Item 1. Business
Item 1. Business.
OVERVIEW
Allied Motion Technologies Inc. (“Allied Motion” or the “Company” or “we” or “our”) is a global company that designs, manufactures and sells precision and specialty controlled motion components and systems used in a broad range of industries. Our target markets include Vehicle, Medical, Aerospace & Defense (A&D), and Industrial. We are headquartered in Amherst, NY, and have global operations and sell to markets across the United States, Canada, South America, Europe and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical and electronic motion technology. Our products include brush and brushless DC (BLDC) motors, brushless servo and torque motors, coreless DC motors, integrated brushless motor-drives, gearmotors, gearing, modular digital servo drives, motion controllers, incremental and absolute optical encoders, active and passive filters for power quality and harmonic issues, and other controlled motion-related products.
Allied Motion was established in 1962 under the laws of Colorado and operates in the United States, Canada, Mexico, Europe and Asia-Pacific. We are headquartered in Amherst, New York and the mailing address of our corporate headquarters is 495 Commerce Drive, Suite 3, Amherst, New York 14228. The telephone number at this location is (716) 242-8634. Our website is www.alliedmotion.com. We trade under the ticker symbol “AMOT” on the NASDAQ exchange.
The Company maintains a website at www.alliedmotion.com. We make available, free of charge on or through our website our annual reports on Form 10 K, quarterly reports on Form 10 Q, current reports on Form 8 K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.
We have a Code of Ethics for our chief executive officer and president and senior financial officers regarding their obligations in the conduct of Company affairs. We also have a Code of Ethics and Business Conduct that is applicable to all directors, officers and employees. The Codes are available on our website. We intend to disclose on our website any amendment to, or waiver of, the Codes that would otherwise be required to be disclosed under the rules of the SEC and the Nasdaq Global Market. A copy of both Codes is also available in print to any stockholder upon written request addressed to Allied Motion Technologies Inc., 495 Commerce Drive, Suite 3, Amherst, NY 14228 2313, Attention: Secretary.
IMPACT OF COVID-19
The ongoing global COVID-19 pandemic has resulted, and may continue to result, in significant disruptions to the United States (“U.S.”) and global economies and has, and may continue to, adversely affect our business, including our supply chain and operations. We have also experienced, and expect to continue to experience, temporary reductions in customer demand in some of our served markets. During 2020, the impact of social distancing measures, the reduced operational status of our suppliers and reductions in production at certain facilities adversely impacted our operations. We expect general business uncertainty will continue to negatively impact demand in several of our served markets into 2021. During 2020, the impact of COVID- 19 on our operations was most pronounced in areas that serve our Vehicle, Industrial and Aerospace & Defense markets. However, during the last half of 2020, we experienced a solid recovery in our Vehicle market as order activity rebounded.
In response to the worldwide outbreak, we have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners, suppliers, and communities. We enacted rigorous safety measures in all of our sites, including implementing social distancing protocols, requiring work from home for those employees that do not need to be physically present on the manufacturing floor or in a lab to perform their work, suspending travel, implementing temperature checks at the entrances to our facilities, extensively and frequently disinfecting our workspaces and providing masks and other protective equipment to those employees who must be physically present. We implemented these measures on a worldwide basis and are continuing to monitor and act in accordance with government authorities’
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requirements and recommendations. We will continue to act in the best interests of our employees, customers, partners, suppliers and communities.
We responded to the outbreak with a recognition that our Company provides essential and important products, including those that our customers rely on to address this crisis. We manufacture and deliver critical controlled motion components, including electronic drives, motors and control assemblies to manufacturers of medical equipment including respirators, ventilators, infusion pumps, medical fluid pumps and other breathing assist equipment required to care for patients with respiratory issues including those caused as the result of COVID-19 pandemic. We are a long-term, qualified supplier to leading medical device manufacturers of ventilators and respirators around the world.
Global demand and capacity to produce ventilators increased significantly in 2020 and we continue to be a reliable supplier of the critical controlled motion components it requires. The Company has rapidly deployed resources to increase production capacity to meet the surge in demand for certain types of medical products related to combatting the COVID-19 virus. We also continue to provide solutions to suppliers of other types of medical equipment, including surgical tools and equipment, surgical robots, diagnostic equipment, test equipment, patient mobility and rehabilitation equipment, hospital beds and mobile equipment carts.
Our worldwide locations are considered to be essential suppliers to our customers and therefore most of our locations have remained substantially operational during the outbreak while implementing enhanced safety procedures. Our facility in China was shut down for a small portion of the first quarter of 2020 but since then has continued to be fully operational. Our facility in Reynosa, Mexico experienced a brief shutdown in the second quarter of 2020 that did not continue into the remainder of the year. These facilities are currently fully operational.
We have taken actions since the beginning of the COVID-19 pandemic to strengthen our liquidity and financial condition. In February 2020, we renewed and increased our revolving credit facility (“Amended Revolving Facility”) to $225 million through February 2025 (refer to Note 7, Debt Obligations from our consolidated financial statements). Through this amendment we lowered our cost of debt and secured more favorable covenants. While part of our pre-COVID- 19 planning, this liquidity preserves our financial flexibility during the pandemic. During 2020, we paid down nearly $17 million of debt while maintaining a robust cash balance to cover our short-term needs. We believe that our cash flows from operations and borrowing capacity are sufficient to support our short and long-term liquidity needs.
To conserve cash while supporting growth plans, we continue to align variable costs with demand, maintain key engineering capabilities, restrict hiring activity and wage increases and tightly control discretionary spending. The Company continues to closely monitor events and conditions resulting from the COVID-19 pandemic and the related impact on all forms of incentive compensation.
The extent of the future impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments on a global scale, including the duration, spread and intensity of the pandemic and the successful distribution and acceptance of vaccines for COVID-19, all of which are uncertain and difficult to predict. We will continue to proactively respond to the situation and will take further actions as warranted to alter our business operations as necessary.
ACQUISITION
Dynamic Controls Group : On March 7, 2020, we acquired Dynamic Controls Group (“Dynamic Controls”), a wholly owned subsidiary of Invacare Corporation, a market-leading designer and manufacturer of equipment for the medical mobility and rehabilitation markets. Dynamic Controls provides the Company with market leading electronic control solutions and products that further strengthen our medical market position, as well as enable us to further develop higher level solutions with embedded electronics across our other major served markets. The acquisition of Dynamic Controls allows us to build out our ability to leverage controlled motion system solutions in a wide range of markets.
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MARKETS AND APPLICATIONS
One of the Company’s growth initiatives includes product line platform development to meet the emerging needs of its selected target markets. The platform development emphasizes a combination of technologies to create increased value solutions for customers. The emphasis on new opportunities has allowed the Company to evolve from being an individual component provider to becoming a solutions provider whereby the new opportunities utilize multiple of the Company’s technologies in a system solution approach. The Company believes this approach will allow it to provide increased value to its customers and improved margins for the Company. Our strong financial condition, along with Allied Systematic Tools (“AST”) continuous improvement initiatives in quality, delivery, and cost provide a positive outlook for the continued long-term growth and profitability of the Company.
The Company’s growth strategy is focused on becoming the recognized controlled motion solution leader in its selected target markets by further developing its products and services platform to utilize multiple Allied Motion technologies to create increased value solutions for its customers. Our strategy further defines Allied Motion as being a “technology/know-how” driven company and to be successful, the Company continues to invest in its areas of excellence.
The Company sells its products into a subset of the following broad markets:
Vehicle : electronic power steering and drive-by-wire applications to electrically replace, or provide power-assist to, a variety of mechanical linkages, traction / drive systems and pumps, automated and remotely guided power steering systems, various high performance vehicle applications, actuation systems (e.g., lifts, slide-outs, covers, etc.), HVAC systems, solutions to improve energy efficiency of vehicles while idling and alternative fuel systems such as LPG, fuel cell and hybrid vehicles. Vehicle types include off- and on-road construction and agricultural equipment; trucks, buses, boats, utility, recreational (e.g., RVs, ATVs (all-terrain vehicles), specialty automotive, automated and remotely guided vehicles) .
Medical : surgical robots, prosthetics, electric powered surgical hand pieces, programmable pumps to meter and administer infusions associated with chemotherapy, pain control and antibiotics, nuclear imaging systems, radiology equipment, automated pharmacy dispensing equipment, kidney dialysis equipment, respiratory ventilators, heart pumps, and patient handling equipment (e.g., wheel chairs, scooters, stair lifts, patient lifts, transport tables and hospital beds). The Company’s sales generated from its March 2020 acquisition of Dynamic Controls are included within this market.
Aerospace & Defense : inertial guided missiles, mid-range smart munitions systems, weapons systems on armed personnel carriers, unmanned vehicles, security and access control, camera systems, door access control, airport screening and scanning devices.
Industrial : products are used in factory automation, specialty equipment, material handling equipment, commercial grade floor polishers and cleaners, commercial building equipment such as welders, cable pullers and assembly tools, the handling, inspection, and testing of components and final products such as PCs, high definition printers, tunable lasers and spectrum analyzers for the fiber optic industry, test and processing equipment for the semiconductor manufacturing industry, power quality products to filter distortion caused by variable frequency drives and other power electronic equipment.
OTHER FACTORS IMPACTING OUR OPERATIONS
Sales and Marketing
We design and develop our products within our Technology Centers and can manufacture these products in various facilities located in the United States, Canada, Mexico, Europe and Asia-Pacific. We also operate Allied Motion Solution Centers that evaluate and focus all Allied Motion products to create integrated controlled motion solutions for our customers. We sell our products and solutions globally to a broad spectrum of customers through our own direct sales force and authorized manufacturers’ representatives and distributors. Our customers include end users and original equipment manufacturers (“OEMs”).
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Allied Motion Sales Organization:
The Company’s sales organization continues to evolve with the goal of becoming the best sales and service force in its industry. Through the One Team approach for providing controlled motion solutions and components that best address customers’ needs, the Company has broadened the knowledge and skills of its direct sales force, while creating sales and service support in its Solution Centers. This enables the entire sales organization to be capable of selling all products designed, developed and produced by Allied Motion globally. The Company’s primary channels to market include the direct sales force and external authorized Sales Representatives, Agents and Distributors that provide field coverage in Asia-Pacific, Europe, Canada, Israel and the Americas. While the majority of the Company’s sales are directly to OEMs, it is working to expand its market reach through Distribution channels.
Allied Motion Solution Centers :
Allied Motion has Solution Centers in China, Europe and North America that enable the design and sale of individual component products as well as integrated controlled motion systems that utilize multiple Allied Motion products and technology. In addition to providing sales and applications support, the solution center function may include final assembly, integration and tests as required to support customers within their geographic region.
Sales Backlog:
Backlog as of December 31, 2020 was $141,344 compared with $124,950 as of December 31, 2019. The time to convert the majority of backlog to sales is approximately three to six months. Given the short product lead times, we do not believe that the amount of our backlog of orders is a reliable indication of our future sales. We may on occasion receive multi-year orders from customers for product to be delivered on demand over that time frame. There is no assurance that the Company’s backlog from these customers will be converted into revenue.
Major Customer
Sales to one customer were 15% and 16% of total sales in 2020 and 2019, respectively. We believe the diversification of the target markets we serve reduces our exposure to negative developments with any single customer.
Competitive Environment
Our products and solutions are sold into the global market with a large and diverse group of competitors that vary by product, geography, industry and application. We believe the controlled motion market is highly fragmented with many competitors, some of which are substantially larger and have greater resources than Allied Motion. We believe our competitive advantages include our electro-magnetic, mechanical and electronic controlled motion expertise, the breadth of our motor technologies and our ability to integrate these technologies with our encoders, gearing, power electronics, digital control technologies and network/feedback communications capabilities, as well as our global presence. Unlike many of our competitors, we are unique in our ability to provide custom-engineered controlled motion solutions that integrate the products we manufacture such as embedded or external electrical control solutions with our motors. We compete on technological capabilities, quality, reliability, service responsiveness, delivery speed and price. Our competitors include Altra Industrial Motion Corp., Ametek, Inc., Parker Hannifin Corporation and other smaller competitors.
Availability of Parts and Raw Materials
We purchase critical raw materials from a limited number of suppliers due to the technically challenging requirements of the supplied product and/or the lengthy process required to qualify these materials both internally and with our customers. We cannot quickly establish additional or replacement suppliers for these materials in some cases because of these rigid requirements. For these critical raw materials, we maintain minimum safety stock levels and partner with suppliers through contract to help ensure the continuity of supply. As a result of the COVID-19 pandemic, we have faced and are facing increased operational challenges from workplace disruptions and restrictions on the movement of raw materials and goods, both at our own facilities and at our customers and suppliers, leading to increases in prices and freight costs. As we seek to secure supply during these uncertain times, we have increased the levels of certain inventories to put us in the position to meet the needs of our customers.
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Patents, Trademarks, Licenses, Franchises and Concessions
We hold a number of patents and trademarks for components manufactured by our various subsidiaries, and we have several patents pending on new products recently developed, which are considered to be of significance.
Working Capital Items
We currently maintain inventory levels adequate for our short-term needs based upon present levels of production. We consider the component parts of our different product lines to be generally available and current suppliers to be reliable and capable of satisfying anticipated needs under normal conditions. As discussed herein, as a result of the COVID-19 pandemic, we have experienced increased costs and have purposely increased certain inventories to deal with global supply chain issues.
Engineering and Development Activities
Our engineering and development (E&D) activities are for the development of new products, enhancement of the functionality, effectiveness and reliability of current products, to redesign products to reduce the cost of manufacturing of products or to expand the types of applications for which our products and solutions can be used. Our engineering and development expenditures for the years ended December 31, 2020 and 2019 were $25,487 and $23,086, respectively, or 7.0% of sales in 2020, and 6.2% of sales in 2019. The increase was a result of the Dynamic Controls acquisition. We believe E&D is critical to our success and expect to continue to invest at these levels in the future. Of these expenditures, no material amounts were charged directly to customers, although we record non-recurring engineering charges to certain customers for custom engineering required to develop products that meet the customer’s specifications.
Environmental Issues
No significant pollution or other types of hazardous emission result from the Company’s operations and it is not anticipated that our operations will be materially affected by Federal, State or local provisions concerning environmental controls. Our costs of complying with environmental, health and safety requirements have not been material.
We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on our business or markets that we serve, nor on our results of operations, capital expenditures or financial position. We will continue to monitor emerging developments in this area.
International Operations
Our operations outside the United States are conducted through wholly-owned foreign subsidiaries and are located primarily in Europe and Asia-Pacific. Our international operations are subject to the usual risks inherent in international trade, including currency fluctuations, local government contracting regulations, local governmental restrictions on foreign investment and repatriation of profits, exchange controls, regulation of the import and distribution of foreign goods, as well as changing economic and social conditions in countries in which our operations are conducted. The information required by this item is set forth in Note 13, Segment Information, of the notes to consolidated financial statements contained in Item 8 of this report.
Human Capital
Employment
At December 31, 2020, we employed approximately 1,770 full-time employees worldwide. Of those, approximately 48% are located in North America, 40% are located in Europe and the remainder are located in Asia-Pacific.
Employee Health and Safety
The Company complies in all respects with the national and local laws of the jurisdictions in which we operate regarding workers safety and health. The Company strives to continuously improve employee safety and health through consistent
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measurement and reporting on progress and leading indicators. It has programs that emphasize that each employee in the organization is responsible for safety in the workplace. The Company provides a comprehensive safety program that focuses on a zero-incident mindset by providing ongoing training opportunities and review of safety activities and initiative. This clearly visible effort encourages employee engagement and active management and leadership involvement.
Human Capital Management
The Company believes that its workforce is one of the Company’s greatest assets, and it has a proactive human capital management and talent development program. The Compensation Committee recognizes human capital as a key driver of long-term value and is responsible for oversight of the Company’s human capital management and talent development programs.
● Attraction: The Company competes within each world-wide market for a finite number of skilled and talented workers. The Company leverages our broad resources and reputation to deliver an outstanding career experience to its candidates and our employees.
● Engagement: The Company strives to provide engaging and meaningful career opportunities for its employees, so they can thrive and be satisfied in our technology and innovation-based culture.
● Development: The Company strengthens its employees’ skills and experiences through diverse career development and learning opportunities, both internal and external. This emphasizes the Company’s key attribute as a compelling place to work and grow at all levels.
● Retention: The Company supports a workplace that provides an environment of trust, personal and professional development and work-life balance is vital to its successful retention of engaged, top-notch talent.
Diversity and Inclusion
The Company is committed to apply fair labor practices while respecting the national and local laws of the countries and communities where we have operations. The Company is committed to providing equal opportunity in all aspects of employment. The Company does not engage in or tolerate unlawful conduct, including discrimination, intimidation, or harassment. The Company strives to establish relationships with key organizations and associations that foster diversity and inclusion initiatives in the communities where it is located. The Company is committed to identifying a talented and innovative workforce by building a diverse and inclusive pipeline of talent. The Compensation Committee is responsible for the oversight of the Company’s diversity and inclusion initiatives.
Ethical Business Practices
The Company is dedicated to conducting its business with integrity and responsibility. The Company promotes honest and ethical conduct, and the Board has adopted a Code of Ethics and Business Conduct which applies to all employees, directors, and officers. The Company does not tolerate human rights abuses, human trafficking and or slavery, the use of child labor and will not engage or be complicit in any activity that solicits or encourages human rights abuse .