ALLIENT INC - Quarter Report: 2016 June (Form 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 June 30, 2016

 

Commission File Number

0-04041

 

 

ALLIED MOTION TECHNOLOGIES INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

495 Commerce Drive, Suite 3

Amherst, New York 14228

(Address of Principal Executive offices, including 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company 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:  9,396,469 as of August 4, 2016

 

 

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 Cash Flows — Unaudited	3
		Notes to Condensed Consolidated Financial Statements - Unaudited	4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.		Controls and Procedures	23
PART II.		OTHER INFORMATION
Item 1A.		Risk Factors	23
Item 5.		Other Information	24
Item 6.		Exhibits	24

 

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

		June 30, 2016			December 31, 2015
Assets
Current Assets:
Cash and cash equivalents		$	10,362		$	21,278
Trade receivables, net of allowance for doubtful accounts of $783 and $611 at June 30, 2016 and December 31, 2015, respectively		31,965			22,710
Inventories, net		30,079			26,175
Prepaid expenses and other assets		2,904			3,749
Total Current Assets		75,310			73,912
Property, plant and equipment, net		38,626			35,315
Deferred income taxes		1,533			2,548
Intangible assets, net		36,288			29,984
Goodwill		28,095			17,757
Other long term assets		3,902			2,631
Total Assets		$	183,754		$	162,147
Liabilities and Stockholders’ Equity
Current Liabilities:
Debt obligations		21,055			9,860
Accounts payable		14,492			13,000
Accrued liabilities		13,901			11,121
Total Current Liabilities		49,448			33,981
Long-term debt		52,555			57,518
Deferred income taxes		2,875			630
Deferred compensation arrangements		3,413			2,636
Pension and post-retirement obligations		4,177			2,785
Total Liabilities		112,468			97,550
Commitments and Contingencies
Stockholders’ Equity:
Common stock, no par value, authorized 50,000 shares; 9,396 and 9,276 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		29,078			27,824
Preferred stock, par value $1.00 per share, authorized 5,000 shares; no shares issued or outstanding		—			—
Retained earnings		51,244			46,650
Accumulated other comprehensive loss		(9,036		)	(9,877		)
Total Stockholders’ Equity		71,286			64,597
Total Liabilities and Stockholders’ Equity		$	183,754		$	162,147

 

See accompanying notes to condensed consolidated financial statements.

 

1

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

		For the three months ended						For the six months ended
		June 30,						June 30,
		2016			2015			2016			2015
Revenues		$	65,835		$	60,479		$	129,510		$	120,059
Cost of goods sold		46,222			42,492			91,620			84,572
Gross margin		19,613			17,987			37,890			35,487
Operating costs and expenses:
Selling		2,635			2,063			5,059			4,271
General and administrative		5,878			5,822			12,287			11,375
Engineering and development		4,174			3,707			8,224			7,153
Business development		135			—			218			—
Amortization of intangible assets		828			660			1,607			1,322
Total operating costs and expenses		13,650			12,252			27,395			24,121
Operating income		5,963			5,735			10,495			11,366
Other expense (income):
Interest expense		1,590			1,511			3,122			3,026
Other expense, net		(130		)	(19		)	(115		)	(285		)
Total other expense, net		1,460			1,492			3,007			2,741
Income before income taxes		4,503			4,243			7,488			8,625
Provision for income taxes		(1,561		)	(1,118		)	(2,419		)	(2,524		)
Net income		$	2,942		$	3,125		$	5,069		$	6,101
Basic earnings per share:
Earnings per share		$	0.31		$	0.34		$	0.54		$	0.66
Basic weighted average common shares		9,343			9,264			9,312			9,225
Diluted earnings per share:
Earnings per share		$	0.31		$	0.34		$	0.54		$	0.66
Diluted weighted average common shares		9,343			9,264			9,312			9,225
Net income		$	2,942		$	3,125		$	5,069		$	6,101
Foreign currency translation adjustment		(1,066		)	917			963			(3,562		)
Change in accumulated (loss) income on derivatives		(17		)	41			(122		)	(59		)
Comprehensive income (loss)		$	1,859		$	4,083		$	5,910		$	2,480

 

See accompanying notes to condensed consolidated financial statements.

 

2

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		For the six months ended
		June 30,
		2016			2015
Cash Flows From Operating Activities:
Net income		$	5,069		$	6,101
Adjustments to reconcile net income to net cash (used in) provided by operating activities (net of working capital acquired):
Depreciation and amortization		4,850			3,665
Deferred income taxes		859			555
Stock compensation expense		974			926
Other		(314		)	272
Changes in operating assets and liabilities:
Trade receivables		(8,992		)	(5,975		)
Inventories, net		689			(1,514		)
Prepaid expenses and other assets		1,389			(666		)
Accounts payable		(39		)	1,757
Accrued liabilities		(2,810		)	(1,519		)
Net cash provided by operating activities		1,675			3,602
Cash Flows From Investing Activities:
Consideration paid for acquisition, net of cash acquired ($2,329)		(16,049		)	—
Purchase of property and equipment		(2,382		)	(2,708		)
Net cash used in investing activities		(18,431		)	(2,708		)
Cash Flows From Financing Activities:
Borrowings on lines-of-credit, net		9,534			1,398
Principal payments of long-term debt		(3,750		)	(3,000		)
Dividends paid to stockholders		(473		)	(468		)
Stock transactions under employee benefit stock plans		268			223
Net cash provided by (used in) financing activities		5,579			(1,847		)
Effect of foreign exchange rate changes on cash		261			(824		)
Net decrease in cash and cash equivalents		(10,916		)	(1,777		)
Cash and cash equivalents at beginning of period		21,278			13,113
Cash and cash equivalents at end of period		$	10,362		$	11,336

 

See accompanying notes to condensed consolidated financial statements.

 

3

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and 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 motion control solutions, which include integrated system solutions as well as individual motion control products, to a broad spectrum of customers throughout the world primarily for the commercial motor, industrial motion, automotive control, 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 significant inter-company accounts and transactions have been eliminated in consolidation.

 

The assets and liabilities of the Company’s international subsidiaries are translated into U.S. dollars using end of period exchange rates.  Changes in reported amounts of assets and liabilities of international subsidiaries that occur as a result of changes in exchange rates between international subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment.  Foreign currency translation adjustment is included in accumulated other comprehensive income, a component of stockholders’ equity in the accompanying condensed consolidated balance sheets.  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 Technology Unit (“TU”) 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 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, 2015 that was previously filed by the Company.

 

Reclassifications

 

Certain items in the prior year’s consolidated financial statements and notes to consolidated financial statements have been reclassified to conform to the 2016 presentation.

 

2.              ACQUISITION

 

Acquisition of Heidrive

 

In December 2015, the Company, through its wholly-owned subsidiary, Allied Motion Technologies B.V., entered into a Share Purchase Agreement (the “Purchase Agreement”) to purchase all of the outstanding equity interests of Heidrive GmbH, a German limited liability company (“Heidrive”) from palero fünf S.à r.l for $22,000 (approximately €20,000), which included certain management performance bonuses to be paid after closing.

 

The adjusted purchase price as of January 12, 2016 is $18,378 (€16,924).  At the end of the first quarter, the adjusted purchase price was $19,329 (€17,800). During the second quarter, the purchase price was reduced by $951 (€876) for a seller concession that was finalized.

 

4

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

The purchase price was funded with cash of $7,519 ($8,470 less the Seller concession of $951, or €6,924) plus $10,859 (€10,000) of borrowings under the Company’s international revolving credit facility (Note 9).

 

Heidrive is headquartered in Kelheim, Germany, and has manufacturing facilities located in the Germany and the Czech Republic.

 

The Company incurred $467 of transaction costs in 2015 and $98 in 2016 related to the acquisition of Heidrive.  Transaction costs are included in Business Development expenses on the consolidated statements of income and comprehensive income.

 

The purchase price was allocated to the underlying net assets based on fair value as of the acquisition date, as follows (in thousands):

 

		January 12, 2016
Cash		$	2,329
Other current assets		5,652
Property, plant and equipment		4,002
Amortizable intangible assets		7,710
Goodwill		10,025
Current liabilities		(7,696		)
Long-term liabilities		(3,644		)
Net purchase price		$	18,378

 

The purchase price allocation has been revised to reflect an updated valuation of intangible assets and property, plant and equipment.  The purchase price allocation may be subject to further adjustment to reflect, among other things, any adjustments to income taxes and the offsetting adjustments to goodwill.

 

The intangible assets acquired consist of customer lists, tradename, and technology.  Goodwill generated in the acquisition is related to the assembled workforce, synergies between Allied Motion’s other Technology Units (“TUs”) that will 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 Heidrive’s management knowledge in providing complementary product offerings to the Company’s customers.

 

3.              INVENTORIES

 

Inventories include costs of materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out basis) or market, as follows (in thousands):

 

		June 30, 2016			December 31, 2015
Parts and raw materials		$	24,556		$	23,710
Work-in-process		5,076			2,404
Finished goods		5,296			3,730
		34,928			29,844
Less reserves		(4,849		)	(3,669		)
Inventories, net		$	30,079		$	26,175

 

5

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

4.              PROPERTY, PLANT AND EQUIPMENT

 

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

 

		June 30, 2016			December 31, 2015
Land		$	974		$	970
Building and improvements		9,875			9,771
Machinery, equipment, tools and dies		42,943			37,782
Furniture, fixtures and other		9,986			8,657
		63,778			57,180
Less accumulated depreciation		(25,152		)	(21,865		)
Property, plant and equipment, net		$	38,626		$	35,315

 

Depreciation expense was approximately $1,752 and $1,198 for the quarters ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, depreciation expense was $3,243 and $2,343, respectively.

 

5.              GOODWILL

 

The change in the carrying amount of goodwill for the quarter ended June 30, 2016 and year ended December 31, 2015 is as follows (in thousands):

 

		June 30,			December 31,
		2016			2015
Beginning balance		$	17,757		$	18,303
Goodwill acquired (Note 2)		10,025			—
Effect of foreign currency translation		313			(546		)
Ending balance		$	28,095		$	17,757

 

6.              INTANGIBLE ASSETS

 

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

 

				June 30, 2016									December 31, 2015
		Life		Gross Amount			Accumulated amortization			Net Book Value			Gross Amount			Accumulated amortization			Net Book Value
Customer lists		8 - 15 years		$	38,183		$	(8,996	)	$	29,187		$	34,149		$	(7,785	)	$	26,364
Trade name		10 - 17 years		6,108			(2,040		)	4,068			4,775			(1,793		)	2,982
Design and technologies		8 - 15 years		4,780			(1,765		)	3,015			2,189			(1,570		)	619
Patents				24			(6		)	18			24			(5		)	19
Total				$	49,095		$	(12,807	)	$	36,288		$	41,137		$	(11,153	)	$	29,984

 

Intangible assets acquired from the Heidrive acquisition were approximately $7,710 (Note 2).

 

Amortization expense for intangible assets was $828 and $660 for the quarters ending June 30, 2016 and 2015, respectively; and $1,607 and $1,322 for the six months ended June 30, 2016 and 2015, respectively.

 

6

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

Estimated future intangible asset amortization expense as of June 30, 2016 is as follows (in thousands):

 

		Estimated Amortization Expense
Remainder of 2016		$	1,602
2017		3,204
2018		3,204
2019		3,204
2020		3,204
Thereafter		21,870
Total estimated amortization expense		$	36,288

 

7.              STOCK-BASED COMPENSATION

 

Stock Incentive Plans

 

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

 

Restricted Stock

 

For the six months ended June 30, 2016, 101,791 shares of unvested restricted stock were awarded at a weighted average market value of $20.02.  Of the restricted shares granted, 58,813 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 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 six months ended June 30, 2016:

 

		Number of shares
Outstanding at beginning of period		367,199
Awarded		101,791
Vested		(105,950	)
Forfeited		(6,445	)
Outstanding at end of period		356,595

 

Stock based compensation expense, net of forfeitures of $461 and $502 was recorded for the quarter ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, stock compensation expense, net of forfeitures, of $974 and $926 was recorded, respectively.

 

7

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

8.              ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

		June 30, 2016			December 31, 2015
Compensation and fringe benefits		$	6,698		$	7,791
Warranty reserve		1,070			780
Other accrued expenses		6,133			2,550
		$	13,901		$	11,121

 

9.              DEBT OBLIGATIONS

 

Debt obligations consisted of the following (in thousands):

 

				June 30, 2016			December 31, 2015
Current Borrowings
Revolving Credit Facility				$	9,829		$	—
China Credit Facility (6.4% at June 30, 2016)				1,570			1,641
Term Loan, current portion, (2.5% at June 30, 2016)		(1	)	9,656			8,219
Current borrowings				$	21,055		$	9,860
Long-term Debt
Term Loan, noncurrent (2.5% at June 30, 2016)		(1	)	$	23,719		$	28,906
Subordinated Notes (14.5%, 13% Cash, 1.5% PIK)				30,000			30,000
Unamortized debt issuance costs				(1,164		)	(1,388		)
Long-term debt				$	52,555		$	57,518

 

(1)    The effective rate of the Term Loan including the impact of the related hedges is 2.79%.

 

Credit Agreement

 

On January 8, 2016, the Company entered into a First Amendment and Consent (the “Amendment”) to the Credit Agreement with Bank of America, N.A., as administrative agent, and the lenders party thereto (as amended, the “Credit Agreement”).  Pursuant to the Amendment, the administrative agent and lenders consented to the Company’s acquisition of Heidrive GmbH, and that such acquisition would not reduce the acquisition basket under the Credit Agreement.  The Amendment also amends the Credit Agreement to increase the revolving credit facility from $15,000 to $30,000 and the international revolving sublimit from $10,000 to $25,000.

 

The Credit Agreement provides for the $30,000 Revolving Credit Facility and a $50,000 Term Loan (collectively the “Senior Credit Facilities”) each with a five year term that matures in 2018.

 

Borrowings under the Senior Credit Facilities are subject to terms defined in the Credit Agreement.  Borrowings bear interest at either the Base Rate plus a margin of 0.25% to 2.00% (currently 1.50%) or the Eurocurrency Rate plus a margin of 1.25% to 3.00% (currently 2.00%), in each case depending on the Company’s ratio of total funded indebtedness to Consolidated EBITDA (the “Total Leverage Ratio”).

 

Principal installments are payable on the Term Loan in varying percentages quarterly through September 30, 2018 with a balloon payment at maturity.  The Senior Credit Facilities are secured by substantially all of the Company’s assets.  The average outstanding borrowings for 2016 for the Senior Credit Facilities were $47,000.  At June 30, 2016, there was approximately $20,200 available under the Senior Credit Facilities.  These amounts reflect the face value of the borrowings without adjustment for unamortized debt issue costs.

 

8

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

The Credit Agreement contains certain financial covenants related to maximum leverage and minimum fixed charge coverage.  The Credit Agreement also includes other covenants and restrictions, including limits on the amount of certain types of capital expenditures.  The Company was in compliance with all covenants at June 30, 2016.

 

Senior Subordinated Notes

 

Under the Company’s Note Agreement, the Company sold $30,000 of 14.50% Senior Subordinated Notes due October 18, 2019 (the “Notes”) to Prudential Capital Partners IV, L.P. and its affiliates in a private placement.  The interest rate on the Notes is 14.50% with 13.00% payable in cash and 1.50% payable in-kind, quarterly in arrears and the outstanding principal amount of the Notes, together with any accrued and unpaid interest is due on October 18, 2019.  The Company may prepay the Notes at any time after October 18, 2016, in whole or in part, at 100% of the principal amount.  The Notes are unsecured obligations of the Company and are fully and unconditionally guaranteed by certain of the Company’s subsidiaries.

 

On January 8, 2016, the Company entered into a Consent and Amendment No. 3 to the Note Agreement with Prudential Capital Partners IV, L.P. and its affiliates.  Pursuant to the Note Amendment, the note holders consented to the Company’s acquisition of Heidrive GmbH and that such acquisition would not reduce the acquisition basket under the Note Agreement.

 

Other

 

The China Facility provides credit of approximately $1,810 (Chinese Renminbi (“RMB”) 12,000).  The China Facility is used for working capital and capital equipment needs at the Company’s China operations, and will mature in November, 2017.  The average balance for 2016 was $1,620 (RMB 10,600).  At June 30, 2016, there was approximately $240 (RMB 1,570) available under the facility.

 

Maturities of long-term debt are as follows:

 

		Total
Remainder of 2016		$	21,054
2017		10,374
2018		13,346
2019		30,000
Total		$	74,774

 

10.       DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company is exposed to certain risk 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 Interest Rate Swaps with a combined notional of $25,000 (representing 50% of the Term Loan balance at that time) that amortize quarterly

 

9

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

to a notional of $6,673 at maturity.  The notional amount changes over time as loan payments are made.  As of June 30, 2016 the amount hedged was $16,688.

 

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 and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  During 2016 and 2015, 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 June 30, 2016 and 2015.

 

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.  The Company estimates that an additional $95 will be reclassified as an increase to interest expense over the next year.

 

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 tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015 (in thousands):

 

				Fair Value
Derivative Instrument		Balance Sheet Classification		June 30, 2016			December 31, 2015
Interest Rate Swaps		Other Liabilities		$	149		$	27

 

The effect of the Company’s derivative financial instruments on the condensed consolidated statement of income and comprehensive income is as follows (in thousands):

 

		Net deferral in OCI of derivatives (effective portion)
		For the quarter ended June 30,						For the six months ended June 30,
Derivative Instruments		2016			2015			2016			2015
Interest Rate Swaps		$	(48	)	$	(9	)	$	(184	)	$	(160	)

 

		Net reclassification from AOCI into income (effective portion)
		For the quarter ended June 30,						For the six months ended June 30,
Statement of earnings classification		2016			2015			2016			2015
Interest expense		$	(30	)	$	(50	)	$	(62	)	$	(101	)

 

11.                               FAIR VALUE

 

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

 

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

 

10

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

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.

 

The following table presents the Company’s financial assets that are accounted for at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, respectively, by level within the fair value hierarchy (in thousands):

 

		June 30, 2016
		Level 1			Level 2			Level 3
Assets
Pension Plan Assets		$	4,916		$	—		$	—
Other long term assets		3,408			—			—
Interest rate swaps		—			(149		)	—

 

		December 31, 2015
		Level 1			Level 2			Level 3
Assets
Pension Plan Assets		$	4,986		$	—		$	—
Other long term assets		2,631			—			—
Interest rate swaps		—			(27		)	—

 

12.       INCOME TAXES

 

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

 

The Company has net operating loss and tax credit carryforwards in certain international jurisdictions expiring through 2017.  The Company evaluates the future realizability of the tax loss and credit carryforwards considering the anticipated future earnings and tax planning strategies in the international jurisdictions.

 

The effective income tax rate as a percentage of income before income taxes was 34.7% and 26.3% for the second quarter 2016 and 2015, respectively and 32.3% and 29.3% for the six months ended June 30, 2016 and 2015, respectively.  The effective tax rate for the second quarter 2016 contains a discrete tax provision of 0.1% ($7) and for the first six months of 2016 contains a discrete tax benefit of 2.0% ($153) related to the adoption of ASU 2016-09.   The effective rate before discrete item for 2016 and 2015 varies from the statutory rate due to permanent differences, state taxes and the difference in US and international tax rates and the mix of international and domestic income.

 

11

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

The Company adopted ASU No. ASU No. 2016-09 prospectively as of January 1, 2016 and ASU No. 2015-17 retrospectively in the second quarter 2016.   These pronouncements impact the accounting and disclosure for income taxes (refer to Note 17).

 

13.       COMMITMENTS AND CONTINGENCIES

 

Warranty

 

The Company offers warranty coverage for its products.  The length of the warranty period for its products varies significantly based on the product being sold.  The Company estimates the costs of repairing products under warranty based on the historical average cost of the repairs.  The assumptions used to estimate warranty accruals are reevaluated periodically in light of actual experience and, when appropriate, the accruals are adjusted.  Estimated warranty costs are recorded at the time of sale of the related product, and are considered a cost of sale.

 

Changes in the Company’s reserve for product warranty claims for the quarter ended June 30, 2016 and the year ended December 31, 2015 were as follows (in thousands):

 

		June 30, 2016			December 31, 2015
Warranty reserve at beginning of the year		$	780		$	786
Warranty reserves acquired		297			—
Provision		31			142
Warranty expenditures		(49		)	(123		)
Effect of foreign currency translation		11			(25		)
Warranty reserve at end of the period		$	1,070		$	780

 

Litigation

 

The Company is involved in certain actions that have arisen out of the ordinary course of business. Management believes that resolution of the actions will not have a significant adverse effect on the Company’s consolidated financial position or results of operations.

 

14.       ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Accumulated Other Comprehensive Income for the quarter ended June 30, 2016 and 2015 is comprised of the following (in thousands):

 

		Defined Benefit Plan Liability			Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
At March 31, 2016		$	(688	)	$	(131	)	$	(7,133	)	$	(7,952	)
Unrealized loss on cash flow hedges		—			(48		)	—			(48		)
Amounts reclassified from AOCI		—			30			—			30
Foreign currency translation loss		—			—			(1,066		)	(1,066		)
At June 30, 2016		$	(688	)	$	(149	)	$	(8,199	)	$	(9,036	)

 

12

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

		Defined Benefit Plan Liability			Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
At March 31, 2015		$	(853	)	$	(102	)	$	(9,307	)	$	(10,262	)
Unrealized loss on cash flow hedges		—			(9		)	—			(9		)
Amounts reclassified from AOCI		—			50			—			50
Foreign currency translation gain		—			—			917			917
At June 30, 2015		$	(853	)	$	(61	)	$	(8,390	)	$	(9,304	)

 

Accumulated Other Comprehensive Income for the six months ended June 30, 2016 and 2015 is comprised of the following (in thousands):

 

		Defined Benefit Plan Liability			Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
At December 31, 2015		$	(688	)	$	(27	)	$	(9,162	)	$	(9,877	)
Unrealized loss on cash flow hedges		—			(184		)	—			(184		)
Amounts reclassified from AOCI		—			62			—			62
Foreign currency translation gain		—			—			963			963
At June 30, 2016		$	(688	)	$	(149	)	$	(8,199	)	$	(9,036	)

 

		Defined Benefit Plan Liability			Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
At December 31, 2014		$	(853	)	$	(2	)	$	(4,828	)	$	(5,683	)
Unrealized loss on cash flow hedges		—			(160		)	—			(160		)
Amounts reclassified from AOCI		—			101			—			101
Foreign currency translation loss		—			—			(3,562		)	(3,562		)
At June 30, 2015		$	(853	)	$	(61	)	$	(8,390	)	$	(9,304	)

 

The realized (gain) loss relating to the Company’s interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income and included in Interest Expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

 

15.       DIVIDENDS PER SHARE

 

The Company declared a quarterly dividend of $0.025 per share in each of the first and second quarters of 2016 and 2015.  Total dividends declared in the first six months of 2016 and 2015 were $475 and $464, respectively.

 

13

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

16.       SEGMENT INFORMATION

 

ASC Topic “Segment Reporting” requires disclosure of operating segments, which as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

The Company operates in one segment for the manufacture and marketing of motion control products for original equipment manufacturers and end user applications.  In accordance with the “Segment Reporting” Topic of the ASC, 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, major customers, and the countries in which the entity holds material assets and reports revenue.  All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes.  Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying condensed consolidated financial statements and within this note.

 

The Company’s wholly owned international subsidiaries, located in The Netherlands, Sweden, Germany, Portugal, China and Mexico are included in the accompanying condensed consolidated financial statements.

 

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

 

		For the three months ended						For the six months ended
		June 30,						June 30,
		2016			2015			2016			2015
Revenues derived from international subsidiaries		$	26,313		$	20,791		$	51,920		$	38,218

 

Identifiable international assets were $79,715 and $56,444 as of June 30, 2016 and December 31, 2015, respectively.

 

Revenues derived from international 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 $29,659 and $21,714 during the quarter ended June 30, 2016 and 2015, respectively; and $58,234 and $41,528 for the six months ended June 30, 2016 and 2015, respectively.

 

For second quarter 2016 and 2015, one customer accounted for 19% and 23% of revenues, respectively; and for the year to date 2016 and 2015 for 19% and 23%, respectively.  As of June 30, 2016 and December 31, 2015, this customer represented 16% of trade receivables.  For second quarter 2015, another customer accounted for 10% of revenues; and as of June 30, 2016 and December 31, 2015, this customer represented 14% and 16% of trade receivables, respectively.

 

17.       RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently adopted accounting pronouncements

 

Effective January 1, 2016, the Company adopted ASU 2016-09, “Compensation — Stock Compensation (Topic 718).”  The FASB issued ASU 2016-09 in March 2016 as part of its simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016 using either prospective,

 

14

Table of Contents

 

ALLIED MOTION TECHNOLOGIES INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

 

retrospective or modified retrospective transition method, depending on the area covered in this update. As permitted within the amendment, the Company elected to early adopt and prospectively apply the provisions of this amendment as of January 1, 2016.  As a result of the adoption, a tax benefit of $160 was recorded in the first quarter.

 

Effective April 1, 2016, the Company adopted ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.”  Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position.  The Update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.  We early adopted this ASU for the first quarter of 2016, and we applied it retrospectively to 2015 for comparability, which resulted in the reclassification of $3,318 and $2,551 of current deferred tax assets to noncurrent as of June 30, 2016 and December 31, 2015.

 

Effective January 1, 2016 the Company adopted ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.”  This standard requires that an entity recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  The update requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  ASU 2015-16 did not have a material impact on the Company’s condensed consolidated financial statements.

 

Effective January 1, 2016, the Company adopted ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” on a retrospective basis.  The updated accounting guidance requires debt issuance costs to be presented as a deduction from the corresponding debt liability instead of the historical presentation as an unamortized debt issuance asset.  The impacts of adopting the new standard as of December 31, 2015, were a decrease in other assets and a decrease in long term debt of $1,388.

 

Recently issued accounting pronouncements

 

In February 2016, the FASB issued ASU 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.”  The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements.  The guidance is effective for reporting periods beginning after December 15, 2018.  ASU 2016-02 mandates a modified retrospective transition method.  The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.”  The standard applies to inventory that is measured using first-in, first-out (FIFO) or average cost.  An entity should measure inventory within the scope of the standard at the lower of cost and net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The amendments in ASU 2015-11 more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS).  The standard is effective for fiscal years beginning after December 15, 2016.  ASU 2015-11 is not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers.  The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.  The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract.  This accounting guidance will be effective for the Company beginning in the first quarter of fiscal year 2018 using one of two prescribed retrospective methods.  Early adoption is not permitted.  The Company has not yet selected a transition method, or determined the effect of the standard on its ongoing financial reporting.

 

15

Table of Contents

 

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 international 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 expressed in good faith 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 motion control components and systems used in a broad range of industries.  Our target markets include Vehicle, Medical, Aerospace & Defense, Electronics 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 motion control 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, and other motion control-related products.

 

Financial overview

 

The Company achieved a 9% increase in sales for the second quarter of 2016 compared to the prior year.  Results for the second quarter of 2016 were favorably impacted by our acquisition of Heidrive.  Sales to our medical, aerospace and defense and industrial markets had strong growth.  Our vehicle market declined slightly primarily due to end-of-life wind downs of several projects.  Earnings were 6% lower in the second quarter of 2016 compared to the prior year which reflects higher operating costs from increased investment in engineering and development for multi-product motion system offerings, the additional expense related to the Heidrive acquisition and the investments we continue to make to realign our organization for greater efficiency and accelerated growth.

 

16

Table of Contents

 

As we advance our global growth strategy and transformation to a precision motion control solutions provider, we are expanding our opportunity pipeline with new applications and new customers while focusing our resources toward higher margin, multi-product solutions.  We expect in time both scale and revenue diversity will help to diminish the variability of sales to specific markets and customers within quarters.

 

We continue to develop custom applications created for specific customer needs that utilize our extensive technical and engineering knowledge.  We are applying this capability to expand our customers and our geographic reach.  We are seeing traction with our efforts in new projects, with some moving into production this year and others planned for 2017 and beyond.  Our attention is on executing our strategy in what appears to be a continuing slow growth economic environment.

 

Operating Results

 

Quarter ended June 30, 2016 compared to quarter ended June 30, 2015

 

		For the quarter ended						2016 vs. 2015
		June 30,						Variance
(in thousands)		2016			2015			$			%
Revenues		$	65,835		$	60,479		$	5,356		9	%
Cost of goods sold		46,222			42,492			3,730			9	%
Gross margin		19,613			17,987			1,626			9	%
Gross margin percentage		29.8		%	29.7		%
Operating costs and expenses:
Selling		2,635			2,063			572			28	%
General and administrative		5,878			5,822			56			1	%
Engineering and development		4,174			3,707			467			13	%
Business development		135			—			135			100	%
Amortization of intangible assets		828			660			168			25	%
Total operating costs and expenses		13,650			12,252			1,398			11	%
Operating income		5,963			5,735			228			4	%
Interest expense		1,590			1,511			79			5	%
Other income (expense)		(130		)	(19		)	(111		)	584	%
Total other expense		1,460			1,492			(32		)	(2	)%
Income before income taxes		4,503			4,243			260			6	%
Provision for income taxes		(1,561		)	(1,118		)	(443		)	40	%
Net Income		$	2,942		$	3,125		$	(183	)	(6	)%
Effective tax rate		34.7		%	26.3		%	8		%	32	%
Diluted earnings per share		$	0.31		$	0.34		$	(0.03	)	(9	)%
Bookings		$	68,347		$	64,523		$	3,824		6	%
Backlog		$	80,742		$	75,605		$	5,137		7	%

 

NET INCOME:  Net income decreased during the second quarter as a result of a shift in the mix of income to international jurisdictions with higher tax rates.  Heidrive is included in our results as of January 12, 2016.

 

EBITDA AND ADJUSTED EBITDA:  EBITDA was $8,673 for the second quarter of 2016 compared to $7,612 for the same quarter last year.  Adjusted EBITDA was $8,446 and $8,114 for the second quarter of 2016 and 2015, respectively.  EBITDA and adjusted EBITDA are non-GAAP measurements.  EBITDA consists of income before interest expense, provision for

 

17