ALLIED MOTION TE(AMOT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion, market risk disclosures, and internal controls Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, statements of stockholders' equity, and cash flows, along with detailed notes explaining the basis of preparation, significant accounting policies, and specific financial line items Condensed Consolidated Balance Sheets – Unaudited Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Total Assets | $585,494 | $588,347 | | Total Liabilities | $348,700 | $372,882 | | Total Stockholders' Equity | $236,794 | $215,465 | | Cash and cash equivalents | $24,120 | $30,614 | | Long-term debt | $227,106 | $235,454 | Condensed Consolidated Statements of Income and Comprehensive Income (Loss) – Unaudited Financial Performance (Three Months Ended June 30, in thousands, except per share data) | Metric | 2023 | 2022 | YoY Change (%) | | :----------------------- | :----- | :----- | :------------- | | Revenues | $146,769 | $122,722 | 19.6% | | Gross profit | $45,977 | $39,774 | 15.6% | | Operating income | $12,020 | $7,518 | 59.9% | | Net income | $6,769 | $4,581 | 47.8% | | Diluted earnings per share | $0.42 | $0.29 | 44.8% | Financial Performance (Six Months Ended June 30, in thousands, except per share data) | Metric | 2023 | 2022 | YoY Change (%) | | :----------------------- | :----- | :----- | :------------- | | Revenues | $292,318 | $237,507 | 23.1% | | Gross profit | $91,811 | $73,234 | 25.4% | | Operating income | $23,409 | $11,783 | 98.7% | | Net income | $13,084 | $7,084 | 84.7% | | Diluted earnings per share | $0.81 | $0.45 | 80.0% | Condensed Consolidated Statements of Stockholders' Equity – Unaudited - Total Stockholders' Equity increased to $236,794 thousand at June 30, 2023, from $215,465 thousand at December 31, 2022[12] - Net income contributed $6,769 thousand (Q2 2023) and $6,315 thousand (Q1 2023) to retained earnings[12] - Share issuance in connection with acquisition added $6,250 thousand in Q1 2023[12] Condensed Consolidated Statements of Cash Flows – Unaudited Cash Flow Summary (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | | :------------------------------------------ | :----- | :----- | | Net cash provided by (used in) operating activities | $17,273 | $(290) | | Net cash used in investing activities | $(12,368) | $(50,923) | | Net cash (used in) provided by financing activities | $(11,092) | $58,781 | | Net (decrease) increase in cash and cash equivalents | $(6,494) | $6,383 | | Cash and cash equivalents at end of period | $24,120 | $28,846 | Notes to Condensed Consolidated Financial Statements – Unaudited Note 1. BASIS OF PREPARATION AND PRESENTATION - Allied Motion Technologies Inc. designs, manufactures, and sells precision and specialty-controlled motion components and systems for vehicle, medical, aerospace and defense, and industrial markets[16] - The unaudited condensed consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries, with all intercompany accounts and transactions eliminated[17] - Foreign subsidiary assets and liabilities are translated into U.S. dollars using end-of-period exchange rates, with translation adjustments included in accumulated other comprehensive loss[18] Note 2. ACQUISITIONS - Acquired FPH Group Inc. and Transtar International, LLC ('FPH') on May 30, 2022, for a final purchase price of $41,316 thousand[23] - Acquired ThinGap, Inc. and Airex, LLC in June 2022 for a collective purchase price of $16,618 thousand[24] - A deferred acquisition payment of $12,500 thousand for Spectrum Controls, Inc. was paid in January 2023 (50% cash, 50% Company stock), with one remaining payment of $12,500 thousand due by January 3, 2024[26] Pro Forma Financial Information (Six Months Ended June 30, 2022, if acquisitions occurred Jan 1, 2021, in thousands) | Metric | Pro Forma | As Reported | | :----------------------- | :-------- | :---------- | | Revenues | $248,322 | $237,507 | | Income before income taxes | $12,943 | $9,454 | Note 3. REVENUE RECOGNITION - Revenue is generally recognized at a single point in time when control of products transfers to the customer, typically upon shipment[29] Revenue by Target Market (Six Months Ended June 30, in thousands) | Target Market | 2023 | 2022 | YoY Change (%) | | :------------------ | :----- | :----- | :------------- | | Industrial | $128,845 | $92,911 | 38.7% | | Vehicle | $65,570 | $65,137 | 0.7% | | Medical | $44,562 | $41,513 | 7.3% | | Aerospace & Defense | $40,266 | $26,593 | 51.4% | | Distribution and Other | $13,075 | $11,353 | 15.2% | Revenue by Geography (Six Months Ended June 30, in thousands) | Geography | 2023 | 2022 | YoY Change (%) | | :------------------------ | :----- | :----- | :------------- | | North America (primarily U.S.) | $198,332 | $156,430 | 26.8% | | Europe | $78,223 | $65,871 | 18.7% | | Asia-Pacific | $15,763 | $15,206 | 3.7% | Note 4. INVENTORIES Inventories (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------------- | :------------ | :---------------- | | Parts and raw materials | $85,742 | $89,100 | | Work-in-process | $13,387 | $11,686 | | Finished goods | $16,969 | $16,322 | | Total | $116,098 | $117,108 | Note 5. PROPERTY, PLANT AND EQUIPMENT - Property, plant, and equipment, net was $68,518 thousand at June 30, 2023, a slight decrease from $68,640 thousand at December 31, 2022[41] - Depreciation expense for the six months ended June 30, 2023, was $6,384 thousand, comparable to $6,404 thousand in the prior year period[41] Note 6. GOODWILL - Goodwill increased to $127,987 thousand at June 30, 2023, from $126,366 thousand at December 31, 2022[42] - The increase was primarily due to measurement period adjustments of acquisitions ($1,356 thousand) and the effect of foreign currency translation ($265 thousand)[42] Note 7. INTANGIBLE ASSETS Intangible Assets, Net (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Customer lists | $74,340 | $78,001 | | Trade name | $7,860 | $8,420 | | Design and technologies | $30,960 | $32,654 | | Total Net Book Value | $113,160 | $119,075 | - Amortization expense for intangible assets was $6,151 thousand for the six months ended June 30, 2023, up from $5,079 thousand in the prior year period[43] - Estimated future intangible asset amortization expense for the remainder of 2023 is $6,073 thousand[44] Note 8. STOCK-BASED COMPENSATION - 123,601 shares of unvested restricted stock were awarded during the six months ended June 30, 2023, at a weighted average market value of $41.53[46] - Stock-based compensation expense, net of forfeitures, was $2,811 thousand for the six months ended June 30, 2023, compared to $2,490 thousand in the prior year period[48] - Outstanding restricted stock at June 30, 2023, was 411,816 shares[48] Note 9. ACCRUED LIABILITIES Accrued Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :------------------------------ | :------------ | :---------------- | | Compensation and fringe benefits | $13,292 | $15,818 | | Accrued business acquisition consideration | $12,444 | $12,500 | | Warranty reserve | $2,225 | $2,160 | | Income taxes payable | $1,710 | $3,934 | | Operating lease liabilities - current | $4,575 | $4,224 | | Finance lease obligations - current | $394 | $377 | | Contract liabilities | $3,620 | $4,807 | | Other accrued expenses | $7,129 | $4,301 | | Total | $45,389 | $48,121 | Note 10. DEBT OBLIGATIONS - Long-term debt decreased to $227,106 thousand at June 30, 2023, from $235,454 thousand at December 31, 2022[50] - The Amended Revolving Credit Facility is a $280 million facility with a maturity date of February 2025, bearing interest at Adjusted SOFR plus an applicable margin (1.75% at June 30, 2023)[51][52] - The Company was in compliance with all debt covenants as of June 30, 2023, with $61,234 thousand of unused capacity under the Amended Revolving Facility[53][54] Note 11. DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses foreign currency contracts with 30-day maturities to hedge short-term balance sheet exposure, with notional amounts of $17,872 thousand at June 30, 2023[57] - Interest rate swaps are used to manage exposure to interest rate movements on variable-rate debt, with combined notional amounts of $60,000 thousand (matures Dec 2024) and $40,000 thousand (matures Dec 2026)[58] - The Company estimates that $3,930 thousand will be reclassified as a decrease to interest expense over the next twelve months related to its interest rate derivatives[60] Note 12. FAIR VALUE - The Company categorizes fair value measurements into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[66] Financial Assets at Fair Value (June 30, 2023, in thousands) | Asset (Liability) | Level 1 | Level 2 | Level 3 | | :-------------------------- | :------ | :------ | :------ | | Pension plan assets | $5,730 | — | — | | Deferred compensation plan assets | $4,141 | — | — | | Foreign currency hedge contract assets | — | $30 | — | | Foreign currency hedge contract liabilities | — | $(27) | — | | Interest rate swaps, net | — | $6,675 | — | | Contingent consideration | — | — | $(4,100) | - Contingent consideration of $(4,100) thousand is a Level 3 fair value measurement, valued using a Monte Carlo valuation model or probability-weighted discounted cash flow analysis[67] Note 13. INCOME TAXES Effective Income Tax Rate | Period | 2023 | 2022 | | :-------------------------- | :----- | :----- | | Three months ended June 30 | 23.9% | 27.0% | | Six months ended June 30 | 23.6% | 25.1% | - The effective tax rate for both periods includes discrete tax benefits primarily related to share-based awards[69] - The Company expects its income tax rate for the full year 2023 to be approximately 24% to 26%[101] Note 14. LEASES Supplemental Cash Flow Information for Leases (Six Months Ended June 30, in thousands) | Metric | 2023 | 2022 | | :------------------------------------ | :----- | :----- | | Cash paid for operating leases | $2,796 | $2,290 | | Cash paid for interest on finance lease obligations | $214 | $368 | | Assets acquired under operating leases | $1,888 | $2,770 | Total Lease Liabilities (June 30, 2023, in thousands) | Lease Type | Total Lease Liabilities | | :--------------- | :---------------------- | | Operating Leases | $22,132 | | Finance Leases | $9,209 | - During the three months ended June 30, 2023, the Company entered into a lease amendment for one manufacturing facility, resulting in a $700 thousand reduction of both the ROU asset and lease liability[71] Note 15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME - Accumulated Other Comprehensive Loss (AOCI) was $(11,461) thousand at June 30, 2023, compared to $(11,963) thousand at December 31, 2022[73][74] - Foreign currency translation adjustment resulted in a loss of $(426) thousand for the three months ended June 30, 2023, and a gain of $928 thousand for the six months ended June 30, 2023[73][74] - Unrealized gain on cash flow hedges was $1,877 thousand for the three months ended June 30, 2023, and $1,131 thousand for the six months ended June 30, 2023[73][74] Note 16. DIVIDENDS PER SHARE - The Company declared a quarterly dividend of $0.03 per share in Q2 2023 and $0.025 per share in Q1 2023 and Q1/Q2 2022[75] - Total dividends declared were $879 thousand for the six months ended June 30, 2023, compared to $776 thousand in the prior year period[75] Note 17. EARNINGS PER SHARE Weighted-Average Shares Outstanding (Three Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Basic weighted average shares outstanding | 15,969 | 15,355 | | Diluted weighted average shares outstanding | 16,219 | 15,932 | Weighted-Average Shares Outstanding (Six Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Basic weighted average shares outstanding | 15,921 | 15,226 | | Diluted weighted average shares outstanding | 16,178 | 15,752 | Note 18. SEGMENT INFORMATION - The Company operates in one reportable segment for the manufacture and marketing of controlled motion products[78] - Revenue shipped to U.S. customers comprised 58% for the three months ended June 30, 2023 and 2022, and 57% for the six months ended June 30, 2023 and 2022[79] - For the three months ended June 30, 2023, Customer A accounted for 12% of revenues and Customer B accounted for 10% of revenues. Customer A represented 16% of trade receivables at June 30, 2023[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, discussing overall business environment, detailed operating results for the three and six months ended June 30, 2023, non-GAAP financial measures, and liquidity and capital resources Overview - Allied Motion is a global company that designs, manufactures, and sells precision and specialty-controlled motion products and solutions[85] - Target markets include Industrial, Vehicle, Medical, and Aerospace & Defense (A&D)[85] - The Company is headquartered in Amherst, NY, with operations in the United States, Canada, Mexico, Europe, and Asia-Pacific[85] Business Environment - The ongoing threat of COVID-19 continues to create uncertainties and disruptions to the Company and the global economy[86] - Inflation negatively impacted input costs (labor and materials) and pricing during 2022 and into the first half of 2023[87] - The Company is focused on successfully integrating recent acquisitions (three in Q2 2022 and three in Q4 2021) to drive future growth and profitability[90] Operating Results - Three months ended June 30, 2023 compared to three months ended June 30, 2022 Key Financials (Three Months Ended June 30, in thousands, except per share data) | Metric | 2023 | 2022 | Variance ($) | Variance (%) | | :-------------------------- | :----- | :----- | :----------- | :----------- | | Revenues | $146,769 | $122,722 | $24,047 | 20% | | Gross profit | $45,977 | $39,774 | $6,203 | 16% | | Gross margin percentage | 31.3% | 32.4% | | -1.1 pp | | Operating income | $12,020 | $7,518 | $4,502 | 60% | | Interest expense | $3,162 | $1,525 | $1,637 | 107% | | Net income | $6,769 | $4,581 | $2,188 | 48% | | Diluted earnings per share | $0.42 | $0.29 | $0.13 | 45% | - Organic revenue growth was 17% during the second quarter of 2023[92] - Bookings decreased by 2% to $137,008 thousand, and backlog decreased by 8% to $298,695 thousand, primarily due to normalization of order patterns[93] Operating Results - Six months ended June 30, 2023 compared to six months ended June 30, 2022 Key Financials (Six Months Ended June 30, in thousands, except per share data) | Metric | 2023 | 2022 | Variance ($) | Variance (%) | | :-------------------------- | :----- | :----- | :----------- | :----------- | | Revenues | $292,318 | $237,507 | $54,811 | 23% | | Gross profit | $91,811 | $73,234 | $18,577 | 25% | | Gross margin percentage | 31.4% | 30.8% | | 0.6 pp | | Operating income | $23,409 | $11,783 | $11,626 | 99% | | Interest expense | $6,145 | $2,563 | $3,582 | 140% | | Net income | $13,084 | $7,084 | $6,000 | 85% | | Diluted earnings per share | $0.81 | $0.45 | $0.36 | 80% | - Organic revenue growth was 21% during the year to date 2023[106] - Bookings decreased by 12% to $260,206 thousand, and backlog decreased by 8% to $298,695 thousand, primarily due to normalization of order patterns and unfavorable currency impact[107] Non-GAAP Measures - Management uses non-GAAP measures like Revenue excluding foreign currency exchange impacts, EBITDA, Adjusted EBITDA, Adjusted net income, and Adjusted diluted earnings per share to evaluate operating results, excluding items not indicative of ongoing operations[119][120] Revenue Excluding Foreign Currency Exchange Impacts (Six Months Ended June 30, 2023, in thousands) | Metric | Amount | | :------------------------------------ | :----- | | Revenue as reported | $292,318 | | Currency impact unfavorable (favorable) | $3,662 | | Revenue excluding foreign currency exchange impacts | $295,980 | Adjusted Financials (Six Months Ended June 30, in thousands, except per share amounts) | Metric | 2023 (Amount) | 2023 (Per Diluted Share) | 2022 (Amount) | 2022 (Per Diluted Share) | | :------------------------------------ | :------------ | :----------------------- | :------------ | :----------------------- | | Net income as reported | $13,084 | $0.81 | $7,084 | $0.45 | | Adjusted net income | $18,405 | $1.14 | $13,357 | $0.85 | | EBITDA | $35,799 | | $24,548 | | | Adjusted EBITDA | $39,406 | | $29,100 | | Liquidity and Capital Resources - Cash and cash equivalents decreased by $6,494 thousand to $24,120 thousand at June 30, 2023[128] - Net cash provided by operating activities significantly increased to $17,273 thousand for the six months ended June 30, 2023, from $(290) thousand in the prior year, driven by increased sales and efficient working capital conversion[129][130] - Net cash used in investing activities decreased to $(12,368) thousand for the six months ended June 30, 2023, from $(50,923) thousand in the prior year, primarily due to lower acquisition cash considerations[129][131] - The Company was in compliance with all debt covenants as of June 30, 2023, with $61,234 thousand unused under the Amended Revolving Facility[133][134] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, specifically foreign currency exchange rate fluctuations and interest rate movements, and the strategies employed to mitigate these risks, including the use of derivative financial instruments Foreign Currency - International operations expose the Company to foreign currency exchange rate fluctuations in various currencies (Euro, Swedish Krona, Chinese Renminbi, Mexican pesos, etc.)[137][139] - A hypothetical 10% change in the U.S. dollar value would impact sales by approximately $4,914 thousand for Q2 2023 and $10,016 thousand for YTD Q2 2023[137] - Foreign currency exchange rate fluctuations decreased revenues by $410 thousand for Q2 2023 and $3,662 thousand for YTD Q2 2023[137] Interest Rates - Interest rates on the Amended Credit Agreement are based on Term SOFR plus a margin, which was 1.75% at June 30, 2023[140] - The Company uses interest rate swaps to manage exposure to interest rate movements on its variable-rate debt, with $100,000 thousand currently hedged out of $218,766 thousand outstanding under the Amended Revolving Facility[141] - A hypothetical one percentage point change in the Base Rate on the $118,766 thousand of unhedged floating rate debt would impact interest expense by approximately $300 thousand for Q2 2023 and $600 thousand for YTD Q2 2023[141] Item 4. Controls and Procedures This section details the management's evaluation of the effectiveness of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Conclusion regarding the effectiveness of disclosure controls and procedures - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023[143] Changes in internal control over financial reporting - There were no material changes in the Company's internal control over financial reporting during the quarter ended June 30, 2023[144] PART II. OTHER INFORMATION This section covers updates on risk factors, details of unregistered equity sales, a list of filed exhibits, and official report signatures Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, apart from factual updates within this Form 10-Q - No material changes to the risk factors disclosed in the Company's Form 10-K for the year ended December 31, 2022, except for factual information disclosed elsewhere in this Form 10-Q[145] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on shares withheld by the Company to cover tax withholding obligations related to stock vesting, clarifying that these were not part of a public repurchase program - 39,007 shares were withheld by the Company during the quarter ended June 30, 2023, at an average price of $38.63 per share, to satisfy tax withholding obligations in connection with the vesting of stock[146] - The Company did not have an authorized stock repurchase plan in place at June 30, 2023[146] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various certifications and XBRL-related documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) and 18 U.S.C. Section 1350[147] - Inline XBRL Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are also filed[147] SIGNATURES This section contains the official signature block for the Form 10-Q, indicating its due authorization and filing date - The report was signed on August 2, 2023, by Michael R. Leach, Senior Vice President & Chief Financial Officer, on behalf of ALLIED MOTION TECHNOLOGIES INC[148]