to Consolidated trailing twelve-month EBITDA (the “Total Leverage Ratio”).  At March 31, 2019, the applicable margin for LIBOR Rate borrowings was 2.00% and the applicable margin for Prime Rate borrowings was 1.00%.  In addition, the Company is required to pay a commitment fee of between 0.10% and 0.25% quarterly (currently 0.220%) on the unused portion of the Revolving facility, also based on the Company’s Total Leverage Ratio.  The Revolving Facility is secured by substantially all of the Company’s non-realty assets and is fully and unconditionally guaranteed by certain of the Company’s subsidiaries.

 

The Credit Agreement contains certain financial covenants related to minimum interest coverage and total leverage ratio at the end of each quarter. The Credit Agreement also includes other covenants and restrictions, including limits on the amount of additional indebtedness, and restrictions on the Company’s ability to merge or sell all or substantially all of its assets. The Company was in compliance with all covenants at March 31, 2019.

 

Other

 

The China Credit Facility provides credit of approximately $1,490 (Chinese Renminbi 10,000) (“the China Facility”).  The China Facility is used for working capital and capital equipment needs at the Company’s China operations.  There have been no borrowings during 2019 and there is no balance in the China Facility at March 31, 2019.  There were no borrowings during the fourth quarter of 2018 and therefore no balance in the China Facility as of December 31, 2018.

 

11.        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, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

 

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. During October 2013, the Company entered into two identical interest rate swaps with a combined notional of $25,000 that amortized quarterly to a notional of $6,673 at the September 2018 maturity.  Neither of these interest rate swaps is currently active as the Company terminated one interest rate swap during October 2016 as part of its debt refinancing, and the second matured September 2018.  In February 2017, the Company entered into three interest rate swaps with a combined notional of $40,000 that matures in February 2022.

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

The effective portion of 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 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.  There was no hedge ineffectiveness recorded in the Company’s earnings during the quarters ended March 31, 2019 and 2018.

 

The Company estimates that an additional $160 will be reclassified as a decrease to interest expense over the next twelve months. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

Asset Derivatives

 

 

 

Liability Derivatives

 

 

 

 

 

Fair value as of:

 

 

 

Fair value as of:

 

Derivatives designated as
hedging instruments

 

Balance Sheet
Location

 

March 31,
2019

 

December 31,
2018

 

Balance Sheet
Location

 

March 31,
2019

 

December 31,
2018

 

Interest rate products

 

Other long-term assets

 

$

223

 

$

566

 

Other long-term liabilities

 

$

 

$

 

 

The tables below present the effect of cash flow hedge accounting on other comprehensive income (loss) (OCI) for the quarters ended March 31, 2019 and 2018 (in thousands):

 

 

 

Amount of gain (loss) recognized in OCI on
derivative

 

Derivatives in cash flow hedging

 

Three months ended March 31,

 

relationships

 

2019

 

2018

 

Interest rate products

 

$

(210

)

$

568

 

 

Location of (gain) loss

 

Amount of (gain) loss reclassified from
accumulated OCI into income

 

reclassified from accumulated

 

Three months ended March 31,

 

OCI into income

 

2019

 

2018

 

Interest expense

 

$

52

 

$

(36

)

 

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

Total amounts of income and expense line items
presented that reflect the effects of cash flow
hedges recorded

 

Derivatives designated as

 

Balance Sheet

 

Three months ended March 31,

 

hedging instruments

 

Location

 

2019

 

2018

 

Interest rate products

 

Other assets

 

$

1,180

 

$

614

 

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of March 31, 2019 and December 31, 2018. 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 condensed consolidated balance sheets.

 

 

 

Gross amounts

 

Gross amounts
offset in the
condensed

 

Net amounts of assets
presented in the
condensed

 

Gross amounts not offset in the condensed consolidated
balance sheets

 

As of
March 31, 2019

 

of recognized
assets

 

consolidated
balance sheets

 

consolidated balance
sheets

 

Financial
instruments

 

Cash collateral
received

 

Net amount

 

Derivatives

 

$

223

 

 

 

$

223

 

 

 

 

 

$

223

 

 

 

 

 

 

Gross amounts
offset in the

 

Net amounts of assets
presented in the

 

Gross amounts not offset in the condensed consolidated

 

As of

 

Gross amounts

 

condensed

 

condensed

 

balance sheets

 

December 31,
2018

 

of recognized
assets

 

consolidated
balance sheets

 

consolidated balance
sheets

 

Financial
instruments

 

Cash collateral
received

 

Net amount

 

Derivatives

 

$

566

 

$

 

$

566

 

$

 

$

 

$

566

 

 

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.

 

12.        FAIR VALUE

 

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

 

The guidance establishes a framework for measuring fair value which utilizes observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  Preference is given to observable inputs.

 

These two types of inputs create the following three-level fair value hierarchy:

 

Level 1:

Quoted prices for identical assets or liabilities in active markets.

 

 

Level 2:

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

 

 

Level 3:

Significant inputs to the valuation model that are unobservable.

 

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

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

The following table presents the Company’s financial assets that are accounted for at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, respectively, by level within the fair value hierarchy (in thousands):

 

 

 

March 31, 2019

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Pension plan assets

 

$

5,603

 

$

 

$

 

Other long-term assets

 

4,340

 

 

 

Interest rate swaps

 

 

223

 

 

 

 

 

December 31, 2018

 

 

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

Pension plan assets

 

$

5,231

 

$

 

$

 

Other long-term assets

 

3,962

 

 

 

Interest rate swaps

 

 

434

 

 

 

13.        INCOME TAXES

 

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period.  Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made.  There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws, settlements with taxing authorities and foreign currency fluctuations.

 

The effective income tax rate as a percentage of income before income taxes was 27.5% and 26.2% in the first quarter 2019 and 2018, respectively. The effective tax rate is net of a discrete tax benefit of (1.8%) and (2.3%), rate for the first quarters of 2019 and 2018 respectively, related primarily to the recognition of excess tax benefits for share-based payment awards.

 

The effective rate before discrete items varies from the statutory rate primarily due to differences in state taxes, the impact of international tax provisions in the US, the difference in foreign tax rates and the mix of foreign and domestic income.    The increase in the effective income tax rate as a percentage of income before income taxes from first quarter 2018 to 2019 is a result of limited deductibility of Executive Compensation and Global Intangible Low-Taxed Income, both of which are on-going provisions of the Tax Cuts and Jobs Act that was enacted on December 22, 2017.

 

Refer to Note 19 — Recent Accounting Pronouncements for discussion of ASU 2018-02,  Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

 

14.        LEASES

 

Accounting Standards Update ASU No. 2016-02, Leases (Topic 842) , requires the Company to recognize a right of use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months.  Refer to Note 19 — Recent Accounting Pronouncements for discussion on the adoption of Topic 842.

 

The Company has operating leases for office space, manufacturing equipment, computer equipment and automobiles. Many leases include one or more options to renew, some of which include options to extend the leases for a long-term period, and some leases include options to terminate the leases within 30 days. In certain of the Company’s lease agreements, the rental payments are adjusted periodically to reflect actual charges incurred for capital area maintenance, utilities, inflation and/or changes in other indexes.

 

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Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

For the quarter ended March 31, 2019, the components of operating lease expense were as follows (in thousands):

 

 

 

March 31,
2019

 

Fixed operating lease expense

 

$

1,016

 

Variable operating lease expense

 

39

 

 

 

1,055

 

 

Supplemental cash flow information related to the Company’s operating leases for the three-month period ended March 31, 2019 was as follows (in thousands):

 

Cash paid for amounts included in the measurement of operating leases

 

$

1,031

 

ROU assets obtained in exchange for operating lease obligations

 

20,466

 

 

The following table presents the lease balances within the Condensed Consolidated Balance Sheet, weighted average remaining lease term, and weighted average discount rates related to the Company’s operating leases as of March 31,2019 (in thousands except for the weighted average remaining lease term and weighted average discount rate):

 

Lease assets and liabilities

 

Classification

 

Amount

 

Assets:

 

 

 

 

 

Right of use asset

 

Other long-term assets

 

$

18,978

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Current

 

 

 

 

 

Right of use liability, current

 

Accrued liabilities

 

$

3,530

 

Long-term

 

 

 

 

 

Right of use liability, long-term

 

Other long-term liabilities

 

15,818

 

Total ROU lease liabilities

 

 

 

$

19,348

 

 

 

 

 

 

 

Weighted average remaining lease term

 

 

 

9 years

 

Weighted average discount rate

 

 

 

3.0

%

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

The following table presents the maturity of the Company’s operating lease liabilities as of March 31, 2019 (in thousands):

 

2020

 

$

4,036

 

2021

 

3,331

 

2022

 

2,703

 

2023

 

2,185

 

2024

 

1,930

 

Thereafter

 

7,316

 

Total undiscounted cash flows

 

21,501

 

Less: present value discount

 

(2,153

)

Total lease liabilities

 

$

19,348

 

 

As of March 31, 2019, the Company had no additional significant operating or finance leases that had not yet commenced.

 

15.        ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Accumulated Other Comprehensive Income (Loss) (“AOCI”) for the quarters ended March 31, 2019 and 2018 is comprised of the following (in thousands):

 

 

 

Defined Benefit
Plan Liability

 

Cash Flow Hedges

 

Foreign Currency
Translation
Adjustment

 

Total

 

At December 31, 2018

 

$

(1,006

)

$

434

 

$

(7,946

)

$

(8,518

)

Unrealized loss on cash flow hedges

 

 

(210

)

 

(210

)

Amounts reclassified from AOCI

 

 

(52

)

 

(52

)

Foreign currency translation loss

 

 

 

(887

)

(887

)

At March 31, 2019

 

$

(1,006

)

$

172

 

$

(8,833

)

$

(9,667

)

 

 

 

Defined Benefit
Plan Liability

 

Cash Flow Hedges

 

Foreign Currency
Translation
Adjustment

 

Total

 

At December 31, 2017

 

$

(945

)

$

196

 

$

(4,837

)

$

(5,586

)

Unrealized loss on cash flow hedges

 

 

568

 

 

568

 

Amounts reclassified from AOCI

 

 

36

 

 

36

 

Foreign currency translation gain

 

 

 

1,687

 

1,687

 

At March 31, 2018

 

$

(945

)

$

800

 

$

(3,150

)

$

(3,295

)

 

The realized gains relating to the Company’s interest rate swap hedges were reclassified from accumulated other comprehensive income (loss) and included in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

 

16.        DIVIDENDS PER SHARE

 

The Company declared a quarterly dividend of $0.030 per share in the first quarter of 2019 and $0.025 per share in the first quarter of 2018.  Total dividends declared were $287 and $230 in the first quarter of 2019 and 2018, respectively.  The declared dividends were paid in April 2019 and 2018, respectively.

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

17.        EARNINGS PER SHARE

 

Basic and diluted weighted-average shares outstanding are as follows:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Basic weighted average shares outstanding

 

9,340

 

9,251

 

Dilutive effect of equity awards

 

35

 

74

 

Diluted weighted average shares outstanding

 

9,375

 

9,325

 

 

For the three months ended March 31, 2019 and 2018, the anti-dilutive common shares excluded from the calculation of diluted earnings per share were immaterial.

 

18.        SEGMENT INFORMATION

 

The Company operates in one segment for the manufacture and marketing of controlled motion products for original

 

equipment manufacturers and end user applications. The Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services in which the entity holds material assets and reports revenue.

 

Financial information related to the foreign subsidiaries is summarized below (in thousands):

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Revenues derived from foreign subsidiaries

 

$

34,579

 

$

32,405

 

 

Identifiable foreign assets were $91,478 and $88,400 as of March 31, 2019 and December 31, 2018, respectively.Revenues derived from foreign subsidiaries and identifiable assets outside of the United States are primarily attributable to Europe.

 

Sales to customers outside of the United States by all subsidiaries were $43,680 and $36,302 during the quarters ended March 31, 2019 and 2018, respectively .

 

For first quarter 2019 and 2018, one customer accounted for 16% and 21% of revenues, respectively.  As of March 31, 2019, and December 31, 2018 this customer represented 20% and 13% of trade receivables, respectively.

 

19.        RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently adopted accounting pronouncements

 

In February 2018, the Financial Accounting Standards Board (“FASB”) FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” , to address a specific consequence of the Tax Cuts and Jobs Act (the “Act”) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act’s reduction of the U.S. federal corporate income tax rate. The ASU is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized.

 

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ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

In February 2016, the FASB issued Accounting Standards Update ASU No. 2016-02, Leases (Topic 842) , which requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability for all leases with terms greater than 12 months and also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as “ASC 842”.

 

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases . The standard had a material impact on the Company’s Consolidated Condensed Balance Sheet but did not have a significant impact on the Company’s consolidated net income and cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. For leases that commenced before the effective date of ASC 842, the Company elected the permitted practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company also elected to exclude leases with a term of 12 months or less in the recognized ROU assets and lease liabilities, when the likelihood of renewal is not probable.

 

As a result of the cumulative impact of adopting ASC 842, the Company recorded operating lease ROU assets of $19,728 and operating lease liabilities of $20,350 as of January 1, 2019, primarily related to real estate, equipment and automobile leases, based on the present value of the future lease payments on the date of adoption. Refer to Note 14 - Leases for the additional disclosures required by ASC 842.

 

The Company determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset also consists of any prepaid lease payments and deferred rent liabilities. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. The Company has lease agreements which require payments for lease and non-lease components and has elected to account for these as a single lease component.

 

Recently issued accounting pronouncements

 

In August 2018, the FASB issued ASU No. 2018-13, “ Fair Value Measurement (Topic 820)” , which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s financial statements.

 

In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” . This guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

All statements contained herein that are not statements of historical fact constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the word “believe,” “anticipate,” “expect,” “project,” “intend,” “will continue,” “will likely result,” “should” or words or phrases of similar meaning. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from the expected results described in the forward-looking statements. The risks and uncertainties include those associated with: the domestic and foreign general business and economic conditions in the markets we serve, including political and currency risks and adverse changes in local legal and regulatory environments; the 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 its 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; changes in government regulations; the availability of financing and our access to capital markets, borrowings, or financial transactions to hedge certain risks; the ability to attract and retain qualified personnel who can design new applications and products for the motion industry; the ability to implement our corporate strategies designed for growth and improvement in profits including to identify and consummate favorable acquisitions to support external growth and the development of new technologies; the ability to successfully integrate an acquired business into our business model without substantial costs, delays, or problems; our the ability to control costs, including the establishment and operation of low cost region manufacturing and component sourcing capabilities; and the additional risk factors discussed under “Item 1A. Risk Factors” in Part II of this report and in the Company’s Annual Report in Form 10-K. Actual results, events and performance may differ materially. Readers are cautioned not to place undue reliance on these forward- looking statements as a prediction of actual results. Any forward-looking statement speaks only as of the date on which it is made.  New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. The Company has no obligation or intent to release publicly any revisions to any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company’s expectations, beliefs and projections are the and are believed to have a reasonable basis; however, the Company makes no assurance that expectations, beliefs or projections will be achieved.

 

Overview

 

We are a global company that designs, manufactures and sells precision and specialty controlled motion components and systems used in a broad range of industries. Our target markets include Vehicle, Medical, Aerospace & Defense, and Industrial. We are headquartered in Amherst, NY, and have operations in the United States, Canada, Mexico, Europe and Asia. 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 original equipment manufacturers (“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

 

Acquisitive and organic growth across all the Company’s served markets led to leveraging of costs and expansion of margins.  Excluding the unfavorable effects of foreign currency exchange (“FX”) of $3,140, first quarter revenue was $97,036, up 26.7%.  Revenue excluding foreign currency exchange impacts is a non-gaap measurement.  Refer to information included in “Non - GAAP Measures” below for a reconciliation of revenue to revenue excluding foreign currency exchange impacts.

 

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

 

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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.

 

Operating Results

 

Quarter ended March 31, 2019 compared to quarter ended March 31, 2018

 

 

 

For the quarter ended

 

2019 vs. 2018

 

 

 

March 31,

 

Variance

 

(in thousands)

 

2019

 

2018

 

$

 

%

 

Revenues

 

$

93,896

 

$

76,576

 

$

17,320

 

23

%

Cost of goods sold

 

66,234

 

54,022

 

12,212

 

23

%

Gross profit

 

27,662

 

22,554

 

5,108

 

23

%

Gross margin percentage

 

29.5

%

29.5

%

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Selling

 

4,093

 

2,697

 

1,396

 

52

%

General and administrative

 

8,950

 

7,456

 

1,494

 

20

%

Engineering and development

 

5,807

 

4,955

 

852

 

17

%

Business development

 

53

 

151

 

(98

)

(65

)%

Amortization of intangible assets

 

1,432

 

884

 

548

 

62

%

Total operating costs and expenses

 

20,335

 

16,143

 

4,192

 

26

%

Operating income

 

7,327

 

6,411

 

916

 

14

%

Interest expense

 

1,180

 

614

 

566

 

92

%

Other (income) expense

 

(18

)

106

 

(124

)

(117

)%

Total other expense

 

1,162

 

720

 

442

 

61

%

Income before income taxes

 

6,165

 

5,691

 

474

 

8

%

Provision for income taxes

 

(1,695

)

(1,493

)

(202

)

14

%

Net Income

 

$

4,470

 

$

4,198

 

$

272

 

6

%

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

27.5

%

26.2

%

1

%

5

%

Diluted earnings per share

 

$

0.48

 

$

0.45

 

$

0.03

 

7

%

Bookings

 

$

93,744

 

$

80,699

 

$

13,045

 

16

%

Backlog

 

$

130,646

 

$

107,321

 

$

23,325

 

22

%

 

NET INCOME:  Net income increased during the first quarter 2019 compared to the first quarter 2018 reflecting a significant increase in revenues partially offset by increased selling and general and administrative costs to support growth.  Gross margins and operating margins were muted by some atypical events within our supply chain and production cycles supporting manufacturing development and customer requirements for new contracts that are beginning to ramp-up in 2019.

 

EBITDA AND ADJUSTED EBITDA:  EBITDA was $11,004 for the first quarter of 2019 compared to $9,096 for the same quarter last year.  Adjusted EBITDA was $11,731 and $9,743 for the first quarters of 2019 and 2018, respectively.  EBITDA and adjusted EBITDA are non-GAAP measurements.  EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization.  Adjusted EBITDA also excludes stock compensation expense and certain other items.  Refer to information included in “Non - GAAP Measures” below for a reconciliation of net income to EBITDA and adjusted EBITDA.

 

REVENUES:  For the quarter, the increase in revenues reflects increased sales in all our served markets as well as contributions from the TCI acquisition made in December 2018.

 

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Sales to U.S. customers were 54% of total sales for the first quarter 2019 compared with 53% for the same period last year, with the balance of sales to customers primarily in Europe, Canada and Asia.   The overall increase in revenue was due to an 27% volume increase offset by a 4% unfavorable currency impact.

 

ORDER BOOKINGS AND BACKLOG:  The increase in bookings in the first quarter of 2019 compared to the first quarter of 2018 is largely due to organic growth across all of the major markets served by the company. The acquisition of TCI in late 2018 contributes to the increased bookings in 2019. The increase in backlog as of March 31, 2019, compared to at March 31, 2018 was attributable to the same factors.

 

GROSS MARGIN:  Gross margin remained consistent at 29.5% for the first quarters of 2019 and 2018 however 2019 was negatively impacted by some atypical events within our supply chain and production cycles as referenced earlier. The first event relates to an increase in pricing from a supplier who is discontinuing operations and subsequently increased their prices for any new orders through the first half of 2019.  The second item was the timing of investment into tooling and prototype samples related to new Vehicle market programs.  Both impacts are expected to moderate over the coming quarters.

 

SELLING EXPENSES:  Selling expenses increased in the first quarter of 2019 compared to the same period of 2018. This was attributable to higher commissioned sales and the additional selling organizations associated with the Maval OE Steering and TCI acquisitions.  Selling expenses as a percentage of revenues were 4.4% in the first quarter of 2019 compared to 3.5% for the same period last year.

 

GENERAL AND ADMINISTRATIVE EXPENSES:  General and administrative expenses increased by 20% in the first quarter 2019 from the first quarter 2018 largely due to the acquisitions of Maval OE Steering and TCI along with higher stock compensation and incentive compensation expense associated with improved performance. As a percentage of revenues, general and administrative expenses decreased 20 basis points to 9.5% for the quarter ended March 31, 2019 compared to 9.7% for the same period in 2018.

 

ENGINEERING AND DEVELOPMENT EXPENSES:  Engineering and development expenses increased by 17.2% in the first quarter of 2019 compared to the same quarter last year, however decreased as a percentage of sales.  The increase in expenses is primarily due to added resources (headcount and consulting), the continued ramp up of development projects to meet the future needs of customers and target markets along with the engineering resources associated with the acquired businesses in 2018. As a percentage of revenues, engineering and development expenses were 6.2% and 6.5% for the first quarters of 2019 and 2018, respectively.

 

BUSINESS DEVELOPMENT COSTS: The Company incurred $53 of business development costs in the first quarter 2019 compared to $151 of business development costs in the first quarter last year. The costs in 2019 relate to activity from the December 2018 acquisition of TCI.  The costs in first quarter 2018 were related to the acquisition of the Maval OE Steering business and activity associated with other M&A opportunities.

 

AMORTIZATION OF INTANGIBLE ASSETS:  Amortization expense increased 62% to $1,432 in the first quarter of 2019 compared to the first quarter of 2018 due to the increase in intangible assets from the acquisition of TCI.

 

INCOME TAXES:  The effective income tax rate as a percentage of income before income taxes was 27.5% and 26.2% in the first quarter 2019 and 2018, respectively.  The effective tax rate is net of a discrete tax benefit of (1.8%) and (2.3%), rate for the first quarters of 2019 and 2018 respectively, related primarily to the recognition of excess tax benefits for share-based payment awards.  The effective rate before discrete items varies from the statutory rate primarily due to differences in state taxes, the impact of international tax provisions in the US, the difference in foreign tax rates and the mix of foreign and domestic income.

 

Non-GAAP Measures

 

Revenue excluding foreign currency exchange impacts, EBITDA and Adjusted EBITDA 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 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

 

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a substitute for analysis of the Company’s results as reported under GAAP, nor are they 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 organic 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, 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 compensation expense, as well as certain income or expenses which are not indicative of the ongoing performance of the Company.  EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with generally accepted accounting principles.

 

The Company’s calculation of revenues excluding foreign currency exchange impacts for the quarter ended March 31, 2019 is as follows:

 

 

 

For the quarter
ended

 

 

 

March 31, 2019

 

Revenue as reported

 

$

93,896

 

Currency impact

 

3,140

 

Revenue excluding foreign currency exchange impacts

 

$

97,036

 

 

The Company’s calculation of EBITDA and Adjusted EBITDA for the quarters ended March 31, 2019 and 2018 is as follows (in thousands):

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

2018

 

Net income as reported

 

$

4,470

 

$

4,198

 

Interest expense

 

1,180

 

614

 

Provision for income tax

 

1,695

 

1,493

 

Depreciation and amortization

 

3,659

 

2,791

 

EBITDA

 

11,004

 

9,096

 

Stock compensation expense

 

674

 

496

 

Business development costs

 

53

 

151

 

Adjusted EBITDA

 

$

11,731

 

$

9,743

 

 

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Liquidity and Capital Resources

 

The Company’s liquidity position as measured by cash and cash equivalents decreased by $1,511 to a balance of $10,184 at March 31, 2019 from December 31, 2018.

 

 

 

Quarter ended
March 31,

 

2019 vs.
2018

 

 

 

2019

 

2018

 

$

 

Net cash (used in) provided by operating activities

 

$

(2,439

)

$

1,695

 

$

(4,134

)

Net cash used in investing activities

 

(2,505

)

(15,534

)

13,029

 

Net cash provided by financing activities

 

6,505

 

10,999

 

(4,494

)

Effect of foreign exchange rates on cash

 

(50

)

253

 

(303

)

Net increase (decrease) in cash and cash equivalents

 

$

1,511

 

$

(2,587

)

$

4,098

 

 

During the first quarter of 2019, the decrease in cash provided by operating activities is primarily due to an increase in working capital needs to support the sequential quarter, primarily for trade receivables.

 

The significant cash used in investing activities in the first quarter 2018 reflects the acquisition the Maval OE Steering business. Purchases of property and equipment were $2,505 during the first quarter 2019 compared to $2,222 for the first quarter 2018. Capital expenditures are expected to increase for the remainder of 2019 to support our continued growth. The Company expects to invest between $15 million and $18 million in capital expenditures during 2019.

 

During 2019, the Company utilized revolver borrowings to fund working capital to support the growth seen from fourth quarter 2018 along with the payment of annual incentive compensation amounts.  The cash used in financing activities in first quarter 2018 reflects the use of the revolver to partially finance the acquisition of the Maval OE Steering business.  At March 31, 2019, we had $129,502 of obligations under the Revolving Facility excluding the unamortized debt issue costs.

 

The Credit Agreement contains certain financial covenants related to minimum interest coverage and total leverage ratio at the end of each quarter. The 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 our assets. We were in compliance with all covenants at March 31, 2019.

 

As of March 31, 2019, the amount available to borrow under the Credit Agreement was approximately $45,498.  The Credit Agreement matures in October 2021.

 

There were no borrowings for the China Facility balance during the quarter ended March 31, 2019.

 

The Company declared dividends of $0.030 per share during the first quarter 2019 and $0.025 per share during the first quarter of 2018.  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 Credit Agreement.

 

Item 3.  Qualitative and Quantitative Disclosures about Market Risk

 

Foreign Currency

 

We have foreign operations in The Netherlands, Sweden, Germany, China, Portugal, Czech Republic, Canada and Mexico, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Czech Krona, Canadian dollar and Mexican pesos, respectively.  We continuously evaluate our foreign currency risk and will take action from time to time in order to best mitigate these risks.  A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $3,500 on our first quarter 2019 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 during the quarter ended March 31, 2019 decreased sales in comparison to quarter ended March 31, 2018 by approximately $3,100.

 

We translate all assets and liabilities of our foreign operations, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translate sales and expenses at the average exchange rates in effect during the period.  The net effect of these translation adjustments is recorded in the Condensed Consolidated Financial Statements as Comprehensive Income.  The translation adjustment was a loss of approximately $900 and a gain of approximately $600 for the first quarter

 

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of 2019 and 2018, respectively.  Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries.  Net foreign currency transaction gains and losses included in other income, net amounted to approximately a loss of $100 and $138 for the first quarters of 2019 and 2018, respectively.  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 $6,700 on our foreign net assets as of March 31, 2019.

 

Interest Rates

 

Interest rates on our Revolving Facility are based on the LIBOR plus a margin of 1.00% to 2.25% (currently 2.0%) or the Prime Rate plus a margin of 0% to 1.25% (currently 1.0%), 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. During October 2013, the Company entered into two interest rate swaps with a combined notional of $25,000 that amortized quarterly to a notional of $6,673 at the September 2018 maturity. Neither of these interest rate swaps is currently active, one was liquidated as part of the 2016 debt refinancing and the other matured in September 2018.   In February 2017, we entered into three interest rate swaps with a combined notional of $40,000 that matures in February 2022.

 

As of March 31, 2019, we had $129,502 outstanding under the Revolving Facility, of which $40,000 is currently being hedged.  Refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for additional information about our outstanding debt.  A hypothetical one percentage point (100 basis points) change in the Base Rate on the $85,462 of unhedged floating rate debt outstanding at March 31, 2019 would have approximately a $200 impact on our interest expense for the first quarter of 2019.

 

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Item 4.  Controls and Procedures

 

Conclusion regarding the effectiveness of disclosure controls and procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2019. 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 March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

Changes in internal control over financial reporting

 

During the quarter ended March 31, 2019, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.                                              OTHER INFORMATION

 

Item 1A.  Risk Factors

 

There have been no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2018, except to the extent factual information disclosed elsewhere in this form 10-Q relates to such risk factors.  For a full discussion of these risk factors, please refer to “Item 1A. Risk Factors” in the 2018 Annual Report in Form 10-K.

 

Item 5.  Other Information

 

The Company held its annual stockholders’ meeting on May 1, 2019.  At the annual meeting, the stockholders of the Company (i) elected the seven director nominees, (ii) approved, on an advisory basis, the compensation awarded to the Company’s Named Executive Officers, (iii) ratified the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2018 fiscal year.

 

The results of the voting for the seven director nominees were as follows:

 

Nominee

 

For

 

Against

 

Abstentions

 

Broker Non-votes

Linda P. Duch

 

7,005,813

 

30,398

 

3,382

 

1,472,228

Richard D. Federico

 

6,983,785

 

52,428

 

3,380

 

1,472,228

Gerald J. Laber

 

7,002,833

 

33,380

 

3,380

 

1,472,228

Richard D. Smith

 

7,005,275

 

31,619

 

2,699

 

1,472,228

James J. Tanous

 

6,985,050

 

51,162

 

3,381

 

1,472,228

Richard S. Warzala

 

6,992,487

 

46,188

 

  918

 

1,472,228

Michael R. Winter

 

6,985,576

 

50,612

 

3,405

 

1,472,228

 

The results for the advisory vote on executive compensation were as follows:

 

For

 

Against

 

Abstentions

 

Broker Non-Votes

6,926,031

 

99,446

 

14,116

 

1,472,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The results for the advisory vote on the frequency of future advisory votes on executive compensation:

 

1 Year

 

2 Years

 

3 Years

 

Abstentions

 

Broker Non-Votes

6,590,759

 

11,309

 

430,960

 

6,565

 

1,472,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26


Table of Contents

 

The results of the voting for the ratification of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2019 fiscal year were as follows:

 

For

 

Against

 

Abstentions

8,466,691

 

35,610

 

9,520

 

 

 

 

 

 

 

 

 

 

 

Item 6.          Exhibits

 

(a)                            Exhibits

 

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from Allied Motion Technologies Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations and comprehensive income, (iii) condensed consolidated statements of cash flows and (iv) the notes to the consolidated financial statements.

 

27


Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DATE:

May 1, 2019

 

ALLIED MOTION TECHNOLOGIES INC.

 

 

 

 

 

 

By:

/s/ Michael R. Leach

 

 

Michael R. Leach

 

 

Chief Financial Officer

 

28


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