What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-09 compared with 2021-03-10 · 134 added, 139 removed, 188 unchanged (59% of the section changed)

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● Revenue was $403,516 for 2021 compared with $366,694 in 2020.

Our Medical market experienced strong growth of more than 61%, which included the contribution from Dynamic Controls, however all other market verticals experienced reduced demand as a result of the global economic impact of the COVID-19 pandemic.

The increase in revenues reflects improved sales in certain markets we serve, specifically Vehicle and Industrial.

The increase reflects the economic recovery and the increases in demand from many of our served markets, as certain markets were negatively affected in the prior year period due to the economic environment brought on by the COVID-19 pandemic .

Sales to U.S.

customers were 53% of total sales for 2020 and 57% of total sales for 2019, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific.

● Gross profit was $108,575 for 2020, a 4% decrease from $112,584 in 2019.

As a percentage of revenue, gross margin decreased 70 basis points to 29.6% as productivity and cost containment efforts helped to mostly offset the impact of lower revenue and higher tariffs, freight and duties.

customers were 54% of total sales for 2021 and 53% for 2020, with the balance of sales to customers primarily in Europe, Canada and Asia-Pacific.

● Gross profit was $121,056 for 2021, a 11% increase from $108,575 in 2020.

As a percentage of revenue, gross margin increased 40 basis points to 30.0% in 2021 from 29.6% in 2020.

The gross margin increase was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins.

The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers.

● Operating income was $26,026, or 6% of revenue, for 2021 compared with $22,994, or 6% of revenue, for 2020.

● Net income was $13,643, or $1.43 per diluted share, compared with $17,022, or $1.80 per diluted share, for 2019.

● Bookings were $370,712 for 2020 compared with $366,103 for 2019, an increase of 1%.

● Net income was $24,094 for 2021, or $1.66 per diluted share, compared with $13,643, or $0.95 per diluted share, for 2020.

Net income was 77% higher in 2021 compared to 2020, and earnings per diluted share increased by 75%.

These increases reflect the impact of increased revenue along with the effect of a $7,373 discrete tax benefit in the first quarter of 2021.

● Bookings were a record $468,449 for 2021 compared with $370,712 for 2020, an increase of 26%.

Backlog as of December 31, 2021 was $249,927, an increase of 77% from $141,344 at year end 2020.

● Debt of $120,079, net of cash of $23,131, increased by $599 to $96,948 at December 31, 2020 from debt of $109,765, net of cash of $13,416 of $96,349 at December 31, 2019.

● We declared and paid a dividend of $0.03 per share for each quarter of 2020 and 2019 pursuant to our quarterly dividend program.

Dividends to shareholders for 2020 and 2019 were $0.12 per diluted share.

The dividend payout ratio was 8% and 7% for 2020 and 2019, respectively when compared with the diluted earnings per share of $1.43 and $1.80, respectively.

The Company’s 2020 sales were 1% lower than in the prior year.

Our market position in the Medical market, combined with the acquisition of Dynamic Controls, nearly offset reductions in our other served markets, many of which were negatively impacted by the COVID-19 pandemic.

Net income was 19.9% lower in 2020 compared to 2019, and earnings per diluted share decreased by 20.6%.

These decreases reflect the impact of declines in the markets we serve and the supply chains we utilize due to market conditions impacted by the COVID-19 pandemic, along with incremental expenses from Dynamic Controls .

Included in backlog as of December 31, 2021 is $47,934 contributed by 2021 business acquisitions.

● Debt of $158,960, net of cash of $22,463, increased by $39,549 to $136,497 at December 31, 2021 from debt of $120,079, net of cash of $23,131 of $96,948 at December 31, 2020, primarily as a result of completing three acquisitions in the fourth quarter of 2021.

● We declared and paid a dividend of $0.02 in the first quarter of 2021 and $0.025 per quarter for the remainder of 2021, and paid a dividend of $0.02 per quarter in 2020 pursuant to our quarterly dividend program.

Dividends to shareholders for 2021 and 2020 were $0.095 and $0.08 per share, respectively.

dividend payout ratio was 6% and 8% for 2021 and 2020, respectively when compared with the diluted earnings per share of $1.66 and $0.95, respectively.

We remain focused on executing our strategy for growth while streamlining the organization and emphasizing continuous improvement in quality, delivery, cost and innovation as we drive the One Allied approach and expand our value proposition for our customers.

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Sales cycles are long and the time from being selected for the solution development to full rate production can be longer, yet we believe we continue to build a scalable foundation which can deliver strong returns on those investments.

Our growth strategy is focused on becoming the controlled motion solution leader in our selected target markets by further developing our products and services platform to utilize multiple Allied Motion technologies to create increased value solutions for our customers.

Our growth strategy is focused on becoming a leading global controlled motion solution provider in our selected target markets by further developing our products and services platform to utilize multiple Allied Motion technologies which create increased value solutions for our customers.

Our strategy further defines Allied Motion as being a “technology/know-how” driven company and to be successful, we continue to invest in our areas of excellence.

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First and foremost, we invest in our people as we believe that attracting and retaining the right people is the most important element in our strategy.

We will continue to invest in applied and design engineering resources.

We will continue to invest significantly in applied and design engineering resources.

Our strategic focus is addressing the critical issues that we believe are necessary to meet the stated long-term goals and objectives of the Company.

The majority of the critical issues are focused on growth initiatives for the Company.

One of these growth initiatives includes product line platform development to meet the emerging needs of our selected target markets.

The majority of the critical issues are focused on growth and profitability initiatives for the Company.

One of these initiatives includes product line platform development to meet the emerging needs of our target markets.

Our platform development emphasizes a combination of our technologies to create increased value solutions for our customers.

The emphasis with new opportunities has evolved from being an individual component provider to becoming a solutions provider whereby the new opportunities utilize multiple Allied Motion technologies in a system solution approach.

We believe this approach will allow us to provide increased value to our customers and improved margins for our Company.

We believe this approach will allow us to provide increased value to our customers and improved margins for our Company, and are demonstrated in our acquisitions completed in the fourth quarter of 2021.

Our strong financial condition, along with AST continuous improvement initiatives in quality, delivery, and cost allow us to have a positive outlook for the continued long-term growth of our Company.

Outlook for 2022

During 2020, we were able to navigate a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results.

Our fourth quarter 2020 performance was supported by record orders driven by favorable trends within our Medical markets, and exceptional engagement and focus on executing a significant recovery in our Vehicle market.

During 2021, we continued to navigate a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results.

We experienced record orders during 2021 reflecting increases in our Vehicle and Industrial markets.

This demand, combined with supply chain constraints, resulted in some inefficiencies and unintended costs as our teams worked hard to support and meet customer demand and schedules.

We also felt the impact of tariffs given the expiration of certain exemptions during the fourth quarter.

Ultimately, we believe we can mitigate these costs over time, though their impact is expected to continue over the coming quarters of 2021.

While the economic outlook for 2021 remains uncertain, we believe we are in a strong operational, financial and reputational position.

While the economic outlook for 2022 remains uncertain and we expect continued upward pressure on material and labor costs, we believe we are in a strong operational, financial and reputational position.

Our record level of backlog, diversified end market penetration and demonstrated agility position us well to perform across varied market trends and give us confidence that we can drive further efficiency, profitable growth and enhanced free cash flow while delivering long-term value for our shareholders.

In 2022, we will continue to focus on leveraging our resources to expand our business in our served markets.

In addition, we will continue to execute the ongoing critical issues as defined by our strategy, developed in 2017 and regularly updated since then.

In addition, we will continue to execute the ongoing critical issues as defined by our board approved strategy.

The critical issues from that strategy include:

1) Execute acquisition strategy to consolidate a fragmented market.

1) Create and drive a long-term global optimization strategy, including acquisitions, to consolidate a fragmented market .

2) Successfully integrate and realize the anticipated benefits from the three acquisitions completed in the fourth quarter of 2021.

3) Pursue target (niche) markets where we can gain a leadership market position.

3) Develop leading edge products to meet the emerging needs of our target markets.

4) Utilize lean tools to enhance company performance.

5) Execute our long-term strategy and set aggressive growth and profitability goals to measure our success.

4) Innovate leading edge products and solutions to meet the emerging needs of our target markets.

5) Develop a lean culture by utilizing our lean tool kit to enhance and continuously improve company performance.

6) Continuously develop talent throughout the organization through training and deployment of Allied Systematic Tools.

Allied Motion is an applied technology/know-how motion company, and to grow, we will continue to invest in the technical resources to ensure we can move forward with our mantra to “ create controlled motion solutions that change the game ” and to meet the emerging needs of our customers in our served market segments.

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We will continue to evaluate and find areas to leverage our current manufacturing and sales footprint to drive sales and improve efficiencies.

In addition to our strategy described above, time and resources will be spent to further understand the ESG ecosystem and developments impacting stakeholder expectations.

While the Company has a number of initiatives focused on individual components of ESG, we will begin to integrate ESG with our broader strategy and Enterprise Risk Management (ERM).

In addition to our strategy described above, time and resources have been spent during 2021 to further understand the ESG ecosystem and developments impacting stakeholder expectations and assess our performance.

The Company has a number of initiatives focused on individual components of ESG, and, under the oversight of the board of directors is continuing to integrate ESG with our broader strategy and Enterprise Risk Management (ERM).

The strategy will include looking to further enhance the Company’s ability to meet ongoing and emerging challenges, including the impacts of the COVID-19 pandemic.

Critical Accounting Estimates

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”).

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For further information regarding the application of these and other accounting policies, See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information.

The Company’s critical accounting estimates include:

The Company’s critical accounting policies and estimates include:

Revenue Recognition

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In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured.

Company establishes provisions for estimated returns and warranties.

The Company establishes provisions for estimated returns and warranties.

All contracts include a standard warranty clause to guarantee that the product complies with agreed specifications.

At December 31, 2020 and 2019, the accrual for future warranty obligations was $1,571 and $1,075, respectively.

The Company’s expense (income) for warranty obligations was $34 in 2020, $210 in 2019, and ($13) in 2018, respectively.

The length of the warranty period for the Company’s products is generally three months to two years and varies significantly based on the product sold.

The Company calculates its warranty expense provision based on its historical warranty experience and adjustments are made periodically to reflect actual warranty expenses.

If actual future sales returns and allowances are higher than the Company’s historical experience, additional accruals may be required.

Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value.

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However, variations in methods or assumptions could have a material impact on our results.

If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our net income.

If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-downs or expense a greater amount of overhead costs, which would negatively impact our net income.

As of December 31, 2021, we have $89,733 of inventory recorded on our consolidated balance sheet, representing approximately 19% of total assets.

A 1% write-down of our inventory would decrease our 2021 net income by approximately $627, or $0.04 per diluted share.

Valuation of Goodwill and Other Long-Lived Assets

We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our goodwill, intangible and other long-lived assets.

Goodwill and intangible assets determined to have an indefinite useful life are not amortized.

Instead, these assets are evaluated for impairment on an annual basis and whenever events or business conditions change that could indicate that the asset is impaired.

Definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.

Evaluation of Goodwill for impairment

We test the reporting unit’s goodwill for impairment as of October 31 st of each fiscal year and between annual tests if an event occurs or circumstances change that may indicate that the fair value of the reporting unit is below its carrying value.

In conducting this annual impairment testing, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value.

If not, no further goodwill impairment testing is required.

If it is more-likely-than-not that the reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its net book value.

If the net book value of the reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

In conducting this annual impairment test, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value.

If we determine that it is not more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, no further goodwill impairment testing is required.

If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

We performed a qualitative assessment of our single reporting unit as of October 31, 2021.

As part of this analysis, we evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall financial performance of our reporting unit.

The assessment indicated that it was more likely than not that the fair value of our reporting unit exceeded its respective carrying value, and as such, a quantitative assessment was not required.

The assessment indicated that it was more-likely-than-not that the fair value of our reporting unit exceeded its carrying amount, and as such, a quantitative assessment was not perfomed.

We do not believe that our reporting unit is at risk for impairment.

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These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

During the year ended December 31, 2021, we completed three business combinations for an aggregate purchase price of $102,169.

We identified and assigned value to identifiable intangible assets of customer lists, technology, and trade names, and estimated the useful lives over which these intangible assets would be amortized.

The estimates of fair values of these identifiable intangible assets were based upon discounted cash flow models, which include assumptions such as forecasted cash flows, customer attrition rates, discount rates, and royalty rates.

The fair value estimates resulted in identifiable intangible assets, in the aggregate, of $45,000.

The resulting goodwill, in the aggregate, from these three acquisitions was $46,431.

The contingent consideration fair value measurement, in connection with the acquisition of ALIO Industries (“ALIO”), of $4,900 is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy.

The Company determines the initial fair value of contingent consideration liabilities using a Monte Carlo valuation model, which involves a simulation of future earnings generated by ALIO during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.

Stock-based Compensation

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Interest expense

Other expense, net

Other (income) expense, net

Total other expense

Income before income taxes

Provision for income taxes

Income tax benefit (provision)

Effective tax rate

Diluted earnings per share

During 2020, the decrease in revenues reflects growth in the Medical market, including the contribution from Dynamic Controls, offset by declines in all other markets we serve due to reduced demand as a result of the global economic impact of the COVID-19 pandemic.

Our sales for 2020 were comprised of 53% to US customers and 47% to customers primarily in Europe, Canada and Asia.

The overall decrease in revenue was due to a 1.7% volume decrease partially offset with a 0.5% favorable currency impact.

The increase in revenues in 2021 reflects improved sales in certain markets we serve, specifically Vehicle and Industrial.

Our sales for 2021 were comprised of 54% to U.S.

customers and 46% to customers primarily in Europe, Canada and Asia-Pacific.

The overall increase in revenue was due to an 8% volume increase and a 2% favorable currency impact.

See information included in “Non – GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of revenue to revenue excluding foreign currency impacts.

Incremental revenues for 2022 from the three acquisitions completed in the fourth quarter of 2021, collectively, are forecasted to be approximately $60,000.

ORDER BOOKINGS AND BACKLOG:

The 26% increase in orders in 2021 compared to 2020 is due to a 24% increase in volume and a 2% favorable currency impact.

The order volume increases are primarily due to increases in the Medical market, offset by reduced demand in all other markets.

The increase in backlog is largely attributable to the Medical market.

Included in the current backlog is approximately $8 million of the previously announced $325 million of Vehicle market awards.

The Company has begun shipments for the first of four, seven-year awards, and all four awards are expected to concurrently be at full rate production in 2024.

The increase in bookings during 2021 compared to 2020 is largely due to increases in our Vehicle and Industrial markets reflecting improvements in the general economy along with growth in our core businesses.

The increase in backlog as of December 31, 2021, compared to December 31, 2020 was related to these factors as well as incremental backlog of $47,934 from the three acquisitions that were completed during the fourth quarter 2021.

GROSS PROFIT AND GROSS MARGIN:

The 4% decrease in gross profit was largely driven by reduced volume in our served markets and additional fixed costs associated with Dynamic Controls.

The 70 basis point decline in gross margin

was due to the impact of lower revenue and higher tariffs, freight, and duties related primarily to the COVID-19 pandemic, offset partially by c ost containment efforts also related to the COVID-19 pandemic .

Gross margins improved to 30.0% for 2021, compared to 29.6% for 2020.

The increase in gross margin percentage was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins.

The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers.

SELLING EXPENSES:

Selling expenses declined 7% during 2020 compared to last year.

The addition of expenses from Dynamic Controls was offset by cost control efforts related to the COVID-19 pandemic, specifically travel restrictions .

Selling expenses as a percentage of revenues were 4% for both 2020 and 2019.

Selling expenses increased 12% during 2021 compared to 2020 primarily due to higher incentive compensation which is tied to improved revenue and profitability.

Cost control efforts related to the COVID-19 pandemic in 2020, specifically travel restrictions, resulted in lower than normal expense levels compared to 2021.

Selling expenses as a percentage of revenues were comparable at 4% during 2021 and 2020.

GENERAL AND ADMINISTRATIVE EXPENSES:

General and administrative expenses increased by 2% during 2020 compared to 2019 due to the incremental expenses from Dynamic Controls and costs associated with ensuring employee safety and making other adjustments for the COVID-19 pandemic, partially offset by reduced incentive compensation and travel costs .

As a percentage of revenues, general and administrative expenses were 10% for both 2020 and 2019.

General and administrative expenses increased by 11% during 2021 compared to 2020 due primarily to increased costs associated with incentive compensation programs which are aligned with our revenue and profit growth.

Also, 2020 was favorably impacted by significant COVID-19 cost containment efforts.

As a percentage of revenues, general and administrative expenses were 11% and 10% in 2021 and 2020, respectively.

ENGINEERING AND DEVELOPMENT EXPENSES:

Engineering and development expenses increased by 9% in 2021 compared to 2020.

The increase is partially due to the addition of Dynamic Controls, whose focus is electronics and software engineering, and partially due to the continued ramp up of development projects to meet the future needs of target markets, as well as supporting growing customer application development needs.

As a percentage of revenues, engineering and development expenses increased to 7% for 2020 from 6% for 2019.

The increase is primarily due to the continued ramp up of development projects to meet the future needs of target markets, as well as supporting growing customer application development needs and higher incentive compensation which is tied to improved revenue and profitability.

As a percentage of revenues, engineering and development expenses were comparable at 7% for the year ended December 31, 2021 and 2020.

BUSINESS DEVELOPMENT COSTS:

The Company incurred $473 of business development costs during 2020 related to the acquisition of Dynamic Controls.

The Company incurred $113 of business development costs during 2019.

The increase in business development costs in 2021 compared to 2020 is due to additional acquisition related costs due to increased merger and acquisition activity, as well as $545 of costs in 2021 related to the Twinsburg plant consolidation.

AMORTIZATION OF INTANGIBLE ASSETS:

Amortization of intangible assets increased 4% in 2020 compared to 2019, from $5,718 to $5,928 due to the addition of Dynamic Controls.

Amortization of intangible assets increased 5% in 2021 compared to 2020, due to the inclusion of Dynamic Controls for the full year 2021 and the incremental amortization from the 2021 acquisitions.

INTEREST EXPENSE:

Interest expense decreased by 28% in 2020 compared to 2019 as the increase in our outstanding debt was offset by lower interest rates .

Interest expense decreased by 13% in 2021 compared to 2020 primarily due to a 27 basis point decrease in average interest rates paid during 2021 due to lower leverage, which decreases the Company’s margin under its credit facility, and the lower interest rate environment.

Additionally, interest expense declined due to lower average debt levels in 2021 compared to 2020 .

INCOME TAXES:

The effective income tax rate as a percentage of income before income taxes was 27.3% and 28.6% for the year ended December 31, 2020 and 2019, respectively.

For the year ended December 31, 2019, the effective tax rate included a discrete tax provision of 1.8% related to settlement of a tax audit in a foreign jurisdiction.

The effective rate before discrete items varies from the statutory rate primarily due to differences in state taxes, the impact of international tax provisions in the US, the difference in US and foreign tax rates and the mix of foreign and domestic income, section 162(m) compensation limits, and the benefit from the R&D tax credit.

Refer to Note 9, Income Taxes, of the notes to consolidated financial statements for a reconciliation of statutory rates to tax provision rates.

For 2021 and 2020, the effective income tax rate was (4.2%) and 27.3%, respectively.

The effective tax rate for 2021 includes a tax benefit of 32.3% related to the recognition of net operating loss carryforwards primarily resulting from tax legislation enacted in New Zealand and 5.6% related to investment tax credits recorded in 2021.

The effective rate for 2021 is partially offset by a 7.2% discrete tax provision related to a valuation allowance recorded on a foreign subsidiary’s deferred tax assets.

The Company expects its income tax rate for the full year 2022 to be approximately 24% to 26%.

NET INCOME AND ADJUSTED NET INCOME:

Net income decreased during 2020 compared to the same period in 2019 reflecting lower revenue resulting from the COVID-19 pandemic’s impact on volume and the resulting impact to margins along with increased operating expenses resulting from the Dynamic Controls acquisition .

Net income increased during 2021 compared to 2020 reflecting the impact of increased revenue, as well as the effect of a $7,373 discrete income tax benefit in the first quarter of 2021 .

Adjusted net income for the years ended December 31, 2021 and 2020 was $18,238 and $14,315, respectively.

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Adjusted net income and adjusted diluted earnings per share are non-GAAP measures.

Adjusted net income for 2020 excludes $1,035 ($752 net of tax) and for 2019 excludes $111 ($79 net of tax) of foreign currency losses.

Adjusted net income for 2020 excludes a non-income based tax assessment gain of $424.

Adjusted net income for 2019 excludes the non-income based tax assessment of $384 and the income tax charge of $433 related to a tax assessment in a foreign jurisdiction.

Adjusted net income for 2020 excludes $473 ($344 net of tax) and for 2019 excludes $113 ($81 net of tax) of business development costs.

See information included in “Non–GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of net income to Adjusted net income and diluted earnings per share to Adjusted diluted earnings per share.

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EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization.

Adjusted EBITDA also excludes stock compensation expense, foreign currency gain/loss and certain other items.

Adjusted EBITDA also excludes stock-based compensation expense, foreign currency gain/loss and

certain other items.

Refer to information included in “Non-GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of net income to EBITDA and Adjusted EBITDA.

Non-GAAP Measures

Revenue excluding foreign currency exchange impacts, EBITDA and Adjusted EBITDA are provided for information purposes only and are not measures of financial performance under GAAP.

Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results;

Revenue excluding foreign currency exchange impacts, EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share are provided for information purposes only and are not measures of financial performance under GAAP.

Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information to investors and other users of our financial statements in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results.

In particular, those charges and credits that are not directly related to operating unit performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature.

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In addition, supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to net income determined in accordance with GAAP.

The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing organic sales results.

The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing sales results.

The Company excludes the effect of currency translation from revenue for this measure because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends.

The portion of revenue attributable to currency translation is calculated as the difference between the current period revenue and the current period revenue after applying foreign exchange rates from the prior period.

The Company believes EBITDA is often a useful measure of the Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, as well as our provision for income tax expense.

The Company believes EBITDA is often a useful measure of a Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, acquisitions, as well as our provision for income tax expense.

EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry.

The Company also believes that Adjusted EBITDA provides helpful information about the operating performance of its business.

Adjusted EBITDA excludes stock compensation expense, foreign currency gain/loss as well as certain income or expenses which are not indicative of the ongoing performance of the Company.

Adjusted EBITDA excludes stock-based compensation expense, as well as business development costs, foreign currency gains/losses on short-term assets and liabilities, and other items that are not indicative of the Company’s core operating performance.

EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP.

The Company’s calculation of revenues excluding foreign currency exchange impacts for 2020 and 2019 is as follows (in thousands):

For the year ended December 31,

Management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance.

Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP.

These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance.

Adjusted net income provides management with a measure of financial performance of the Company based on operational factors as it removes the impact of certain non-routine items from the Company’s operating results.

Adjusted diluted earnings per share provides management with an indication of how Adjusted net income would be reflected on a per share basis for comparison to the GAAP diluted earnings per share measure.

Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business.

This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted expense and income items.

The Company’s calculation of revenue excluding foreign currency exchange impacts for 2021 is as follows (in thousands):

December 31, 2021

Revenue as reported

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Revenue excluding foreign currency exchange impacts

The Company’s calculation of EBITDA and Adjusted EBITDA for 2020 and 2019 is as follows:

The Company’s calculation of EBITDA and Adjusted EBITDA for 2021 and 2020 is as follows (in thousands):

Net income as reported

Interest expense

Provision for income tax

Income tax (benefit) provision

Depreciation and amortization

Stock compensation expense

Stock-based compensation expense

Business development costs

Foreign currency loss

Non income-based tax (refund) assessment

Non income-based tax refund

Adjusted EBITDA

Allied Motion’s management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance.

Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP.

These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance.

Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business.

This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted charges and income items.

The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2020 and 2019 is as follows:

The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2021 and 2020 is as follows (in thousands, except per share data):

For the year ended

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Non-GAAP adjustments, net of tax

Non-income based tax assessment

Income tax provision charge

Discrete income tax benefit

Non income-based tax refund

Income tax valuation allowance

Foreign currency loss - net

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Liquidity and Capital Resources

The Company’s liquidity position as measured by cash and cash equivalents increased by $9,715 to a balance of $23,131 at December 31, 2020 from 2019.

The Company’s liquidity position as measured by cash and cash equivalents decreased by $668 to a balance of $22,463 at December 31, 2021 from 2020.

Year Ended December 31,

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Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Effect of foreign exchange rates on cash

Net increase in cash and cash equivalents

Of the $23,131 cash and cash equivalents on hand at December 31, 2020, $21,371 was located at our foreign entities and may be subject to withholding tax if repatriated back to the U.S.

During 2020, the decrease in cash provided by operating activities as compared to 2019 was equally impacted by net income, accrued liabilities, and inventories.

Moreover, inventories in 2020 increased due to the push out of orders related to the COVID-19 pandemic, building inventory for new product launches and purchasing additional inventory in order to secure supply.

Accrued expenses in 2020 decreased based on timing of income tax payments and reduced amounts of incentive compensation.

The significant cash used in investing activities in 2020 reflects the acquisition of Dynamic Controls for $14,728 net of cash acquired.

Purchases of property and equipment were $9,371 in 2020 compared to $14,882 during 2019 reflecting cash preservation efforts during the COVID-19 pandemic.

The increase in cash provided by financing activities reflects the Amended Revolving Facility borrowing for the acquisition of Dynamic Controls for approximately $26,000 in the first quarter of 2020.

Subsequent to the acquisition, we have made payments of $16,897 on the Amended Revolving Facility.

During 2019, the Company utilized revolver borrowings to fund working capital needed to support growth, and for the payment of normal year-end accruals.

Net (decrease) increase in cash and cash equivalents

Of the $22,463 cash and cash equivalents on hand at December 31, 2021, $15,943 was located at our foreign subsidiaries and may be subject to withholding tax if repatriated back to the U.S.

During 2021, the cash provided by operating activities remained consistent with 2020 due to increased net income adjusted for non-cash items, offset by cash used for working capital (primarily inventory) required to support our customer base in the current supply chain environment.

The increased cash used in investing activities in 2021 relates to the $47,254 net cash consideration paid for the ORMEC, ALIO and Spectrum Controls acquisitions in the fourth quarter.

Purchases of property and equipment were $13,716 during the 2021 compared to $9,371 during the year ended December 31, 2020 reflecting continued commitments to projects supporting growth initiatives.

Cash used in investing activities in the prior year period included a $14,728 outflow related to the acquisition of Dynamic Controls.

The Company expects 2022 capital expenditures to be approximately $15,000 to $20,000.

The increase in cash provided by financing activities in 2021 from 2020 includes Amended Revolving Facility borrowings of $50,500 to fund the three acquisitions in the fourth quarter of 2021.

Debt payments of $12,248 were made during 2021.

The cash provided by financing activities in 2020 reflects the Amended Revolving Facility borrowing for the acquisition of Dynamic Controls for approximately $26,000 in the first quarter of 2020, net of payments of $16,897 during the year.

At December 31, 2021, we had $159,395 of obligations under the Amended Revolving Facility, excluding deferred financing costs.

The Amended Credit Agreement contains certain financial covenants related to minimum interest coverage and total leverage ratio at the end of each quarter.

The Amended Credit Agreement also includes other covenants and restrictions, including limits on the amount of additional indebtedness, and restrictions on the ability to merge, consolidate or sell all or substantially all our assets.

The Amended Credit Agreement contains certain financial covenants related to minimum interest coverage, total leverage ratio, and non-material subsidiaries assets to consolidated total assets at the end of each quarter.

Under the provisions of the Amended Credit Agreement, we may elect to increase our Leverage Ratio to a 4.0 to 1.0 ratio (a “Leverage Increase”) during the fiscal quarter in which a Material Acquisition (as defined in the Amended Credit Agreement) takes place and for the next three fiscal quarters.

If the Material Acquisition occurs within the last 45 days of any fiscal quarter, the Leverage Increase is applicable for the following four fiscal quarters.

We qualified for and elected the Leverage Increase as a result of the Spectrum Controls acquisition.

We were in compliance with all covenants at December 31, 2021.

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The Amended Credit Agreement matures in February 2025.

There were no borrowings for the China Facility balance during 2020 or 2019.

The Company declared dividends of $0.03 per share during each quarter of 2020 and 2019.

There were no borrowings under the China Facility during 2021 or 2020.

The Company declared dividends, in total, of $0.095 and $0.08 per share during 2021 and 2020, respectively.

The Company’s working capital, capital expenditure and dividend requirements are expected to be funded from cash provided by operations and amounts available under the Amended Credit Agreement (refer to Note 7, Debt Obligations , of the notes to consolidated financial statements for definition and terms).

Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our diverse market channel strategy and the steps we have taken to strengthen our balance sheet, such as retaining cash to support shorter term needs and extending the maturity of our revolving credit facility leaves us well-positioned to manage our business through the crisis as it continues to unfold.

Based on our analysis, we believe our existing balances of cash, the flexibility of our Amended Credit Agreement and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Contractual Obligations

The following table summarizes contractual obligations and borrowings as of December 31, 2020 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods.

We expect to fund other commitments primarily with operating cash flows generated in the normal course of business.

At December 31, 2020, our long-term contractual obligations were limited to debt and leases.

Payments Due by Period

Operating leases

Debt Obligations (1)

Interest on Debt (2)

(1) Amounts represent our debt obligations as of December 31, 2020.

(2) Amounts represent the estimated interest payments based on the balances as of December 31, 2020 and applicable interest rates under the Amended Revolving Facility.

Although there is ongoing uncertainty related to the anticipated impact of COVID-19 and variants on our future results, we believe our diverse markets, our strong market position in many of our businesses, and the steps we have taken to strengthen our balance sheet, such as retaining cash to support shorter term needs and extending the maturity of our revolving credit facility in early 2020 leaves us well-positioned to manage our business through the crisis as it continues to unfold.

We continually assess our liquidity and cash positions and have assessed the impact of COVID-19 on our Company.

Based on our analysis, we believe our existing balances of cash, the flexibility of our Amended Credit Agreement and our currently anticipated operating cash flows will be more than sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Qualitative and Quantitative Disclosures about Market Risk

Foreign Currency

We have international operations in The Netherlands, Sweden, Germany, China, Portugal, Canada, Czech Republic, Mexico, the United Kingdom and New Zealand which expose us to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively.

transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively.

We continuously evaluate our foreign currency risk and we take action from time to time in order to best mitigate these risks.

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The net effect of these translation adjustments is recorded in the consolidated financial statements as comprehensive income.

The translation adjustment was a gain of $8,410 for 2020 and a loss of $680 for 2019.

The translation adjustment was a loss of $7,193 for 2021 and a gain of $8,410 for 2020.

Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries.

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dollar in relation to our most significant foreign currency net assets would have had an impact of approximately $11,000 and $10,000 on our foreign net assets as of December 31, 2021 and 2020, respectively.

To the extent that our monetary assets and liabilities, including short-term and long-term intercompany loans, are recorded in a currency other than the functional currency of the subsidiary, these amounts are remeasured each period at the period-end exchange rate, with the resulting gain or loss recorded in other expense, net in the consolidated statement of income and comprehensive income.

Beginning in the first quarter of 2021, we began entering into contracts to hedge our short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates.

The resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income.

To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $13,500 at December 31, 2021.

The foreign currency contracts are recorded in the consolidated balance sheets at fair value and resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income.

During the year ended December 31, 2021, we recorded a loss of $170 on foreign currency contracts which is included in other (income) expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other (income) expense, net.

Net foreign currency transaction gains and losses included in total other expense, net amounted to losses of $21 and $1,035 in 2021 and 2020, respectively.

In the first quarter of 2021, the Company began a hedging program to help mitigate these foreign currency transaction gains and losses.

Accordingly, we expect these gains and losses to be lower in the future.

Interest Rates

Interest rates on our Amended Credit Agreement are based on the LIBOR plus a margin of 1.00% to 1.75% (1.625% at December 31, 2020) or the Prime Rate plus a margin of 0% to 0.75% (0.625% at December 31, 2020), in each case depending on the Company’s ratio of total funded indebtedness to Consolidated EBITDA.

Interest rates on our Amended Credit Agreement are based on the LIBOR or EURIBOR plus a margin of 1.00% to 1.75% (1.375% at December 31, 2021) or the Prime Rate plus a margin of 0% to 0.75% (0.375% at December 31, 2021), in each case depending on the Company’s ratio of total funded indebtedness to Consolidated EBITDA.

We use interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements.

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A hypothetical one percentage point (100 basis points) change in the Base Rate on the $99,395 of unhedged floating rate debt outstanding at December 31, 2021 would have an impact of approximately $994 on our interest expense for 2021.

A hypothetical one percentage point (100 basis points) change in the Base Rate on the $70,085 of unhedged floating rate debt outstanding at December 31, 2019 would have had an impact of approximately $701 on our interest expense for 2019.

A hypothetical one percentage point (100 basis points) change in the Base Rate on the $60,656 of unhedged floating rate debt outstanding at December 31, 2020 would have an impact of approximately $607 on our interest expense for 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis